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Text: We will be referring to that slide deck throughout today's call.
I'm Kelly Boyer, Vice President of Investor Relations.
Joining me on the call today are Chris Rossi, President and Chief Executive Officer; and Damon Audia, Vice President and Chief Financial Officer.
These risk factors and uncertainties are detailed in Kennametal's SEC filings.
In addition, we will be discussing non-GAAP financial measures today.
Reconciliations to GAAP financial measures that we believe are most directly comparable can be found at the back of the slide deck and on our Form 8-K on our website.
For today's call, I'll start with some general comments on the year followed by an overview of the fourth quarter.
From there, Damon will review the quarterly financial results and our outlook in more detail.
Now turning to Slide 2.
In fiscal year '21, despite the obvious COVID-19 challenges, we continue to operate safely to serve customers and invest in our commercial and operational excellence initiatives, including simplification/modernization.
We ended the year on a particularly strong note, with positive momentum heading into fiscal year '22, enabled by continued market recovery and advancement of our strategic initiatives that are transforming the company.
The additional simplification/modernization savings in fiscal year '21 bought the total savings achieved from the program to $186 million, in line with the target range we announced in our December 2017 Investor Day, despite lower volumes than we envisioned at that time.
This is a notable achievement.
And while fiscal year '21 may have marked the end of investment in our simplification/modernization program, we will continue to drive benefits from this investment.
In fact, the structural cost savings for the program are already contributing to strong underlying operating leverage as volumes recover, which we saw in Q3 and Q4 of fiscal year '21 and expect to continue in fiscal year '22 and beyond.
In addition, our investment in modernized processes will drive future growth and share gain.
These investments enable higher levels of customer service and new product innovations, some recent examples of which include the HARVI I TE endmill, which was a 2021 Golden Edge Award winner for Best Product Innovation at the China International Machine Tool Trade Show and is helping us gain share in aerospace and general engineering.
And our new indexable milling platform, Mill 4-15, designed to improve customer productivity to gain share, especially in general engineering.
We also saw a major win in the electric vehicle space with our RIQ Reamer, which was selected over top competitors by a major electric vehicle manufacturer for motor casings.
We would not have been able to make this tool without our investments in additive manufacturing as part of modernization.
And finally, our fit-for-purpose products, which as a result, of modernization can now be produced at a price point and availability to win in a multibillion-dollar application space of metal cutting that we previously had not focused on.
We are making excellent progress in this space with growth of our fit-for-purpose product portfolio outpacing the broader general engineering and market growth.
We're also seeing success in renewable energy applications, such as the machining of components for wind turbines and our infrastructure business segment is successfully leveraging their simplification/modernization investments to improve global reach and expand into mining adjacencies.
So looking forward, we are excited and confident to deliver additional returns on our simplification/modernization investment as we leverage it for growth, share gain and improved profitability throughout the economic cycle.
Now let's review a summary of Q4 on Slide 3.
We saw underlying momentum picking up across all our end markets, and in the fourth quarter we posted 29% organic growth versus a decline of 33% in the prior year quarter.
On a year-over-year basis, all regions and end markets posted positive growth, except aerospace.
It's worth noting, however, that on a sequential growth basis, Aerospace was one of the leading end markets.
Our adjusted EBITDA margin increased to 19.2%, driven mainly by increasing volume and associated absorption, incremental simplification/modernization benefits, partially offset by the reversal of temporary cost control actions taken in the prior year.
Free operating cash flow was $66 million for the quarter and $113 million for the full year.
Adjusted earnings per share was $0.53 for the quarter.
Graph on the left shows the sales level on a rolling 4-quarter basis through the downturn relative to our sales during the Great Recession while the graph on the right shows the corresponding adjusted operating margin.
The margins at the trough were 600 basis points higher through this downturn, illustrating our substantially improved cost structure.
Also note that the current trend lines are showing an upswing in both revenue and margin.
And we believe that these trends will continue in fiscal year '22, supported by the strong operating leverage from our simplification/modernization investments as demonstrated on Slide 5.
You can see from the slide that on a sequential basis we increased operating income by 57% on a 6% increase in sales.
This strong operating leverage is also evident on a year-over-year basis and even more impressive when you consider the roughly $45 million of temporary cost actions we took in the prior year quarter.
I will begin on Slide 6 with a review of our Q4 operating results on both a reported and adjusted basis.
As Chris mentioned, demand trends improved significantly year-over-year and our results highlight the strong operating leverage we are now demonstrating from our continued focus on commercial and operational excellence.
For the quarter, sales of $516 million improved 36% year-over-year and 29% on an organic basis from the low of $379 million in the fourth quarter last year.
Foreign currency had a positive effect of 6% on sales and business days contributed another 1%.
