Markets

Kennametal (KMT) Beats Q3 Earnings, Falls Y/Y, Ups View

Machinery company Kennametal Inc.KMT impressed investors with better-than-expected results for third-quarter fiscal 2016 (ended Mar 31, 2016). The company's adjusted earnings of 37 cents per share exceeded the Zacks Consensus Estimate of 24 cents by 54.2%. However, the bottom-line declined 19.6% from the year-ago tally of 46 cents.

Kennametal Inc. - Earnings Surprise | FindTheBest

Kennametal's adjusted results excluded roughly 18 cents per share of restructuring and related charges, 2 cents of tax-adjustments for prior asset impairments and roughly 3 cents per share of divestiture-related losses.

Talking about Kennametal's top-line results, net sales of $497.8 million surpassed the Zacks Consensus Estimate of $483 million. On a year-over-year basis, the top-line decreased 22.1%. The year-over-year fall was triggered by tough operating conditions in the end markets, which resulted in an 8% decline in organic revenues. Also, a 4% adverse impact from foreign currency translation and 10% divestiture-related losses hurt the top line.

On a geographical basis, Kennametal generated sales of $232.2 million from its North American operations, decreasing 23% year over year. Business in Western Europe remained weak, with revenues of $130.9 million, declining 27.3% year over year. Revenues sourced from Rest of the World fell 14.4% year over year to $134.7 million.

Segmental Details

Kennametal reports its revenues under two heads/segments. The company's segmental performance is briefly discussed below:

The Industrial segment's net sales in the quarter were $316.4 million, down 10.8% year over year. The decline was due to a 5% fall in organic revenues, 1% adverse impact from divestiture and 5% negative impact from foreign currency translation.

Organic sales in energy, general engineering, transportation, and aerospace & defense end markets declined. On a geographical basis, revenues fell 8% in Asia, 6% in the Americas and 2% in Europe.

The Infrastructure segment's revenue totaled $181.5 million, down 36.1% year over year. The decline was due to a 12% fall in organic revenues, 21% adverse impact from divestiture and 3% negative impact from foreign currency translation.

Organic revenues declined due to weak sales in oil & gas, mining, industrial applications and processing end markets. Geographically, revenues fell 23%, 11% and remained flat in the Americas, Asia and Europe, respectively.

Margins

In the quarter, Kennametal's adjusted cost of goods sold decreased 22.8% year over year, representing 68.1% of total revenue compared with 68.7% in the year-ago quarter. Adjusted gross margin improved 60 basis points (bps) to 31.9%.

Adjusted operating expense, as a percentage of total revenue, was 23.2%, up 170 bps year over year. Adjusted operating margin fell 100 bps year over year to 7.8%.

Balance Sheet and Cash Flow

Exiting third-quarter fiscal 2016, Kennametal's cash and cash equivalents were $136.6 million, down 1.8% from $139 million at the previous quarter-end. Long-term debt and capital leases were roughly flat sequentially at $700 million.

In the first-nine months of fiscal 2016, Kennametal generated net cash of $145.4 million from its operating activities, down from $219.6 million recorded in the year-ago period. Capital spending was $83.3 million compared with $77.6 million spent in first-half fiscal 2015. Free operating cash flow declined 53.1% year over year to $67.2 million.

Concurrent with the earnings release, Kennametal announced that its board of directors has approved a quarterly cash dividend of 20 cents per share, payable on May 27 to shareholders of record as on May 13.

Outlook

For fiscal 2016, Kennametal projects a 20−22% decline in revenues compared with the previous expectation of 20−23%. Organic revenue is now predicted to drop 10−12%, better than a 10−13% fall estimated earlier.

Adjusted earnings are expected within $1.05−$1.15 per share, up from 85 cents to $1.05 per share projected earlier.

Cash flow from operating activities is projected in a range of $225−$245 million (versus the previous expectation of $215−$245 million), while capital spending is anticipated within approximately $125−$135 million (retained). Free cash flow will likely come in a band of $100−$110 million (versus the previous projection of $90−$110 million).

Also, according to Kennametal, Phase 1 of its restructuring activities has been witnessing sufficient progress, having recorded pre-tax savings of $62 million so far. Once fully implemented, these initiatives will lead to annual pre-tax savings in the range of $40−$45 million, while associated charges will be approximately $60 million. Expected completion date is Jun 30, 2016.

The second phase of Kennametal's restructuring activities is expected to be completed by the end of calendar year 2018. Charges are estimated within $90−$100 million, while annualized savings are predicted in a range of $40−$50 million. So far, the company has incurred $42 million in pre-tax charges, while realizing $32 million of savings.

The third phase of Kennametal's restructuring activities is expected to be completed by Mar 2017. Estimated charges are $40−$45 million, while annualized savings are predicted in a range of $25−$30 million. So far, the company has incurred $15 million in pre-tax charges, while realizing $3 million of savings.

With a market capitalization of $1.9 billion, Kennametal currently carries a Zacks Rank #2 (Buy). Other stocks worth considering in the machinery industry include Gorman-Rupp Co. GRC , Luxfer Holdings PLC LXFR and Sandvik AB SDVKY . While both Gorman-Rupp and Luxfer Holdings sport a Zacks Rank #1 (Strong Buy), Sandvik AB carries a Zacks Rank #2 (Buy).

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

KENNAMETAL INC (KMT): Free Stock Analysis Report

SANDVIK AB (SDVKY): Free Stock Analysis Report

GORMAN RUPP CO (GRC): Free Stock Analysis Report

LUXFER HOLDINGS (LXFR): Free Stock Analysis Report

To read this article on Zacks.com click here.

Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story

SDVKY KMT LXFR GRC

Other Topics

Earnings Stocks

Latest Markets Videos