Kennametal Inc. Form 10-Q Summary
Reporting period: Fiscal 2021 second quarter and six months ended December 31, 2020. The interim financial statements are unaudited. Kennametal operates in Metal Cutting and Infrastructure; effective July 1, 2020, Industrial and Widia were combined into Metal Cutting.
Financial performance
| Metric | Three months ended Dec. 31, 2020 | Three months ended Dec. 31, 2019 | Six months ended Dec. 31, 2020 | Six months ended Dec. 31, 2019 |
|---|---|---|---|---|
| Sales | $440.5 million | $505.1 million | $840.8 million | $1,023.2 million |
| Gross profit | $121.5 million | $132.0 million | $226.6 million | $271.0 million |
| Gross margin | 27.6% | 26.1% | 27.0% | 26.5% |
| Operating income (loss) | $19.0 million | $(47.6) million | $1.9 million | $(31.3) million |
| Operating margin | 4.3% | (9.4)% | Not clearly provided | Not clearly provided |
| Net income (loss) attributable to Kennametal | $19.4 million | $(5.9) million | $(2.3) million | $0.5 million |
| Diluted EPS | $0.23 | $(0.07) | $(0.03) | $0.01 |
Second-quarter sales declined 13%, including a 14% organic decline, partly offset by favorable currency and business-day effects. Sales improved approximately 10% sequentially and exceeded typical seasonality. Six-month sales declined 18%, including a 17% organic decline.
Quarterly operating income improved primarily because restructuring charges were $4.2 million versus $51.3 million in the prior-year quarter, raw material costs were lower, simplification/modernization benefits increased, and there were no comparable goodwill impairment or divestiture-loss charges. These benefits were partly offset by lower volumes and unfavorable labor and fixed-cost absorption.
Segment results
| Segment | Q2 2021 sales | Year-over-year sales change | Q2 2021 operating income | Q2 2021 margin |
|---|---|---|---|---|
| Metal Cutting | $282.9 million | (13)% | $13.7 million | 4.8% |
| Infrastructure | $157.6 million | (13)% | $6.3 million | 4.0% |
Metal Cutting was affected by weakness in aerospace, general engineering, energy and transportation. Infrastructure was pressured by energy and earthworks demand, including a reported 63% year-over-year decline in U.S. land rig counts.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was $67.4 million, down from $87.1 million in the prior-year period.
- Capital expenditures were $68.6 million, compared with $147.5 million, primarily reflecting lower simplification/modernization spending.
- Six-month financing cash outflow was $512.0 million, including a $475.5 million net reduction in revolving and other borrowings and $33.3 million of dividends.
- Cash and cash equivalents were $103.2 million at December 31, 2020, compared with $606.7 million at June 30, 2020.
- Total debt was $628.7 million, consisting primarily of $593.8 million of long-term debt and $35.0 million of current borrowings and notes payable.
- The $700 million revolving credit facility matures in June 2023. At quarter-end, $24.5 million was outstanding and $675.5 million was available; the company was in compliance with its covenants.
- Working capital was $546.0 million, compared with $542.7 million at June 30, 2020. Kennametal shareholders’ equity was $1.279 billion.
- The company paid quarterly dividends of $0.20 per share, or $33.3 million during the six-month period.
Material changes and unusual items
- FY21 restructuring actions include German restructuring and the planned closure of the Johnson City, Tennessee facility. Expected pretax charges are $90 million to $100 million, with expected annualized savings of $65 million to $75 million.
- The company reported approximately $145 million of annualized simplification/modernization savings inception to date and remains on track for $180 million by the end of fiscal 2021.
- The prior-year quarter included a $14.6 million goodwill and indefinite-lived trademark impairment charge and a $6.5 million loss on divestiture; neither recurred in the current quarter.
- The prior-year period also included a $14.5 million discrete Swiss tax reform benefit, making year-over-year effective tax rates and earnings comparisons less comparable.
- Foreign currency translation generated $74.5 million of other comprehensive income for the six months, materially increasing reported equity despite the net loss attributable to Kennametal.
Outlook, risks and contingencies
Management expects COVID-19 to continue negatively affecting fiscal 2021 demand, particularly in energy, aerospace and transportation. The filing identifies risks from pandemic duration, economic and cyclical downturns, raw-material costs, foreign exchange, international operations, competition, labor relations, supply-chain and information-technology disruptions, environmental matters, intellectual property, and potential impairment charges.
The company expects to access capital markets during the current fiscal year to refinance its $300 million, 3.875% senior unsecured notes due February 2022. Management believes projected cash and revolver availability could repay the notes if refinancing is not completed, but provides no assurance. Additional cost controls or restructuring could be required if market conditions deteriorate.
An Italian tax assessment remains in litigation. The Italian tax authority seeks approximately €36 million, or about $44 million, including penalties and interest. The company considers the assessment baseless, has recorded no liability, and currently has a stay preventing payment. Environmental accruals were $15.0 million at December 31, 2020; future costs remain uncertain.
Investor verification points
- Verify the pace and sustainability of organic sales recovery, particularly in aerospace, transportation, energy and general engineering.
- Track remaining FY21 restructuring charges, savings realization and the effect of facility closures on future margins and cash flow.
- Assess liquidity after the substantial debt paydown, cash reduction and the planned February 2022 note refinancing.
- Review compliance with the amended leverage and interest-coverage covenants as COVID-19 and operating conditions evolve.
- Evaluate potential exposure from the Italian tax matter, environmental remediation, pension obligations and future goodwill or intangible impairments.
- Separate operating improvement from favorable comparisons caused by the absence of prior-year impairment, divestiture and unusually large restructuring charges.