Kennametal Inc. KMT reported better-than-expected earnings for fourth-quarter fiscal 2015 (ended Jun 30, 2015). Adjusted earnings came in at 46 cents per share, surpassing the Zacks Consensus Estimate of 44 cents. However, the bottom line was down 41.8% from 79 cents earned a year ago.
Adjusted results excluded roughly 24 cents per share of restructuring and related charges and roughly 4 cents per share of tax gains. Including these one-time adjustments, earnings on a Generally Accepted Accounting Principles (“GAAP”) basis were 26 cents per share.
For fiscal 2015, Kennametal‘s adjusted earnings came in at $2.02 per share, down from $2.53 recorded in fiscal 2014.
Revenues
Kennametal’s sales in the quarter totaled $637.7 million, declining 17.4% year over year, but surpassing the Zacks Consensus Estimate of $624 million.
The year-over-year fall was triggered by tough operating conditions in the end-markets served, which resulted in a 10% decline in organic revenues. Also, adverse impact of 7% from foreign currency translation and 1% from divestitures hurt the top line. These negatives were, however, partially offset by 1% growth from more working days in the quarter.
Kennametal reports its revenues under two heads/segments. The company’s segmental performance is briefly discussed below:
The Industrial segment’s revenues decreased 14% year over year to $357.5 million. The decline was due to a 4% fall in organic revenues, 10% negative impact from foreign currency translation and 1% divestiture-related loss, partially offset by gains related to more business days in the quarter.
Organic sales declined in transportation, aerospace & defense, and energy end-markets. On a geographical basis, revenues remained flat in Asia, while decreasing 6% in the Americas and 1% in Europe.
The Infrastructure segment generated revenues of $280.1 million, down 21.5% year over year. Organic revenues declined 16% year over year due to weak sales in earthworks and energy end-markets. Foreign currency translation adversely impacted sales by 6%. Geographically, revenues fell 21%, 17% and 5% in the Americas, Asia and Europe, respectively.
On a geographical basis, Kennametal’s revenue from North America totaled $295.1 million, decreasing 16.6% year over year. Business in Western Europe was weak, with revenues of $176.4 million decreasing 24.12% from the year-ago tally. Revenues sourced from Rest of the World declined 10.8% year over year to $166.2 million.
In fiscal 2015, Kennametal generated sales of $2,647.2 million, down 6.7% year over year.
Margins
Kennametal’s adjusted cost of goods sold fell 13.8% year over year, representing 69.9% of total revenue compared with 66.9% in the year-ago quarter. Adjusted operating expenses, as a percentage of total revenue, were 20.3%, up 60 basis points (bps) year over year. Adjusted operating margin fell 360 bps year over year to 8.8%.
Balance Sheet and Cash Flow
Exiting fourth-quarter fiscal 2015, Kennametal’s cash and cash equivalents were $105.5 million compared with $146.2 million in the preceding quarter. Long-term debt and capital leases decreased 8.5% sequentially to $735.9 million.
In fiscal 2015, Kennametal generated net cash of $351.4 million from its operating activities, up 29.3% from the year-ago tally of $271.9 million. Capital spending was $100.9 million as against $117.4 million spent in the year-ago comparable period. Free operating cash flow grew 71.2% year over year to $266.6 million.
Concurrent with the earnings release, Kennametal announced that its board of directors has approved a quarterly cash dividend of 20 cents per share, payable on Aug 26, 2015 to shareholders of record as on Aug 11. The dividend rate represents an increase of 20% or 2 cents per share over the previous rate of 18 cents.
Outlook
For fiscal 2016, Kennametal’s guidance reflects the prevailing uncertainties in the global market, especially in its end-markets, as well as impact of the ongoing cost-reduction initiatives. While the company anticipates growth in the Industrial segment, weakness will likely persist in the Infrastructure segment.
Total sales are anticipated to decrease in the range of 7−9%, including organic revenue fall of 1−3%. Earnings are expected within $1.70−$2.00 per share, including negative impact of 30−35 cents per share related to foreign currency translation.
Cash flow from operating activities is projected in the range of $275−$310 million, while capital spending is anticipated within approximately $160−$175 million. Free cash flow will likely come in a band of $115−$135 million.
Also, Kennametal hinted that Phase 1 of its restructuring activities has been witnessing sufficient progress, having recorded pre-tax savings of $30 million so far. Once fully implemented, these initiatives will lead to annual pre-tax savings in the range of $50−$55 million, while associated charges will come within $55−$60 million. Expected completion date is Jun 30, 2016.
The second phase of Kennametal’s restructuring activities is expected to be completed by calendar year-end 2016. Charges are estimated within $90−$100 million, while annualized savings are predicted in a range of $40−$50 million. So far, the company has incurred $24 million in pre-tax charges, while realizing $7 million of savings.
The third phase of Kennametal’s restructuring activities is expected to be completed by Mar 2017. Estimated charges are $40−$45 million, while annualized savings are predicted in a band of $25−$30 million.
With a market capitalization of $2.6 billion, Kennametal currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the machinery industry include Middleby Corp. MIDD, Graco Inc. GGG and Nordson Corporation NDSN. While Middleby Corp. sports a Zacks Rank #1 (Strong Buy), both Graco Inc. and Nordson carry a Zacks Rank #2 (Buy).
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