Kennametal Announces Fourth Quarter & Fiscal 2014 Results - Total sales growth of 15 percent; organic sales growth of 5 percent

- Reported EPS of $0.57; adjusted EPS of $0.75

- Acquisition and restructuring charges of $17 million; divestiture of non-core business for $10 million cash

- Fiscal year operating cash flow of $272 million

LATROBE, Pa., July 31, 2014 /PRNewswire/ -- Kennametal Inc. (NYSE: KMT) today announced fiscal 2014 and fourth-quarter results. For fiscal 2014, the company reported earnings per diluted share (EPS) of $1.99, compared with $2.52 during the prior year. The current year adjusted EPS were $2.50 absent nonrecurring charges and results of the Tungsten Materials Business (TMB).

For its fiscal fourth quarter, the company reported EPS of $0.57, compared with the prior year quarter EPS of $0.76. The current quarter adjusted EPS were $0.75 absent nonrecurring charges and TMB results.

"During the June quarter, we saw accelerating growth and ongoing strength in our served industrial markets; however, certain sectors are still challenging," said Kennametal Chairman, President and CEO Carlos Cardoso. "Although we have yet to realize the full potential of our operating leverage, we continued to elevate our base performance and protect our profitability. Since necessary investments in sales and other customer-facing functions were made in fiscal 2014, we will manage a tighter cost structure as we move ahead."

Cardoso added, "We remain pleased with the progress related to the integration of our Tungsten Materials Business, which is currently ahead of schedule. We will continue to manage our business and control what factors we can."

Fiscal 2014 Fourth Quarter Key Developments

  • Sales were $772 million, compared with $671 million in the same quarter last year. Sales increased by 15 percent, reflecting an 11 percent increase from the TMB acquisition and 5 percent from organic growth, partially offset by 1 percent decrease from fewer business days.
  • Operating income was $78 million, compared with $91 million in the same quarter last year. Excluding nonrecurring charges and TMB results, adjusted operating income of $90 million was relatively flat compared with the prior year, as organic sales growth was offset by lower fixed cost absorption and mix in Infrastructure, and higher employment costs overall. Operating margin was 10.1 percent, compared with an operating margin of 13.5 percent in the prior year. Current year adjusted operating margin was 12.9 percent.
  • During the quarter, TMB contributed sales of $72 million and on-going operating income of $5 million or $0.03 per share. In addition, there were acquisition-related charges of $3 million pre-tax or $0.02 per share, and restructuring and related charges of $14 million pre-tax or $0.17 per share. The company also completed the sale of a non-core business that was part of the TMB acquisition. Cash proceeds from this divestiture amounted to $10 million. The loss on divestiture and related charges totaled $1 million pre-tax or $0.02 per share.
  • The reported effective tax rate was 30.5 percent compared to 23.9 percent in the prior year, primarily driven by restructuring charges in tax jurisdictions where a tax benefit is not permitted for these charges.
  • EPS were $0.57, compared with the prior year quarter EPS of $0.76. Adjusted EPS were $0.75 in the current year period.
  • Adjusted return on invested capital (ROIC) was 7.6 percent as of June 30, 2014 and reflects increased debt in the near term from recent acquisitions.
  • For the year, the company generated $272 million in cash flow from operating activities, compared with $284 million in the prior year. Net capital expenditures were $116 million and $80 million in fiscal years 2014 and 2013, respectively. The company realized free operating cash flow of $156 million compared with $204 million last year. Free operating cash flow was impacted by the acquisition of TMB.

