KENNAMETAL INC MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A) (form 10-Q)

OVERVIEW

 Kennametal Inc. was founded based on a tungsten carbide technology breakthrough in 1938. The Company was incorporated in Pennsylvania in 1943 as a manufacturer of tungsten carbide metal cutting tooling and was listed on the New York Stock Exchange (NYSE) in 1967. With more than 80 years of materials expertise, the Company is a global industrial technology leader, helping customers across the aerospace, earthworks, energy, general engineering and transportation industries manufacture with precision and efficiency. This expertise includes the development and application of tungsten carbides, ceramics, super-hard materials and solutions used in metal cutting and extreme wear applications to keep customers up and running longer against conditions such as corrosion and high temperatures. Our standard and custom product offerings span metal cutting and wear applications including turning, milling, hole making, tooling systems and services, as well as specialized wear components and metallurgical powders. End users of our metal cutting products include manufacturers engaged in a diverse array of industries including: the manufacturers of transportation vehicles and components, machine tools and light and heavy machinery; airframe and aerospace components; and energy-related components for the oil and gas industry, as well as power generation. Our wear and metallurgical powders are used by producers and suppliers in equipment-intensive operations such as road construction, mining, quarrying, oil and gas exploration, refining, production and supply. Throughout the MD&A, we refer to measures used by management to evaluate performance. We also refer to a number of financial measures that are not defined under accounting principles generally accepted in the United States of America  
(U.S. GAAP), including organic sales growth, constant currency regional sales growth (decline) and constant currency end market sales growth (decline). We provide the definitions of these non-GAAP financial measures at the end of the MD&A section as well as details on the use and derivation of these financial measures. Our sales of $486.7 million for the quarter ended December 31, 2021 increased 10 percent year-over-year, reflecting 11 percent organic sales growth, partially offset by an unfavorable business days effect of 1 percent. Operating income was $47.5 million compared to $19.0 million in the prior year quarter. The year-over-year change of $28.5 million was due primarily to organic sales growth, $1.7 million of net benefit from the reversal of restructuring and related charges compared to charges of $4.2 million in the prior year quarter, favorable pricing, favorable product mix and approximately $4 million of incremental simplification/modernization benefits, partially offset by higher raw material costs of approximately $12 million and approximately $10 million due to the restoration of salaries and other cost-control measures that were taken in the prior year quarter. Operating margin was 9.8 percent compared to 4.3 percent in the prior year quarter. The Metal Cutting and Infrastructure segments had operating margins of 9.3 percent and 10.6 percent, respectively, for the quarter ended December
31, 2021
. On March 11, 2020, the World Health Organization declared the Coronavirus Disease 2019 (COVID-19) a pandemic bringing significant uncertainty in our end markets and operations. Since then, national, regional and local governments have taken steps at various times since the pandemic began to limit the spread of the virus through stay-at-home, social distancing, and various other orders and guidelines. Although some jurisdictions have relaxed these measures, particularly as more and more people are vaccinated, others have not or have reinstated them as COVID-19 cases surge and variants emerge. The imposition of these measures has created significant operating constraints on our business. Throughout the pandemic, based on the guidance provided by the U.S. Centers for Disease Control and other relevant authorities, we have deployed safety protocols and processes to keep our employees safe while continuing to serve our customers. To date, we have not experienced a material disruption in our supply chain. The extent to which the COVID-19 pandemic may continue to affect our business, operating results or financial condition in the future will depend on a number of factors, including the duration and spread of the pandemic, the emergence of more contagious or virulent strains of the virus, travel restrictions, business and workforce disruptions associated with the pandemic, including the availability of critical materials and resources, the success of preventative measures to contain or mitigate the spread of the virus and emerging variants, and the effectiveness of the distribution and acceptance of COVID-19 vaccines. We recorded a net benefit of $1.7 million from the reversal of pre-tax restructuring and related charges in the quarter. Total restructuring and related charges since inception of $81.8 million were recorded through December 31, 2021 for the FY21 Restructuring Actions. The expected pre-tax charges for this program are approximately $85
million
. Inception to date, we have achieved annualized savings of approximately $68 million. 22

