Kennametal Inc. FY2015 Form 10-K Summary
Business context and reporting period
This Form 10-K covers the fiscal year ended June 30, 2015. The company manufactures metalworking tools, engineered components, advanced materials, coatings and earth-cutting products through two reportable segments: Industrial and Infrastructure. Approximately 55% of fiscal 2015 sales were generated outside the United States.
The filing reflects a sharp late-year deterioration in oil and gas and earthworks markets. The requested “2014 Q4” period is not the filing period; the filing provides fiscal fourth-quarter 2015 data and fiscal-year comparisons.
Financial performance and key metrics
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Sales | $2.647 billion | $2.837 billion | Down 6.7% |
| Gross profit | $806.0 million | $897.0 million | Down $91.0 million |
| Gross margin | 30.4% | 31.6% | Down 120 basis points |
| Operating income (loss) | $(357.8) million | $263.4 million | Declined materially |
| Operating margin | (13.5)% | 9.3% | Down 22.8 percentage points |
| Net income (loss) attributable to Kennametal | $(373.9) million | $158.4 million | Turned to a loss |
| Diluted EPS | $(4.71) | $1.99 | Declined $6.70 |
| Operating cash flow | $351.4 million | $271.9 million | Up $79.6 million |
| Capital expenditures | $100.9 million | $117.4 million | Down $16.4 million |
| Cash dividends paid | $57.0 million | $56.4 million | Approximately flat |
Fiscal fourth-quarter 2015 sales were $637.7 million, gross profit was $189.0 million, net income attributable to Kennametal was $21.1 million and diluted EPS was $0.26. These figures compare with fourth-quarter 2014 sales of $772.2 million, gross profit of $252.8 million, net income of $45.5 million and diluted EPS of $0.57.
Segment results and material changes
- Industrial: Sales declined 4% to $1.462 billion. Operating income decreased to $160.9 million from $177.0 million, and operating margin declined to 11.0% from 11.6%. Currency effects, restructuring charges, lower manufacturing absorption and weaker aerospace, defense and energy demand weighed on results.
- Infrastructure: Sales declined 10% to $1.185 billion. The segment reported an operating loss of $509.4 million versus operating income of $94.9 million in the prior year. Energy and earthworks sales each declined approximately 10% excluding currency effects.
- Impairments: The company recorded $541.7 million of non-cash asset impairment charges, including $536.2 million related to Infrastructure goodwill and other intangible assets. Goodwill impairment represented $527.5 million, and additional Infrastructure intangible impairments totaled $14.2 million.
- Restructuring: Restructuring and related charges were $58.1 million in FY2015 versus $19.1 million in FY2014. Programs involve facility consolidation, overhead reduction, supply-chain savings and employment-related cost reductions.
- Currency and mix: The sales decline reflected a 5% organic decrease and a 4% unfavorable currency impact, partially offset by a 2% net contribution from acquisition and divestiture activity. Infrastructure mix was unfavorable.
Cash flow, debt and liquidity
- Operating cash flow increased to $351.4 million, primarily due to working-capital improvements, including a $70.9 million inventory reduction and a $46.6 million reduction in accounts receivable.
- Cash used in investing activities was $84.6 million, principally reflecting capital expenditures. FY2014 investing outflows included $634.6 million of acquisition spending, primarily for the Tungsten Materials Business.
- Cash used in financing activities was $333.0 million, including a $282.5 million net reduction in borrowings and $57.0 million of dividends.
- Cash and cash equivalents were $105.5 million at June 30, 2015, down from $177.9 million a year earlier. Working capital was $775.8 million, down from $962.4 million.
- Total debt, including capital leases and notes payable, was $751.6 million, down from $1.062 billion. Long-term debt, excluding current maturities, was $735.9 million.
- The company had $42.8 million outstanding under its $600 million revolving credit facility, which matures in April 2018, and was in compliance with all debt covenants. Management stated that operating cash flow and available credit were expected to satisfy cash requirements over the next 12 months.
- Approximately 7% of debt was exposed to variable interest rates at June 30, 2015, compared with 34% a year earlier.
Guidance, outlook, risks and unusual items
Management stated that the oil and gas downturn was expected to continue at least through the first half of fiscal 2016, while the earthworks downturn was severe and persistent. The filing does not provide a clear numerical fiscal 2016 sales or earnings guidance value in the supplied text.
- Management expects restructuring programs to generate estimated annualized savings of $115 million to $135 million after total charges of $185 million to $205 million. Expected completion dates range from June 2016 through March 2017.
- The company is exploring strategic alternatives for several primarily Infrastructure businesses with estimated net book values of approximately $170 million to $250 million. Additional impairment charges could result depending on the strategic direction.
- Key risks include cyclical industrial demand, prolonged weakness in oil and gas and mining markets, foreign currency volatility, raw-material availability and pricing, restructuring execution, goodwill impairment, environmental liabilities, regulatory changes, competition, labor availability, product liability and information-technology disruptions.
- Environmental reserves were $12.6 million at June 30, 2015. Certain Superfund matters were not sufficiently developed to estimate ultimate remediation costs or the company’s share of liability.
- Goodwill and other intangible assets totaled $704.1 million, or approximately 25% of total assets, at year-end. The Infrastructure reporting unit’s fair value approximated carrying value after impairment testing, increasing sensitivity to future operating performance and discount-rate changes.
- The company paid $0.72 per share in dividends during FY2015 and maintained the dividend rate from FY2014.
Important facts for investors to verify
- Whether oil and gas and earthworks demand recovered as assumed and whether further Infrastructure impairments were required.
- Actual fiscal 2016 sales, earnings, cash-flow and restructuring savings performance versus management’s expectations.
- Progress and final outcomes of the strategic review of businesses with $170 million to $250 million of estimated net book value.
- Debt maturities, revolving-credit availability, covenant compliance and the company’s ability to continue reducing leverage while paying dividends.
- Whether the reported operating loss and $4.71 diluted loss per share are appropriately evaluated separately from the $536.2 million non-cash Infrastructure goodwill and intangible impairment charges.
- Changes in foreign-exchange rates, raw-material costs, pension funding requirements and environmental or legal contingencies.
- The filing’s reported effective tax rate of 4.3%, including the limited tax benefit associated with goodwill impairment charges and the $2.9 million tax charge related to foreign cash redeployment.