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Kennametal Announces Fiscal 2020 Second Quarter Results

February 4, 2020 GMT

PITTSBURGH, Feb. 3, 2020 /PRNewswire/ -- Kennametal Inc. (NYSE: KMT) (the “Company”) today reported results for its fiscal 2020 second quarter ended December 31, 2019, with loss per diluted share (LPS) of $0.07, compared with earnings per diluted share (EPS) of $0.66 in the prior year quarter, and adjusted EPS of $0.17, compared with adjusted EPS of $0.71 in the prior year quarter.

“Our second quarter results reflect weakening end-market conditions, particularly from greater than expected deceleration in the U.S., Germany and India, combined with headwinds developing in the 737 MAX supply chain,” said Christopher Rossi, President and CEO.

Rossi continued, “We expect increased profitability in the second half driven by progress on simplification/ modernization and raw material cost improvements now that higher-priced inventory has moved through the P&L. Nevertheless, we are reducing our full-year outlook to reflect further second half end-market weakness and a higher adjusted effective tax rate.”

Fiscal 2020 Second Quarter Key Developments

Sales of $505 million decreased 14 percent from $587 million in the prior year quarter, reflecting 12 percent organic sales decline, 1 percent unfavorable currency exchange effect and 1 percent decline from divestiture.

Reported EPS in the current quarter includes restructuring and related charges of $0.39, loss on divestiture of $0.03 and discrete benefits from foreign tax reforms of $0.18. Reported EPS in the prior year quarter includes a non-recurring benefit related to U.S. tax reform of $0.04, a tax charge from change in permanent reinvestment assertion of $0.07 and restructuring and related charges of $0.02.

Restructuring Update

Other Items Recognized in the Quarter

Operating loss was $48 million, or 9.4 percent loss margin, compared to operating income of $79 million, or 13.4 percent margin, in the prior year quarter. Adjusted operating income was $24 million, or 4.8 percent margin, compared to $81 million, or 13.8 percent margin, in the prior year quarter. The decrease in adjusted operating income was due primarily to organic sales decline, unfavorable labor and fixed cost absorption in certain facilities due to lower volumes and simplification/modernization efforts in progress, and higher raw material costs, partially offset by incremental simplification/modernization benefits. Higher raw material costs, which will abate in the second half of fiscal 2020 now that higher-priced inventory has moved through the P&L, had a detrimental effect on year-over-year adjusted operating margin of approximately 130 basis points.

The reported effective tax rate (ETR) for the quarter was 87.9 percent benefit on a loss and the adjusted ETR was 29.6 percent provision on income, compared to reported ETR of 24.8 percent provision on income and adjusted ETR of 21.3 percent provision on income in the prior year quarter. The increase in the adjusted ETR is due primarily to the effects of global intangible low-taxed income (GILTI) and base erosion and anti-abuse tax (BEAT), which are both provisions of the U.S. Tax Cuts and Jobs Act of 2017, and jurisdictional mix.

Year-to-date net cash flow provided by operating activities was $87 million compared to $62 million in the prior year quarter. Year-to-date free operating cash flow (FOCF) was negative $60 million compared to negative $24 million in the prior year quarter. The change in FOCF was driven primarily by lower earnings and higher capital expenditures of $59 million due primarily to simplification/modernization, partially offset by changes in working capital.

Outlook

The Company has reduced its outlook due primarily to lower end-market demand experienced in the December quarter, as well as expectations of further weakness through the remainder of the fiscal year, which was previously forecasted to stabilize. The outlook also accounts for the effect of the 737 MAX on the aerospace supply chain, and a higher than anticipated effective tax rate.

The updated outlook for fiscal 2020 is as follows:

Segment Results

Industrial sales of $279 million decreased 12 percent from $317 million year-over-year, driven by organic sales decline of 11 percent and a 1 percent unfavorable currency exchange impact. Operating loss was $19 million, or 6.9 percent loss margin, compared to operating income $58 million, or 18.1 percent margin, in the prior year quarter. Adjusted operating income was $30 million, or 10.7 percent margin, compared to $59 million, or 18.6 percent margin, in the prior year quarter. The decrease in adjusted operating income was driven primarily by organic sales decline, unfavorable labor and fixed cost absorption in certain facilities due to lower volumes and simplification/modernization efforts in progress and higher compensation expense, partially offset by incremental simplification/modernization benefits. Higher raw material costs, which will abate in the second half of fiscal 2020, had a detrimental effect on year-over-year adjusted operating margin of approximately 70 basis points.