Segment Developments for the Fiscal 2014 Fourth Quarter

  • Industrial segment sales of $416 million increased 15 percent from $363 million in the prior year quarter. This increase was due to 7 percent growth related to the TMB acquisition, 8 percent organic growth and a 1 percent increase due to favorable currency exchange, partially offset by a 1 percent decrease from fewer business days.
  • Excluding TMB, Industrial sales increased 11 percent in transportation, 9 percent in general engineering, partially offset by a 1 percent decrease in aerospace and defense. The transportation market benefited from increased demand in the light vehicle markets world-wide and general engineering increased due to continued demand from distribution channels. Sales increased in all geographies, up 15 percent in Asia, 6 percent in the Americas and 4 percent in Europe.
  • Industrial segment operating income was $53 million compared with $62 million in the prior year period. Excluding nonrecurring charges and TMB results, adjusted operating income of $64 million benefited from organic growth, but was largely offset by higher employment costs. Industrial adjusted operating margin was 16.5 percent compared with 17.0 percent in the prior year.
  • Infrastructure segment sales of $357 million increased 16 percent from $309 million in the prior year. The increase was driven by 15 percent growth from the TMB acquisition and 1 percent organic growth.
  • Excluding TMB, Infrastructure sales increased by 10 percent in energy, largely offset by a decrease of 9 percent in earthworks. Energy sales continued to improve year over year, reflecting improving demand in oil and gas drilling activity, coupled with continued gains in process wear applications. Earthworks sales decreased due to persistently weak underground coal and surface mining markets globally, as well as lower road construction activity. On a regional basis sales grew 2 percent in Europe and held relatively steady in the Americas and Asia.
  • Infrastructure segment operating income was $27 million, compared with $30 million in the same quarter of the prior year. Excluding nonrecurring charges and TMB results, adjusted operating income was also $27 million. Operating income was impacted by lower fixed cost absorption and mix. Infrastructure adjusted operating margin was 8.8 percent compared with 9.7 percent in the prior year.

As previously disclosed, segment results were restated for certain sales reclassifications based on products and technologies.

Fiscal 2014 Key Developments

  • Sales were $2,837 million, compared with $2,589 million last year. Sales increased by 10 percent, driven by 8 percent growth related to the TMB acquisition and 2 percent organic growth.
  • Operating income was $263 million, compared with $296 million in the same period last year. Excluding nonrecurring charges and TMB results, adjusted operating income was $298 million. The current year operating income was favorably impacted by organic growth and raw material costs, offset by higher employment costs and a non-recurring inventory charge of $6 million. Operating margin was 9.3 percent compared with an operating margin of 11.4 percent in the prior year. Adjusted operating margin was 11.3 percent for the current year.
  • Restructuring and related charges amounted to $19 million pre-tax or $0.22 per share.
  • EPS were $1.99, compared with the prior year EPS of $2.52. Adjusted EPS was $2.50 in the current year.

Earnings Per Diluted Share Reconciliation for the Quarter and Year Ended June 30, 2014









FY 2014

Quarter

Year

Reported EPS

$

0.57


$

1.99


TMB results:



  Base operating income

(0.06)


(0.11)


  Depreciation and amortization step-up

0.03


0.08


  On-going operating income

(0.03)


(0.03)





Inventory step-up


0.14


Acquisition-related charges

0.02


0.07


Restructuring and related charges

0.17


0.22


Tax repatriation expense


0.09


Loss on divestiture

0.02


0.02


Adjusted EPS

$

0.75


$

2.50


Restructuring Actions

Kennametal accelerated restructuring actions during fiscal 2014 and continues to expect to deliver annual pre-tax permanent savings of $35 million to $45 million once these initiatives are fully implemented. The cumulative total pre-tax charges are expected to be approximately $50 million. Total restructuring and related benefits realized in fiscal 2014 were approximately $3 million while the related charges recorded inception-to-date were $19 million.

Reconciliations of all non-GAAP financial measures are set forth in the tables attached, and corresponding descriptions are contained in the company's report on Form 8-K, to which this news release is attached.

Outlook

For fiscal year 2015, the company's outlook reflects ongoing market uncertainties as well as limited visibility related to customer demand trends. Kennametal's current assumptions include expectations of continued macro-economic improvement, driven primarily by Industrial end markets. While underground coal mining activity will likely remain at relatively low levels globally, the company believes manufacturing activity is projected to grow over the next 12 months.

Given these factors, the company expects organic sales growth ranging from 3 to 5 percent, with total sales growth between 5 and 7 percent.

The company expects consolidated EPS to range from $2.90 to $3.20 in fiscal 2015. This forecast includes the contribution from TMB.

