Kennametal Inc. Form 10-Q Summary
Reporting period: Three and six months ended December 31, 2015. The filing covers the second quarter of fiscal 2016, although the requested period is identified as 2015 Q2. Kennametal manufactures tooling, engineered components and advanced materials through its Industrial and Infrastructure segments.
Financial Performance and Condition
| Metric | Three months ended Dec. 31, 2015 | Three months ended Dec. 31, 2014 | Six months ended Dec. 31, 2015 | Six months ended Dec. 31, 2014 |
|---|---|---|---|---|
| Sales | $524.0 million | $675.6 million | $1,079.4 million | $1,370.6 million |
| Gross profit | $140.8 million | $199.5 million | $292.0 million | $417.6 million |
| Gross margin | 26.9% | 29.5% | 27.1% | 30.5% |
| Operating loss | $(234.0) million | $(333.8) million | $(227.3) million | $(272.8) million |
| Net loss attributable to Kennametal | $(169.2) million | $(388.3) million | $(175.5) million | $(348.8) million |
| Diluted loss per share | $(2.12) | $(4.89) | $(2.20) | $(4.40) |
- Quarterly sales declined 22%; six-month sales declined 21%. The quarter reflected a 12% organic decline, a 6% unfavorable currency impact and a 4% divestiture impact.
- Quarterly operating loss included $112.2 million of restructuring and asset impairment charges and a $133.3 million loss on divestiture. Six-month charges were $121.4 million and $133.3 million, respectively.
- Six-month operating cash flow was $104.5 million, down from $135.3 million in the prior-year period. Capital expenditures were $61.2 million versus $54.7 million.
- Cash and cash equivalents were $139.0 million at December 31, 2015, compared with $105.5 million at June 30, 2015. Working capital was $668.0 million, down $107.8 million from fiscal year-end.
- Total debt was approximately $706.7 million, including $700.7 million of long-term debt and capital leases. Debt declined $35.2 million from June 30, 2015. The company had $5.4 million outstanding under its $600 million revolving credit facility and was in compliance with all covenants.
- Shareholders’ equity was $1.125 billion, down from $1.346 billion at June 30, 2015, primarily due to the net loss, currency effects and dividends.
- The quarterly Industrial operating margin was 2.4%, compared with 11.2% in the prior-year quarter. Infrastructure reported a $237.7 million operating loss, including the divestiture loss and impairment charges.
Material Changes Versus the Prior Comparable Period
- Industrial sales decreased 16% in the quarter and 17% for the six-month period; Industrial operating income fell to $7.4 million for the quarter and $27.1 million for the six months.
- Infrastructure sales decreased 30% in the quarter and 27% for the six months, driven by weakness in energy, mining, earthworks and related markets. Infrastructure’s six-month operating loss was $246.2 million.
- Demand deterioration was particularly severe in oil and gas, mining, energy and general engineering. Management also cited destocking in indirect distribution channels and Asia.
- The company sold several non-core businesses for net proceeds of $61.1 million, against approximately $182.5 million of net book value, recognizing a $133.3 million pretax loss. The divested businesses had approximately $220 million of annual sales.
- The company recorded a preliminary $105.7 million Infrastructure goodwill impairment and $2.7 million of trademark impairments. This compared with $376.5 million of impairment charges in the prior-year quarter.
- Restructuring and related charges totaled $24.0 million for the six months versus $20.4 million in the prior-year period. Management reported approximately $19 million of pretax savings during the quarter and approximately $77 million of savings since program inception.
- Interest expense declined to $6.8 million for the quarter and $13.8 million for the six months, primarily because of lower borrowings.
Outlook, Risks and Unusual Items
- Restructuring programs have estimated total pretax charges of $185 million to $205 million, with estimated annualized savings of $105 million to $125 million. Expected completion dates range from June 2016 to December 2018.
- Management stated that it expects sufficient resources to meet cash requirements for the next 12 months and continues to have access to capital markets at investment-grade credit ratings.
- The company is evaluating strategic alternatives for a non-core Infrastructure business with an estimated net book value of approximately $40 million. Additional impairment charges cannot be determined at this time.
- Management warned that a further acceleration or prolonged persistence of weak global end markets could adversely affect sales, profitability, cash flows and asset values. Other stated risks include currency movements, raw-material availability and costs, environmental liabilities, competition, product liability, information technology continuity, restructuring execution and potential future goodwill impairments.
- Environmental reserves were $12.2 million at December 31, 2015. Certain Superfund matters remain at an early stage and cannot yet be reasonably estimated.
- On February 3, 2016, Ronald M. DeFeo became President and Chief Executive Officer, succeeding Donald A. Nolan.
Investor Verification Priorities
- Verify the final valuation and any adjustments to the preliminary $105.7 million Infrastructure goodwill impairment.
- Assess whether the restructuring programs deliver the stated $105 million to $125 million annualized savings and whether cash costs remain within the $185 million to $205 million estimate.
- Monitor demand trends in oil and gas, mining, earthworks, general engineering and transportation, including the effects of destocking and currency movements.
- Review the financial and strategic outcome of the divested businesses and the unresolved strategic alternatives for the remaining non-core Infrastructure business.
- Evaluate liquidity, covenant compliance, debt maturities and the sustainability of dividends while the company is generating net losses.
- Reconcile subsequent filings for the CEO transition, environmental contingencies, deferred-tax classification changes and any additional impairment or restructuring charges.