Kennametal Inc. 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. Its two reportable segments are Metal Cutting and Infrastructure. This unaudited filing covers the three months ended September 30, 2021, the first quarter of fiscal 2022, compared with the prior-year quarter ended September 30, 2020.
Financial Performance and Position
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Sales | $483.5 million | $400.3 million | Up $83.2 million, or 21% |
| Gross profit | $160.8 million | $105.1 million | Up $55.7 million |
| Gross margin | 33.2% | 26.2% | Up 700 basis points |
| Operating income | $54.6 million | $(17.2) million | Improved $71.8 million |
| Operating margin | 11.3% | (4.3)% | Improved 15.6 percentage points |
| Net income attributable to Kennametal | $36.2 million | $(21.7) million | Returned to profitability |
| Diluted EPS | $0.43 | $(0.26) | Improved $0.69 |
| Operating cash flow | $15.8 million | $9.6 million | Up $6.2 million |
- Sales growth included 19% organic growth and a 2% favorable currency effect. Reported growth was 20% for Metal Cutting and 21% for Infrastructure.
- Metal Cutting sales were $298.4 million and operating income was $29.2 million, compared with an operating loss of $23.6 million in the prior-year quarter. Operating margin was 9.8%.
- Infrastructure sales were $185.1 million and operating income was $26.0 million, compared with $7.3 million previously. Operating margin was 14.1%.
- Interest expense declined to $6.3 million from $10.6 million, primarily due to lower borrowings and refinancing at lower rates.
- Capital expenditures were $17.8 million, down from $39.3 million. Cash dividends paid were $16.7 million, and $12.9 million was used for share repurchases.
- Cash and cash equivalents were $107.3 million at September 30, 2021, compared with $154.0 million at June 30, 2021. Total debt was approximately $592.9 million.
- The company had no borrowings under its $700.0 million revolving credit facility and reported full availability. It was in compliance with all debt covenants.
- Working capital was $577.7 million, compared with $567.4 million at June 30, 2021.
Material Changes Versus the Prior Comparable Period
- Results benefited from stronger demand across most end markets, favorable pricing and product mix, currency effects, and approximately $5 million of incremental simplification and modernization benefits.
- Restructuring and related charges declined substantially to approximately $1.2 million in the current quarter from $28.6 million in the prior-year quarter. The current-quarter charges were primarily in Metal Cutting.
- Salary and other cost-control measures taken in the prior year were restored, creating approximately $15 million of year-over-year expense pressure.
- Metal Cutting benefited from recovery in aerospace, transportation and general engineering. Infrastructure benefited particularly from U.S. oil and gas recovery and mining-related earthworks demand.
- Inventory increased $28.7 million from June 30, 2021, while accounts payable and accrued liabilities declined $43.7 million during the quarter, limiting operating cash conversion.
- Other comprehensive loss was $12.5 million, primarily reflecting unfavorable foreign currency translation, compared with other comprehensive income of $32.9 million in the prior-year quarter.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide a clear quantified full-year sales, earnings or margin guidance range.
- Management reported approximately $68 million of annualized savings achieved to date from the FY21 restructuring actions. The program is expected to total approximately $90 million of pre-tax charges, with $83.4 million recorded through September 30, 2021.
- Management believes available cash, operating cash flow, credit capacity and investment-grade credit ratings are sufficient to meet cash requirements for the next 12 months.
- COVID-19 remains a significant uncertainty, including potential new variants, workforce and supply-chain disruptions, travel restrictions, vaccine effectiveness and broader economic effects. The company had not experienced a material supply-chain disruption as of the filing date.
- Raw-material costs, energy and commodity prices, foreign exchange, labor relations, international market conditions, demand recovery and execution of restructuring initiatives could materially affect future results.
- The company has $14.6 million of environmental remediation accruals, including $2.5 million classified as current. Management states that additional costs could vary based on contamination, regulatory requirements and other uncertainties.
- An Italian tax dispute remains pending. The tax authority seeks approximately €36.2 million, or $41.9 million including penalties and interest. The company has obtained a stay, has recorded no liability, and believes the assessment is baseless.
- U.S. net deferred tax assets were $25.9 million, including $57.0 million of tax attributes. If future taxable income is insufficient, a valuation allowance could materially increase tax expense.
- The company authorized a $200 million, three-year share repurchase program on July 27, 2021. Approximately $187.2 million remained available under the program at September 30, 2021.
Important Facts for Investors to Verify
- Whether strong organic growth and end-market recovery continue after the first-quarter rebound.
- Progress toward the approximately $90 million restructuring program target and realization of the stated annualized savings.
- Impact of inflation, raw-material costs, supply-chain constraints and restored labor costs on margins.
- Liquidity and covenant compliance as the revolving credit facility matures in June 2023.
- Potential cash or tax effects from the unresolved Italian assessment and environmental matters.
- Whether COVID-19 developments or economic weakness affect demand, operations or realization of deferred tax assets.
- The pace and valuation impact of the newly authorized share repurchase program alongside dividend payments and capital spending.