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Kennametal (KMT) Q2 Earnings Miss Estimates, Guidance Cut

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Kennametal Inc. (KMT - Free Report) reported weaker-than-expected results for second-quarter fiscal 2020 (ended Dec 31, 2019) with both earnings and sales lagging estimates by 10.5% and 3.7%, respectively.

This machinery company’s adjusted earnings in the reported quarter were 17 cents, below the Zacks Consensus Estimate of 19 cents. Also, the bottom line plunged 76.1% from the year-ago figure of 71 cents on weak sales and margin results.

Revenue Details

Kennametal generated revenues of $505.1 million, declining 14% year over year. While organic sales fell 12% in the quarter, forex woes had an impact of 1% and business days left a negative impact of 1%.

The company’s performance suffered from weakness in India, the United States and Germany. Also, concerns related to the supply chain of 737 MAX were a spoiler.

Kennametal’s top line lagged the Zacks Consensus Estimate of $524.4 million.

On a geographical basis, the company generated revenues of $245.2 million from America operations, decreasing 17% year over year. Sales in Europe, the Middle East and Africa (EMEA) were down 13.8% to $150.4 million while the same from the Asia Pacific dropped 6.6% to $109.4 million.

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

Industrial revenues of $279.2 million were down 12% year over year. The results were adversely impacted by an 11% decline in organic revenues and a 1% impact from forex woes.

WIDIA revenues were $44.3 million, down 9.4% year over year. The results were negatively impacted by an organic sales decline of 8% and the business days’ impact of 1%.

Infrastructure revenues totaled $181.5 million, declining 18% year over year. The results were affected by 1% from forex woes, 1% from business days, 14% decline in organic sales and 2% from divestiture headwinds.

Margin Profile

Kennametal’s cost of goods sold in the reported quarter dipped 4% year over year to $373.1 million. It represented 73.9% of revenues compared with 66.2% in the year-ago quarter. Gross profit deteriorated 33.5% year over year to $132 million wherein margin contracted 770 basis points (bps) to 26.1%. Operating expenses summed $107.5 million in the quarter under review, decreasing 6.2% year over year. As a percentage of revenues, operating expenses were 21.3% compared with 19.5% a year ago.

Adjusted operating income in the reported quarter slumped 69.8% year over year to $24.5 million. Notably, this downside is caused by a decline in organic sales, the negative impacts of simplification/modernization actions, high cost of raw materials and lower absorption of costs (including fixed and volume-related labor costs) in some facilities. However, the adverse impacts were to partly offset by the benefits of simplification/modernization actions. Adjusted operating margin slipped 900 bps to 4.8%.

Adjusted effective tax rate was 29.6% compared with 21.3% in the prior year.

Balance Sheet and Cash Flow

Exiting the fiscal second quarter, Kennametal had cash and cash equivalents of $105.2 million, decreasing 7.3% from $113.5 million at the end of the last reported quarter. Long-term debt and capital leases inched up 0.1% sequentially to approximately $593.2 million.

In the first half of fiscal 2020, the company generated net cash of $87.1 million from operating activities, surging 41.6% from the year-ago period. Capital invested in purchasing property, plant and equipment came in at $147.5 million, above $88.1 million in the year-earlier period. Free cash outflow was $59.6 million compared with $24.1 million in the first half of fiscal 2019.

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 its shareholders of record as of Feb 11, 2020. The dividend will be paid out on Feb 25.

Restructuring Actions

In July 2019, the company announced that it is undertaking certain measures as part of its simplification/modernization initiatives, which are likely to help it streamline the business structure, improve efficiency and boost shareholder value. These restructuring moves are likely to be completed within the next two years and aid the company to progress toward achieving the fiscal 2021 (ending June 2021) targets.

The suggested restructuring actions will likely yield annualized savings of $35-$40 million in fiscal 2020 (ending June 2020). Pre-tax charges associated with these efforts will be $55-$65 million.

The company predicts that facility closures scheduled for fiscal 2021 will lead to annualized savings worth $25-$30 million. Pre-tax charges in the year will be $55-$65 million.

Outlook

For fiscal 2020, Kennametal anticipates to gain from simplification/modernization activities. However, end-market challenges, issues related with the 737 MAX and higher tax rates will adversely impact results in the second half. Therefore, the company lowered its projections for the full year.

It predicts an organic sales decline of 9-12% for fiscal 2020, indicating a decline from the precious projection of 5-9% fall. It expects adjusted earnings per share of $1.20-$1.50, suggesting a decrease from the earlier forecast of $1.70-$2.10.

The company expects effective tax rate of 25-28%, higher than 22-24% expected previously for the current fiscal year.

Capital expenditure is expected to be $240-$260 million for fiscal 2020, largely supporting the simplification/modernization initiatives. The company estimates free operating cash flow at a break-even. The past guided range was $20-$50 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 $2.6 billion, Kennametal currently carries a Zacks Rank #4 (Sell).

Some better-ranked stocks in the Zacks Industrial Products sector are SPX FLOW, Inc. (FLOW - Free Report) , Barnes Group, Inc. (B - Free Report) and Tennant Company (TNC - Free Report) . While SPX FLOW currently sports a Zacks Rank #1 (Strong Buy), Barnes and Tennant carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

In the past 60 days, earnings estimates for these companies have been revised upward for the current year. Further, average four-quarter positive earnings surprise is 6.95% for SPX FLOW, 4.21% for Barnes and 28.65% for Tennant.

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