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

     Current quarter earnings per diluted share (EPS) of $0.37 was favorably affected by the net benefit from the reversal of restructuring and related charges of $0.02 per share and the gain on the New Castle divestiture of $0.01 per share, partially offset by differences in annual projected tax rates of $0.01 per share. The earnings per diluted share (EPS) of $0.23 in the prior year quarter was unfavorably affected by restructuring and related charges of $0.04 per share, offset by differences in annual projected tax rates of $0.11 per share. We generated net cash flows from operating activities of $57.8 million during the six months ended December 31, 2021 compared to $67.4 million during the prior year quarter. Capital expenditures were $37.7 million and $68.6 million during the six months ended December 31, 2021 and 2020, respectively, with the decrease primarily related to lower capital spending on our simplification/modernization initiative.  RESULTS OF CONTINUING OPERATIONS SALES Sales for the three months ended December 31, 2021 were $486.7 million, an increase of $46.2 million, or 10 percent, from $440.5 million in the prior year quarter. The increase in sales was driven by organic growth of 11 percent, partially offset by an unfavorable business days effect of 1 percent. Sales for the six months ended December 31, 2021 were $970.2 million, an increase of $129.4 million, or 15 percent, from $840.8 million in the prior year period. The increase in sales was driven by organic growth of 15 percent and a favorable currency exchange effect of 1 percent, partially offset by an unfavorable business days effect of 1 percent.                                                          Three Months Ended December 31, 2021             Six Months Ended December 31, 2021                                                                                                               As (in percentages)                                         As Reported          Constant Currency            Reported           Constant Currency End market sales growth (decline): Aerospace                                                    24%                     24%                     22%                     21% Energy                                                        24                      24                      24                      23 General engineering                                           14                      14                      19                      18 Earthworks                                                    12                      11                      10                      7 Transportation                                               (11)                    (10)                     2                       1 Regional sales growth: Americas                                                     16%                     16%                     21%                     20% Europe, the Middle East and Africa (EMEA)                     7                       9                       14                      13 Asia Pacific                                                  4                       3                       8                       5   GROSS PROFIT Gross profit for the three months ended December 31, 2021 was $153.0 million, an increase of $31.4 million from $121.5 million in the prior year quarter. The increase was primarily due to organic sales growth, favorable pricing, favorable product mix, and incremental simplification/modernization benefits of approximately $4 million, partially offset by higher raw material costs of approximately $12 million and the restoration of salaries and other cost control measures that were taken in the prior year quarter. Gross profit margin for the three months ended December 31, 2021 was 31.4 percent, as compared to 27.6 percent in the prior year quarter. Gross profit for the six months ended December 31, 2021 was $313.7 million, an increase of $87.1 million from $226.6 million in the prior year period. The increase was primarily due to organic sales growth, favorable pricing, favorable product mix, and incremental simplification/modernization benefits of approximately $7 million, partially offset by higher raw material costs of approximately $14 million and the restoration of salaries and other cost control measures that were taken in the prior year period. Gross profit margin for the six months ended December 31, 2021 was 32.3 percent, as compared to 27.0 percent in the prior year period.                                        23

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

     OPERATING EXPENSE Operating expense for the three months ended December 31, 2021 was $106.7 million compared to $97.8 million for the three months ended December 31, 2020. Operating expense for the six months ended December 31, 2021 was $209.3 million compared to $191.1 million for the six months ended December 31, 2020. Both increases were primarily due to the restoration of previously reduced salaries and other cost-control measures that were taken in the prior year. We invested further in technology and innovation during the current quarter to continue delivering high quality products to our customers. Research and development expenses included in operating expense totaled $10.5 million and $9.3 million for the three months ended December 31, 2021 and 2020, respectively, and $20.7 million and $18.1 million for the six months ended December 31, 2021 and 2020, respectively. RESTRUCTURING AND RELATED CHARGES AND ASSET IMPAIRMENT CHARGES FY21 Restructuring Actions In the September quarter of fiscal 2020, we announced the initiation of restructuring actions in Germany associated with our simplification/modernization initiative to reduce structural costs. Subsequently, we also announced the acceleration of our other structural cost reduction plans including the closure of the Johnson City, Tennessee facility. Expected pre-tax charges for the FY21 Restructuring Actions are approximately $85 million. Total restructuring and related charges since inception of $81.8 million were recorded for this program through December 31, 2021, consisting of: $74.1 million in Metal Cutting and $7.7 million in Infrastructure. The remaining charges related to the FY21 Restructuring Actions are expected to be within the Metal Cutting segment. Restructuring and Related Charges Recorded We recorded restructuring and related benefits from the reversal of charges of $1.7 million for the three months ended December 31, 2021, which consisted of benefits of $1.7 million in Metal Cutting and an immaterial amount in Infrastructure. Of this amount, restructuring benefits were $3.5 million and restructuring-related charges were $1.8 million (included in cost of goods sold), for the three months ended December 31, 2021. For the three months ended December 31, 2020, we recorded restructuring and related charges of $4.2 million which consisted of charges of $3.5 million in Metal Cutting and $0.7 million in Infrastructure. Of this amount, restructuring charges totaled $1.8 million of which $0.4 million was included in cost of goods sold for the three months ended December 31, 2020. Restructuring-related charges of $2.4 million were recorded in cost of goods sold for the three months ended December 31, 2020. We recorded restructuring and related benefits from the reversal of charges of $0.4 million for the six months ended December 31, 2021, which consisted of benefits of $0.4 million in Metal Cutting and an immaterial amount in Infrastructure. Of this amount, restructuring benefits were $3.3 million, and restructuring-related charges were $2.8 million (included in cost of goods sold) for the six months ended December 31, 2021. For the six months ended December 31, 2020, we recorded restructuring and related charges of $32.9 million which consisted of charges of $29.5 million in Metal Cutting and $3.3 million in Infrastructure. Of this amount, restructuring charges were $27.4 million, of which $0.4 million was included in cost of goods sold. Restructuring-related charges of $5.5 million were recorded in cost of goods sold for the six months ended December 31, 2020. GAIN ON DIVESTITURE During the year ended June 30, 2020, we completed the sale of certain assets of the non-core specialty alloys and metals business within the Infrastructure segment located in New Castle, Pennsylvania to Advanced Metallurgical Group N.V. for an aggregate price of $24.0 million. The net book value of these assets at closing was $29.5 million, and the pre-tax loss on divestiture recognized during the year ended June 30, 2020 was $6.5 million. Transaction proceeds were primarily used for capital expenditures related to our simplification/modernization efforts. During the quarter ended December 31, 2021, we recorded a gain of $1.0 million on the New Castle divestiture due to proceeds held in escrow until November 2021.                                        24

