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Kennametal (KMT) Beats Q3 Earnings & Sales, Ups FY17 View

Machinery company Kennametal Inc.KMT reported impressive results for third-quarter fiscal 2017 (ended Mar 31, 2017). Adjusted earnings came in at 60 cents per share, surpassing the Zacks Consensus Estimate of 43 cents by 39.5%. Also, the bottom line surged 62.2% from the year-ago tally of 37 cents.

The company's revenues totaled $528.6 million in the quarter, above the Zacks Consensus Estimate of $512.3 million. On a year-over-year basis, the top line increased 6.2% on the back of 5% organic revenue growth and 2% positive impact of more business days. However, the positives were partially offset by 1% adverse impact from foreign currency translation.

On a geographical basis, Kennametal generated sales of $245.6 million from its North American operations, increasing 5.8% year over year. Business in Western Europe remained weak, with revenues of $128.7 million declining 1.7% year over year. Revenues from Rest of the World grew 14.6% year over year to $154.4 million.

Segmental Details

Kennametal reports its revenue results under three segments viz. Industrial, WIDIA and Infrastructure (effective from the start of fiscal 2017). The company's segmental performance is briefly discussed below:

The Industrial segment's net sales in the quarter were $289.5 million, increasing 5.6% year over year. Organic revenue growth of 5% and gain of 3% from more business days were partially offset by 2% negative impact from foreign currency translation.

Organic sales in energy, general engineering, aerospace & defense and transportation increased. On a geographical basis, revenues grew 17% in Asia, 4% in the Americas and 6% in Europe.

The WIDIA segment's revenues totaled $46.3 million, up 9.6% year over year. The year-over-year growth was driven by 9% increase in organic revenues and 1% gain from more business days. On a geographical basis, revenues grew 14% in Asia, 11% in the Americas and 3% in Europe.

The Infrastructure segment's revenues totaled $192.9 million, increasing 6.3% year over year. The improvement was due to 4% organic revenue growth and 2% gain from more business days.

Organic revenues increased in energy, earthworks and general engineering end markets. Geographically, revenues increased 12% in Asia and 6% in the Americas while remained flat in Europe.

Margins

In the quarter, Kennametal's adjusted cost of goods sold inched up 0.5% year over year, representing 64.5% of total revenue compared with 68.1% in the year-ago quarter. Adjusted gross margin improved 360 basis points (bps) to 35.5%.

Adjusted operating expense, as a percentage of total revenue, was 22%, down 120 bps year over year. Adjusted operating margin grew 500 bps year over year to 12.8%.

Balance Sheet and Cash Flow

Exiting the fiscal third quarter, Kennametal's cash and cash equivalents were $100.8 million, slightly below $102 million recorded at the previous quarter-end. Long-term debt and capital leases were roughly flat at $694.6 million.

In the quarter, Kennametal's net cash flow from operating activities totaled $33.4 million, down from $40.9 million in the year-ago quarter. Capital spending grew 6.4% year over year to $23.5 million. Free operating cash flow in the quarter was $10.3 million versus $19.5 million generated in the year-ago quarter.

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 31 to shareholders on record as of May 16.

Outlook

For fiscal 2017, Kennametal increased its adjusted earnings guidance to $1.50−$1.60 per share from the previous forecast of $1.20−$1.50. Free cash flow will likely come in a band of $60−$90 million, below the earlier issued guidance range of $90−$110 million. The decline was due to expectation of requirement of more working capital.

The company anticipates its restructuring programs, including headcount reduction initiatives and others, to yield pre-tax savings of approximately $165−$180 million by Dec 2018. Charges related to these initiatives will likely be $165−$195 million.

Of these programs, the company predicts its headcount reduction initiatives to result in estimated annualized savings of $90 million by Dec 2017. Related charges will be roughly $60−$70 million. In addition, the other programs are likely to generate savings of $75−$90 million by Dec 2018. Related charges will be $105−$125 million.

Also, over the next three years, the company anticipated to start realizing benefits from its modernization and End-to-End initiatives as well as from ongoing product and process simplification initiatives.

Kennametal Inc. Price and Consensus

Kennametal Inc. Price and Consensus | Kennametal Inc. Quote

Zacks Rank & Key Picks

With a market capitalization of $3.3 billion, Kennametal currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the machinery industry include Parker-Hannifin Corporation PH , Broadwind Energy, Inc. BWEN and DXP Enterprises, Inc. DXPE . While Parker-Hannifin sports a Zacks Rank #1 (Strong Buy), both Broadwind Energy and DXP Enterprises carry a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here .

Parker-Hannifin Corporation reported better-than-expected results in the last four quarters, with an average positive earnings surprise of 12.44%. Also, earnings expectations for fiscal 2017 and fiscal 2018 improved over the past 60 days.

Broadwind Energy's earnings estimates for 2017 were revised upward over the last 60 days.

DXP Enterprises witnessed positive revisions in earnings estimates for 2017 and 2018, over the past 60 days. Also, it delivered an average positive earnings surprise of 50.37% for the last four quarters.

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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.

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