Kennametal Inc. (NYSE:KMT) is an industrial equipment manufacturer, particularly metal-cutting tools, drill bits, and other pieces of equipment where resistance to wear is required. These products are used in many end markets, primarily industry and construction. KMT operates in an oligopoly, and produces niche industrial products with few competitors, giving it pricing power in the market. Being an industrial supplier, however, means that the company's success depends on the health of industrial end markets. Any economic shocks in an industry using machine tools directly affects KMT returns, so when oil prices rise, for example, the expansion of the oilfield services industry leads to increased demand for KMT's tungsten-carbide tools. The company earned $2 billion in sales but incurred a net loss of $120 million in 2009.
End markets often reflect the state of the economy they operate in, so KMT has made several acquisitions and divestments to shift some of its dependence away from the U.S. economy and towards more international markets, in order to reduce its risk. Rising costs for materials like steel and tungsten affect the entire machine tools industry, and force Kennametal to raise prices or cut costs to avoid shrinking margins.
Kennametal operates two main segments:
Since Kennametal is primarily an industrial supplier, the health of the economy's end markets are crucial to Kennametal's success. Increased global industrial production will directly affect Kennametal's product manufacturing by causing demand for its industrial tools to rise. The general engineering end market is KMT's main buyer (43% of sales). This end market involves KMT selling its tungsten carbide tooling and advanced materials to various manufacturing businesses, from waste water treatment to animal food processing. The automotive industry affects Kennametal's second-largest end market, on-highway vehicles (28% of sales). KMT sells axles and bearings to the automotive industry. Every market trend affects the outcome of Kennametals' business strategies. High oil prices, for example, have caused increased exploration for new energy taps, which in turn increase demand for KMT's earth-drilling tools.
Since Kennametal products are sold to several end markets, the state of an economy drives Kennametal's success; the strength of an economy is an indicator of the strength of its end markets. KMT believes the U.S. is entering a recession, and hopes that international expansion will reduce revenue loss by causing the company to be less dependent on the U.S. economy. To this end:
Some of Kennametal's past acquisitions include
Some of the company's divestments include
Steel, Cobalt, and Tungsten are the three main raw materials used in Kennametal product manufacturing. Tungsten APT prices have increased 160% in the last five years. Since 2004, Cobalt prices have decreased 22%. Both have seen price increases thanks to the economic growth of emerging markets and rising demand for industrial equipment. To offset these increases in cost, Kennametal has increased net product prices.