Kennametal Inc. (KMT Quick QuoteKMT - Free Report) reported weaker-than-expected results for third-quarter fiscal 2018 (ended Mar 31, 2018), with earnings lagging estimates by 4.1%. This was the second consecutive quarter of negative earnings surprise for the company.

The machinery company’s adjusted earnings in the reported quarter were 70 cents, missing the Zacks Consensus Estimate of 73 cents. However, the bottom line improved 16.7% from the year-ago tally of 60 cents, backed by growth in end markets, as well as benefits derived from the company’s initiatives to drive growth, modernization and simplification.

Segmental Performances Drive Revenues

In the quarter under review, Kennametal generated revenues of $607.9 million, surpassing the Zacks Consensus Estimate of $598.9 million. Also, the top line increased 15% year over year on the back of 11% organic revenue growth and 6% positive foreign currency impact. This was partially offset by 2% negative impact from fewer business days.

On a geographical basis, the company generated revenues of $294.2 million from American operations, increasing 12.6% year over year. Sales in Europe, Middle East and Africa (EMEA) grew 19.1% to $192.9 million, while that from Asia Pacific operations increased 14.8% to $120.9 million.

The company reports revenue results under three segments, Industrial, WIDIA and Infrastructure. The company’s segmental performance in the fiscal third quarter is briefly discussed below:

Industrial revenues totaled $333 million, increasing 15% year over year. Organic revenues grew 10% and foreign currency translation had a positive impact of 8%. Lower business days had an adverse impact of 3%.

WIDIA revenues were $52.2 million, up 12.8% year over year. The improvement was driven by 9% increase in organic revenues and 5% positive impact from foreign currency movements. Lower business days had an adverse impact of 1%.

Infrastructure revenues totaled $222.7 million, increasing 15.5% year over year. The improvement was due to 14% organic revenue growth and 3% positive impact from foreign currency movements. This was partially offset by 2% negative impact from fewer business days.

Margin Profile Improves Despite Rise in Raw Material Costs

Kennametal’s adjusted cost of goods sold in the reported quarter increased 13.8% year over year to $387.8 million. It represented 63.8% of revenues versus 64.5% in the year-ago quarter. Adjusted gross margin increased 70 basis points (bps) to 36.2%.

Adjusted operating expenses totaled $129.4 million in the quarter under review, increasing 11.5% year over year. As a percentage of revenues, it was 21.3% versus 22% in the year-ago quarter. Adjusted operating margin expanded 150 bps year over year to 14.3%, on the back of organic sales growth, favorable mix, forex impact and gains from the company’s restructuring efforts. These positives were partially offset by rise in raw-material costs and lower efficiency in manufacturing as well as higher compensation and salary expenses.

Balance Sheet and Cash Flow

Exiting the fiscal third quarter, Kennametal had cash and cash equivalents of $221.9 million, up from $159.9 million at the end of the previous quarter. Long-term debt and capital leases were roughly flat at $696.1 million sequentially.

In the quarter under review, the company generated net cash of $113.8 million from its operating activities, significantly above $34.1 million generated in the year-ago quarter. Capital invested for purchasing property, plant and equipment totaled $43.1 million, higher than $23.5 million used in the year-ago quarter. Free cash flow was $72.1 million, increasing from $10.9 million in the third quarter of fiscal 2017.

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 of record as of May 15, 2018. The dividend will be paid on May 30.

Outlook

Kennametal anticipates gaining from its growth, modernization and simplification initiatives. It also predicts favorable price realization to offset raw material cost inflation in fiscal 2018.

Encouraged by the above-mentioned positives, the company raised adjusted earnings per share guidance to $2.55-$2.65 from the previous projection of $2.40-$2.70. The mid-point now stands at $2.60 versus the earlier figure of $2.55. Organic sales growth is predicted to be at the higher-end of the prior projection of 9-11%. The tax rate is likely to be 23-25% versus 22-25% expected earlier, while capital expenditure is expected to be at the lower-end of the prior forecast of $210-$230 million. Free cash flow is expected to be $60-$75 million versus $0-$30 million estimated earlier.

Kennametal Inc. Price, Consensus and EPS Surprise