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Nov. 6, 2019, 10:27 a.m. EST

10-Q: KENNAMETAL INC

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(EDGAR Online via COMTEX) -- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)

OVERVIEW

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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)







        RESULTS OF CONTINUING OPERATIONS
        SALES
        Sales for the three months ended September 30, 2019 were $518.1 million, a
        decrease of $68.6 million, or 12 percent, from $586.7 million in the prior year
        quarter. The decrease in sales was driven by 11 percent organic sales decline
        and 2 percent unfavorable currency exchange impact, partially offset by a 1
        percent favorable business day effect.
                                                   Three Months Ended September 30, 2019
        (in percentages)                            As Reported      Constant Currency
        End market sales decline:
        Energy                                         (20)%               (19)%
        Transportation                                 (19)                (17)
        General engineering                             (9)                 (8)
        Earthworks                                      (3)                 (1)
        Aerospace                                       (3)                 (1)
        Regional sales decline:
        Asia Pacific                                   (16)%               (15)%
        Europe, the Middle East and Africa (EMEA)      (11)                 (7)
        Americas                                       (10)                (10)
        


GROSS PROFIT

OPERATING EXPENSE

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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

RESTRUCTURING AND RELATED CHARGES AND ASSET IMPAIRMENT CHARGES

INTEREST EXPENSE

PROVISION FOR INCOME TAXES

BUSINESS SEGMENT REVIEW

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        Item 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS (CONTINUED)
        Our sales and operating income by segment are as follows:
                                                                           Three Months Ended September 30,
        (in thousands)                                                         2019                 2018
        Sales:
        Industrial                                                      $       280,028       $       320,559
        Widia                                                                    44,057                48,672
        Infrastructure                                                          194,003               217,456
        Total sales                                                     $       518,088       $       586,687
        Operating income (loss):
        Industrial                                                      $        21,271       $        58,542
        Widia                                                                    (1,965 )               2,093
        Infrastructure                                                           (2,690 )              23,860
        Corporate                                                                  (240 )              (1,343 )
        Total operating income                                                   16,376                83,152
        Interest expense                                                          7,881                 8,097
        Other income, net                                                        (2,681 )              (2,761 )
        Income from continuing operations before income taxes           $        11,176       $        77,816
        








        INDUSTRIAL
                                                   Three Months Ended September 30,
        (in thousands, except operating margin)        2019                 2018
        Sales                                   $       280,028       $       320,559
        Operating income                                 21,271                58,542
        Operating margin                                    7.6 %                18.3 %
        (in percentages)                    Three Months Ended September 30, 2019
        Organic sales decline                               (11)%
        Foreign currency exchange impact(1)                  (2)
        Sales decline                                       (13)%
                                    Three Months Ended September 30, 2019
        (in percentages)            As Reported        Constant Currency
        End market sales decline:
        Transportation                 (19)%                 (17)%
        General engineering            (11)                   (9)
        Energy                          (9)                   (8)
        Aerospace                       (3)                   (1)
        Regional sales decline:
        Asia Pacific                   (17)%                 (15)%
        EMEA                           (15)                   (12)
        Americas                        (8)                   (7)
        


Table of Contents

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

For the three months ended September 30, 2019, Industrial sales decreased 13 percent from the prior year quarter. Transportation sales declined in all regions due to continued weakness in market conditions, while general engineering sales declined in all regions due to an overall softening in global manufacturing activity. Energy sales decreased due to a decline in oil and gas drilling in the Americas, partially offset by continued strength in renewable energy in China. Sales in aerospace were down primarily due to large projects in the prior year that did not repeat. The sales decrease in Asia Pacific was primarily driven by declines in the transportation and general engineering end markets, partially offset by an increase in the energy end market. The sales decrease in EMEA was mostly due to a decline in the transportation end market, but also due to declines in the general engineering and energy markets, partially offset by an increase in the aerospace end market. The sales decrease in the Americas was driven primarily by declines in the general engineering and transportation end markets, but also due to declines in the energy and aerospace end markets.







        WIDIA
                                   Three Months Ended September 30,
        (in thousands)                 2019                  2018
        Sales                   $       44,057         $       48,672
        Operating (loss) income         (1,965 )                2,093
        Operating margin                  (4.5 )%                 4.3 %
        (in percentages)                    Three Months Ended September 30, 2019
        Organic sales decline                               (10)%
        Foreign currency exchange impact(1)                  (1)
        Business days impact(2)                               2
        Sales decline                                       (9)%
                                  Three Months Ended September 30, 2019
        (in percentages)          As Reported        Constant Currency
        Regional sales decline:
        Asia Pacific                 (24)%                 (24)%
        Americas                      (3)                   (3)
        EMEA                          (2)                    -
        


For the three months ended September 30, 2019, Widia sales decreased 9 percent from the prior year quarter. The sales decrease in Asia Pacific was driven primarily by further deteriorating market conditions, specifically in India and China where the decline in auto production has affected distributors. The decrease in the Americas was primarily due to a slower U.S. manufacturing environment, partially offset by growth in products focused on aerospace applications. Sales in EMEA, despite the increasingly difficult market environment, were flat on a constant currency basis due to the growth in products focused on aerospace applications.

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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

For the three months ended September 30, 2019, Widia operating loss was $2.0 million compared to operating income of $2.1 million in the prior year quarter. The change was driven primarily by higher raw material costs, organic sales decline and higher manufacturing costs, partially offset by incremental simplification/modernization benefits. Higher raw material costs, which are expected to abate in the second half of fiscal 2020, had a detrimental effect on year-over-year operating margin of approximately 430 basis points.







        INFRASTRUCTURE
                                    Three Months Ended September 30,
        (in thousands)                  2019                  2018
        Sales                   $       194,003         $       217,456
        Operating (loss) income          (2,690 )                23,860
        Operating margin                   (1.4 )%                 11.0 %
        (in percentages)                    Three Months Ended September 30, 2019
        Organic sales decline                               (11)%
        Foreign currency exchange impact(1)                  (1)
        Business days impact(2)                               1
        Sales decline                                       (11)%
                                           Three Months Ended September 30, 2019
        (in percentages)                   As Reported        Constant Currency
        End market sales decline:
        Energy                                (24)%                 (24)%
        General engineering                    (5)                   (4)
        Earthworks                             (3)                   (1)
        Regional sales growth (decline):
        Americas                              (14)%                 (14)%
        Asia Pacific                          (13)                   (11)
        EMEA                                    5                     9
        


For the three months ended September 30, 2019, Infrastructure sales decreased by 11 percent from the prior year quarter. The U.S. oil and gas market drove year-over-year decline in the energy market with average U.S. land rig counts down 14 percent compared to the prior year quarter. The decline in general engineering was driven by slower economic conditions in the Americas and Asia Pacific, offset partially by increased defense-related business in EMEA. Earthworks end market sales were down year-over-year due to softness in mining in the Americas and Asia Pacific, partially offset by growth in Americas construction. The sales decrease in the Americas was primarily driven by a decline in the energy end market, while the decrease in Asia Pacific was primarily due to declines in the general engineering and earthworks end markets. The sales increase in EMEA was driven primarily by growth in the general engineering end market, partially offset by declines in both the earthworks and energy end markets.

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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

CORPORATE

For the three months ended September 30, 2019, Corporate expense decreased by $1.1 million from the prior year quarter.

LIQUIDITY AND CAPITAL RESOURCES

Nov 06, 2019

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