Kennametal Inc. Fiscal 2023 First-Quarter 10-Q Summary
Business context and reporting period
Kennametal is a global industrial technology company serving aerospace, earthworks, energy, general engineering and transportation markets through its Metal Cutting and Infrastructure segments. This unaudited filing covers the three months ended September 30, 2022, the first quarter of fiscal 2023. Comparisons are primarily with the three months ended September 30, 2021.
Financial performance and liquidity
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Sales | $494.8 million | $483.5 million | Up 2% |
| Gross profit | $160.0 million | $160.8 million | Down $0.8 million |
| Gross margin | 32.3% | 33.2% | Down 0.9 percentage points |
| Operating income | $48.5 million | $54.6 million | Down $6.1 million |
| Operating margin | 9.8% | 11.3% | Down 1.5 percentage points |
| Net income attributable to Kennametal | $28.2 million | $36.2 million | Down $8.0 million |
| Diluted EPS | $0.34 | $0.43 | Down $0.09 |
| Cash flow from operations | $(10.7) million | $15.8 million | Down $26.6 million |
| Capital expenditures | $29.5 million | $17.8 million | Up $11.7 million |
Organic sales growth was 9%, but a 7% unfavorable foreign-currency effect limited reported growth to 2%. Metal Cutting sales increased 1% to $299.9 million, while Infrastructure sales increased 5% to $194.9 million.
Cash and cash equivalents were $64.6 million at September 30, 2022, compared with $85.6 million at June 30, 2022. Total debt was $679.8 million, including $85.2 million of current borrowings and $594.6 million of long-term debt. The company had $79.9 million outstanding under its $700 million revolving credit facility and $620.1 million of additional availability. Management stated that the company was in compliance with all credit agreement covenants and believed available resources were sufficient for the next 12 months.
Working capital was $514.0 million at quarter-end, down from $539.1 million at June 30, 2022. Inventories increased to $591.5 million from $570.8 million, primarily reflecting higher material costs, lengthening supply chains and higher sales volumes.
Material changes versus the prior comparable period
- Operating income declined primarily because approximately $17 million of higher raw-material costs, higher operating costs, approximately $6 million of foreign-exchange headwinds and approximately $5 million of temporary supply-chain disruption costs more than offset favorable pricing, volume and product mix.
- Operating expense increased to $108.3 million from $102.7 million, primarily because of higher travel and salaries.
- Other expense was $1.0 million versus other income of $3.5 million in the prior-year quarter, principally because of lower net periodic pension income.
- Operating cash flow shifted to an outflow of $10.7 million from an inflow of $15.8 million, driven by a $38.5 million increase in inventories and a $42.1 million decrease in accounts payable and accrued liabilities.
- Foreign-currency translation produced a $52.9 million after-tax loss in other comprehensive income, resulting in a $49.0 million total comprehensive loss.
- The company repurchased $19.4 million of common stock and paid $16.3 million in shareholder dividends during the quarter. The filing states that cumulative repurchases under the $200 million three-year program totaled approximately $105 million since inception.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide a clear numerical earnings or sales outlook for fiscal 2023. Management reported continued underlying demand and organic growth, with recovery in aerospace, transportation and general engineering and stronger energy and earthworks activity. Pricing actions partially mitigated inflation and currency pressures.
- COVID-19-related restrictions, labor shortages and supply-chain constraints continued to affect operations, including restrictions in China.
- Russia’s invasion of Ukraine contributed to higher energy and raw-material costs and additional supply-chain issues. Kennametal ceased Russian operations during fiscal 2022 and expected liquidation of its Russian legal entity during fiscal 2023.
- Inflation, foreign-exchange volatility, raw-material availability and temporary supply-chain disruptions remain significant risks to margins and cash flow.
- An Italian tax assessment remains under litigation. The company has obtained a stay and recorded no liability. An adverse outcome could increase income-tax expense by up to €36.7 million, or approximately $35.8 million, including penalties and interest.
- Environmental remediation accruals totaled $12.3 million at September 30, 2022. The company stated that existing accruals represent its best estimate of probable and reasonably estimable costs, but those amounts could change materially as additional information becomes available.
- No restructuring and related charges were recorded in the current quarter, compared with $1.2 million in the prior-year quarter.
Important facts for investors to verify
- Whether pricing actions can offset persistent raw-material, labor, energy, logistics and other inflationary costs.
- Whether the reported 9% organic sales growth continues after separating foreign-exchange effects and potential macroeconomic weakening.
- Inventory levels, working-capital conversion and the return of operating cash flow to positive levels.
- Revolver utilization, interest-rate exposure, leverage covenant headroom and debt refinancing requirements.
- The timing and financial impact of the Russian entity liquidation and ongoing Ukraine-related disruptions.
- The ultimate resolution and potential cash-tax impact of the Italian tax assessment.
- Potential changes in environmental remediation obligations and any future goodwill or intangible-asset impairment risk.