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Nov. 3, 2020, 12:28 p.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)

We generated net cash flows from operating activities of $9.6 million during the three months ended September 30, 2020 compared to $27.5 million during the prior year quarter. Capital expenditures were $39.3 million and $72.5 million during the three months ended September 30, 2020 and 2019, respectively, with the decrease primarily related to lower capital spending on our simplification/modernization initiative.







        RESULTS OF CONTINUING OPERATIONS
        SALES
        Sales for the three months ended September 30, 2020 were $400.3 million, a
        decrease of $117.8 million, or 23 percent, from $518.1 million in the prior year
        quarter. The decrease in sales was driven by 21 percent organic sales decline, a
        1 percent unfavorable currency exchange impact and a 1 percent decline from
        divestiture.
                                                                                  Three Months Ended September 30, 2020
        (in percentages)                                                             As Reported        Constant Currency
        End market sales decline:
        Aerospace                                                                       (45)%                 (45)%
        Energy                                                                           (26)                  (26)
        Transportation                                                                   (22)                  (21)
        General engineering                                                              (21)                  (19)
        Earthworks                                                                       (12)                  (11)
        Regional sales decline:
        Americas                                                                        (31)%                 (28)%
        Europe, the Middle East and Africa (EMEA)                                        (20)                  (21)
        Asia Pacific                                                                     (7)                   (6)
        


GROSS PROFIT

OPERATING EXPENSE

RESTRUCTURING AND RELATED CHARGES AND ASSET IMPAIRMENT CHARGES







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

FY21 Restructuring Actions

INTEREST EXPENSE

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 (loss) income by segment are as follows:
                                                                                    Three Months Ended September 30,
        (in thousands)                                                                  2020                2019
        Sales:
        Metal Cutting                                                               $  247,876          $ 324,085
        Infrastructure                                                                 152,429            194,003
        Total sales                                                                 $  400,305          $ 518,088
        Operating (loss) income:
        Metal Cutting                                                               $  (23,626)         $  19,306
        Infrastructure                                                                   7,268             (2,690)
        Corporate                                                                         (820)              (240)
        Total operating (loss) income                                                  (17,178)            16,376
        Interest expense                                                                10,578              7,881
        Other income, net                                                               (4,019)            (2,681)
        (Loss) income from continuing operations before income taxes                $  (23,737)         $  11,176
        








        METAL CUTTING
                                                         Three Months Ended September 30,
        (in thousands, except operating margin)          2020                            2019
        Sales                                     $       247,876                    $ 324,085
        Operating (loss) income                           (23,626)                      19,306
        Operating margin                                     (9.5)  %                      6.0  %
        (in percentages)                         Three Months Ended September 30, 2020
        Organic sales decline                                    (23)%
        Foreign currency exchange impact(1)                       (1)
        Sales decline                                            (24)%
                                                 Three Months Ended September 30, 2020
          (in percentages)                 As Reported                       Constant Currency
          End market sales decline:
          Aerospace                           (45)%                                (45)%
          Transportation                      (22)                                  (21)
          General engineering                 (20)                                  (20)
          Energy                              (17)                                  (17)
          Regional sales decline:
          Americas                            (30)%                                (29)%
          EMEA                                (23)                                  (24)
          Asia Pacific                        (11)                                  (9)
        


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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, 2020, Metal Cutting sales decreased 24 percent from the prior year quarter due to the global manufacturing slowdown and deteriorating conditions across all end markets and regions. Aerospace end market sales declined in all regions due to a significant reduction in airplane manufacturing. Transportation end market sales declined in all regions due to continued weakness in auto build rates caused by a slowdown in auto sales. Sales in our general engineering end market declined in all regions as a result of continued lower manufacturing activity, related to the COVID-19 pandemic. Energy sales decreased primarily due to a decline in oil and gas drilling in the Americas, partially offset by continued strength in power generation in China. On a regional basis, the sales decrease in the Americas was driven by declines in all four end markets, while the sales decrease in EMEA was primarily driven by declines in the general engineering and transportation end markets, in addition to a decline in the aerospace end market. The sales decrease in Asia Pacific was primarily driven by declines in the transportation and general engineering end markets, in addition to a decline in the aerospace end market, offset by an increase in sales in the energy end market.







