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Kennametal Lags on Q1 Earnings, to Sell Non-Core Assets

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Kennametal Inc.KMT reported lower-than-expected earnings for first-quarter fiscal 2016 (ended Sep 30, 2015). Adjusted earnings came in at 14 cents per share, lagging the Zacks Consensus Estimate of 22 cents. Also, the bottom line dropped 75% from 56 cents earned a year ago, primarily due to weakness in industrial and infrastructure end markets as well as unfavorable impact from currency translations.

Adjusted results excluded roughly 14 cents per share of restructuring and related charges and roughly 8 cents per share of divestiture-related charges. Including these one-time adjustments, Kennametal reported loss, on a Generally Accepted Accounting Principles basis, of 8 cents per share.

Kennametal Inc. - Earnings Surprise | FindTheBest

Revenues

Kennametal generated net sales of $555.4 million in the quarter, down 20.1% year over year. Also, the top line missed the Zacks Consensus Estimate of $568 million. The year-over-year fall was triggered by tough operating conditions in the end markets served, which resulted in a 13% decline in organic revenues. Also, a 7% adverse impact from foreign currency translation hurt the top line.

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

The Industrial segment generated revenues of $313.3 million, down 17.1% year over year. The decline was due to 8% fall in organic revenues and 9% 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 6% in Asia, 15% in the Americas and 1% in Europe.

The Infrastructure segment 's revenues totaled $242 million, down 23.7% year over year. Organic revenues declined 19% year over year due to weak sales in earthworks, general engineering and energy end markets. Foreign currency translation adversely impacted sales by 5%. Geographically, revenues fell 27%, 11% and 1% in the Americas, Asia and Europe, respectively.

On a geographical basis, Kennametal generated sales of $253.1 million from its North American operations, decreasing 24.3% year over year. Business in Western Europe remained weak, with revenues of $155.7 million declining 18.4% year over year. Revenues sourced from Rest of the World fell 13.6% year over year to $146.5 million.

Margins

Kennametal's adjusted cost of goods sold fell 14.9% year over year, representing 72.5% of total revenue compared with 68.1% in the year-ago quarter. Adjusted gross margin fell 440 basis points (bps) to 27.5%.

Adjusted operating expense, as a percentage of total revenue, was 22.5%, up 140 bps year over year. Adjusted operating margin fell 600 bps year over year to 3.9%.

Balance Sheet and Cash Flow

Exiting first-quarter fiscal 2016, Kennametal had cash and cash equivalents of $97.2 million, down from $105.5 million recorded in the preceding quarter. Long-term debt and capital leases fell 1.4% sequentially to $725.5 million.

During the first quarter, Kennametal generated net cash of $38.7 million from its operating activities, down 24% year over year. Capital spending was $37.2 million compared with $30.8 million spent in the year-ago quarter. Free operating cash flow declined 83.5% year over year to $3.4 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 Nov 24 to shareholders of record as on Nov 10.

Assets Divestiture

Kennametal took a step toward better aligning its business portfolio with current market demands as well as improve profitability. The company announced the divestiture of some of its non-core assets, roughly 18 facilities including 11 manufacturing and 7 small facilities from castings, steel-plate fabrication and deburring operations. The transaction value has been fixed at $70 million in cash.

Kennametal expects to complete the asset sale before end of second-quarter fiscal 2016. It intends to use the proceeds from the transaction to repay debt.

Also, Kennametal anticipates incurring after-tax loss of $100−$120 million from the asset sale, while predicting adverse sales impact of $125 million. However, the transaction will likely be immediately accretive to the company's operating margin and remain neutral to earnings.

Outlook

For fiscal 2016, Kennametal's guidance reflects the current uncertainties in the global market, especially in its end markets, as well as impact of its ongoing cost-reduction initiatives. Total sales are anticipated to decrease in a range of 10−14%, including a 6−10% fall in organic revenues. This guidance marks a revision from the earlier projection of 7−9% sales decline, including 1−3% fall in organic revenues.

Adjusted earnings are expected within $1.50−$1.70 per share, down from $1.70−$2.00 per share projected earlier. The revised bottom line guidance includes negative impact of 65−70 cents per share from weak sales estimates, partially offset by 20−25 cents per share of gain each from the positive impact of currency, taxes & others and additional cost-reduction actions.

Cash flow from operating activities is projected in a range of $275−$310 million, while capital spending is anticipated within approximately $160−$175 million. Free cash flow will likely come in a band of $115−$135 million.

Also, according to Kennametal, Phase 1 of its restructuring activities has been witnessing sufficient progress, having recorded pre-tax savings of $42 million so far. Once fully implemented, these initiatives will lead to annual pre-tax savings in the range of $50−$55 million, while associated charges will come within $55−$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 2016. 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 $32 million in pre-tax charges, while realizing $16 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.

With a market capitalization of $2.2 billion, Kennametal currently carries a Zacks Rank #4 (Sell). Better-ranked stocks in the machinery industry include CUI Global, Inc. CUI , Powell Industries, Inc. POWL and Middleby Corp. MIDD . All three stocks carry a Zacks Rank #2 (Buy).

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KENNAMETAL INC (KMT): Free Stock Analysis Report

MIDDLEBY CORP (MIDD): Free Stock Analysis Report

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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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