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Kennametal (KMT) Q4 Earnings Miss, 1H FY20 Outlook Weak

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Kennametal Inc. (KMT - Free Report) has reported weaker-than-expected results for fourth-quarter fiscal 2019 (ended Jun 30, 2019), with earnings lagging estimates by 2.3%. This was the company’s second consecutive quarter of dismal results, with third-quarter fiscal 2019 earnings lagging estimates by 3.75%.

The machinery company’s adjusted earnings in the reported quarter were 84 cents, lagging the Zacks Consensus Estimate of 86 cents. Also, the company’s earnings declined 3.4% from the year-ago figure of 87 cents due to weak sales results.

For fiscal 2019, its adjusted earnings were $3.02 per share, lagging the Zacks Consensus Estimate of $3.05. However, the company’s earnings grew 14% year over year.

Segmental Weakness Lowers Revenues

In the quarter under review, Kennametal generated revenues of $603.9 million, declining 6.5% year over year. Organic sales declined 2% in the quarter while forex woes had an adverse impact of 4% and business days had negative impact of 1%.

Also, the company’s top line lagged the Zacks Consensus Estimate of $643.2 million by 6.1%.

On a geographical basis, it generated revenues of $308.1 million from America operations, declining 3.1% year over year. Sales in Europe, Middle East and Africa (EMEA) were down 10.3% to $173.8 million while that for the Asia Pacific declined 9.1% to $122.1 million.

The company reports revenue results under three segments — Industrial, WIDIA and Infrastructure. Its segmental performance for the fiscal fourth quarter is briefly discussed below:

Industrial revenues totaled $318 million, declining 8.9% year over year. The results were adversely impacted by a 4% decline in organic revenues, 4% impact of forex woes and 1% negative impact of business days.

WIDIA revenues were $48.9 million, down 8.3% year over year. The results were impacted adversely by forex woes of 3%, business days’ impact of 2% and organic sales decline of 2%.

Infrastructure revenues totaled $237 million, declining 2.7% year over year. The results were adversely impacted by 3% from forex woes and 1% from business days. Organic sales in the quarter grew 1%.

For fiscal 2019, the company’s revenues totaled $2,375.2 million, inching up 0.3% from the previous year. Its revenues missed the Zacks Consensus Estimate of $2.42 billion.

Operating Margin Improves

Kennametal’s cost of goods sold in the reported quarter declined 5.7% year over year to $390.2 million. It represented 64.6% of revenues versus 64.1% in the year-ago quarter. Gross profit moved down 8% year over year to $213.7 million, wherein margin declined 60 basis points (bps) to 35.4%. Operating expenses totaled $116.1 million in the quarter under review, decreasing 10.6% year over year. As a percentage of revenues, it was 19.2% versus 20.1% in the year-ago quarter.

Adjusted operating income in the reported quarter declined 4.3% year over year to $95.3 million. Notably, fall in adjusted operating income was due to impacts of simplification/modernization actions, forex woes and lower absorption of costs (including fixed and volume-related labor costs) in some facilities. However, the adverse impacts were to some extent offset by lower compensation expenses and benefits of simplification/modernization actions. Adjusted operating margin rose 40 bps to 15.8%.

Adjusted effective tax rate was 21%, down from 22.1%.

Balance Sheet and Cash Flow

Exiting the fiscal fourth quarter, Kennametal had cash and cash equivalents of $182 million, increasing 61.6% from $112.6 million at the end of the last reported quarter. Long-term debt and capital leases inched up 0.1% sequentially to $592.5 million.

In fiscal 2019, the company generated net cash of $300.5 million from operating activities, increasing 8.4% from the year-ago period. Capital invested for purchasing property, plant and equipment totaled $212.3 million, above $171 million in fiscal 2018. Free cash inflow was $99.4 million, down from $120.7 million in fiscal 2018.

Concurrent with the earnings release, the company announced that its board of directors approved the payment of a quarterly cash dividend of 20 cents per share to shareholders of record as of Aug 13, 2019. The dividend will be paid out on Aug 27.

Restructuring Actions

Last month, the company announced that it is taking certain measures as part of its simplification/modernization initiatives, which are meant to help it simplify the business structure, improve efficiency and boost shareholder value.

As noted, Kennametal proposes to restrict operations in Germany. It plans to close manufacturing facilities in Lichtenau and Essen by merging their operations with lower-cost Industrial facilities of the company. It also plans to shut Neunkirchen-based distribution center. In addition, the company put forward an idea to outsource distribution operations (related to Essen and Neunkirchen facilities) to a logistics specialist (third-party).

In addition to these moves, Kennametal decided to stop operating its Irwin, PA-based manufacturing facility. Operations of this facility will be combined with Rogers, AR-based Infrastructure plant.

The above-mentioned restructuring moves are likely to be completed in the next two years and help the company in progressing toward fiscal 2021 (ending June 2021) targets. The suggested restricting actions are part of its previously announced simplification/modernization drive for fiscal 2020, which will likely yield annualized savings of $35-$40 million and incur pre-tax charges of $55-$65 million by fiscal 2020 end.

The company predicts that facility closures scheduled for fiscal 2021 will result in annualized savings of $25-$30 million. Notably, pre-tax charges will likely be $60-$75 million, combining fiscal 2020 and fiscal 2021 actions.

Outlook

For fiscal 2020, Kennametal anticipates gaining from simplification/modernization initiatives, meant for simplifying the business structure, improving efficiency and boosting shareholder value. However, these restructuring measures will create cost-related headwinds in the first half of the fiscal year, with the impact likely to abate in the second half. Also, end-market conditions will be challenging in the first half while modest recovery is predicted on improvement in energy and transportation markets.

Organic sales growth is predicted to be (2%)-2% in fiscal 2020. For the Industrial segment, the company predicts that fall in tungsten prices will create margin headwinds in the first half of the fiscal year.

Adjusted earnings per share will likely be $2.80-$3.20. Notably, the company believes that roughly two-third portion of adjusted earnings will be generated in the second half. Effective tax rate is likely to be 21-23%.

Capital expenditure is expected to be $240-$260 million, largely supporting the company’s simplification/modernization initiatives. Free cash flow is estimated to be $75-$100 million.

Kennametal Inc. Price, Consensus and EPS Surprise

 

Kennametal Inc. Price, Consensus and EPS Surprise

Kennametal Inc. price-consensus-eps-surprise-chart | Kennametal Inc. Quote

Zacks Rank & Stocks to Consider

With a market capitalization of $2.8 billion, Kennametal currently carries a Zacks Rank #4 (Sell).

Some better-ranked stocks in the Zacks Industrial Products sector are Roper Technologies, Inc. (ROP - Free Report) , Hickok Inc. (CRAWA - Free Report) and Dover Corporation (DOV - Free Report) . All these stocks currently carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

In the past 60 days, earnings estimates for Roper and Dover have improved for the current year while remained unchanged for Hickok. Further, average earnings surprise for the last four quarters was 6.92% for Roper, 9.24% for Hickok and 6.91% for Dover.

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