Kennametal Beats on Q1 Earnings, Lowers 2015 Outlook - Analyst Blog

Kennametal Inc. (KMT) reported an impressive result for first-quarter fiscal 2015 (ended Sep 30, 2014). Adjusted earnings came in at 56 cents per share, up 14.3% from 49 cents earned in the year-ago quarter. Also, the bottom line surpassed the Zacks Consensus Estimate of 55 cents.

Adjusted results excluded roughly 7 cents per share of restructuring and related charges. Including this one-time charge, GAAP earnings were 49 cents per share.

Revenue

Kennametal's revenues in the quarter totaled $694.9 million, increasing 12.1% year over year. The improvement can be attributed to 1% organic growth, 1% favorable foreign currency impact and 12% gain from acquisition of the Tungsten Materials Business (TMB).

However, revenues came in below the Zacks Consensus Estimate of $704 million.

Kennametal reports its revenue results under two heads/segments. The company's segmental performance is briefly discussed below:

The Industrial segment generated revenues of $377.9 million, reflecting an increase of 11.7% year over year. Organic growth of 5% was driven by improvements in general engineering and transportation end markets, offset by declines in aerospace and defense end markets. On a geographical basis, revenues increased 8% in Asia, 1% in Europe and 7% in the Americas.

The Infrastructure segment's revenues rose 12.6% year over year to $317.1 million. Organic revenues declined 3% year over year due to weak sales in earthworks market, offsetting improvements in the energy market. Revenues dropped 10% and 7% in Europe and Asia respectively, while increasing 2% in the Americas.

On a geographical basis, Kennametal generated revenues of $334.6 million from its North American operations, representing a year-over-year increase of 24.1%. Revenues sourced from Western Europe were $190.9 million, up 1.7% year over year, while revenues from Rest of the World totaled $169.5 million, up 4.2% year over year.

Margins

Kennametal's cost of goods sold expanded 13.1% year over year, representing 68.6% of total revenues versus 68% in the year-ago quarter. Operating expenses, as a percentage of total revenue, were 21.4%, down 30 basis points (bps) year over year.

Adjusted operating margin grew 20 bps year over year to 9.9%.

Balance Sheet and Cash Flow

Exiting first-quarter fiscal 2015, Kennametal had cash and cash equivalents of $156.2 million, down 12.2% from $177.9 million in the preceding quarter. Long-term debt and capital leases decreased 7.4% sequentially to $908.6 million.

In first-quarter fiscal 2015, Kennametal generated cash of $42.6 million from its operating activities, decreasing 4.2% year over year. Capital spending grew 23.3% year over year to $30.8 million. Lower operating cash flow and a rise in capital spending lowered the available free cash by 36.9% to $12.4 million.

Concurrent with the earnings release, Kennametal announced that its board of directors has approved a quarterly cash dividend payment of 18 cents per share on Nov 25, 2014 to shareholders of record as on Nov 11.

Outlook

For fiscal 2015, Kennametal lowered its total sales growth forecast to a 2−4% range from the prior prediction of 5−7%. Organic growth is now anticipated within 1−3% versus 3−5% expected earlier. The revised guidance includes the adverse impacts 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.

Based on these, Kennametal revised down its earnings estimates to a range of $2.80−$3.00 per share from the earlier projection of $2.90−$3.20 per share.

Cash flow from operating activities is anticipated within $280−$310 million range, down from the prior expectation of $290−$320 million. Capital spending forecast has been kept constant at $110−$120 million. Free cash flow is likely to be in the band of $170−$190 million as against $180−$200 million predicted earlier.

Restructuring activities, once fully implemented, will result in annual pre-tax savings of $50−$55 million as against the earlier estimation of $35−$45 million.

With a market capitalization of $3 billion, Kennametal currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the machinery industry include Barnes Group Inc. (B), Parker-Hannifin Corporation (PH) and AO Smith Corp. (AOS). All these stocks hold a Zacks Rank #2 (Buy).