Kennametal Inc. FY2021 Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2021. The provided filing is an annual Form 10-K for FY2021, not a standalone 2020 Q4 filing. Comparisons are primarily with FY2020. Kennametal operates through Metal Cutting and Infrastructure segments and generated 62% of sales outside the United States.
Business Context
Kennametal manufactures metal-cutting tooling, engineered wear components, ceramics, earth-cutting tools and metallurgical powders. Its principal end markets include general engineering, transportation, aerospace, energy and earthworks. Effective July 1, 2020, the former Industrial and Widia businesses were combined into the Metal Cutting segment, with prior-period segment results retrospectively restated.
Key Financial Metrics
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Sales | $1,841.4 million | $1,885.3 million | Down 2% |
| Gross profit | $552.5 million | $529.5 million | Up $23.0 million |
| Gross margin | 30.0% | 28.1% | Up 190 basis points |
| Operating income | $102.2 million | $22.3 million | Up $79.9 million |
| Operating margin | 5.5% | 1.2% | Up 430 basis points |
| Net income attributable to Kennametal | $54.4 million | $(5.7) million | Returned to profitability |
| Diluted EPS | $0.65 | $(0.07) | Improved $0.72 |
| Cash flow from operations | $235.7 million | $223.7 million | Up $12.0 million |
| Capital expenditures | $127.3 million | $244.2 million | Down $116.9 million |
| Dividends paid | $66.7 million | $66.3 million | Approximately flat |
Segment Results and Material Changes
- Metal Cutting: Sales declined 2% to $1,150.7 million; operating income increased to $45.9 million from $1.0 million, and operating margin improved to 4.0% from 0.1%.
- Infrastructure: Sales declined 2% to $690.7 million; operating income increased to $59.5 million from $23.1 million, and operating margin improved to 8.6% from 3.3%.
- Consolidated organic sales declined 4%, partly offset by a 2% favorable currency effect. Transportation sales increased 7%, while aerospace declined 33% and energy declined 10% on a reported basis.
- Sales pressure reflected COVID-19 effects, weak aerospace production, lower oil and gas drilling activity and softness in portions of general engineering and earthworks.
- Profitability benefited from simplification and modernization savings, lower raw-material costs, lower restructuring charges and the absence of FY2020 goodwill and intangible-asset impairment charges.
- Restructuring and related charges declined to $40.4 million from $83.3 million. The company reported approximately $186 million of cumulative simplification/modernization savings since inception and considered the related capital investment and restructuring substantially complete at fiscal year-end.
Cash Flow, Debt and Liquidity
- Cash and cash equivalents were $154.0 million at June 30, 2021, compared with $606.7 million a year earlier, primarily reflecting repayment of revolving debt.
- Total debt was $600.5 million, compared with $1,094.5 million at June 30, 2020. The company had no borrowings under its $700 million revolving credit facility and had $700 million of availability at year-end.
- The company issued $300 million of 2.800% senior notes due 2031 and used the proceeds and cash on hand to repay its $300 million of 3.875% senior notes due 2022. The refinancing generated a $9.6 million make-whole premium and other debt-extinguishment effects.
- The remaining principal maturities of long-term debt are $300 million in 2028 and $300 million in 2031. The revolving facility matures in June 2023.
- Kennametal was in compliance with its debt covenants at June 30, 2021. Its credit ratings were described as investment grade.
- Working capital increased to $567.4 million from $542.7 million, while shareholders’ equity increased to $1,329.6 million from $1,229.9 million.
Guidance, Outlook, Risks and Unusual Items
- The filing contains forward-looking statements regarding FY2022 sales, earnings, cash flow and capital expenditures, but the provided text does not present a clear numerical FY2022 guidance range.
- Management reported sequential sales improvement during each quarter of FY2021 and expects long-term benefits from growth initiatives, WIDIA repositioning and simplification/modernization.
- COVID-19 remains a significant uncertainty, including potential variants, demand disruption, supply-chain impacts, workforce availability, liquidity and covenant compliance.
- Other material risks include economic cyclicality, international currency and geopolitical exposure, tariffs, raw-material availability and pricing, environmental liabilities, cybersecurity, product liability, competition and possible future goodwill impairment.
- Goodwill and indefinite-lived intangible assets totaled $289.4 million at June 30, 2021. No impairment was recorded in FY2021, but the indefinite-lived trademark’s fair value approximated carrying value, making it sensitive to weaker demand or lower projected cash flows.
- U.S. net deferred tax assets were $26.3 million, including $57.0 million of tax attributes. Failure to generate sufficient future taxable income could require a valuation allowance and increase tax expense.
- An Italian tax assessment remains in litigation. The filing states that the potential exposure could be as much as €36.0 million, or approximately $43.0 million, and no liability has been recorded.
- Environmental remediation accruals were $14.7 million at June 30, 2021. Management believes the accrual is adequate for probable and reasonably estimable obligations, but future costs could change.
- On July 27, 2021, the board authorized a three-year program to repurchase up to $200 million of common stock, funded with operating cash flow.
- PricewaterhouseCoopers LLP issued unqualified opinions on the financial statements and internal control over financial reporting. The critical audit matter concerned realization of U.S. net deferred tax assets.
Important Facts for Investors to Verify
- Confirm that the intended period is FY2021 rather than 2020 Q4, because the supplied filing covers the year ended June 30, 2021.
- Assess whether margin improvement is sustainable after restructuring savings, particularly as aerospace, energy and other cyclical markets recover.
- Review the remaining FY21 restructuring charges, cash expenditures and timing of the expected approximately $75 million of annualized savings.
- Evaluate liquidity after the substantial debt repayment, planned $200 million share-repurchase authorization and ongoing capital expenditures.
- Monitor compliance with the revolving credit facility, which matures in June 2023, and the company’s ability to refinance or repay future debt maturities.
- Track COVID-19 developments, raw-material prices, tariffs, currency movements and demand in aerospace, oil and gas, transportation and earthworks.
- Review sensitivity analyses for the $277.6 million of Metal Cutting goodwill and the $11.8 million indefinite-lived trademark.
- Follow the Italian tax litigation, U.S. deferred tax asset realization and environmental remediation obligations for potential cash or earnings effects.