Widia sales of $44 million decreased 9 percent from $49 million year-over-year, driven by organic sales decline of 8 percent and an unfavorable business day effect of 1 percent. Operating loss was $16 million, or 35.9 percent loss margin, compared to operating income of $2 million, or 3.5 percent margin, in the prior year quarter. Adjusted operating loss was $1 million, or 2.4 percent loss margin, compared to adjusted operating income of $2 million, or 3.7 percent margin, in the prior year quarter. The change in adjusted operating results was driven primarily by organic sales decline, partially offset by incremental simplification/modernization benefits. Higher raw material costs, which will abate in the second half of fiscal 2020, had a detrimental effect on year-over-year adjusted operating margin of approximately 230 basis points.

Infrastructure sales of $182 million decreased 18 percent from $221 million year-over-year, driven by organic sales decline of 14 percent, a 2 percent decline from divestiture, an unfavorable currency exchange impact of 1 percent and an unfavorable business day effect of 1 percent. Operating loss was $12 million, or 6.4 percent loss margin, compared to operating income of $21 million, or 9.3 percent margin, in the prior year quarter. Adjusted operating loss was $3 million, or 1.8 percent loss margin, compared to adjusted operating income of $21 million, or 9.6 percent margin, in the prior year quarter. The change was primarily driven by organic sales decline, unfavorable mix and higher raw material costs, partially offset by incremental simplification/modernization benefits. Higher raw material costs, which will abate in the second half of fiscal 2020, had a detrimental effect on year-over-year adjusted operating margin of approximately 180 basis points.

Dividend Declared

Kennametal also announced that its Board of Directors declared a quarterly cash dividend of $0.20 per share. The dividend is payable on February 25, 2020 to shareholders of record as of the close of business on February 11, 2020.

The Company will host its second quarter fiscal 2020 results on Tuesday, February 4, 2020 at 8:00 a.m. Eastern Time. The conference call will be broadcast via real-time audio on the Kennametal website at www.kennametal.com. Once on the homepage, select “About Us”, “Investor Relations” and then “Events.”

(1) Previously announced restructuring actions associated with the ongoing simplification/modernization program. These restructurings and proposed facility closures in fiscal 2020 (FY20 Restructuring Actions) are currently estimated to deliver annualized savings of $35 to $40 million with pre-tax charges of $55 to $65 million. Fiscal 2021 proposed restructuring and facility closures (FY21 Restructuring Actions) estimated to deliver annualized savings of $25 to $30 million with pre-tax charges of $55 to $65 million.

This earnings release contains non-GAAP financial measures. Reconciliations and descriptions of all non-GAAP financial measures are set forth in the tables that follow.

Certain statements in this release may be forward-looking in nature, or “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are statements that do not relate strictly to historical or current facts. For example, statements about Kennametal’s outlook for earnings, sales volumes, cash flow, capital expenditures and effective tax rate for fiscal year 2020 and our expectations regarding future growth and financial performance are forward-looking statements. Any forward-looking statements are based on current knowledge, expectations and estimates that involve inherent risks and uncertainties. Should one or more of these risks or uncertainties materialize, or should the assumptions underlying the forward-looking statements prove incorrect, our actual results could vary materially from our current expectations. There are a number of factors that could cause our actual results to differ from those indicated in the forward-looking statements. They include: downturns in the business cycle or the economy; our ability to achieve all anticipated benefits of restructuring, simplification and modernization initiatives; risks related to our foreign operations and international markets, such as currency exchange rates, different regulatory environments, trade barriers, exchange controls, and social and political instability; changes in the regulatory environment in which we operate, including environmental, health and safety regulations; potential for future goodwill and other intangible asset impairment charges; our ability to protect and defend our intellectual property; continuity of information technology infrastructure; competition; our ability to retain our management and employees; demands on management resources; availability and cost of the raw materials we use to manufacture our products; product liability claims; integrating acquisitions and achieving the expected savings and synergies; global or regional catastrophic events; demand for and market acceptance of our products; business divestitures; labor relations; and implementation of environmental remediation matters. Many of these risks and other risks are more fully described in Kennametal’s latest annual report on Form 10-K and its other periodic filings with the Securities and Exchange Commission. We can give no assurance that any goal or plan set forth in forward-looking statements can be achieved and readers are cautioned not to place undue reliance on such statements, which speak only as of the date made. We undertake no obligation to release publicly any revisions to forward-looking statements as a result of future events or developments.