        INFRASTRUCTURE
                                                  Three Months Ended September 30,
                (in thousands)                    2020                            2019
                Sales                      $       152,429                    $ 194,003
                Operating income (loss)              7,268                       (2,690)
                Operating margin                       4.8   %                     (1.4) %
                 (in percentages)            Three Months Ended September 30, 2020
                 Organic sales decline                       (18)%
                 Business days impact(2)                       1
                 Divestiture impact(3)                        (4)
                 Sales decline                               (21)%
                                                                                      Three Months Ended September 30, 2020
        (in percentages)                                                         As Reported                       Constant Currency
        End market sales decline:
        Energy                                                                      (32)%                                (31)%
        General engineering                                                         (22)                                 (14)
        Earthworks                                                                  (12)                                 (11)
        Regional sales (decline) growth:
        Americas                                                                    (31)%                                (27)%
        EMEA                                                                        (10)                                  (9)
        Asia Pacific                                                                  -                                    1
        


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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, 2020, Infrastructure sales decreased by 21 percent from the prior year quarter. The U.S. oil and gas market drove year-over-year decline in the energy market with U.S. land rig counts down approximately 70 percent compared to the prior year quarter. The sales decline in general engineering was primarily driven by the economic decline and the effect of COVID-19 in all regions, and in the earthworks end market, sales were down year-over-year due to softness in mining in the Americas, partially offset by growth in EMEA and Asia Pacific construction. On a regional basis, the sales decrease in the Americas was primarily driven by declines in the energy end market, and to a lesser extent, declines in the general engineering and earthworks end markets. In EMEA, the sales decrease was driven primarily by a decline in the general engineering end market, partially offset by growth in the earthworks end market and process industries within the energy end market. The increase in sales in Asia Pacific, excluding the unfavorable impact of currency exchange, was driven primarily by growth in the energy end market, partially offset by a decline in the general engineering end market.

For the three months ended September 30, 2020, Corporate expense increased by $0.6 million from the prior year quarter.

LIQUIDITY AND CAPITAL RESOURCES







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

The Company continues to assess the expected conditions in its primary end markets, including the effects of COVID-19 on the Company's business, financial condition, operating results and cash flows. Because the extent and duration of the COVID-19 pandemic are uncertain, the effects of the pandemic could materially affect our availability to borrow under the Credit Agreement and our compliance with the maximum leverage ratio covenant of the Credit Agreement. To offset some of the uncertainty related to COVID-19, we obtained an Amendment to the Credit Agreement during the first quarter of fiscal 2021, as described above. Additionally, we continue to evaluate when and to what extent we may access the capital markets, including our plan to refinance the $300 million 3.875% Senior Unsecured Notes due February 2022 during the current fiscal year. In the event that a refinancing does not occur before the February 2022 maturity date, management believes that the Company will have the ability to repay the February 2022 Notes with projected cash on hand and availability under the Credit Agreement. However, the Company can provide no assurance of this due in part, but not limited to, the uncertainty surrounding the COVID-19 pandemic. If over the course of the next year, market conditions do not improve or further deteriorate, the Company may need to take one or a combination of the following additional actions to ensure the Company has adequate access to liquidity and remains in compliance with the maximum leverage ratio covenant of the Credit Agreement both of which are within the Company's control: implement additional short-term cost-control actions and undertake new restructuring programs. We have concluded that we will remain in compliance with the covenants of the Credit Agreement and, as a result, will have adequate access to liquidity to satisfy our obligations within one year after the date the financial statements are issued.







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

During the three months ended September 30, 2019, cash flow provided by operating activities consisted of net income and non-cash items amounting to an inflow of $48.9 million and changes in certain assets and liabilities netting to an outflow of $21.3 million. Contributing to the changes in certain assets and liabilities were a decrease in accounts payable and accrued liabilities of $47.1 million, a decrease in accrued income taxes of $6.7 million and a decrease in accrued pension and postretirement benefits of $6.3 million. Partially offsetting these cash outflows were a decrease in accounts receivable of $41.6 million and a decrease in inventories of $2.7 million, Cash Flow Used for Investing Activities

FINANCIAL CONDITION

Nov 03, 2020

COMTEX_373875928/2041/2020-11-03T12:28:06

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