Kennametal Announces Fourth Quarter and Fiscal 2020 Results

PITTSBURGH, Aug. 3, 2020 /PRNewswire/ -- Kennametal Inc. (NYSE: KMT) (the "Company") today announced fourth quarter and fiscal 2020 results. For the fourth quarter, the Company reported loss per share (LPS) of $0.11, compared with earnings per share (EPS) of $0.74 in the prior year quarter. The current quarter adjusted EPS was $0.15, compared with $0.84 in the prior year quarter. For fiscal 2020, the Company reported LPS of $0.07, compared with EPS of $2.90 in the prior year. Adjusted EPS was $0.94 in the current year, compared with $3.02 in the prior year.

 

"The effects of COVID-19 were felt in every region during the quarter and created a challenging environment. Nevertheless, we have continued to aggressively manage our costs and production schedules to minimize the effect on operating leverage while keeping our employees safe and continuing to serve customers," said Christopher Rossi, President and CEO. "We also continued with our simplification/modernization plan and have substantially completed the capital spend as of year-end. This is a significant milestone for Kennametal, and one that substantially lowers the breakeven point of the Company while improving customer service to enable profitable growth."

 

Rossi commented further: "While we expect FY21 to present ongoing macroeconomic challenges, we are actively working to minimize those headwinds while continuing to advance our commercial and operational excellence initiatives so that we are well-positioned to outperform competitors as markets recover. Additionally, we will continue to leverage our innovative products, including Metal Cutting's award-winning HARVITM 1 TE and Infrastructure's PCD road-milling products, to enable us to exceed customer performance expectations and gain market share."

 

FY21 Metal Cutting Segment

 

Effective July 1, 2020, Kennametal has combined its former Industrial and WIDIA business segments to form one Metal Cutting business segment. The Infrastructure segment remains unchanged.

 

Rossi commented, "We combined into one metal cutting organization to more effectively direct our commercial resources, technical expertise, and products toward capturing a larger share-of-wallet and expanding into a multi-billion-dollar segment of metal cutting that we previously had not focused on. This represents more than a 40 percent estimated increase in addressable market for the Company. Furthermore, we will leverage our newly-modernized manufacturing capability for improved operational and financial performance to serve this new segment."

 

Pete Dragich, Chief Operations Officer, Metal Cutting, is responsible for demand fulfillment for the segment, including operations for all metal cutting facilities globally and the P&L. Ron Port, Chief Commercial Officer for Metal Cutting, is responsible for demand generation for the new segment including sales, marketing, brand strategy, product management and digital customer experience. Both will continue to report to President and CEO, Christopher Rossi.

 

Simplification/Modernization

 

The benefits from the simplification/modernization program are expected to increase year-over-year in FY21, bringing savings since inception to approximately $180 million at fiscal year-end.

 

As part of this ongoing program, the Company is continuing with footprint rationalization and is announcing today the closure of its manufacturing facility in Johnson City, Tennessee. The Johnson City operations will be consolidated into other newly modernized Kennametal facilities.

 

"This is the sixth plant closure since the beginning of our program, not including the significant downsizing of the Essen, Germany operation. These footprint actions over the last 18 months are lowering our structural and operating costs for improved performance throughout the economic cycle," said Rossi. "Notably, this closure marks the completion of the global footprint rationalization program as outlined in our original simplification/modernization plan, making it an important achievement for the Company. At the same time, we recognize the effect this has on our employees and will support them throughout the transition."

 

The closure is expected to be completed by the end of fiscal 2021 and is part of the Company's previously announced FY21 Restructuring Actions.

 

Q4 Restructuring Update

 

 

Fiscal 2020 Fourth Quarter Key Developments

 

Sales were $379 million compared with $604 million in the same quarter last year. Sales decreased by 37 percent, driven by 33 percent organic decline, 2 percent unfavorable currency exchange impact and a 2 percent unfavorable impact from divestiture. COVID-19 affected all regions and end markets during the quarter. As an essential business, Kennametal facilities continued to operate throughout the quarter, with the notable exception of our Bangalore, India plant, which was closed for approximately half of the quarter due to a government mandated lockdown. As of today, all our production facilities are operating.

 

Operating income was $16 million, or 4.1 percent margin, compared with $85 million, or 14.1 percent margin, in the same quarter last year. The decrease in operating income was due primarily to organic sales decline, unfavorable labor and fixed cost absorption due to lower volumes, $18 million of pre-tax restructuring and related charges compared to $10 million in the prior year quarter, partially offset by approximately $14 million of incremental simplification/modernization benefits, lower raw material costs, lower variable compensation expense and other benefits from cost-control measures previously announced including, among other things, reductions in discretionary spending, furloughs, extensive travel restrictions, and reduced production at global manufacturing facilities to align with the current lower demand environment. Adjusted operating income was $33 million, or 8.8 percent margin, compared with $95 million, or 15.8 percent margin, in the prior year quarter.