Adjusted gross profit margin of 34.5% was up 680 basis points year-over-year.
Adjusted operating expenses increased year-over-year to $108 million, reflecting the reversal of temporary cost actions taken last year.
Nevertheless, we were able to hold our operating expenses at 20.9% of sales, close to our target of 20% this quarter.
Adjusted EBITDA margin increased to 19.2%, up 150 basis points from the prior year quarter and adjusted operating margin of 12.8% was up 400 basis points year-over-year.
The 19.2% adjusted EBITDA margin is another validation point related to the successful execution of commercial and operational excellence.
The last time adjusted EBITDA margins were over 19% was in the third and fourth quarters of fiscal year 2019, and that was based on quarterly sales of approximately $600 million or 15% higher than this quarter.
This is yet another data point of the structural cost improvements we have made in confirming our ability to achieve the 24% to 26% adjusted EBITDA margin target as sales reached the $2.5 billion to $2.6 billion level.
The improved year-over-year performance was related to higher volumes and associated absorption, benefits from simplification/modernization and a slight positive from price and raw materials, partially offset by roughly $45 million of temporary cost actions taken last year and a modest mix headwind.
The adjusted effective tax rate in the quarter was 24.3%, a more normalized level than the previous year due to higher pre-tax income as well as a reduced effect of GILTI on the effective tax rate this quarter.
The adjusted effective tax rate for the full year was approximately 23.6% as expected.
We reported GAAP earnings per share of $0.41 versus a loss per share of $0.
11 in the prior year period.
On an adjusted basis, earnings per share was $0.53 per share versus $0.15 in the prior year quarter.
The main drivers of our adjusted earnings per share performance are highlighted on the bridge on Slide 7.
The effect of operations this quarter amounted to positive $0.02 compared to negative $0.68 in the prior year quarter and negative $0.33 in the third quarter of this fiscal year.
The operations bucket turned positive for the first time since Q3 of fiscal year '19, reflecting improving volumes offset by approximately $0.26 related to the reversal of temporary cost actions in effect last year.
Simplification/modernization contributed an incremental $0.13 in the quarter, bringing the total FY '21 simplification/modernization savings to $0.68 or $85 million and $186 million for the total program.
The detailed full year results can be found in the appendix.
Slides 8 and 9 detail the favorable performance and continuing progress we have achieved on our initiatives in our segments this quarter.
Metal cutting sales increased 30% organically versus a 35% decline in the prior year period.
All regions posted year-over-year sales increases with the largest increase in EMEA at 37%, followed by the Americas at 30% and Asia Pacific at 23%.
The slightly lower sales growth in Asia Pacific reflects the earlier timing of the recovery in China last year as well as the ongoing challenges in India this quarter due to a surge in COVID-19 cases.
From an end market perspective, on a year-over-year basis, the increasing strength in demand is broad-based.
Transportation was the strongest end market with 50% growth, followed by general engineering, up 35%.
Energy was up 4% year-over-year despite slowing demand in China due to the reduced wind subsidies.
Although aerospace declined 7% year-over-year, it showed the strongest sequential improvement, up 10%.
In addition to aerospace, on a sequential basis, General Engineering also showed strong signs of improvement and energy was slightly positive.
Transportation declined 11% sequentially due to the temporary supply chain challenges, which force transportation customers to slow their metal cutting factories like engine plants to better align with their overall production.
Based on comments from our customers, we expect these challenges to persist into our fiscal first quarter and to start to improve sequentially thereafter.
However, the situation continues to be fluid and different customer by customer.
Adjusted operating margin improved 540 basis points to 11.7% compared to 6.3% in the prior year quarter.
The increase was primarily driven by volume and associated absorption, simplification/modernization benefits and price and raw material benefits, partially offset by temporary cost actions taken last year and a modest mix headwind.
Turning to Infrastructure on Slide 9.
Organic sales increased 28% year-over-year versus a 29% decline in the prior year period.
FX and business days contributed positively to sales in the amount of 5% and 1%, respectively.
Regionally, the largest increase year-over-year was in the Americas at 35%, then EMEA at 29% and Asia at 14%.
By end market, the results were primarily driven by general engineering and energy, up 42% and 41%, respectively.
Earthworks was up 12%.
The bright spots in Earthworks this quarter were in the Americas in agriculture and forestry and in EMEA construction.
Adjusted operating margin increased to 14.5% from 12.7% in the prior year quarter.
The improvement was driven by higher volumes and associated absorption, simplification/modernization benefits, a slight positive effect from price and raw materials, partially offset by temporary cost actions taken last year in mix.
Now turning to Slide 10 to review our balance sheet and free operating cash flow.
