Kennametal Announces Fiscal 2020 Second Quarter Results

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.

 

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.