 

Reported LPS in the current quarter includes restructuring and related charges of $0.17 and differences in projected annual tax rates of $0.17 partially offset by the effect of the Coronavirus Aid, Relief, and Economic Security (CARES) Act of $0.08. Reported EPS in the prior year quarter includes restructuring and related charges of $0.11 and a discrete benefit of $0.01 from the release of a valuation allowance on Australian deferred tax assets.

 

The reported effective tax rate (ETR) was 186.1 percent and the adjusted ETR was 51.2 percent, compared to reported ETR of 21.0 percent and adjusted ETR of 21.0 percent in the prior year quarter. The increase in the year-over-year ETR is primarily attributable to increased Global Intangible Low-Taxed Income (GILTI) tax partially offset by the effect of the CARES Act in the fourth quarter of fiscal 2020.

 

Fiscal 2020 Key Developments

 

Sales of $1,885 million decreased from $2,375 million in the prior year. Sales decreased by 21 percent, driven by 18 percent organic decline, 2 percent unfavorable currency exchange impact and a 1 percent unfavorable impact from divestiture.

 

Operating income was $22 million, or 1.2 percent margin, compared with $329 million, or 13.8 percent margin, in the prior year. The decrease in operating income was due primarily to organic sales decline, unfavorable labor and fixed cost absorption due to lower volumes and simplification/modernization efforts in progress, $113 million of restructuring and asset impairment charges compared to $17 million in the prior year, partially offset by incremental simplification/modernization benefits, lower raw material costs and lower variable compensation expense. Adjusted operating income was $141 million, or 7.5 percent margin, compared with $346 million, or 14.6 percent margin, in the prior year.

 

Net cash flow provided by operating activities in fiscal 2020 was $224 million compared to $301 million in the prior year. The change in net cash flow provided by operating activities was driven primarily by lower earnings. Free operating cash flow (FOCF) was negative $18 million compared to positive $99 million in the prior year period. The change in FOCF was driven primarily by lower net income and greater net capital expenditures related to simplification/modernization initiatives, partially offset by lower working capital requirements. We were in compliance with all covenants and had full availability under the terms of the Credit Agreement as of June 30, 2020.

 

Fiscal 2021 Outlook

 

Due to the uncertainty in the global economy caused by COVID-19, visibility into the Company's primary end markets remains limited. As a result, the Company will not be issuing annual FY21 outlook outside of capital spending. Capital spending is expected to be $110 million to $130 million, with the majority of the spending occurring in the first half of the fiscal year. The Company will provide more details regarding its fiscal 2021 assumptions on its conference call on August 4, 2020 at 8:00 a.m. Eastern Time.

 

Fiscal 2020 Fourth Quarter Segment Results

 

Industrial sales of $195 million decreased 39 percent from $318 million in the prior year quarter due to organic sales decline of 36 percent, unfavorable currency exchange of 2 percent and a 1 percent decrease due to fewer business days. Operating income was $4 million, or 1.8 percent margin, compared to $47 million, or 14.9 percent margin, in the prior year period. The decrease in operating income was driven primarily by organic sales decline, unfavorable labor and fixed cost absorption due to lower volumes, partially offset by lower variable compensation expense and other cost-control actions, incremental simplification/modernization benefits and lower raw material costs. Adjusted operating income was $15 million, or 7.7 percent margin, compared to $58 million, or 18.3 percent margin, in the prior year quarter.

 

Widia sales of $32 million decreased 35 percent from $49 million in the prior year quarter, driven by organic decline of 32 percent, unfavorable currency exchange of 2 percent and a 1 percent decrease due to fewer business days. Operating loss was $3 million, or 10.3 percent loss margin, compared to operating loss of $1 million, or 1.9 percent loss margin, in the prior year. The change in operating results was driven primarily by organic sales decline, unfavorable labor and fixed cost absorption due to lower volumes, partially offset by lower variable compensation expense and other cost-control actions and lower raw material costs. Adjusted operating loss was $1 million, or 2.9 percent loss margin, compared to operating income of $1 million, or 1.8 percent margin, in the prior year.

 

Infrastructure sales of $152 million decreased 36 percent from $237 million in the prior year driven by organic decline of 29 percent, a 4 percent unfavorable impact from divestiture, unfavorable currency exchange of 2 percent and a 1 percent decrease due to fewer business days. Operating income was $15 million, or 10.1 percent margin, compared to $39 million, or 16.5 percent margin, in the prior year period. The change in operating results was primarily driven by organic sales decline, unfavorable labor and fixed cost absorption due to lower volumes, partially offset by lower variable compensation expense and other cost-control actions, lower raw material costs and incremental simplification/modernization benefits. Adjusted operating income was $19 million, or 12.7 percent margin, compared to $37 million, or 15.5 percent margin, in the prior year quarter.

 

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 9,000 employees are helping customers in more than 60 countries stay competitive. Kennametal generated nearly $1.9 billion in revenues in fiscal 2020. Learn more at www.kennametal.com.