We continue to maintain a very strong liquidity position, healthy balance sheet and debt maturity profile.
At fiscal year-end, we had combined cash and revolver availability of approximately $850 million.
Primary working capital of $602 million was relatively flat year-over-year and down approximately $13 million sequentially.
On a percentage of sales basis, it decreased to 33.4% as our focus on working capital during the year continued to strengthen our free operating cash flow even as sales have increased.
Our primary working capital target remains 30%, which we expect to approach by the end of this fiscal year.
Our fourth quarter free operating cash flow was $66 million, a significant year-over-year increase, reflecting higher income due to volume and strong operating leverage.
This is similar on a full year basis with free operating cash flow of $113 million compared to negative $18 million last year.
Net capital expenditures for the quarter were $30 million, a decrease of approximately $8 million from the prior year, bringing the total net capital spend for the year to $123 million, in line with our expectations.
We also paid the dividend of $17 million in the quarter.
The full balance sheet can be found on Slide 18 in the appendix.
Starting with the first quarter, we expect sales to be in the range of $470 million to $490 million.
At the midpoint, this implies year-over-year growth of approximately 20% and approximately 7% sequential decline, which is stronger than our normal Q4 to Q1 pattern.
At the midpoint of the sales outlook, we have assumed there will be no significant sequential change in the supply chain challenges in transportation.
We expect these challenges to persist into our fiscal first quarter and to start to improve sequentially thereafter.
However, the situation continues to be fluid.
Also, we do not expect to see demand adversely affected from additional lockdowns associated with the COVID-19 Delta variant.
Lastly, we are planning for the typical EMEA first quarter extended vacation and summer shutdowns for our customers.
Assuming our current outlook, we expect adjusted operating income to be a minimum of $45 million and to improve by at least 300% year-over-year despite the $15 million in Q1 year-over-year headwinds related to temporary cost actions taken last year.
Also, we expect the adjusted effective tax rate to be in the range of 25% to 28%, and depreciation and amortization will increase $3 million to $4 million year-over-year.
Lastly, we expect free operating cash flow to be slightly negative, which is typical in the first quarter.
Regarding the full year, visibility remains limited in the current environment.
But at this time, we would expect to exceed normal sequential growth patterns throughout the year.
Furthermore, we are confident that we will continue to achieve strong annual operating leverage in any growth scenario.
Keep in mind, this annual operating leverage is excluding approximately $25 million of year-over-year headwinds from temporary cost actions taken last year, of which approximately $15 million will return in Q1 and the remaining $10 million in Q2.
Also, it's important to note that leverage may vary quarter-to-quarter.
For example, in the first quarter, after adjusting for temporary cost actions, the operating leverage is expected to be higher than our normal annualized level as Q1 has the greatest combined effect of raw materials and pricing compared to the remainder of the year.
Moving on to other variables for the full year.
We expect an adjusted effective tax rate of 25% to 28%.
Depreciation and amortization is expected to increase $15 million to $20 million year-over-year to a range of $140 million to $145 million.
Capital expenditures will be consistent with this year and in the range of $110 million to $130 million.
As I mentioned earlier, we expect primary working capital to trend toward our 30% goal by the end of the fiscal year.
Together, this will translate to free operating cash flow generation and approximately 100% of adjusted net income, in line with our long-term target, which further demonstrates our progress in transforming the company by continued execution of our operational and commercial excellence initiatives.
Looking ahead in fiscal year '22, we are excited to build off Q4's momentum by leveraging our modernized footprint and strong operating leverage to drive growth and higher profitability as well as cash flow at approximately 100% of net income.
We expect the end market recovery to continue.
And though visibility remains limited right now, we expect growth to outpace our normal quarterly sequential trends throughout the year.
This sales performance will be driven both by market growth and our commercial excellence initiatives, aimed at gaining share in targeted end markets, including growth of our fit-for-purpose offering.
In summary, I believe fiscal year '22 will be a year where we further demonstrate the ability to achieve our adjusted EBITDA target when sales reached $2.5 billion to $2.6 billion by continuing to execute on our strategic operational and commercial excellence initiatives.
And I look forward to further outlining the details of these strategic initiatives at our next Investor Day, which is tentatively planned for early next calendar year.
We'll provide more details on that as we get closer to the date.

user
q4 adjusted earnings per share $0.53.
q4 earnings per share $0.41.
q4 sales $516 million versus refinitiv ibes estimate of $514.2 million.
sees q1 sales up 17 to 22 percent.
sees fy 2022 capital spending is expected to be $110 million - $130 million.
sees fy 2022 primary working capital trending toward 30 percent of sales by year-end.
sees fy 2022 adjusted etr expected to be 25% - 28%.

assistant