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

     INTEREST EXPENSE Interest expense for the three months ended December 31, 2021 decreased to $6.5 million compared to $8.3 million for the three months ended December 30, 2020. Interest expense for the six months ended December 31, 2021 decreased to $12.8 million compared to $18.9 million for the six months ended December 31, 2020. Both decreases were primarily related to the amounts outstanding under the Credit Agreement in the prior year and the refinancing of long-term debt at a lower interest rate during fiscal 2021. OTHER INCOME, NET Other income for the three months ended December 31, 2021 decreased to $3.1 million from $3.9 million during the three months ended December 31, 2020. Other income for the six months ended December 31, 2021 decreased to $6.6 million from $7.9 million during the six months ended December 31, 2020. PROVISION FOR INCOME TAXES The effective income tax rates for the three months ended December 31, 2021 and 2020 were 25.9 percent (provision on income) and 39.0 percent (benefit on income), respectively. The year-over-year change is primarily due to the effects of changes in projected pre-tax income in the prior period, higher projected pre-tax income in the current year and geographical mix. The effective income tax rates for the six months ended December 31, 2021 and 2020 were 26.5 percent (provision on income) and 93.3 percent (benefit on a loss), respectively. The year-over-year change is primarily due to the effects of higher projected pre-tax income in the current period and geographical mix. As of December 31, 2021, we have $25.5 million of U.S. net deferred tax assets, of which $57.0 million is related to net operating loss, tax credit, and other carryforwards that can be used to offset future U.S. taxable income. Certain of these carryforwards will expire if they are not used within a specified timeframe. At this time, we consider it more likely than not that we will have sufficient U.S. taxable income in the future that will allow us to realize these net deferred tax assets. However, it is possible that some or all of these tax attributes could ultimately expire unused, especially if our end markets do not continue to recover from the COVID-19 global pandemic. Therefore, if we are unable to generate sufficient U.S. taxable income from our operations, a valuation allowance to reduce the U.S. net deferred tax assets may be required, which would materially increase income tax expense in the period in which the valuation allowance is recorded.  BUSINESS SEGMENT REVIEW We operate in two reportable segments consisting of Metal Cutting and Infrastructure. Our reportable operating segments have been determined in accordance with our internal management structure, which is organized based on operating activities, the manner in which we organize segments for allocating resources, making operating decisions and assessing performance and the availability of separate financial results. We do not allocate certain corporate expenses related to executive retirement plans, our Board of Directors, strategic initiatives, and certain other costs and report them in Corporate. Our reportable operating segments do not represent the aggregation of two or more operating segments.                                        25

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Our sales and operating income (loss) by segment are as follows:

