Item 2.02 Results of Operations and Financial Condition.
On
April 25, 2017
, Kennametal Inc. (Kennametal or the Company) issued an earnings announcement for its fiscal 2017
third
quarter ended
March 31, 2017
.
The press release contains certain non-generally accepted accounting principles (GAAP) financial measures. The following GAAP financial measures have been presented on an adjusted basis: sales; gross profit and margin; operating expense; operating expense as a percentage of sales; operating income (loss) and margin; net income (loss) attributable to Kennametal Shareholders; earnings per diluted share (EPS) and loss per diluted share (LPS); effective tax rate; Industrial operating income and margin; Widia operating income (loss) and margin; and Infrastructure operating income and margin. Adjustments for the
three
months ended
March 31, 2017
include restructuring and related charges. Adjustments for the
nine
months ended
March 31, 2017
include (1) restructuring and related charges and (2) Australia deferred tax valuation allowance. Adjustments for the
three
months ended
March 31, 2016
include: (1) restructuring and related charges, (2) tax effect of prior asset impairment charges and (3) loss on divestiture. Adjustments for the
nine
months ended
March 31, 2016
include: (1) restructuring and related charges, (2) goodwill and other intangible asset impairment charges, (3) loss on divestiture and related charges and (4) operations of divested businesses. Management adjusts for these items in measuring and compensating internal performance and to more readily compare the Company’s financial performance period-to-period. The press release also contains free operating cash flow and earnings (loss) before interest, taxes, depreciation and amortization (E(L)BITDA) and margin which are non-GAAP measures and are defined below.
Management believes that presentation of these non-GAAP financial measures provides useful information about the results of operations of the Company for the current and past periods. Management believes that investors should have available the same information that management uses to assess operating performance, determine compensation and assess the capital structure of the Company. These non-GAAP measures should not be considered in isolation or as a substitute for the most comparable GAAP measures. Investors are cautioned that non-GAAP financial measures utilized by the Company may not be comparable to non-GAAP financial measures used by other companies.
Free Operating Cash Flow
Free operating cash flow is a non-GAAP financial measure and is defined by the Company as cash provided by operations (which is the most directly comparable GAAP measure) less capital expenditures plus proceeds from disposals of fixed assets. Management considers free operating cash flow to be an important indicator of Kennametal’s cash generating capability because it better represents cash generated from operations that can be used for dividends, debt repayment, strategic initiatives, and other investing and financing activities.
E(L)BITDA
E(L)BITDA are a non-GAAP financial measure and are defined as net income attributable to Kennametal, with interest expense, interest income, provision for income taxes, depreciation and amortization added back. The most directly comparable GAAP measure is net income attributable to Kennametal. However, we believe that E(L)BITDA are widely used as a measure of operating performance and are an important indicator of the Company’s operational strength and performance. Nevertheless, the measure should not be considered in isolation or as a substitute for operating income, cash flows from operating activities or any other measure for determining liquidity that is calculated in accordance with GAAP. Additionally, Kennametal will adjust E(L)BITDA. Management uses this information in reviewing operating performance.
Additionally, during our quarterly earnings teleconference we may use various non-GAAP financial measures to describe the underlying operating results. Accordingly, we have compiled below certain reconciliations as required by Regulation G. These non-GAAP measures should not be considered in isolation or as a substitute for the most comparable GAAP measures. Investors are cautioned that non-GAAP financial measures utilized by the Company may not be comparable to non-GAAP financial measures used by other companies.
Primary Working Capital
Primary working capital is a non-GAAP financial measure and is defined as accounts receivable, net plus inventories, net minus accounts payable. The most directly comparable GAAP measure is working capital, which is defined as current assets less current liabilities. We believe primary working capital better represents Kennametal’s performance in managing certain assets and liabilities controllable at the segment level and is used as such for internal performance measurement.
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PRIMARY WORKING CAPITAL (UNAUDITED)
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|
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(in thousands, except percents)
|
3/31/17
|
12/31/16
|
9/30/16
|
6/30/16
|
3/31/16
|
Average
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Current assets
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$
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1,043,046
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|
$
|
971,745
|
|
$
|
991,837
|
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$
|
1,075,341
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$
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1,099,260
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$
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1,036,246
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Current liabilities
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426,799
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390,151
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|
402,574
|
|
427,275
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421,415
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|
413,643
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|
Working capital, GAAP
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$
|
616,247
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$
|
581,594
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$
|
589,263
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$
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648,066
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$
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677,845
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$
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622,603
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Excluding items:
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Cash and cash equivalents
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(100,817
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)
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(102,001
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)
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(119,411
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)
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(161,579
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)
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(136,564
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)
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(124,074
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)
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Other current assets
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(75,061
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)
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(80,375
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)
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(64,660
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)
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(84,016
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)
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(111,479
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)
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(83,118
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)
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Total excluded current assets
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(175,878
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)
|
(182,376
|
)
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(184,071
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)
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(245,595
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)
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(248,043
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)
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(207,193
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)
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Adjusted current assets
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867,168
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789,369
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807,766
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829,746
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851,217
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829,053
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Current maturities of long-term debt and capital leases, including notes payable
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(1,591
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)
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(2,263
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)
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(1,381
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)
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(1,895
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)
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(4,140
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)
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(2,254
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)
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Other current liabilities
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(234,367
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)
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(219,008
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)
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(225,189
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)
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(243,341
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)
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(247,943
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)
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(233,970
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)
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Total excluded current liabilities
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(235,958
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)
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(221,271
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)
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(226,570
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)
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(245,236
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)
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(252,083
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)
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(236,224
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)
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Adjusted current liabilities
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190,841
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168,880
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176,004
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182,039
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169,332
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177,419
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Primary working capital
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$
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676,327
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$
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620,489
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$
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631,762
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$
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647,707
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$
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681,885
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$
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651,634
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Three Months Ended
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3/31/17
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12/31/16
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9/30/16
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6/30/16
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Total
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Sales
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$
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528,630
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$
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487,573
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$
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477,140
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$
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521,224
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$
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2,014,567
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Primary working capital as a percentage of sales
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32.3
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%
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PRIMARY WORKING CAPITAL (UNAUDITED)
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(in thousands, except percents)
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6/30/16
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3/31/16
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12/31/15
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9/30/15
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6/30/15
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Average
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Current assets
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$
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1,075,341
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$
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1,099,260
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$
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1,062,992
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$
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1,168,511
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$
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1,258,546
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$
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1,132,930
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Current liabilities
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427,275
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421,415