Kennametal expects to generate cash flow from operating activities in the range of $290 million to $320 million in fiscal 2015. Based on anticipated capital expenditures of approximately $110 million to $120 million, the company expects to generate free operating cash flow in the range of $180 million to $200 million for fiscal year 2015.

Dividend Declared

Kennametal also announced that its board of directors declared a quarterly cash dividend of $0.18 per share. The dividend is payable August 26, 2014 to shareowners of record as of the close of business on August 12, 2014.

Kennametal advises shareowners to note monthly order trends, for which the company generally makes a disclosure ten business days after the conclusion of each month. This information is available via the Investor Relations section of Kennametal's corporate website at www.kennametal.com.

The company will discuss its fiscal 2014 fourth-quarter results in a live webcast at 10:00 a.m. Eastern Time today. This event will be broadcast live on the company's website, www.kennametal.com. To access the webcast, select "Investor Relations" and then "Events." A recorded replay of this event also will be available on the company's website through September 2, 2014.

Certain statements in this release may be forward-looking in nature, or "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are statements that do not relate strictly to historical or current facts. For example, statements about Kennametal's outlook for earnings, sales volumes, and cash flow for fiscal year 2015 and our expectations regarding future growth and financial performance are forward-looking statements. Any forward looking statements are based on current knowledge, expectations and estimates that involve inherent risks and uncertainties. Should one or more of these risks or uncertainties materialize, or should the assumptions underlying the forward-looking statements prove incorrect, our actual results could vary materially from our current expectations. There are a number of factors that could cause our actual results to differ from those indicated in the forward-looking statements. They include: economic recession; availability and cost of the raw materials we use to manufacture our products; our foreign operations and international markets, such as currency exchange rates, different regulatory environments, trade barriers, exchange controls, and social and political instability; changes in the regulatory environment in which we operate, including environmental, health and safety regulations; our ability to protect and defend our intellectual property; competition; our ability to retain our management and employees; demands on management resources; demand for and market acceptance of our products; integrating acquisitions and achieving the expected savings and synergies; business divestitures; global or regional catastrophic events; energy costs; commodity prices; labor relations; demand for and market acceptance of new and existing products; and implementation of environmental remediation matters. Many of these risks and other risks are more fully described in Kennametal's latest annual report on Form 10-K and its other periodic filings with the Securities and Exchange Commission. We can give no assurance that any goal or plan set forth in forward-looking statements can be achieved and readers are cautioned not to place undue reliance on such statements, which speak only as of the date made. We undertake no obligation to release publicly any revisions to forward-looking statements as a result of future events or developments.

Celebrating more than 75 years as an industrial technology leader, Kennametal Inc. delivers productivity to customers seeking peak performance in demanding environments. The company provides innovative wear-resistant products, application engineering and services backed by advanced material science, serving customers in 60 countries across diverse sectors of aerospace, earthworks, energy, industrial production, transportation and infrastructure. With approximately 14,000 employees and nearly $3 billion in sales, the company realizes half of its revenue from outside North America, and over 40% globally from innovations introduced in the past five years. Recognized among the "World's Most Ethical Companies" (Ethisphere); "Outstanding Corporate Innovator" (Product Development Management Association); and "America's Safest Companies" (EHS Today) with a focus on 100% safety, Kennametal and its foundation invest in technical education, industrial technologies and material science to deliver the promise of progress and economic prosperity to people everywhere. For more information, visit the company's website at www.kennametal.com.

 

FINANCIAL HIGHLIGHTS


CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)


















Three Months Ended
June 30,


Twelve Months Ended
June 30,

(in thousands, except per share amounts)