About Kennametal
With over 80 years as an industrial technology leader, Kennametal Inc. delivers productivity to customers through materials science, tooling and wear-resistant solutions. Customers across aerospace, earthworks, energy, general engineering and transportation turn to Kennametal to help them manufacture with precision and efficiency. Every day approximately 10,000 employees are helping customers in more than 60 countries stay competitive. Kennametal generated nearly $2.4 billion in revenues in fiscal 2019. Learn more at www.kennametal.com. Follow @Kennametal: Twitter, Instagram, Facebook, LinkedIn and YouTube.

FINANCIAL HIGHLIGHTS


CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)



Three Months Ended
December 31,

Six Months Ended
December 31,

(in thousands, except per share amounts)

2019


2018

2019


2018

Sales

$

505,080



$

587,394


$

1,023,168



$

1,174,080


Cost of goods sold

373,062



388,796


752,170



764,389


Gross profit

132,018



198,598


270,998



409,691


Operating expense

107,548



114,635


221,739



237,920


Restructuring and asset impairment charges

62,329



1,545


66,995



2,620


Loss on divestiture

6,517




6,517




Amortization of intangibles

3,262



3,560


7,008



7,141


Operating (loss) income

(47,638)



78,858


(31,261)



162,010


Interest expense

8,055



8,104


15,936



16,201


Other income, net

(4,211)



(4,022)


(6,891)



(6,782)


(Loss) income before income taxes

(51,482)



74,776


(40,306)



152,591


(Benefit) provision for income taxes

(45,253)



18,529


(41,487)



37,921


Net (loss) income

(6,229)



56,247


1,181



114,670


Less: Net (loss) income attributable to noncontrolling interests

(290)



1,549


653



3,274


Net (loss) income attributable to Kennametal

$

(5,939)



$

54,698


$

528



$

111,396


PER SHARE DATA ATTRIBUTABLE TO KENNAMETAL SHAREHOLDERS




Basic (loss) earnings per share

$

(0.07)



$

0.66


$

0.01



$

1.35


Diluted (loss) earnings per share

$

(0.07)



$

0.66


$

0.01



$

1.34


Dividends per share

$

0.20



$

0.20


$

0.40



$

0.40


Basic weighted average shares outstanding

83,075



82,331


82,979



82,218


Diluted weighted average shares outstanding

83,075



83,310


83,618



83,233


CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)


(in thousands)

December 31,
2019


June 30,

2019

ASSETS




Cash and cash equivalents

$

105,210



$

182,015


Accounts receivable, net

310,379



379,855


Inventories

522,499



571,576


Other current assets

97,824



57,381


Total current assets

1,035,912



1,190,827


Property, plant and equipment, net

1,008,638



934,895


Goodwill and other intangible assets, net

427,224



461,009


Other assets

151,259



69,538


Total assets

$

2,623,033



$

2,656,269


LIABILITIES




Current maturities of long-term debt, including notes payable

$

2,102



$

157


Accounts payable

173,160



212,908


Other current liabilities

233,848



248,661


Total current liabilities

409,110



461,726


Long-term debt

593,223



592,474


Other liabilities

273,673



227,365


Total liabilities

1,276,006



1,281,565


KENNAMETAL SHAREHOLDERS' EQUITY

1,306,168



1,335,172


NONCONTROLLING INTERESTS

40,859



39,532


Total liabilities and equity

$

2,623,033



$

2,656,269


SEGMENT DATA (UNAUDITED)

Three Months Ended
December 31,

Six Months Ended
December 31,

(in thousands)

2019


2018

2019


2018

Outside Sales:







Industrial

$

279,242



$

317,320


$

559,270



$

637,878


Widia

44,337



48,954


88,394



97,626


Infrastructure

181,501



221,120


375,504



438,576


Total sales

$

505,080



$

587,394


$

1,023,168



$

1,174,080


Sales By Geographic Region:







Americas

$

245,243



$

295,626


$

504,532



$

584,755


EMEA

150,433



174,608


303,913



346,115


Asia Pacific

109,404



117,160


214,723



243,210


Total sales

$

505,080



$

587,394


$

1,023,168



$

1,174,080


Operating (Loss) Income Loss:







