Kennametal Inc. Form 10-Q Summary
Reporting period: Three and nine months ended March 31, 2022, fiscal 2022 third quarter. The request metadata identifies “2021 Q3,” but the filing itself is for fiscal 2022 Q3 and compares against March 31, 2021. Amounts are in thousands unless otherwise stated.
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, which provides tooling and metal-cutting solutions, and Infrastructure, which provides engineered wear products, earth-cutting tools and metallurgical powders.
The interim financial statements are unaudited. Management stated that results for the nine months ended March 31, 2022 are not necessarily indicative of the full fiscal year.
Financial Performance and Position
| Metric | Three Months Ended March 31, 2022 | Prior Year | Nine Months Ended March 31, 2022 | Prior Year |
|---|---|---|---|---|
| Sales | $512.3 million | $484.7 million | $1,482.4 million | $1,325.5 million |
| Gross profit | $164.6 million | $150.2 million | $478.3 million | $376.8 million |
| Gross margin | 32.1% | 31.0% | 32.3% | 28.4% |
| Operating income | $53.4 million | $39.5 million | $155.5 million | $41.4 million |
| Operating margin | 10.4% | 8.2% | 10.5% | 3.1% |
| Net income attributable to Kennametal | $35.3 million | $21.6 million | $102.9 million | $19.3 million |
| Diluted EPS | $0.42 | $0.26 | $1.22 | $0.23 |
- Sales growth: Third-quarter sales increased 6%, comprising 8% organic growth and a 2% favorable business-days effect, partly offset by a 4% unfavorable foreign-currency effect. Nine-month sales increased 12%, driven by 12% organic growth.
- Segment performance: Third-quarter Metal Cutting sales increased 2% and operating margin improved to 9.6% from 7.4%. Infrastructure sales increased 12% and operating margin improved to 11.9% from 10.4%.
- Cash flow: Nine-month operating cash flow was $93.0 million, down from $139.2 million. Capital expenditures were $60.2 million, compared with $94.1 million in the prior year.
- Liquidity: Cash and cash equivalents were $100.0 million at March 31, 2022, compared with $154.0 million at June 30, 2021. Working capital was $582.9 million, compared with $567.4 million at June 30, 2021.
- Debt: Total debt was $621.9 million, including $593.1 million of long-term debt and $28.7 million of current borrowings and notes payable. The $700 million revolving credit facility had $27.5 million outstanding and $672.5 million available. The facility matures in June 2023.
- Capital allocation: The company repurchased $50.5 million of common stock and paid $50.1 million of dividends during the nine months. The quarterly dividend was $0.20 per share.
Material Changes Versus the Prior Comparable Period
- Operating income increased 35% in the quarter and nearly quadrupled for the nine-month period, benefiting from sales growth, pricing, product mix and simplification/modernization savings.
- Gross margin expanded by 1.1 percentage points in the quarter and 3.9 percentage points for the nine-month period.
- Higher raw-material costs, including approximately $13 million in the quarter and $27 million for the nine-month period, together with COVID-19-related absenteeism, higher manufacturing costs and depreciation, limited margin expansion.
- Interest expense declined to $6.4 million from $20.9 million in the quarter and to $19.2 million from $39.8 million for nine months. The prior-year amounts included costs associated with early extinguishment of debt.
- Restructuring and related charges declined to $2.6 million for the nine months from $34.9 million. Cumulative charges for the FY21 restructuring program reached $84.8 million, substantially completing the program against an approximately $85 million target. Annualized savings reached approximately $71 million.
- Inventory increased $85.7 million from June 30, 2021, primarily because of higher material costs, longer supply chains and higher sales volumes. This increase was a significant use of operating cash flow.
- Accumulated other comprehensive loss increased by $22.9 million, principally because of unfavorable foreign-currency translation.
Guidance, Outlook, Commentary, Risks and Unusual Items
- The filing does not provide a specific full-year revenue, earnings or cash-flow guidance figure.
- Management cited continued recovery in aerospace, general engineering, energy, mining and construction markets. Transportation remained pressured by semiconductor and wiring-harness shortages.
- COVID-19 lockdowns in China, including in Shanghai, affected manufacturing and distribution operations late in the quarter and created supply-chain and workforce disruption risks.
- Following the Russia-Ukraine conflict, the company ceased operations in Russia and expects to liquidate its Russian legal entity during fiscal 2023. It recorded $1.8 million of charges for expected receivable losses and inventory impairment related to its Russian and Ukrainian operations.
- Management identified risks from raw-material and commodity costs, energy prices, labor availability, supply-chain disruption, foreign exchange, geopolitical sanctions, COVID-19 developments, competition, environmental obligations, potential goodwill or intangible-asset impairments and demand uncertainty.
- Environmental accruals totaled $12.9 million at March 31, 2022. Management stated that the accruals represent its best current estimate but could change materially as facts, remediation requirements or responsible-party assessments evolve.
- A pending Italian tax assessment could increase income-tax expense by up to €36.4 million, or approximately $40.5 million, including penalties and interest, if the tax authority prevails. The company disputes the assessment, has obtained a stay and has recorded no liability for it.
- Management concluded that it had sufficient resources to meet cash requirements for the next 12 months and was in compliance with the revolving-credit facility covenants.
Most Important Facts for an Investor to Verify
- Confirm the applicable period: this filing is fiscal 2022 third quarter, not fiscal 2021 third quarter.
- Assess whether sales growth and pricing can offset persistent raw-material, labor, manufacturing and supply-chain inflation.
- Monitor working-capital absorption, particularly the $85.7 million inventory increase and the decline in operating cash flow.
- Review the maturity and covenant requirements of the $700 million revolving facility and the company’s $621.9 million total debt.
- Evaluate the sustainability of the approximately $71 million of annualized restructuring savings after the program’s substantial completion.
- Track the financial effects of the Russia exit, China lockdowns and broader geopolitical and sanctions-related disruption.
- Follow the Italian tax litigation and environmental matters for potential cash or earnings exposure.
- Reconcile GAAP results with management’s non-GAAP organic-growth and constant-currency measures when evaluating underlying performance.