                                                          Three Months Ended December 31,            Six Months Ended December 31, (in thousands)                                               2021                2020                  2021                  2020 Sales: Metal Cutting                                            $  298,581          $ 282,917          $       597,011          $ 530,793 Infrastructure                                              188,092            157,590                  373,171            310,019 Total sales                                              $  486,673          $ 440,507          $       970,182          $ 840,812 Operating income (loss): Metal Cutting                                            $   27,895          $  13,693          $        57,059          $  (9,933) Infrastructure                                               19,971              6,265                   46,007             13,533 Corporate                                                      (361)              (924)                    (955)            (1,743) Total operating income                                       47,505             19,034                  102,111              1,857 Interest expense                                              6,460              8,317                   12,781             18,896 Other income, net                                            (3,142)            (3,857)                  (6,601)            (7,875) Income (loss) before income taxes                        $   44,187          $  14,574          $        95,931          $  (9,164)   METAL CUTTING                                            Three Months Ended December 31,               Six Months Ended December 31, (in thousands, except operating margin)                                       2021                   2020                   2021                  2020 Sales                                  $       298,581           $  282,917          $      597,011           $  530,793 Operating income (loss)                         27,895               13,693                  57,059               (9,933) Operating margin                                   9.3   %              4.8  %                  9.6   %             (1.9) %                                                                   Three Months Ended          Six Months Ended (in percentages)                                                December 31, 2021          December 31, 2021 Organic sales growth                                                    7%                        12% Foreign currency exchange effect(1)                                     -                          1 Business days effect(2)                                                (1)                        (1)  Sales growth                                                            6%                        12%                                                             Three Months Ended December 31, 2021                        Six Months Ended December 31, 2021 (in percentages)                                    As Reported                    Constant Currency           As Reported                    Constant Currency End market sales growth (decline): Aerospace                                               24%                               24%                      22%                               21% General engineering                                      12                                13                       18                                17 Energy                                                   7                                 7                        5                                 4 Transportation                                          (11)                              (10)                      2                                 1 Regional sales growth (decline): Americas                                                11%                               11%                      17%                               16% EMEA                                                     5                                 8                        13                                14 Asia Pacific                                            (3)                               (4)                       4                                 1                                          26

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

     For the three months ended December 31, 2021, Metal Cutting sales increased 6 percent from the prior year quarter. Aerospace end market sales increased in all regions as airplane manufacturing continues to recover. Sales in our general engineering end market increased in all regions, as manufacturing activity continues to recover from the effects of the COVID-19 pandemic. Energy sales increased in Americas as oil and gas drilling improved, partially offset by a decline in Asia Pacific driven by lower activity in China wind power. Transportation end market sales decreased in all regions due to the ongoing semiconductor related supply chain challenges. On a regional basis, the sales increases in the Americas was driven by an increase in the aerospace, energy, and general engineering end markets, partially offset by a decline in the transportation end market. The sales increase in EMEA was driven by increases in the aerospace and general engineering end markets, partially offset by a decrease in the energy and transportation end markets. The sales decrease in Asia Pacific was primarily driven by declines in the energy and transportation end markets, partially offset by increases in sales in the general engineering and aerospace end markets. For the three months ended December 31, 2021, Metal Cutting operating income was $27.9 million compared to $13.7 million in the prior year quarter. The year-over-year change was due primarily to organic sales growth, $2 million of net benefit from the reversal of restructuring and related charges compared to charges of $4 million in the prior year quarter, favorable pricing, approximately $4 million of incremental simplification/modernization benefits and favorable product mix, partially offset by approximately $8 million due to the restoration of salaries and other cost-control measures that were taken in the prior year quarter. For the six months ended December 31, 2021, Metal Cutting sales increased 12 percent from the prior year period. Aerospace end market sales increased in all regions as airplane manufacturing continues to recover. Energy sales increased in Americas as oil and gas drilling improved, partially offset by declines in Asia Pacific driven by lower wind power activity in China. Sales in our general engineering end market increased in all regions, as manufacturing activity continues to recover from the COVID-19 pandemic. Transportation end market sales increased in the Americas due to improved automotive manufacturing levels, partially offset by declines in EMEA and Asia Pacific due to supply chain challenges. On a regional basis, the sales increase in the Americas was driven by increases in all end markets. The sales increase in EMEA was primarily driven by increases in the aerospace, energy and general engineering end markets, partially offset by a decline in the transportation end market. The sales increase in Asia Pacific was primarily driven by increases in the aerospace, and general engineering end markets, partially offset by a decline in the energy and transportation end markets. For the six months ended December 31, 2021, Metal Cutting operating income was $57.1 million compared to an operating loss of $9.9 million in the prior year period. The year-over-year change was due primarily to organic sales growth, $0.4 million of net benefit from the reversal of restructuring and related charges compared to charges of $29.5 million in the prior year period, favorable pricing, approximately $4 million of incremental simplification/modernization benefits and favorable product mix, partially offset by approximately $19 million due to the restoration of salaries and other cost-control measures that were taken in the prior year period. INFRASTRUCTURE                                               Three Months Ended December 31,               Six Months Ended December 31, (in thousands)                                   2021                   2020                   2021                  2020 Sales                                     $       188,092           $  157,590          $      373,171           $  310,019 Operating income                                   19,971                6,265                  46,007               13,533 Operating margin                                     10.6   %              4.0  %                 12.3   %              4.4  %                                                                   Three Months Ended          Six Months Ended (in percentages)                                                December 31, 2021          December 31, 2021 Organic sales growth                                                   18%                        18% Foreign currency exchange effect(1)                                     1                          2  Sales growth                                                           19%                        20%                                          27