Industrial

$

(19,259)



$

57,519


$

2,012



$

116,061


Widia

(15,918)



1,728


(17,882)



3,822


Infrastructure

(11,570)



20,614


(14,260)



44,474


Corporate (2)

(891)



(1,003)


(1,131)



(2,347)


Total operating (loss) income

$

(47,638)



$

78,858


$

(31,261)



$

162,010




(2) Represents unallocated corporate expenses


NON-GAAP RECONCILIATIONS (UNAUDITED)

In addition to reported results under generally accepted accounting principles in the United States of America (GAAP), the following financial highlight tables include, where appropriate, a reconciliation of adjusted results including: operating (loss) income and margin; ETR; net (loss) income attributable to Kennametal; diluted (LPS) EPS; Industrial operating (loss) income and margin; Widia operating (loss) income and margin; Infrastructure operating (loss) income and margin; FOCF; and consolidated and segment organic sales decline (all of which are non-GAAP financial measures), to the most directly comparable GAAP financial measures. Adjustments for the three months ended December 31, 2019 include (1) restructuring and related charges; (2) goodwill and other intangible asset impairment charges; (3) loss on divestiture; and (4) discrete benefit from Swiss tax reform. Adjustments for the three months ended December 31, 2018 include: (1) restructuring and related charges; (2) discrete effect from U.S. tax reform; and (3) tax charge from change in permanent reinvestment assertion. For those adjustments that are presented ‘net of tax’, the tax effect of the adjustment can be derived by calculating the difference between the pre-tax and the post-tax adjustments presented. The tax effect on adjustments is calculated by preparing an overall tax calculation including the adjustments and then a tax calculation excluding the adjustments. The difference between these calculations results in the tax impact of the adjustments.

Management believes that presentation of these non-GAAP financial measures provides useful information about the results of operations of the Company for the current and past periods. Management believes that investors should have available the same information that management uses to assess operating performance, determine compensation and assess the capital structure of the Company. These non-GAAP financial measures should not be considered in isolation or as a substitute for the most comparable GAAP financial measures. Investors are cautioned that non-GAAP financial measures used by management may not be comparable to non-GAAP financial measures used by other companies. Reconciliations and descriptions of all non-GAAP financial measures are set forth in the disclosures below.

Reconciliations to the most directly comparable GAAP financial measures for the following forward-looking non-GAAP financial measures for the full fiscal year of 2020 have not been provided, including but not limited to: adjusted EPS, adjusted ETR, organic sales decline and FOCF. The most comparable GAAP financial measures are (loss) earnings per share, ETR, sales decline and net cash flow from operating activities, respectively. Because the non-GAAP financial measures on a forward-looking basis are subject to uncertainty and variability as they are dependent on many factors - including, but not limited to, the effect of foreign currency exchange fluctuations, impacts from potential acquisitions or divestitures, gains or losses on the potential sale of businesses or other assets, restructuring costs, asset impairment charges, gains or losses from early extinguishment of debt, the tax impact of the items above and the impact of tax law changes or other tax matters - reconciliations to the most directly comparable forward-looking GAAP financial measures are not available without unreasonable effort.

THREE MONTHS ENDED DECEMBER 31, 2019 (UNAUDITED)


(in thousands, except percents and
per share data)

Sales

Operating
(loss)
income

ETR

Net (loss)
income(3)

Diluted
(LPS) EPS

Reported results

$

505,080


$

(47,638)


87.9%


$

(5,939)


$

(0.07)


Reported margins


(9.4)%





Restructuring and related charges


50,969


(11.5)


32,402


0.39


Goodwill and other intangible asset
impairment charges


14,627


(13.3)


381



Loss on divestiture


6,517


(3.8)


2,433


0.03


Discrete benefit from Swiss tax reform



(29.7)


(15,288)


(0.18)


Adjusted results

$

505,080


$

24,475


29.6%


$

13,989


$

0.17


Adjusted margins


4.8%







(3) Attributable to Kennametal


THREE MONTHS ENDED DECEMBER 31, 2019 (UNAUDITED)



Industrial

Widia

Infrastructure

(in thousands, except percents)

Sales

Operating
(loss)
income

Sales

Operating
loss

Sales

Operating
loss

Reported results

$

279,242


$

(19,259)


$

44,337


$

(15,918)


$

181,501


$

(11,570)


