Kennametal Inc. Form 10-Q Summary
Business Context and Reporting Period
Kennametal is a global manufacturer of tooling, engineered components and advanced materials serving industrial, aerospace, defense, transportation, energy, mining and construction markets. The company reports two segments: Industrial and Infrastructure.
This unaudited filing covers the three and six months ended December 31, 2011, representing fiscal 2012 second-quarter and year-to-date results. The comparable periods ended December 31, 2010.
Financial Performance and Key Metrics
| Metric | Three months ended Dec. 31, 2011 | Three months ended Dec. 31, 2010 | Six months ended Dec. 31, 2011 | Six months ended Dec. 31, 2010 |
|---|---|---|---|---|
| Sales | $641.7 million | $565.8 million | $1.301 billion | $1.095 billion |
| Gross profit | $231.9 million | $200.0 million | $482.9 million | $388.8 million |
| Gross margin | 36.1% | 35.4% | 37.1% | 35.5% |
| Operating income | $94.0 million | $61.6 million | $195.7 million | $119.1 million |
| Operating margin | 14.7% | 10.9% | 15.0% | 10.9% |
| Net income attributable to Kennametal | $73.7 million | $43.5 million | $145.7 million | $78.4 million |
| Diluted EPS | $0.91 | $0.52 | $1.79 | $0.94 |
- Quarterly sales increased 13%, while year-to-date sales increased 19%. Management attributed growth primarily to organic volume and pricing, with a favorable foreign-currency effect for the six-month period.
- Quarterly operating income rose 53%; year-to-date operating income rose 64%. Higher volume, price realization, restructuring benefits and cost discipline more than offset higher raw-material costs.
- Quarterly net margin was approximately 11.6%, compared with 7.8% in the prior-year quarter. The effective tax rate declined to 17.3% from 21.3%, partly because of a $4.2 million Netherlands valuation-allowance reduction.
- Industrial quarterly sales increased 11% and operating income increased to $62.9 million from $42.2 million. Infrastructure sales increased 18% and operating income increased to $33.3 million from $21.6 million.
- Research and development expense was $8.5 million in the quarter.
Cash Flow, Liquidity and Capital Structure
- Six-month operating cash flow was $71.1 million, compared with $67.4 million in the prior-year period.
- Investing cash usage was $43.9 million, including $35.6 million of capital expenditures and a $10.0 million technology-license purchase.
- Financing cash usage was $84.8 million, including $66.7 million of share repurchases and $21.1 million of dividends.
- Cash and equivalents declined to $128.5 million at December 31, 2011, from $204.6 million at June 30, 2011.
- Total debt was $307.9 million, primarily reflecting $300.0 million of senior unsecured notes due June 2012. The company had no borrowings under its $600.0 million revolving credit facility and was in compliance with its financial covenants.
- Working capital was $474.0 million, up from $446.1 million at June 30, 2011. Inventory increased $51.1 million to $571.1 million, principally to support higher demand.
- The company stated that its investment-grade ratings and financial position provide access to capital markets. Approximately $290 million of cash, cash equivalents and short-term intercompany advances held by foreign subsidiaries was not expected to be available for U.S. use without tax consequences.
Material Changes, Outlook and Unusual Items
- No restructuring charges were recorded in the current quarter or six-month period. Completed restructuring programs were generating approximately $170 million of annual ongoing pretax savings.
- Raw-material prices, particularly tungsten, had doubled from the prior year but were stabilizing. Management stated that pricing actions had recovered inflationary costs, while continuing to monitor commodity prices.
- On January 17, 2012, Kennametal announced an agreement to acquire Deloro Stellite for approximately €277 million. Deloro Stellite had approximately €220 million of annual sales and 1,300 employees. The transaction was expected to be accretive to fiscal 2013 earnings and was to be funded with existing credit facilities and operating cash flow.
- The company planned to refinance the $300 million notes due June 2012 through a new corporate bond issuance. The filing does not provide a specific earnings or revenue forecast.
- Foreign-currency translation reduced accumulated other comprehensive income by approximately $100.7 million during the six months, contributing to a decline in shareholders’ equity despite strong net income.
- Environmental remediation reserves were $4.7 million at December 31, 2011. Certain Superfund matters were too early-stage for the company to estimate potential ultimate costs, timing or liability allocation.
- Management identified risks from economic conditions, raw-material and energy costs, foreign exchange, international operations, regulation, competition, labor relations, product claims, acquisitions, environmental matters and demand for products.
Important Facts for Investors to Verify
- Timing and terms of the planned refinancing of the $300 million June 2012 debt maturity.
- Closing, financing, integration costs and expected earnings contribution of the Deloro Stellite acquisition.
- Whether pricing actions continue to offset tungsten and other raw-material inflation.
- Inventory growth and its effect on operating cash conversion and working-capital requirements.
- Potential changes in environmental remediation obligations and unreserved Superfund exposure.
- Sustainability of the lower effective tax rate, including the Netherlands valuation-allowance benefit.
- Exposure to foreign-currency movements, including the substantial translation loss recorded in accumulated other comprehensive income.