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

                                                                      Three Months Ended December 31, 2021                        Six Months Ended December 31, 2021 (in percentages)                                           As Reported                    Constant Currency           As Reported                    Constant Currency End market sales growth: Energy                                                         33%                               33%                      36%                               35% General engineering                                             17                                17                       21                                20 Earthworks                                                      12                                11                       10                                7 Regional sales growth: Americas                                                       22%                               22%                      25%                               25% EMEA                                                            15                                15                       15                                11 Asia Pacific                                                    17                                14                       15                                10   For the three months ended December 31, 2021, Infrastructure sales increased by 19 percent from the prior year quarter. The U.S. oil and gas market drove a year-over-year increase in the energy market as U.S. land rig counts continued to increase. Sales in our earthworks end market increased primarily due to growth in the construction end markets and higher underground mine output. In general engineering, the increase in sales was across all regions reflecting continued strength of the global manufacturing economy. On a regional basis, the sales increases in the Americas, EMEA and Asia Pacific were all driven by increases in all end markets. For the three months ended December 31, 2021, Infrastructure operating income was $20.0 million compared to $6.3 million in the prior year quarter. The year-over-year change was due primarily to organic sales growth, favorable pricing and favorable product mix, partially offset by higher raw material costs of approximately $11 million and approximately $2 million due to the restoration of salaries and other cost-control measures that were taken in the prior year quarter. For the six months ended December 31, 2021, Infrastructure sales increased by 20 percent from the prior year period. The U.S. oil and gas market drove a year-over-year increase in the energy market. Sales in our earthworks end market increased primarily due to growth in the mining end market. In general engineering, the increase in sales was across all regions. On a regional basis, the sales increases in the Americas, EMEA and Asia Pacific were all driven by increases in all end markets. For the six months ended December 31, 2021, Infrastructure operating income was $46.0 million compared to $13.5 million in the prior year period. The year-over-year change was due primarily to organic sales growth, favorable pricing and favorable product mix, partially offset by higher raw material costs of approximately $14 million and approximately $5 million due to the restoration of salaries and other cost-control measures that were taken in the prior year period. CORPORATE                                               Three Months Ended December 31,               Six Months Ended December 31,
(in thousands)                                   2021                   2020                  2021                  2020 Corporate expense                         $           (361)         $     (924)         $         (955)         $   (1,743)   For the three months ended December 31, 2021, Corporate expense decreased by $0.6 million from the prior year quarter. For the six months ended December 31, 2021 Corporate expense decreased by $0.8 million from the prior year period.  LIQUIDITY AND CAPITAL RESOURCES Cash flow from operations is the primary source of funding for our capital expenditures. For the six months ended December 31, 2021, cash flow provided by operating activities was $57.8 million.                                        28

