Kennametal Inc. (KMT) reported improved year-over-year bottom-line results for second-quarter fiscal 2015 (ended Dec 31, 2014), but failed to meet the estimates. Adjusted earnings came in at 52 cents per share, reflecting an increase of 4% year over year. However, earnings per share lagged the Zacks Consensus Estimate of 55 cents.
Adjusted results excluded roughly 13 cents per share of restructuring and related charges and 4 cents per share of technology asset impairment charge. Including this one-time charge, Kennametal's Generally Accepted Accounting Principles (“GAAP”) bottom-line reflected a loss of $4.89 per share.
Revenue
Kennametal generated revenues of $675.6 million in the quarter, down 2.1% year over year. The top-line fall was due to tough operating conditions in the end markets served, that resulted in a 2% decline in organic revenues. A 4% adverse impact from foreign currency translation added to the woes. However, acquisitions contributed 3% to revenue growth, while more working days in the quarter positively impacted revenues by 1%.
Nevertheless, revenues came in below the Zacks Consensus Estimate of $705 million.
Kennametal reports its revenue results under two heads/segments. The company’s segmental performance is briefly discussed below:
The Industrial segment’s revenues inched up 0.2% year over year to $371.6 million. Organic growth of 2% was driven by improvements in general engineering and transportation end-markets. Results in aerospace and defense end-markets were relatively flat. On a geographical basis, revenues increased 14% in Asia and 3% in the Americas, offset by 1% decline in the European results.
The Infrastructure segment generated revenues of $304.1 million, down 4.8% year over year. Organic revenues declined 8% year over year due to weak sales in earthworks and energy end-markets. Revenues dropped 14%, 9% and 2% in Europe, Asia and the Americas, respectively.
On a geographical basis, Kennametal’s revenue from North America totaled $319.5 million, up 5.8% year over year. Business in Western Europe was weak, with revenues of $183.6 million reflecting a 14.9% fall over the year-ago tally. Revenues sourced from Rest of the World edged up 0.2% year over year to $172.6 million.
Margins
Kennametal’s adjusted cost of goods sold fell 0.4% year over year, representing 69.9% of total revenue versus 68.9% in the year-ago quarter. Adjusted operating expenses, as a percentage of total revenue, stood at 19.8%, down 150 basis points (bps) year over year.
Adjusted operating margin grew 20 bps year over year to 9.1%.
Balance Sheet and Cash Flow
Exiting second-quarter fiscal 2015, Kennametal had cash and cash equivalents of $146.3 million, down compared with $156.2 million in the preceding quarter. Long-term debt and capital leases decreased 4.6% sequentially to $867.1 million.
In the six months ended Dec 31, Kennametal generated cash of $135.3 million from its operating activities, soaring 59.9% year over year. Capital spending was $54.7 million versus $48.8 million spent in the year-ago comparable period. Free operating cash flow grew 125.1% year over year to $81.6 million.
Concurrent with the earnings release, Kennametal announced that its board of directors has approved a quarterly cash dividend of 18 cents per share, payable on Feb 25, 2015 to shareholders of record as on Feb 10.
Outlook
For fiscal 2015, Kennametal revised its guidance to reflect the prevailing uncertainties in the global market, especially in end-markets served by the company.
Total sales are now anticipated to decrease in the range of 6−7%, including organic revenue decline in the range of 4−5%. This compares with the previous total revenue growth forecast of 2−4%, including organic growth expectation of 1−3%.
The revised guidance includes the adverse impact of lower demand in Eurozone and decline in underground mining production levels. Also, a fall in drilling activities in the oil and gas sector will hurt results, going forward. In addition, foreign currency translation represents a major headwind.
Based on these, Kennametal revised down its adjusted earnings estimates to a range of $1.90−$2.10 from the earlier projection of $2.80−$3.00 per share.
Cash flow from operating activities is anticipated to come in the $270−$295 million range, down from the prior expectation of $280−$310 million. Capital spending will come approximately within $110−$115 million versus the prior forecast of $110−$120 million. Free cash flow is likely to be in the band of $160−$180 million as against $170−$190 million predicted earlier.
Also, Kennametal hinted that Phase 1 of its restructuring activities is witnessing sufficient progress, having recorded pre-tax savings of $12 million so far. Once fully implemented, these initiatives will result in annual pre-tax savings in the range of $50−$55 million, while associated charges will be $55−$60 million. Expected completion date is Jun 30, 2016.
Kennametal also initiated the second phase of its restructuring activities, expected to be completed by calendar year-end 2016. Estimated charges are $90−$100 million, while annualized savings are predicted within $40−$50 million.
With a market capitalization of $2.5 billion, Kennametal currently carries a Zacks Rank #4 (Sell). Some better-ranked stocks in the machinery industry include Graham Corporation (GHM), Pioneer Power Solutions, Inc. (PPSI) and Kadant Inc. (KAI). While Graham Corporation sports a Zacks Rank #1 (Strong Buy), both Pioneer Power Solutions and Kadant carry a Zacks Rank #2 (Buy).
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