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394,983
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438,406
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482,744
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432,965
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Working capital, GAAP
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$
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648,066
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$
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677,845
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$
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668,009
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$
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730,105
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$
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775,802
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$
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699,965
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Excluding items:
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Cash and cash equivalents
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(161,579
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)
|
(136,564
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)
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(138,978
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)
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(97,199
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)
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(105,494
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)
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(127,963
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)
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Other current assets
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(84,016
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)
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(111,479
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)
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(113,113
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)
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(120,583
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)
|
(132,148
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)
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(112,268
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)
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Total excluded current assets
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(245,595
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)
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(248,043
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)
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(252,091
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)
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(217,782
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)
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(237,642
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)
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(240,231
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)
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Adjusted current assets
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829,746
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851,217
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810,901
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950,729
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1,020,904
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892,699
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Current maturities of long-term debt and capital leases, including notes payable
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(1,895
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)
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$
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(4,140
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)
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(5,942
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)
|
(25,285
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)
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(15,702
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)
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(10,593
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)
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Other current liabilities
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(243,341
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)
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(247,943
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)
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(237,444
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)
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(235,385
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)
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(279,661
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)
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(248,755
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)
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Total excluded current liabilities
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(245,236
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)
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(252,083
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)
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(243,386
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)
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(260,670
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)
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(295,363
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)
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(259,348
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)
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Adjusted current liabilities
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182,039
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169,332
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151,597
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177,736
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187,381
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173,617
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Primary working capital
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$
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647,707
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$
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681,885
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$
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659,304
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$
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772,993
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$
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833,523
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$
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719,082
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Three Months Ended
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6/30/16
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3/31/16
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12/31/15
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9/30/15
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Total
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Sales
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$
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521,224
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$
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497,837
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$
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524,021
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$
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555,354
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$
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2,098,436
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Primary working capital as a percentage of sales
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34.3
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%
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Debt to Capital
Debt to capital is a non-GAAP financial measure and is defined by Kennametal as total debt divided by the sum of total equity plus total debt. The most directly comparable GAAP measure is debt to equity, which is defined as total debt divided by total equity. Management believes that debt to capital provides additional insight into the underlying capital structure and performance of the Company.
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DEBT TO CAPITAL (UNAUDITED)
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March 31,
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June 30,
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(in thousands, except percents)
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2017
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2016
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Total debt
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$
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696,222
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$
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695,443
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Total equity
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979,571
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|
995,801
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Debt to equity, GAAP
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71.1
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%
|
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69.8
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%
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Total debt
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$
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696,222
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$
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695,443
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Total equity
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979,571
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995,801
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Total capital
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$
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1,675,793
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$
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1,691,244
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Debt to capital
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41.5
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%
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41.1
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%
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Debt to EBITDA
Debt to EBITDA is a non-GAAP financial measure and is defined by Kennametal as total debt divided by the sum of the four trailing quarters of EBITDA. The most directly comparable GAAP measure is debt to net income attributable to Kennametal. Management believes that debt to EBITDA provides additional insight into the underlying capital structure, liquidity and performance of the Company. Additionally, Kennametal will adjust debt to EBITDA.
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DEBT TO ADJUSTED EBITDA (UNAUDITED)
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MARCH 31, 2017 (in thousands, except debt to adjusted EBITDA)
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Three Months Ended
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EBITDA
|
3/31/17
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12/31/16
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9/30/16
|
6/30/16
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Net income (loss) attributable to Kennametal, reported
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$
|
38,890
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$
|
7,262
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$
|
(21,656
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)
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$
|
(66,515
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)
|
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Add back:
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Interest expense
|
7,331
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|
7,151
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6,993
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|
6,857
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Interest income
|
(306
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)
|
(206
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)
|
(248
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)
|
(568
|
)
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Provision for income taxes
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9,301
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|
8,221
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4,879
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86,812
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Depreciation
|
22,375
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22,827
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23,167
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23,407
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Amortization
|
4,245
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|
4,150
|
|
4,271
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|
4,447
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EBITDA
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$
|
81,836
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$
|
49,405
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$
|
17,406
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$
|
54,440
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Adjustments:
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Restructuring and related charges
|
9,623
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|
11,783
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|
31,657
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|
15,539
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Fixed asset disposal charges
|
—
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|
—
|
|
—
|
|
5,381
|
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Loss on divestiture
|
—
|
|
—
|
|
—
|
|
712
|
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Adjusted EBITDA
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$
|
91,459
|
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$
|
61,188
|
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$
|
49,063
|
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$
|
76,072
|
|
|
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Total debt
|
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$
|
696,222
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Trailing four quarters adjusted EBITDA
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$
|
277,782
|
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Debt to adjusted EBITDA
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2.5
|
|