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

     During the three months ended September 30, 2020, we entered into the First Amendment (the Amendment) to the Fifth Amended and Restated Credit Agreement dated as of June 21, 2018, (as amended by the Amendment, the Credit Agreement). The Credit Agreement is a five-year, multi-currency, revolving credit facility that is used to augment our cash from operations and as an additional source of funds. The Credit Agreement provides for revolving credit loans of up to $700.0 million for working capital, capital expenditures and general corporate purposes. The Credit Agreement allows for borrowings in U.S. dollars, euros, Canadian dollars, pounds sterling and Japanese yen. Interest payable under the Credit Agreement is based upon the type of borrowing under the facility and may be (1) LIBOR plus an applicable margin, (2) the greater of the prime rate or the Federal Funds effective rate plus an applicable margin, or (3) fixed as negotiated by us. The Credit Agreement matures in June 2023. The Credit Agreement requires us to comply with various restrictive and affirmative covenants, including two financial covenants: (1) a maximum leverage ratio where debt, net of domestic cash in excess of $25 million and sixty percent of the unrestricted cash held outside of the United States, must be less than or equal to 3.5 times trailing twelve months EBITDA (temporarily increased by the Amendment to 4.25 times trailing twelve months EBITDA during the period from September 30, 2020 through and including December 31, 2021), adjusted for certain non-cash expenses and which may be further adjusted, at our discretion, to include up to $120 million of cash restructuring charges through December 31, 2021; and (2) a minimum consolidated interest coverage ratio of EBITDA to interest of 3.5 times (as the aforementioned terms are defined in the Credit Agreement). Borrowings under the Credit Agreement are guaranteed by our significant domestic subsidiaries. As of December 31, 2021, we were in compliance with all the covenants of the Credit Agreement. For the six months ended December 31, 2021, average daily borrowings outstanding under the Credit Agreement were approximately $9.4 million. We had $9.0 million of borrowings outstanding under the Credit Agreement and $691.0 million of additional availability as of December 31, 2021. There were no borrowings outstanding as of June 30, 2021. We consider the majority of the unremitted earnings of our non-U.S. subsidiaries to be permanently reinvested. With regard to these unremitted earnings, we have not, nor do we anticipate the need to, repatriate funds to the U.S. to satisfy domestic liquidity needs arising in the ordinary course of business, including liquidity needs associated with our domestic debt service requirements. With regard to the small portion of unremitted earnings that are not indefinitely reinvested, we maintain a deferred tax liability for foreign withholding and U.S. state income taxes. In 2012, we received an assessment from the Italian tax authority that denied certain tax deductions primarily related to our 2008 tax return. Attempts at negotiating a reasonable settlement with the tax authority were unsuccessful; and as a result, we decided to litigate the matter. While the outcome of the litigation is still pending, the tax authority served notice in the September quarter of fiscal 2020 requiring payment in the amount of €36 million. Accordingly, we requested and were granted a stay and are not currently required to make a payment in connection with this assessment. We continue to believe that the assessment is baseless and accordingly, no income tax liability has been recorded in connection with this assessment in any period. However, if the Italian tax authority were to be successful in litigation, settlement of the amount alleged by the Italian tax authority would result in an increase to income tax expense by as much as €36.3 million, or $41.1 million, including penalties and interest of €21.6 million, or $24.4 million. A trial date has not yet been set by the Italian court. At December 31, 2021, cash and cash equivalents were $101.8 million, Total Kennametal Shareholders' equity was $1,316.0 million and total debt was $605.0 million. Our current senior credit ratings are at investment grade levels. We believe that our current financial position, liquidity and credit ratings provide us access to the capital markets. We believe that we have sufficient resources available to meet cash requirements for the next 12 months. We continue to closely monitor our liquidity position and the condition of the capital markets, as well as the counterparty risk of our credit providers. There have been no material changes in our contractual obligations and commitments since June 30, 2021 other than the temporary provisions provided under the Amendment to the Credit Agreement (as outlined above) that expired subsequent to December 31, 2021. Cash Flow Provided by Operating Activities During the six months ended December 31, 2021, cash flow provided by operating activities was $57.8 million, compared to $67.4 million for the prior year period. Cash flow provided by operating activities for the current year period consisted of net income and non-cash items amounting to an inflow of $144.5 million and changes in certain assets and liabilities netting to an outflow of $86.7 million. Contributing to the changes in certain assets and liabilities were an increase in inventories of $67.0 million and a decrease in accounts payable and accrued liabilities of $36.6 million. Partially offsetting these cash outflows was a decrease in accounts receivable of $23.0 million.                                        29

