A month has gone by since the last earnings report for Kennametal (KMT - Free Report) . Shares have added about 1.3% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Kennametal due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Kennametal Q1 Earnings Top Estimates, Revenues Miss
Kennametal reported better-than-expected results for first-quarter fiscal 2019 (ended Sep 30, 2018), with earnings beating estimates by 7.7%.
This machinery company’s adjusted earnings in the reported quarter were 70 cents, surpassing the Zacks Consensus Estimate of 65 cents. Moreover, the bottom line improved 27.3% from the year-ago figure of 55 cents driven by healthy growth in end markets as well as the continued benefits derived from the company’s initiatives, including growth, modernization and simplification.
Segmental Performance Drives Revenues
In the quarter under review, Kennametal generated revenues of $586.7 million, increasing 8.2% year over year on the back of 10% organic revenue growth, partially offset by 2% negative foreign currency impact.
Notably, the top line missed the Zacks Consensus Estimate of $587 million by 0.06%.
On a geographical basis, the company generated revenues of $289.1 million from American operations, increasing 10.3% year over year. Sales in Europe, Middle East and Africa (EMEA) grew 3.2% to $171.5 million while that from the Asia Pacific operations increased 11.5% to $126.1 million.
The company reports revenue results under three segments — Industrial, WIDIA and Infrastructure. Its segmental performance in fiscal first quarter is briefly discussed below:
Industrial revenues totaled $320.6 million, increasing 8% year over year. Organic revenues grew 1%, which was partially offset by 2% negative impact of foreign currency translation.
WIDIA revenues were $49 million, up 8% year over year. The improvement was driven by a 11% increase in organic revenues, which was partially offset by 3% negative impact of foreign currency translation.
Infrastructure revenues totaled $217 million, increasing 9% year over year. The improvement was due to 10% organic revenue growth. However, it was partially offset by 1% negative impact of foreign currency translation.
Kennametal’s adjusted cost of goods sold in the reported quarter increased 4.3% year over year to $375.6 million. It represented 64% of revenues versus 66.4% in the year-ago quarter. Adjusted gross margin increased 260 basis points (bps) to 36%.
Adjusted operating expenses totaled $123.3 million in the quarter under review, increasing 2.8% year over year. As a percentage of revenues, it was 21% versus 22.1% in the year-ago quarter. Adjusted operating margin grew 460 bps to 14.2% on the back of growth in organic sales, favorable mix and gains from the company’s restructuring efforts.
These positives were partially offset by rise in raw-material costs as well as temporary manufacturing inefficiencies in certain locations and overtime expenses. It is worth noting that inflation in raw material costs was more than offset by price realizations in the reported quarter.
Balance Sheet and Cash Flow
Exiting the fiscal first quarter, Kennametal had cash and cash equivalents of $102.1 million, down from $556.2 million at the end of the last-reported quarter. Long-term debt and capital leases were roughly $591.3 million, down marginally on a sequential basis.
In the quarter under review, the company generated net cash of $9.2 million from its operating activities against a negative $40 million in the year-ago quarter. Capital invested for purchasing property, plant and equipment totaled $43.3 million, above $22.3 million in the year-ago quarter. Free cash flow was negative $33.2 million compared with negative $61.5 million in the prior-year quarter.
The company announced that its board of directors has approved the payment of a quarterly cash dividend of 20 cents per share to shareholders of record as of Nov 13, 2018. The dividend will be paid on Nov 28.
The company reiterated its previous guidance for fiscal 2019. It continues to expect adjusted earnings per share to be $2.90-$3.20. Organic sales growth is predicted to be 5-8%. The tax rate is likely to be 22-25%. Capital expenditure is expected to be $240-$260 million and free cash flow is estimated to be $120-$140 million.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates flatlined during the past month.
At this time, Kennametal has a subpar Growth Score of D, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
Kennametal has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.