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 through its Metal Cutting and Infrastructure segments. The filing covers the three and nine months ended March 31, 2021, the company’s fiscal third quarter of 2021, and was filed May 4, 2021. The request metadata identifies “2020 Q3,” but the filing period is March 31, 2021.
Key financial metrics
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Sales | $484.7 million, versus $483.1 million | $1.325 billion, versus $1.506 billion |
| Gross profit | $150.2 million, versus $157.0 million | $376.8 million, versus $428.0 million |
| Gross margin | 31.0%, versus 32.5% | 28.4%, unchanged |
| Operating income | $39.5 million, versus $37.9 million | $41.4 million, versus $6.6 million |
| Operating margin | 8.2%, versus 7.8% | 3.1%, versus 0.4% |
| Net income attributable to Kennametal | $21.6 million, versus $2.9 million | $19.3 million, versus $3.4 million |
| Diluted EPS | $0.26, versus $0.03 | $0.23, versus $0.04 |
| Operating cash flow | Not separately provided | $139.2 million, versus $146.1 million |
Quarterly sales were essentially flat year over year, reflecting a 2% favorable currency effect offset by a 1% organic decline and a 1% unfavorable business-day effect. Nine-month sales declined 12%, primarily from a 12% organic decline and a 1% divestiture effect.
- Metal Cutting quarterly sales increased 2% to $308.1 million; operating income increased to $22.7 million from $16.6 million, and operating margin improved to 7.4% from 5.5%.
- Infrastructure quarterly sales declined 2% to $176.5 million; operating income declined to $18.3 million from $21.9 million, and operating margin declined to 10.4% from 12.2%.
- Cash flow used in investing activities was $92.7 million, including $94.1 million of capital expenditures, compared with $180.2 million and $206.1 million, respectively, in the prior-year period.
- Cash flow used in financing activities was $545.5 million, primarily reflecting a $490.0 million reduction in revolving borrowings, debt refinancing activity and $50.0 million of dividends.
- Cash and cash equivalents were $114.3 million at March 31, 2021, compared with $606.7 million at June 30, 2020. Total debt was $610.4 million, including $591.7 million of long-term debt and $18.7 million of current borrowings and notes payable.
- Working capital was $541.4 million. The company had $10.0 million outstanding and $670.0 million available under its $700.0 million revolving credit facility and was in compliance with its covenants.
Material changes versus the prior comparable period
- Operating income and earnings improved substantially for the nine-month period, benefiting from simplification and modernization savings, lower restructuring charges and the absence of prior-year goodwill and intangible impairment charges.
- Quarterly operating income increased despite lower gross profit because of approximately $18 million of incremental simplification and modernization benefits, including approximately $13 million of incremental restructuring savings.
- Quarterly gross margin declined 150 basis points because of lower volumes, unfavorable labor and fixed-cost absorption and mix effects.
- Interest expense increased to $20.9 million from $7.9 million in the quarter and to $39.8 million from $23.8 million for the nine-month period. The increase primarily reflected the early extinguishment of the 2022 Notes, including a $9.6 million make-whole premium and accelerated hedge-related losses.
- In February 2021, the company issued $300 million of 2.800% senior unsecured notes due 2031 and used the proceeds and cash on hand to repay its $300 million of 3.875% notes due 2022.
- Prior-year results included $15.6 million of quarterly and $30.2 million of nine-month non-cash goodwill and intangible impairment charges, as well as a $6.5 million divestiture loss for the nine-month period. No comparable charges were recorded in the current quarter.
- The effective tax rate was an 8.0% benefit on income in the current quarter versus a 93.1% provision in the prior-year quarter. Current-quarter tax results included discrete benefits of $12.4 million and $3.5 million.
Guidance, outlook, commentary and risks
- Management remained on track for $180 million of total annualized simplification and modernization savings by the end of fiscal 2021. Annualized savings achieved inception to date were approximately $164 million.
- FY21 restructuring actions are expected to generate approximately $75 million of annualized savings and require expected pretax charges of $90 million to $95 million. Charges recorded for the program through March 31, 2021 were $76.7 million, leaving additional charges expected.
- Management stated that current financial resources, liquidity and investment-grade credit ratings should be sufficient to meet cash requirements for the next 12 months.
- COVID-19 continues to create uncertainty regarding demand, operations, workforce disruption, supply chains and the global economy. The company reported no material supply-chain disruption through the filing date.
- Demand remained weak in aerospace, energy and certain general engineering and earthworks markets. Quarterly aerospace sales declined 32% and energy sales declined 12% on a reported basis; U.S. land rig counts were approximately 51% below the prior-year quarter.
- Other disclosed risks include economic and business-cycle downturns, foreign currency movements, raw-material availability and costs, competition, labor relations, environmental obligations, intellectual property, information technology security, potential impairment charges and execution of restructuring initiatives.
- The company is defending an Italian tax assessment requiring payment of €36 million, including penalties and interest. No liability has been recorded, the matter remains in litigation, and payment is currently stayed. A loss could increase income tax expense by up to approximately $42 million.
- Environmental remediation accruals totaled $14.7 million at March 31, 2021. Management believes the accruals are adequate, but noted that actual obligations could change materially.
Most important facts for investors to verify
- Whether the company achieves the remaining fiscal 2021 simplification and modernization savings and whether restructuring charges remain within the $90 million to $95 million estimate.
- The sustainability of earnings excluding discrete tax benefits, debt-refinancing costs, restructuring charges and other unusual items.
- Recovery trends in aerospace, energy, transportation and general engineering markets, particularly in the Americas and EMEA.
- Future cash generation, capital expenditures, dividend funding and the reduction or refinancing of debt maturities in 2028 and 2031.
- Compliance with the revolving credit facility’s leverage and interest-coverage covenants after the temporary covenant relief expires.
- The outcome and potential cash and tax impact of the Italian tax litigation and environmental remediation matters.
- The filing’s segment reorganization effective July 1, 2020, which combined the Industrial and Widia businesses into Metal Cutting and may affect period-to-period comparability.