Kennametal Announces Fiscal 2020 Third Quarter Results

PITTSBURGH, May 4, 2020 /PRNewswire/ -- Kennametal Inc. (NYSE: KMT) (the "Company") today reported results for its fiscal 2020 third quarter ended March 31, 2020, with earnings per diluted share (EPS) of $0.03, compared with EPS of $0.82 in the prior year quarter, and adjusted EPS of $0.46, compared with adjusted EPS of $0.77 in the prior year quarter.

 

"Despite the many headwinds we faced in the third quarter, we delivered solid results that were strengthened by our early cost-control actions and the continued benefits of our simplification/modernization investments," said President and CEO Christopher Rossi. "Kennametal is considered an essential business by governments around the world, so we have kept almost all of our production facilities open and serving customers throughout this crisis. We ended the quarter with a strong liquidity position that will allow us to manage the uncertain times created by COVID-19 and continue to execute on our simplification/modernization strategy."

 

Rossi continued, "As we look ahead, we expect COVID-19 will be a significant operational and market headwind. Early in this crisis we deployed global safety protocols and processes to keep our employees safe while continuing to serve critical industries. At the same time, however, COVID-19 is creating extensive uncertainty and limited visibility into our end markets, prompting us to withdraw our outlook for fiscal year 2020. We are approaching this challenging time determined to stay focused on the things we can control: keeping our employees safe, serving our customers, delivering savings from simplification/modernization and continuing to execute our strategy so that we are well-positioned for the eventual market recovery."

 

COVID-19

 

Excluding China, the effect of COVID-19 on the third quarter was minimal from a revenue standpoint. As an essential business, Kennametal facilities have operated throughout the crisis, unless there was a government mandated lockdown of a certain region where the Company has a facility. The Company has put extensive safety protocols and procedures in place to protect employees while also allowing production facilities to continue to operate safely while serving customers. As of today, all but one production facility is operating, and this facility is expected to reopen mid-May pending expiration of a locally mandated shutdown order. Our Bangalore plant, which closed on March 26th, is reopening this week.

 

In addition to the previously announced restructuring actions, the Company is taking other aggressive cost-control measures to offset the market headwinds. These measures include, among other things, reductions in all discretionary spending, furloughs, extensive travel restrictions, and reduced production at global manufacturing facilities to align with the current lower demand environment.

 

Fiscal 2020 Third Quarter Key Developments

 

Sales of $483 million decreased 19 percent from $597 million in the prior year quarter, reflecting 17 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 $0.06 and goodwill and other intangible asset impairment charges of $0.17. Reported EPS in the prior year quarter includes a non-recurring benefit related to U.S. tax reform of $0.08 and restructuring and related charges of $0.03.

 

Operating income was $38 million, or 7.8 percent margin, compared to $82 million, or 13.7 percent margin, in the prior year quarter. 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, $21 million of restructuring and asset impairment charges compared to $3 million in the prior year quarter, partially offset by approximately $15 million of incremental simplification/modernization benefits, lower raw material costs and lower variable compensation expense. Adjusted operating income was $59 million, or 12.2 percent margin, compared to $85 million, or 14.3 percent margin, in the prior year quarter.

 

Q3 Restructuring Update

 

 

The Company recorded non-cash pre-tax Widia goodwill and other intangible asset impairment charges of $16 million due to the decline in actual and projected financial results for the Widia reporting unit, primarily as a result of the COVID-19 global pandemic.

 

The reported effective tax rate (ETR) for the quarter was 93.1 percent and the adjusted ETR was 28.5 percent, compared to reported ETR of 11.0 percent and adjusted ETR of 19.8 percent in the prior year quarter. The year-over-year change in the reported ETR is due primarily to the effects of current year restructuring and the Widia goodwill and other intangible asset impairment charges. 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 $146 million compared to $157 million in the prior year quarter. The change in net cash flow provided by operating activities was driven primarily by lower earnings, partially offset by changes in working capital. Year-to-date free operating cash flow (FOCF) was negative $57 million compared to positive $15 million in the prior year quarter. The change in FOCF was driven primarily by higher capital expenditures of $60 million due primarily to simplification/modernization and lower earnings, partially offset by changes in working capital.

 

As a result of the financial market uncertainty resulting from COVID-19 and in keeping with our cautious approach in this environment, subsequent to the quarter-end, the Company preemptively drew $500 million from its $700 million revolving credit agreement. The Company has adequate liquidity and access to credit to meet its cash flow requirements and expects to remain in compliance with relevant debt covenants.

 

Outlook and Fourth Quarter Assumptions

 

Looking ahead, due to the increased uncertainty in the global economy and Kennametal's end markets caused by COVID-19, the Company is withdrawing its previously announced outlook for fiscal year 2020.  The Company will provide more details regarding its fourth quarter assumptions on its conference call on May 5, 2020 at 8:00 a.m. Eastern Time.

 

Segment Results

 

Industrial sales of $261 million decreased 18 percent from $319 million year-over-year, driven by organic sales decline of 17 percent and a 2 percent unfavorable currency exchange effect, partially offset by a favorable business day effect of 1 percent. Operating income was $30 million, or 11.6 percent margin, compared to operating income of $57 million, or 18.0 percent margin, in the prior year quarter. The decrease in operating income was driven primarily by organic sales decline, unfavorable labor and fixed cost absorption due to lower volumes and simplification/modernization efforts in progress, partially offset by incremental simplification/modernization benefits, lower raw material costs, and lower variable compensation expense. Adjusted operating income was $34 million, or 13.1 percent margin, compared to $58 million, or 18.3 percent margin, in the prior year quarter.

 

Widia sales of $43 million decreased 16 percent from $51 million year-over-year, driven by organic sales decline of 16 percent and a 1 percent unfavorable currency exchange effect, partially offset by a favorable business day effect of 1 percent. Operating loss was $14 million, or 31.7 percent loss margin, compared to break even operating income in the prior year quarter. The change in operating results was driven primarily by organic sales decline and $16 million of goodwill and other intangible asset impairment charges, partially offset by incremental simplification/modernization benefits, lower raw material costs and lower variable compensation expense. Adjusted operating income was $2 million, or 4.9 percent margin, compared to $1 million, or 1.3 percent margin, in the prior year quarter.

 

Infrastructure sales of $180 million decreased 21 percent from $228 million year-over-year, driven by organic sales decline of 17 percent, a 3 percent decline from divestiture and an unfavorable currency exchange effect of 1 percent. Operating income was $22 million, or 12.2 percent margin, compared to operating income of $25 million, or 11.0 percent margin, in the prior year quarter. The change in operating results was primarily driven by organic sales decline, unfavorable labor and fixed cost absorption due to lower volumes and simplification/modernization efforts in progress, partially offset by incremental simplification/modernization benefits, lower raw material costs, and lower variable compensation expense. Adjusted operating income was $23 million, or 13.0 percent margin, compared to adjusted operating income of $27 million, or 11.7 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 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.