Kennametal Inc. 2021 Fiscal Second-Quarter Form 10-Q Summary
Business context and reporting period
Kennametal is a global industrial technology company serving aerospace, earthworks, energy, general engineering and transportation markets. It operates through Metal Cutting and Infrastructure segments, providing tooling, wear-resistant components, ceramics, tungsten carbide products and metallurgical powders.
This unaudited Form 10-Q covers the three and six months ended December 31, 2021, representing the second quarter and first six months of fiscal 2022. Comparisons are primarily with the corresponding periods ended December 31, 2020.
Key financial metrics
| Metric | Three months ended Dec. 31, 2021 | Three months ended Dec. 31, 2020 | Six months ended Dec. 31, 2021 | Six months ended Dec. 31, 2020 |
|---|---|---|---|---|
| Sales | $486.7 million | $440.5 million | $970.2 million | $840.8 million |
| Gross profit | $153.0 million | $121.5 million | $313.7 million | $226.6 million |
| Gross margin | 31.4% | 27.6% | 32.3% | 27.0% |
| Operating income | $47.5 million | $19.0 million | $102.1 million | $1.9 million |
| Operating margin | 9.8% | 4.3% | 10.5% | 0.2% |
| Net income attributable to Kennametal | $31.4 million | $19.4 million | $67.6 million | $(2.3) million |
| Diluted EPS | $0.37 | $0.23 | $0.80 | $(0.03) |
Six-month operating cash flow was $57.8 million versus $67.4 million in the prior-year period. Capital expenditures were $37.7 million versus $68.6 million, and cash flow used in investing activities was $36.1 million versus $67.6 million.
At December 31, 2021, cash and cash equivalents were $101.8 million, total debt was approximately $605.0 million, and working capital was $573.2 million. The company had $9.0 million drawn under its $700.0 million revolving credit facility and $691.0 million of remaining availability. Management stated that the company was in compliance with its debt covenants and believed available resources were sufficient for the next 12 months.
Material changes versus the prior comparable period
- Second-quarter sales increased 10%, including 11% organic growth, while six-month sales increased 15%, including 15% organic growth and a 1% favorable currency effect.
- Gross margin improved by 3.8 percentage points in the quarter and 5.3 percentage points for the six-month period, reflecting volume, pricing, mix and simplification/modernization savings. These benefits were partly offset by higher raw material costs of approximately $12 million in the quarter and $14 million for the six months.
- Operating income increased substantially, aided by lower restructuring charges, organic sales growth, pricing, product mix and approximately $4 million of incremental simplification/modernization benefits in the quarter.
- Operating expenses increased primarily because salaries and other cost-control measures reduced in the prior-year period were restored. Research and development expense increased to $10.5 million for the quarter and $20.7 million for the six months.
- Interest expense declined to $6.5 million for the quarter and $12.8 million for the six months, primarily because of lower prior-year revolver borrowings and refinancing at a lower interest rate.
- Metal Cutting sales increased 6% in the quarter and 12% for the six months; its operating margin improved to 9.3% and 9.6%, respectively, from 4.8% and negative 1.9%.
- Infrastructure sales increased 19% in the quarter and 20% for the six months; its operating margin improved to 10.6% and 12.3%, respectively, from 4.0% and 4.4%.
- Cash declined by $52.2 million from June 30, 2021, primarily reflecting dividends of $33.5 million, share repurchases of $35.5 million and working-capital investment, including a $67.0 million increase in inventories.
Guidance, outlook, management commentary, risks and unusual items
- The filing does not provide a clear quantitative full-year earnings or revenue guidance figure.
- Management described continued recovery in aerospace, general engineering, energy, mining and construction markets. Transportation remained affected by semiconductor-related supply-chain challenges.
- The company reported approximately $68 million of annualized savings achieved to date from its simplification/modernization program. Total restructuring and related charges since inception were $81.8 million against expected program charges of approximately $85 million.
- The quarter included a $1.7 million net restructuring benefit and a $1.0 million gain from escrow proceeds related to the prior New Castle divestiture. These items increased quarterly diluted EPS by approximately $0.02 and $0.01, respectively.
- COVID-19, emerging variants, workforce and supply-chain disruptions, raw-material costs, energy and commodity prices, foreign exchange, international operations and economic conditions remain material risks. The company had not experienced a material supply-chain disruption as of the filing date.
- An Italian tax assessment remains in litigation. The tax authority seeks approximately €36.0 million, and the company estimates a potential increase to income tax expense of up to €36.3 million, or approximately $41.1 million including penalties and interest, if the authority prevails. No liability has been recorded, and payment is currently stayed.
- Environmental remediation accruals totaled $14.6 million at December 31, 2021. Management stated that the accruals were adequate based on current information but noted substantial uncertainty.
- The temporary debt-covenant provisions under the credit agreement expired after December 31, 2021. The company stated that it remained compliant as of December 31, 2021.
Important facts for investors to verify
- Whether sales recovery, particularly in aerospace and Infrastructure end markets, continues and offsets transportation weakness.
- Whether pricing and simplification/modernization savings can offset raw-material inflation, labor-cost normalization and other operating expenses.
- Inventory growth, working-capital requirements and the conversion of earnings into operating cash flow.
- Debt maturities, covenant compliance and the effect of the revolving facility’s June 2023 maturity.
- The status and potential financial impact of the Italian tax litigation and environmental matters.
- The sustainability of reported earnings after excluding restructuring reversals, the divestiture gain and other unusual items.
- Progress under the $200 million, three-year share repurchase authorization; the company repurchased approximately 600,000 shares under the program during the quarter.