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Kennametal (KMT) Lags on Q4 Earnings but Beats Revenues

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Machinery company Kennametal Inc. (KMT - Free Report) reported lower-than-expected bottom line for fourth-quarter fiscal 2016 (ended Jun 30, 2016). The company’s adjusted earnings of 44 cents per share lagged the Zacks Consensus Estimate of 45 cents by 2.2% However, the bottom-line was on par with the year-ago tally.

For fiscal 2016, Kennametal’s adjusted earnings were $1.11 per share, surpassing the Zacks Consensus Estimate of $1.10 but roughly 44.5% below the year-ago tally of $2.00.

Kennametal Inc. (KMT - Free Report) Street EPS & Surprise Percent - Last 5 Quarters | FindTheCompany

 

Talking about Kennametal’s top-line results, net sales in the quarter were $521.2 million, above the Zacks Consensus Estimate of $516 million. On a year-over-year basis, the top-line decreased 18.3%. The year-over-year fall was triggered by a 9% decline in organic revenues, 1% adverse impact from foreign currency translation and 9% divestiture-related losses, partially offset by 1% gain related to more business days.

On a geographical basis, Kennametal generated sales of $234.2 million from its North American operations, decreasing 20.6% year over year. Business in Western Europe remained weak, with revenues of $142.5 million, declining 19.2% year over year. Revenues sourced from Rest of the World fell 13% year over year to $144.5 million.

For fiscal 2016, the company’s revenues totaled $2,015.9 million, down 16.2% year over year and below the Zacks Consensus Estimate of $2.09 billion.

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 $328.6 million, down 8.1% year over year. The decline was due to an 8% fall in organic revenues and 1% negative impact from foreign currency translation, partially offset by 1% gain due to more business days.

Organic sales in energy, general engineering and transportation end markets declined, while increased for aerospace & defense end market. On a geographical basis, revenues fell 11% in Asia, 8% in the Americas and 1% in Europe.

The Infrastructure segment’s revenue totaled $192.7 million, down 31.2% year over year. The decline was due to 11% fall in organic revenues, 20% adverse impact from divestiture and 1% negative impact from foreign currency translation, partially offset by 1% gain due to more business days.

Organic revenues declined due to weak sales in energy, earthworks and general engineering end markets. Geographically, revenues fell 18% in the Americas and 11% in Asia, offset by 5% gain in Europe.

Margins

In the quarter, Kennametal’s adjusted cost of goods sold decreased 11.5% year over year, representing 67.5% of total revenue compared with 68.8% in the year-ago quarter. Adjusted gross margin improved 130 basis points (bps) to 32.5%.

Adjusted operating expense, as a percentage of total revenue, was 22.7%, up 150 bps year over year. Adjusted operating margin fell 20 bps year over year to 9%.

Balance Sheet and Cash Flow

Exiting fourth-quarter fiscal 2016, Kennametal had cash and cash equivalents of $161.6 million, up from $136.6 million at the previous quarter-end. Long-term debt and capital leases were roughly flat sequentially at $700 million.

In fiscal 2016, Kennametal generated net cash of $219.3 million from its operating activities, down from $351.4 million recorded in the previous year. Capital spending was $110.7 million compared with $100.9 million in fiscal 2015. Free operating cash flow declined 57% year over year to $114.6 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 Aug 26 to shareholders of record as on Aug 12.

Outlook

For fiscal 2017, Kennametal anticipates total revenue to be flat compared with roughly $2 billion generated in fiscal 2016. Organic revenue is projected to decline 2% to grow roughly 2%. Adjusted earnings are expected within $1.10−$1.40 per share. Effective tax rate will be within 13−17% range.

Cash flow from operating activities is projected in a range of $190−$230 million, while capital spending is anticipated within $100−$120 million. Free cash flow will likely come in a band of $90−$110 million.

Also, according to Kennametal, Phase 1 of its restructuring activities has been substantially completed in the fourth-quarter fiscal 2016. Estimated annualized pre-tax savings from this phase is $40−$45 million.

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. The third phase of the company’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.

Kennametal announced that it will reduce its workforce by 1000, resulting in savings of $100−$110 million in fiscal 2017. In addition, the company initiated certain productivity and efficiency enhancement strategies for the next 2−3 years, estimated to yield savings of $200−$300 million.

KENNAMETAL INC Price, Consensus and EPS Surprise

KENNAMETAL INC Price, Consensus and EPS Surprise | KENNAMETAL INC Quote

Zacks Rank & Stocks to Consider

With a market capitalization of $2 billion, Kennametal currently carries a Zacks Rank #4 (Sell). Better-ranked stocks in the machinery industry include Stanley Black & Decker Inc. (SWK - Free Report) , Franklin Electric Co., Inc. (FELE - Free Report) and AO Smith Corp. (AOS - Free Report) . All these stocks carry a Zacks Rank #2 (Buy).

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