One month after stating that already-enacted cost-savings measures would need to accelerate amid COVID-19 business impacts, Kennametal announced Tuesday that its salaried employees will be seeing considerably smaller paychecks for the next year.
The Pittsburgh-based metalworking products maker said it is increasing the reduction in compensation for salaried employees from 10 percent to 20 percent based on job level through the first half of the company's fiscal 2021. It's part of Kennametal's accelerated "Simplification/Modernization" initiative, which was originally announced in November 2019 and amended in January. The pay cuts are effective July 1 and are expected to save about $10 million to $15 million per quarter, which the company said is similar in amount to and replaces furloughs or similar actions currently in place for salaried employees.
Also effective July 1, Kennametal's board of directors' cash compensation will be reduced 20 percent through the first half of fiscal 2021, and the company will continue temporary shutdowns and reduced production schedules to align manufacturing capacity to anticipated customer demand.
"Within our Simplification/Modernization initiative, the current market conditions provide an opportunity to accelerate our plans for reducing structural costs while improving the effectiveness of our commercial functions and manufacturing operations," said Christopher Rossi, Kennametal president and CEO. "The acceleration will lead to increased savings by the end of fiscal year 2021. Also, as volume increases, we will be able to leverage this structure and our modernized manufacturing processes for even more productivity."
Kennametal reported its 2020 third quarter financial results on May 4, showing an accelerated decline in year-over-year sales that the company said were minimally impacted by COVID-19 outside of China — evidence of a continued underlying slump in demand for industrial products that began in mid-2019. The company's Q3 sales of $483 million were down 19 percent year-over-year (YoY), with organic sales down 17 percent. Sequentially, that compares with Q2 sales of $505 million, which were down 14 percent YoY overall, with organic sales down 12 percent. The company's Q3 operating profit was $38 million, compared to $82 million a year earlier. Total Q3 profit of $2.9 million was dwarfed by $70 million of a year earlier.
That Q3 report said the company had taken aggressive cost-control measures to offset COVID-19 headwinds, which included reductions in discretionary spending, furloughs, extensive travel restrictions and reduced production at global manufacturing facilities to align with current lower demand.
At that time, the company also announced the withdrawal of $500 million of its $700 million revolving credit facility during Q3 to boost its cash flow and liquidity.
"Based on our April and May sales, we expect economic weakness will persist, and we need to continue to maintain these types of temporary cost-control actions until we begin to see markets recover," Rossi continued Tuesday. "The steps we are announcing today and the ongoing work we are doing in Simplification/Modernization position us well for long-term success. Even so, these are difficult decisions as they touch every one of our employees, especially those who will be leaving Kennametal, and we are committed to supporting them throughout this transition."