Kennametal Misses on Earnings, Guides Down - Analyst Blog

Kennametal Inc. (KMT) reported adjusted earnings per share of 52 cents in the second quarter of fiscal 2014 (ended Dec 31, 2013). Adjusted earnings missed the Zacks Consensus Estimate of 61 cents but were higher than 50 cents reported in the year-ago quarter.

GAAP earnings per share in the quarter came in at 30 cents, down from 52 cents reported in the year-ago quarter.

Revenue

Kennametal generated revenues of $689.9 million, up 9.0% year over year and above the Zacks Consensus Estimate of $663.0 million. The year-over-year increase can be attributed to a 2% hike in organic revenues and a 7% gain from the acquisition of Tungsten Materials Business (TMB) from ATI in Nov 2013.

Excluding the $44.8 million contribution from the TMB acquisition, adjusted revenue in the quarter was were $645.1 million.

A brief discussion on the segments of Kennametal is given below:

Industrial segment revenue in the quarter grew 10.0% year over year and came in at $370.6 million. Organic growth of 6% was driven by improvements in general engineering, transportation, energy, aerospace and defense. On a geographical basis, revenues increased 12% in Asia, 7% in Europe and Americas 2% in the Americas.

Infrastructure segment reported a 7.0% year-over-year increase in revenue to $319.3 million. Organic revenue declined 2% due to weak results in the earthworks and transportation markets, offset by strength seen in general engineering and energy. Revenue in Europe grew 8% while it declined 7% in the Americas and 4% in Asia.

On a geographical basis, North America revenue increased 7.9% year over year to $302.0 million; revenue from Western Europe was $215.7 million, up 16.9% year over year while revenue from Rest of the World was about $172.2 million, up 2.0% year over year.

Margins

Cost of revenue in the second quarter went up 11.4% year over year and represented 70.0% of total revenue; up from 68.5% in the year-ago quarter. Operating expenses, as a percentage of total revenue, stood at 21.5%, up 130 basis points year over year. Adjusted operating margin in the quarter was 9.6%.

Balance Sheet

Exiting fiscal second quarter 2014, cash and cash equivalents of Kennametal stood at $163.3 million, nearly half of $333.3 million reported in the previous quarter. Long-term debt and capital leases stood at $1,035.6 million, substantially up from $703.4 million recorded in the previous quarter.
 
Cash Flow

Kennametal reported $40.2 million net cash flow from operating activities in the second quarter of fiscal 2014, down from $51.1 million generated in the year-ago quarter. Capital expenditure in the quarter increased 28.0% year over year to $23.8 million. Free cash flow was approximately $16.7 million compared with $32.8 million in the year-ago quarter.

Besides the financial result announcement, Kennametal's board of directors also approved a quarterly cash dividend of 18 cents. The dividend will be paid on Feb 26, 2014 to shareholders of record as of Feb 11, 2014.
   
Outlook

For fiscal 2014, Kennametal expects total sales growth to be in the 12%-13% range versus 5%-7% expected earlier. The revised guidance includes roughly 7%-9% contribution from the TMB acquisition.

Organic revenue growth is anticipated to be within 2%-4% versus 4%-6% expected earlier. The guidance has been lowered to account for lower-than-anticipated growth in the oil and gas markets served by Kennametal and continued weakness in underground mining in the U.S. and China.

The Industrial segment is projected to exhibit solid growth while the Infrastructure segment will remain weak due to lower volume gains.

Earnings per share guidance has been lowered to a range of $2.60-$2.75 from $2.90-$3.05 expected earlier. The TMB acquisition is likely to dilute earnings by 32-36 cents.

Kennametal anticipates cash flow from operating activities to range within $280-$310 million versus $330-$380 million expected earlier. Capital expenditure is predicted to be in the $130-$140 million range (versus $130-$150 million range expected earlier) while free cash flow is likely to be within $150-$170 million (versus $200-$230 million range expected earlier).

Kennametal expects to incur integration costs of $40-$50 million related to the TMB acquisition through fiscal 2016. Also, annual savings of $35-$45 million are expected to be realized via consolidation of acquired assets, reduction in administrative overhead costs and leveraging supply chain.

Kennametal currently has a market capitalization of $3.7 billion and carries a Zacks Rank #2 (Buy). Other stocks to watch out for in the industry include CIRCOR International, Inc. (CIR), Flow International Corp. (FLOW) and MRC Global Inc. (MRC). All these companies carry the same Zacks Rank as Kennametal.