Kennametal Inc. Form 10-Q Summary
Reporting period: Three and nine months ended March 31, 2023, filed May 3, 2023. The request metadata identifies “2022 Q3,” but the filing is for fiscal 2023 third quarter.
Business Context and Reporting Period
Kennametal is a global industrial technology company serving aerospace, earthworks, energy, general engineering and transportation markets. Its two reportable segments are Metal Cutting and Infrastructure. The filing contains unaudited interim financial statements and states that results for the nine months ended March 31, 2023 are not necessarily indicative of full-year results.
Financial Performance and Liquidity
| Metric | Three months ended March 31, 2023 | Three months ended March 31, 2022 | Nine months ended March 31, 2023 | Nine months ended March 31, 2022 |
|---|---|---|---|---|
| Sales | $536.0 million | $512.3 million | $1,527.9 million | $1,482.4 million |
| Gross profit | $167.9 million | $164.6 million | $470.8 million | $478.3 million |
| Gross margin | 31.3% | 32.1% | 30.8% | 32.3% |
| Operating income | $52.5 million | $53.4 million | $136.5 million | $155.5 million |
| Operating margin | 9.8% | 10.4% | 8.9% | 10.5% |
| Net income attributable to Kennametal | $31.9 million | $35.3 million | $82.0 million | $102.9 million |
| Diluted EPS | $0.39 | $0.42 | $1.01 | $1.22 |
For the quarter, reported sales increased 5%, comprising 8% organic growth and a 1% favorable business-days effect, partly offset by a 4% unfavorable foreign-currency effect. For the nine-month period, sales increased 3%, with 10% organic growth offset by a 7% unfavorable currency effect.
- Metal Cutting: Quarterly sales rose 6% to $333.5 million and operating income rose to $43.8 million from $30.2 million; operating margin improved to 13.1% from 9.6%. Nine-month operating income increased to $98.6 million from $87.3 million.
- Infrastructure: Quarterly sales rose 2% to $202.5 million, but operating income fell to $9.7 million from $23.7 million; operating margin declined to 4.8% from 11.9%. Nine-month operating income declined to $40.5 million from $69.7 million.
- Cash flow: Nine-month operating cash flow was $126.2 million, compared with $93.0 million in the prior-year period. Capital expenditures were $71.1 million versus $60.2 million.
- Cash and working capital: Cash and cash equivalents were $93.5 million at March 31, 2023, compared with $85.6 million at June 30, 2022. Working capital was $590.3 million, up from $539.1 million.
- Debt and liquidity: Total debt was $659.0 million. Revolving-facility borrowings were $62.6 million, with $637.4 million of additional availability under the $700 million facility maturing in June 2027. The company was in compliance with its debt covenants and stated that it had sufficient resources for the next 12 months.
- Capital returns: The company paid $48.5 million in dividends and repurchased $37.6 million of common stock during the nine months. The remaining authorization under the three-year $200 million repurchase program was approximately $77.3 million at March 31, 2023.
Material Changes Versus the Prior Comparable Period
- Revenue growth and pricing were not sufficient to offset higher raw-material costs, inflation, under-absorption and currency headwinds. Nine-month gross margin declined 150 basis points.
- Infrastructure profitability deteriorated materially because of approximately $41 million of higher raw-material costs, approximately $10 million of under-absorption, inflation, supply-chain disruptions and unfavorable currency effects.
- Metal Cutting profitability improved because of pricing, volume growth and approximately $3 million of gains on property sales, partly offset by approximately $19 million of higher raw-material costs, inflation and currency effects.
- Interest expense increased to $21.4 million from $19.2 million for the nine-month period because of higher borrowings and market interest rates.
- Other expense of $2.6 million replaced other income of $11.1 million, primarily because of lower net periodic pension income.
- The effective tax rate declined to 23.9% from 27.2% for the nine-month period, reflecting geographic mix and a $2.2 million benefit related to Swiss tax reform.
- Foreign-currency translation produced $13.6 million of other comprehensive income for the nine-month period, compared with a $34.6 million loss in the prior-year period.
Outlook, Commentary, Risks and Unusual Items
The filing does not provide a clear quantified earnings or revenue guidance range. Management highlighted continued underlying demand in several end markets and partial mitigation of inflation and currency pressures through price increases, but stated that the effects of macroeconomic conditions cannot be predicted.
- Risks include inflation, raw-material and energy costs, supply-chain disruptions, labor constraints, foreign-exchange volatility, recessionary conditions, COVID-19 effects, the Russia-Ukraine conflict and related sanctions, competition, regulatory changes, environmental obligations, intellectual-property claims and potential goodwill or intangible-asset impairments.
- Kennametal ceased operations in Russia during the March 2022 quarter and expects liquidation of its Russian legal entity to be completed during fiscal 2024.
- Environmental accruals totaled $12.1 million at March 31, 2023, including $1.7 million classified as current. The company is a potentially responsible party at certain Superfund sites and notes that costs could change substantially as facts and remediation requirements develop.
- An Italian tax assessment remains subject to litigation. The company has a stay and has recorded no liability; an adverse outcome could increase income-tax expense by as much as €35.5 million, or approximately $38.6 million, including penalties and interest.
- Restructuring accruals totaled $4.4 million at March 31, 2023. No restructuring charges were recorded during the current three- or nine-month periods; net benefits of $1.0 million and $2.5 million, respectively, primarily reflected gains on property sales.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.
Investor Verification Priorities
- Verify whether pricing actions can continue to offset raw-material, labor, energy and other inflationary costs.
- Monitor Infrastructure segment margins, capacity utilization and the resolution of under-absorption and supply-chain issues.
- Assess cash conversion as inventories and receivables increased and accounts payable declined from June 30, 2022.
- Review leverage, interest-rate exposure and compliance with the 3.75-times adjusted leverage covenant.
- Track the Italian tax litigation, environmental remediation obligations and the planned liquidation of the Russian entity.
- Reconcile reported growth with organic growth and currency effects, particularly in EMEA and Asia Pacific.
- Confirm the sustainability of dividends, share repurchases and capital expenditures relative to operating cash flow.