Machinery company Kennametal Inc. KMT reported better-than-expected results for first-quarter fiscal 2018 (ended Sep 30, 2017), with an earnings beat of 44.7%.
The quarter’s adjusted earnings came in at 55 cents per share, excluding the impact of 7 cents per share of restructuring and related charges. The bottom line topped the Zacks Consensus Estimate of 38 cents and the year-ago quarter’s tally of 11 cents.
The bottom line benefitted from healthy organic sales, favorable mix, margin improvement, restructuring benefits and lower taxes.
Segmental Performance Drives Revenues
Kennametal’s revenues in the quarter totaled $542.5 million, surpassing the Zacks Consensus Estimate of $513.5 million by 5.6%. Also, the top line increased 13.7% year over year on the back of 13% organic revenue growth and 2% positive foreign currency impact. This was partially offset by 1% negative impact of fewer business days.
On a geographical basis, the company generated sales of $262.4 million from its American operations, increasing 13.8% year over year. Sales in Europe, Middle East and Africa (EMEA) grew 12.1% to $166.6 million while that generated from Asia Pacific operations increased 15.9% to $113.5 million.
The company reports its revenue results under three segments viz. Industrial, WIDIA and Infrastructure. The company’s segmental performance in the fiscal first quarter is briefly discussed below:
Industrial net sales were $297.5 million, increasing 11% year over year. Organic revenues grew 9% and foreign currency translation had a positive 2% impact.
Organic sales in energy, general engineering, aerospace & defense and transportation increased. On a geographical basis, revenues jumped 14% in Asia Pacific, 8% in the Americas and 7% in EMEA.
WIDIA revenues totaled $45.2 million, up 10% year over year. The year-over-year growth was driven by 9% increase in organic revenues and 1% positive impact from foreign currency movements. On a geographical basis, revenues grew 8% in Asia Pacific, 5% in the Americas and 19% in EMEA.
Infrastructure revenues totaled $199.7 million, increasing 20% year over year. The improvement was due to 19% organic revenue growth and 2% positive impact from foreign currency movements. This was partially offset by 1% negative impact from fewer business days.
Organic revenues increased in energy, earthworks and general engineering end markets. Geographically, revenues rose 21% in Asia Pacific, 20% in the Americas and 8% in EMEA.
Margins Improve on Falling Costs Proportion
Kennametal’s adjusted cost of goods sold in the quarter jumped 7.4% year over year, representing 65.7% of total revenues compared with 69.5% in the year-ago quarter. Adjusted gross margin increased 380 basis points (bps) to 34.3%.
Adjusted operating expenses, as a percentage of total revenues, was 22%, down 290 bps year over year. Adjusted operating margin grew 700 bps year over year to 11.7% on the back of higher sales, favorable mix, fixed-cost absorption and improved productivity.
Balance Sheet and Cash Flow
Exiting the fiscal first quarter, Kennametal had cash and cash equivalents of $110.7 million, below $190.6 million at the previous quarter end. Long-term debt and capital leases were roughly flat sequentially at $695 million.
In the quarter, the company used net cash of $19.9 million for its operating activities versus $23.6 million generated in the year-ago quarter. Capital spending slipped 40 bps to $42.1 million.
Concurrent with the earlier release, the company announced that its board of directors approved payment of a quarterly cash dividend of 20 cents per share to shareholders on record as of Nov 14. The dividend will be paid on Nov 29.
Outlook
For fiscal 2018, Kennametal raised its adjusted earnings per share guidance to $2.30-$2.60 from the previous projection of $2.00-$2.30. The bottom line will benefit from organic sales growth of 5-7% (up from the earlier forecast of 2-4%) and benefits from cost-reduction initiatives. Tax rate will likely be 18-22% while capital expenditure is expected to be within $210-$230 million. Free cash is projected to be in a range of $0-$20 million.
As noted, the company substantially completed its restructuring programs in the fiscal first quarter, realizing benefits of $21 million from head count reduction and $19.5 million from other restructuring programs. On an annualized basis, benefits from these programs amount to $165 million. Additionally, the company communicated that it is on track to realize benefits from its modernization and end-to-end initiatives.
Kennametal Inc. Price and Consensus
Kennametal Inc. Price and Consensus | Kennametal Inc. Quote
Zacks Rank & Key Picks
With a market capitalization of $3.8 billion, Kennametal currently carries a Zacks Rank #2 (Buy). Other stocks worth in the machinery industry include Kadant Inc. KAI, Sun Hydraulics Corporation SNHY and Stanley Black & Decker, Inc. SWK. While both Kadant and Sun Hydraulics sport a Zacks Rank #1 (Strong Buy), Stanley Black & Decker carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Kadant reported better-than-expected results in the last four quarters, with an average positive earnings surprise of 20.32%. Also, its earnings estimates for 2017 and 2018 improved in the last 60 days.
Sun Hydraulics’ earnings estimates for 2017 and 2018 improved in the last 60 days. Also, the pulled off an average positive earnings surprise of 3.47% in the last four quarters.
Stanley Black & Decker pulled off an average positive earnings surprise of 4.26% in the last four quarters. Its earnings estimates improved for 2017 and 2018 in the last 60 days.
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