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

     During the six months ended December 31, 2020, cash flow provided by operating activities consisted of net income and non-cash items amounting to an inflow of $80.0 million and changes in certain assets and liabilities netting to an outflow of $12.7 million. Contributing to the changes in certain assets and liabilities were a decrease in accrued income taxes of $24.5 million, an increase in accounts receivable of $22.5 million and a decrease in accrued pension and postretirement benefits of $13.4 million. Partially offsetting these cash outflows was a decrease in inventories of $46.7 million. Cash Flow Used for Investing Activities Cash flow used for investing activities was $36.1 million for the six months ended December 31, 2021, compared to $67.6 million for the prior year period. During the current year period, cash flow used for investing activities primarily included capital expenditures, net of $37.1 million, which consisted primarily of expenditures related to our simplification/modernization initiatives and equipment upgrades, partially offset by the $1.0 million in proceeds from the New Castle divestiture. For the six months ended December 31, 2020, cash flow used for investing activities included capital expenditures, net of $67.7 million, which consisted primarily of expenditures related to our simplification/modernization initiatives and equipment upgrades. Cash Flow Used for Financing Activities Cash flow used for financing activities was $72.5 million for the six months ended December 31, 2021 compared to $512.0 million in the prior year period. During the current year period, cash flow used for financing activities included $35.5 million in common shares repurchased, $33.5 million of cash dividends paid to Kennametal Shareholders, $6.8 million of the effect of employee benefit and stock plans and dividend reinvestment, and $5.1 million decrease in notes payable, partially offset by $9 million from the borrowings under the Credit Agreement. For the six months ended December 31, 2020, cash flow used for financing activities included $475.5 million of a net decrease in the revolving and other lines of credit and $33.3 million of cash dividends paid to Kennametal Shareholders.  FINANCIAL CONDITION Working capital was $573.2 million at December 31, 2021, an increase of $5.8 million from $567.4 million at June 30, 2021. The increase in working capital was primarily driven by an increase in inventories of $56.7 million and a decrease in other current liabilities of $31.8 million, partially offset by a decrease in cash and cash equivalents of $52.2 million and a decrease in accounts receivable of $30.4 million. Currency exchange rate effects decreased working capital by a total of approximately $13.6 million, the impact of which is included in the aforementioned changes. Property, plant and equipment, net decreased $32.4 million from $1,055.1 million at June 30, 2021 to $1,022.8 million at December 31, 2021, primarily due to depreciation expense of $58.2 million and unfavorable currency effects of $10.9 million, partially offset by net capital additions of $37.1 million. At December 31, 2021, other assets were $603.9 million, a decrease of $1.9 million from $605.8 million at June 30, 2021. The decrease was primarily due to amortization of intangibles of $6.5 million, a decrease in goodwill of $4.3 million due to currency exchange effects, and a decrease in the operating lease right-of-use asset of $4.7 million, partially offset by an increase in other assets of $15.8 million. Kennametal Shareholders' equity was $1,316.0 million at December 31, 2021, a decrease of $13.6 million from $1,329.6 million at June 30, 2021. The decrease was primarily due to the repurchase of capital stock of $35.5 million primarily under the share repurchase program that was initiated during fiscal 2022, cash dividends paid to Kennametal Shareholders of $33.5 million, and other comprehensive loss of $18.8 million, partially offset by net income attributable to Kennametal of $67.6 million.  DISCUSSION OF CRITICAL ACCOUNTING POLICIES There have been no changes to our critical accounting policies since June 30, 2021.                                         30

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

     RECONCILIATION OF FINANCIAL MEASURES NOT DEFINED BY U.S. GAAP In accordance with SEC rules, below are the definitions of the non-GAAP financial measures we use in this report and the reconciliation of these measures to the most closely related GAAP financial measures. We believe that these measures provide useful perspective on underlying business trends and results and provide a supplemental measure of year-over-year results. The non-GAAP financial measures described below are used by management in making operating decisions, allocating financial resources and for business strategy purposes. We believe these measures may be useful to investors as they provide supplemental information about business performance and provide investors a view of our business results through the eyes of management. These non-GAAP financial measures are not intended to be considered by the user in place of the related GAAP financial measure, but rather as supplemental information to our business results. These non-GAAP financial measures may not be the same as similar measures used by other companies due to possible differences in method and in the items or events being adjusted. Organic sales growth Organic sales growth is a non-GAAP financial measure of sales growth (which is the most directly comparable GAAP measure) excluding the effects of acquisitions, divestitures, business days and foreign currency exchange from year-over-year comparisons. We believe this measure provides investors with a supplemental understanding of underlying sales trends by providing sales growth on a consistent basis. Also, we report organic sales growth at the consolidated and segment levels. Constant currency end market sales growth (decline) Constant currency end market sales growth (decline) is a non-GAAP financial measure of sales growth (decline) (which is the most directly comparable GAAP measure) by end market excluding the effects of acquisitions, divestitures and foreign currency exchange from year-over-year comparisons. We note that, unlike organic sales growth (decline), constant currency end market sales growth (decline) does not exclude the effect of business days. We believe this measure provides investors with a supplemental understanding of underlying end market trends by providing end market sales growth (decline) on a consistent basis. Also, we report constant currency end market sales growth (decline) at the consolidated and segment levels. Constant currency regional sales growth (decline) Constant currency regional sales growth (decline) is a non-GAAP financial measure of sales growth (decline) (which is the most directly comparable GAAP measure) by region excluding the effects of acquisitions, divestitures and foreign currency exchange from year-over-year comparisons. We note that, unlike organic sales growth (decline), constant currency regional sales growth (decline) does not exclude the effect of business days. We believe this measure provides investors with a supplemental understanding of underlying regional trends by providing regional sales growth (decline) on a consistent basis. Also, we report constant currency regional sales growth (decline) at the consolidated and segment levels. Reconciliations of organic sales growth to sales growth are as follows: Three Months Ended December 31, 2021        Metal Cutting          Infrastructure       Total Organic sales growth                             7%                      18%             11% Foreign currency exchange effect(1)               -                       1               - Business days effect(2)                          (1)                      -              (1)  Sales growth                                     6%                      19%             10%  