Reported operating margin


(6.9)%



(35.9)%



(6.4)%


Restructuring and related
charges


49,024



219



1,726


Goodwill and other intangible
asset impairment charges




14,627




Loss on divestiture






6,517


Adjusted results

$

279,242


$

29,765


$

44,337


$

(1,072)


$

181,501


$

(3,327)


Adjusted operating margin


10.7%



(2.4)%



(1.8)%


THREE MONTHS ENDED DECEMBER 31, 2018 (UNAUDITED)


(in thousands, except percents and
per share data)

Sales

Operating
income

ETR

Net
income(3)

Diluted EPS

Reported results

$

587,394


$

78,858


24.8%


$

54,698


$

0.66


Reported margins


13.4%





Restructuring and related charges


2,071



1,621


0.02


Discrete effect from U.S. tax reform(4)



4.6


(3,452)


(0.04)


Tax charge from change in permanent
reinvestment assertion(5)



(8.1)


6,093


0.07


Adjusted results

$

587,394


$

80,929


21.3%


$

58,960


$

0.71


Adjusted margins


13.8%






(3) Attributable to Kennametal

(4) Additional charge recorded to reflect adjustments to the amounts recorded for the application of a measure of the Tax Cuts and Jobs Act of
2017 (TCJA) requiring a one-time transition tax on previously untaxed accumulated earnings and profits of non-U.S. companies (toll tax)
considering regulatory guidance issued through December 31, 2018.

(5) As a result of TCJA, the Company reevaluated its permanent reinvestment assertion in certain jurisdictions, concluding that the unremitted
earnings and profits of certain of our non-U.S. subsidiaries and affiliates will no longer be permanently reinvested. This change in assertion
required the recognition of a tax charge of $6 million primarily for foreign withholding and state income taxes.


Industrial

Widia

Infrastructure

(in thousands, except percents)

Sales

Operating
income

Sales

Operating
income

Sales

Operating
income

Reported results

$

317,320


$

57,519


$

48,954


$

1,728


$

221,120


$

20,614


Reported operating margin


18.1%



3.5%



9.3%


Restructuring and related
charges


1,480



76



514


Adjusted results

$

317,320


$

58,999


$

48,954


$

1,804


$

221,120


$

21,128


Adjusted operating margin


18.6%



3.7%



9.6%


Free Operating Cash Flow (FOCF)
FOCF is a non-GAAP financial measure and is defined by the Company as net cash flow provided by operating activities (which is the most directly comparable GAAP financial measure) less capital expenditures plus proceeds from disposals of fixed assets. Management considers FOCF to be an important indicator of the Company’s cash generating capability because it better represents cash generated from operations that can be used for dividends, debt repayment, strategic initiatives (such as acquisitions) and other investing and financing activities.



Six Months Ended
December 31,

FREE OPERATING CASH FLOW (UNAUDITED)


(in thousands)


2019


2018

Net cash flow provided by operating activities


$

87,097



$

61,501


Purchases of property, plant and equipment


(147,532)



(88,076)


Disposals of property, plant and equipment


835



2,490


Free operating cash flow


$

(59,600)



$

(24,085)


Organic Sales Decline
Organic sales decline is a non-GAAP financial measure of sales decline (which is the most directly comparable GAAP measure) excluding the impacts of acquisitions, divestitures, business days and foreign currency exchange from year-over-year comparisons. Management believes this measure provides investors with a supplemental understanding of underlying sales trends by providing sales growth (decline) on a consistent basis. Management reports organic sales growth (decline) at the consolidated and segment levels.

ORGANIC SALES DECLINE (UNAUDITED)





Three Months Ended December 31, 2019


Industrial


Widia


Infrastructure


Total

Organic sales decline


(11)%


(8)%


(14)%


(12)%

Foreign currency exchange impact (6)


(1)



(1)


(1)

Business days impact (7)



(1)


(1)


Divestiture impact (8)




(2)


(1)

Sales decline


(12)%


(9)%


(18)%


(14)%


(6) Foreign currency exchange impact is calculated by dividing the difference between current period sales at prior period foreign exchange rates
and prior period sales by prior period sales.

(7) Business days impact is calculated by dividing the year-over-year change in weighted average working days (based on mix of sales by
country) by prior period weighted average working days.

(8) Divestiture impact is calculated by dividing prior period sales attributable to divested businesses by prior period sales.

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SOURCE Kennametal Inc.