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Machinery company Kennametal Inc. (KMT - Free Report) reported lower-than-expected results for fourth-quarter fiscal 2017 (ended Jun 30, 2017). Adjusted earnings came in at 56 cents per share, lagging the Zacks Consensus Estimate of 63 cents by 11.1%. However, the bottom line increased 27.3% from the year-ago tally of 44 cents.

For fiscal 2017, the company’s adjusted earnings were $1.52 per share, below the Zacks Consensus Estimate of $1.58. Compared with the year-ago tally of $1.11 per share, the bottom line grew 36.9%.

Revenues

Revenues totaled $565 million in the quarter, above the Zacks Consensus Estimate of $553.8 million. On a year-over-year basis, the top line increased 8.4% on the back of 12% organic revenue growth. However, the positives were partially offset by 2% adverse impact from foreign currency translation and 2% negative impact of fewer business days.

On a geographical basis, Kennametal generated sales of $269.5 million from its North American operations, increasing 15.1% year over year. Business in Western Europe remained weak, with revenues of $132.4 million declining 7.1% year over year. Revenues from Rest of the World grew 12.9% year over year to $163.1 million.

For fiscal 2017, the company’s revenues were $2.058 billion, above the Zacks Consensus Estimate of $2.04 billion. However, the top line declined 1.9% year over year.

Segmental Details: Kennametal reports its revenue results under three segments viz. Industrial, WIDIA and Infrastructure. The company’s segmental performance in the fourth quarter is briefly discussed below:

Industrial net sales were $300.3 million, increasing 5.2% year over year. Organic revenue growth of 10% was partially offset by 3% negative impact from foreign currency translation and 2% negative impact from fewer business days.

Organic sales in energy, general engineering, aerospace & defense and transportation increased. On a geographical basis, revenues grew 14% in Asia, 9% in the Americas and 4% in Europe.

WIDIA revenues totaled $47.5 million, up 10.3% year over year. The year-over-year growth was driven by 14% increase in organic revenues, partially offset by 3% impact from fewer business days and 1% negative impact from unfavorable foreign currency movements. On a geographical basis, revenues grew 13% in Asia, 15% in the Americas and 2% in Europe.

Infrastructure revenues totaled $217.2 million, increasing 12.8% year over year. The improvement was due to 14% organic revenue growth, partially offset by 1% negative impact from fewer business days.

Organic revenues increased in energy, earthworks and general engineering end markets. Geographically, revenues increased 11% in Asia and 22% in the Americas while decreased 11% in Europe.

Margins

In the quarter, Kennametal’s adjusted cost of goods sold grew 8.8% year over year, representing 67.8% of total revenue compared with 67.5% in the year-ago quarter. Adjusted gross margin declined 30 basis points (bps) to 32.2%.

Adjusted operating expenses, as a percentage of total revenue, was 20.3%, down 240 bps year over year. Adjusted operating margin grew 220 bps year over year to 11.2%.

Balance Sheet and Cash Flow

Exiting the fiscal fourth quarter, Kennametal’s cash and cash equivalents were $190.6 million, up from $100.8 million recorded at the previous quarter-end. Long-term debt and capital leases were roughly flat at $695 million.

In the quarter, Kennametal’s net cash flow from operating activities totaled $112.2 million, up from $73.9 million in the year-ago quarter. Capital spending decreased 12.7% year over year to $23.900 million. Free operating cash flow in the quarter was $89.4 million versus $47.4 million generated in the year-ago quarter.
 
Concurrent with the earlier release, the company announced that its board of directors approved payment of a quarterly cash dividend of 20 cents per share to shareholders on record as of Aug 18. The dividend will be paid on Aug 31.

Outlook

For fiscal 2018, Kennametal anticipates adjusted earnings guidance to be in the $2.00−$2.30 per share range. The bottom line will benefit from organic sales growth of 2−4% and benefits from cost-reduction initiatives. Tax rate will likely be 18−22%, while capital expenditure is expected to be within $210−$230 million. Free cash is projected to be positive, in a range of $0−$20 million.

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 anticipates 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 billion, Kennametal currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the industry include Schneider Electric SE (SBGSY - Free Report) , Plug Power, Inc. (PLUG - Free Report) and Regal Beloit Corporation (RBC - Free Report) . While Schneider Electric sports a Zacks Rank #1 (Strong Buy), both Plug Power and Regal Beloit Corporation carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank  stocks here.

Schneider Electric’s earnings estimates for 2017 remained stable while that for 2018 improved in the last 60 days.
 
Plug Power’s earnings are anticipated to grow roughly 25% in the next three to five years.

Regal Beloit Corporation pulled off an average positive earnings surprise of 1.48% in the last four quarters. Its earnings estimates remained stable for 2017 while improved for 2018 in the last 60 days.

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