Kennametal Inc. Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2016. The request metadata references “2015 Q4,” but the filing is the fiscal 2016 annual report; the filing also provides unaudited fourth-quarter data for the quarter ended June 30, 2016.
Business Context
Kennametal supplies metalworking tools, engineered components, advanced materials, surface technologies and earth-cutting products. Its two reportable segments during fiscal 2016 were Industrial and Infrastructure. Major end markets include general engineering, transportation, energy, earthworks, aerospace and defense. International markets represented 57% of fiscal 2016 sales.
Key Financial Metrics
| Metric | Fiscal 2016 | Fiscal 2015 | Change |
|---|---|---|---|
| Sales | $2,098.4 million | $2,647.2 million | Down 20.7% |
| Gross profit / margin | $616.1 million / 29.4% | $806.0 million / 30.4% | Margin down 100 bps |
| Operating income (loss) | $(174.9) million | $(357.8) million | Improved $182.9 million |
| Net loss attributable to Kennametal | $(226.0) million | $(373.9) million | Improved $147.9 million |
| Diluted loss per share | $(2.83) | $(4.71) | Improved $1.88 |
| Cash flow from operations | $219.3 million | $351.4 million | Down $132.1 million |
| Capital expenditures | $110.7 million | $100.9 million | Up $9.8 million |
| Cash and equivalents | $161.6 million | $105.5 million | Up $56.1 million |
| Total debt | $701.5 million | $751.6 million | Down $50.1 million |
| Working capital | $648.1 million | $775.8 million | Down $127.7 million |
Margins and segments: Industrial sales declined 13% to $1,269.2 million, and operating income declined 49.5% to $81.2 million, producing a 6.4% operating margin versus 11.0% in fiscal 2015. Infrastructure sales declined 30% to $829.3 million, while operating loss improved to $246.3 million from $509.4 million, primarily because fiscal 2015 included substantially larger impairment charges.
Fourth quarter: Sales were $521.2 million, gross profit was $166.7 million, net loss attributable to Kennametal was $66.5 million and diluted loss per share was $0.83. In the comparable fiscal 2015 fourth quarter, sales were $637.7 million, net income was $21.1 million and diluted earnings per share were $0.26.
Material Changes Versus Prior Period
- Sales decreased 21%, reflecting an 11% organic decline, a 5% divestiture impact and a 5% unfavorable currency impact.
- Demand weakened particularly in energy, earthworks and general engineering. Infrastructure sales were affected by persistent weakness in oil and gas, mining and industrial applications.
- Gross margin declined because of lower volume, unfavorable mix, lower fixed-cost absorption, currency effects and divestitures, partly offset by lower raw-material costs and restructuring benefits.
- Operating loss improved primarily because fiscal 2015 included $541.7 million of goodwill and intangible impairment charges, compared with $108.5 million in fiscal 2016.
- Fiscal 2016 included a $131.5 million pretax loss on the sale of non-core businesses, including $127.9 million in Infrastructure and $3.6 million in Industrial.
- The Company completed divestitures for $56.1 million of net cash proceeds. The divested businesses had approximately $220 million of annual sales and a $191.9 million net book value.
- Cash generation benefited from inventory and receivables reductions, although operating cash flow declined from the prior year because of lower earnings and related working-capital effects.
- Shareholders received $63.7 million in dividends, or $0.80 per share, versus $57.0 million, or $0.72 per share, in fiscal 2015.
Restructuring, Outlook and Unusual Items
- Restructuring programs generated approximately $79 million of pretax benefits in fiscal 2016, including approximately $44 million of incremental benefits. Phase 1 was substantially completed and is expected to provide $40 million to $45 million of annual savings.
- Additional restructuring programs are expected to produce $75 million to $90 million of annual pretax savings when fully implemented by December fiscal 2019, with expected total charges of $105 million to $125 million.
- A workforce-reduction initiative is expected to eliminate approximately 1,000 positions, cost $80 million to $95 million and produce $100 million to $110 million of annual run-rate savings by fiscal year-end 2017.
- Management identified further automation and efficiency opportunities that it expects could yield savings of several hundred million dollars over three years; the filing does not provide a more specific quantified schedule.
- The revolving credit facility was amended to extend maturity to April 2021, retain borrowing capacity of up to $600 million and increase flexibility under certain leverage and restructuring provisions. No borrowings were outstanding under the facility at June 30, 2016, and the Company was in compliance with its covenants.
- Management expected operating cash flow and available credit lines to meet cash requirements over the following 12 months. No specific fiscal 2017 sales or earnings guidance is provided in the filing text.
- The Company is exploring strategic alternatives for a remaining non-core Infrastructure business with an estimated net book value of approximately $30 million. Additional impairment charges may result depending on the outcome.
Liquidity, Debt and Contingencies
Debt consisted primarily of $400 million of 2.65% senior notes due 2019 and $300 million of 3.875% senior notes due 2022. The Company had $55.3 million of cash and equivalents that was not available for long-term U.S. use without tax consequences. Pension obligations were underfunded by $183.7 million at June 30, 2016, and accrued pension benefits increased to $182.6 million.
Environmental reserves were $12.5 million, compared with $12.6 million in the prior year. The Company is a potentially responsible party at certain Superfund sites, and environmental liabilities could change based on contamination, remediation requirements, technology, new information and the financial condition of other responsible parties. Ordinary-course litigation was not considered material by management.
Goodwill and other indefinite-lived intangible assets totaled $315.3 million, or 13% of total assets. The filing warns that further deterioration in end markets could result in additional impairment charges. Management reported effective disclosure controls and effective internal control over financial reporting; PricewaterhouseCoopers LLP issued an unqualified audit opinion.
Most Important Facts for Investors to Verify
- Whether energy, mining, oil and gas and other Infrastructure end markets stabilize or deteriorate further.
- The timing, cash cost and actual savings delivered by the restructuring and 1,000-position workforce-reduction initiatives.
- Whether the remaining non-core Infrastructure business is sold, retained or impaired, and the resulting financial impact.
- The Company’s ability to sustain dividends while reporting losses, funding capital expenditures and addressing pension obligations.
- Compliance with leverage and interest-coverage covenants under the amended $600 million revolving facility.
- Potential additional goodwill, intangible-asset, fixed-asset, environmental or tax valuation-allowance charges.
- Execution of the fiscal 2017 operating restructure, including the planned separation of the WIDIA business into a new reportable segment.
- The effect of currency movements, raw-material availability and pricing, international regulation, labor relations and cyclical industrial demand.