Six Months Ended December 31, 2021 Metal Cutting Infrastructure Total Organic sales growth

                             12%                     18%             15% Foreign currency exchange effect(1)               1                       2               1 Business days effect(2)                          (1)                      -              (1)  Sales growth                                     12%                     20%             15%                                          31

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

     Reconciliations of constant currency end market sales growth (decline) to end market sales growth (decline)(3) are as follows: Metal Cutting Three Months Ended December 31, 2021                 General engineering          Transportation            Aerospace            Energy Constant currency end market sales growth (decline)                                                    13%                       (10)%                   24%                 7% Foreign currency exchange effect(1)                          (1)                        (1)                     -                   -  End market sales growth (decline)(3)                         12%                       (11)%                   24%                 7%   

Infrastructure

 Three Months Ended December 31, 2021                              Energy             Earthworks            General engineering Constant currency end market sales growth                           33%                  11%                       17% Foreign currency exchange effect(1)                                  -                    1                         -  End market sales growth(3)                                          33%                  12%                       17%   Total Three Months Ended December 31, 2021           General engineering         Transportation          Aerospace          Energy           Earthworks Constant currency end market sales growth (decline)                                              14%                     (10)%                  24%               24%                11% Foreign currency exchange effect(1)                     -                       (1)                    -                 -                  1  End market sales growth (decline)(3)                   14%                     (11)%                  24%               24%                12%   Metal Cutting Six Months Ended December 31, 2021                 General engineering          Transportation            Aerospace            Energy Constant currency end market sales growth                  17%                        1%                     21%                 4% Foreign currency exchange effect(1)                         1                          1                      1                   1  End market sales growth(3)                                 18%                        2%                     22%                 5%   Infrastructure Six Months Ended December 31, 2021                                Energy             Earthworks            General engineering Constant currency end market sales growth                           35%                  7%                        20% Foreign currency exchange effect(1)                                  1                    3                         1  End market sales growth(3)                                          36%                  10%                       21%   Total Six Months Ended December 31, 2021           General engineering         Transportation          Aerospace          Energy           Earthworks Constant currency end market sales growth                                               18%                       1%                   21%               23%                7% Foreign currency exchange effect(1)                   1                        1                     1                 1                  3  End market sales growth (3)                          19%                       2%                   22%               24%                10%                                          32

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Reconciliations of constant currency regional sales growth (decline) to reported regional sales growth (decline) (4) are as follows:

                                                              Three Months Ended                                              Six Months Ended                                                               December 31, 2021                                              December 31, 2021                                              Americas                EMEA            Asia Pacific           Americas                EMEA            Asia Pacific Metal Cutting Constant currency regional sales growth (decline)                                11%                   8%                 (4)%                  16%                   14%                

1%

 Foreign currency exchange effect(1)              -                    (3)                  1                    1                    (1)                

3

  Regional sales growth (decline)(4)              11%                   5%                 (3)%                  17%                   13%                

4%

Infrastructure

 Constant currency regional sales growth                                          22%                   15%                 14%                  25%                   11%                

10%

 Foreign currency exchange effect(1)              -                     -                   3                    -                     4                   5  Regional sales growth(4)                        22%                   15%                 17%                  25%                   15%                 15%  Total Constant currency regional sales growth                                          16%                   9%                  3%                   20%                   13%                

5%

 Foreign currency exchange effect(1)              -                    (2)                  1                    1                     1                   3  Regional sales growth(4)                        16%                   7%                  4%                   21%                   14%                 8%   (1) Foreign currency exchange effect is calculated by dividing the difference between current period sales and current period sales at prior period foreign exchange rates by prior period sales. (2) Business days effect is calculated by dividing the year-over-year change in weighted average working days (based on mix of sales by country) by prior period weighted average working days. (3) Aggregate sales for all end markets sum to the sales amount presented on Kennametal's financial statements. (4) Aggregate sales for all regions sum to the sales amount presented on Kennametal's financial statements.                                        33

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