2014


2013


2014


2013

Sales

$

772,204



$

671,410



$

2,837,190



$

2,589,373


Cost of goods sold

519,364



442,696



1,940,187



1,744,369


  Gross profit

252,840



228,714



897,003



845,004


Operating expense

154,785



132,883



589,768



527,850


Restructuring charges

12,594





17,608




Amortization of intangibles

7,404



5,258



26,195



20,760


  Operating income

78,057



90,573



263,432



296,394


Interest expense

8,450



7,042



32,451



27,472


Other expense (income), net

1,267



1,812



2,172



2,313


  Income from continuing operations before income taxes

68,340



81,719



228,809



266,609


  Provision for income taxes

20,861



19,535



66,611



59,693


Net income

47,479



62,184



162,198



206,916


Less: Net income attributable to noncontrolling interests

2,024



1,366



3,832



3,651


Net income attributable to Kennametal

$

45,455



$

60,818



$

158,366



$

203,265


PER SHARE DATA ATTRIBUTABLE TO KENNAMETAL SHAREOWNERS
















Basic earnings per share

$

0.58



$

0.77



$

2.01



$

2.56


Diluted earnings per share

$

0.57



$

0.76



$

1.99



$

2.52


Dividends per share

$

0.18



$

0.16



$

0.72



$

0.64


Basic weighted average shares outstanding

78,818



78,615



78,678



79,463


Diluted weighted average shares outstanding

79,850



79,866



79,667



80,612


 

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)









(in thousands)

June 30,

2014


June 30,

2013

ASSETS




Cash and cash equivalents

$

177,929



$

377,316


Accounts receivable, net

531,515



445,322


Inventories

703,766



578,795


Other current assets

111,986



98,040


Total current assets

1,525,196



1,499,473


Property, plant and equipment, net

884,458



741,482


Goodwill and other intangible assets, net

1,318,752



944,520


Other assets

139,680



115,564


Total assets

$

3,868,086



$

3,301,039


LIABILITIES




Current maturities of long-term debt and capital leases, including notes

payable

$

80,117



$

44,319


Accounts payable

206,891



190,623


Other current liabilities

275,748



232,651


Total current liabilities

562,756



467,593


Long-term debt and capital leases

981,666



703,626


Other liabilities

362,056



317,527


Total liabilities

1,906,478



1,488,746


KENNAMETAL SHAREOWNERS' EQUITY

1,929,256



1,781,826


NONCONTROLLING INTERESTS

32,352



30,467


Total liabilities and equity

$

3,868,086



$

3,301,039


 

















SEGMENT DATA (UNAUDITED)

Three Months Ended
June 30,

Twelve Months Ended
June 30,

(in thousands)

2014


2013

2014


2013

Outside Sales:







Industrial

$

415,529



$

362,696


$

1,524,075



$

1,386,690


Infrastructure

356,675



308,714


1,313,115



1,202,683


Total outside sales

$

772,204



$

671,410


$

2,837,190



$

2,589,373


Sales By Geographic Region:







North America

$

353,604



$

293,048


$

1,276,704



$

1,145,722


Western Europe

232,280



202,168


873,828



768,276


Rest of World

186,320



176,194


686,658



675,375


Total sales by geographic region

$

772,204



$

671,410


$

2,837,190



$

2,589,373


Operating Income:







Industrial

$

52,598



$

61,651


$

177,040



$

192,828


Infrastructure

26,636



29,830


94,940



111,453


Corporate (1)

(1,177)



(908)


(8,548)



(7,887)


Total operating income

$

78,057



$

90,573


$

263,432



$

296,394


(1)  Represents unallocated corporate expenses.

NOTE: Previously disclosed segment results were restated for certain sales reclassifications based on products and technologies.

 

In addition to reported results under generally accepted accounting principles in the United States of America (GAAP), the following financial highlight tables include where appropriate, a reconciliation of adjusted results including sales, operating income and margin, net income, diluted EPS, Industrial sales, Industrial operating income and margin, Infrastructure sales, Infrastructure operating income and margin, free operating cash flow and return on invested capital (which are non-GAAP financial measures), to the most directly comparable GAAP measures. For those adjustments that are presented 'net of tax', the tax effect of the adjustment can be derived by calculating the difference between the pre-tax and the post-tax adjustments presented. The tax effect on adjustments is calculated by preparing an overall tax calculation including the adjustments and then a tax calculation excluding the adjustments. The difference between these calculations results in the tax impact of the adjustments.

Management believes that investors should have available the same information that management uses to assess operating performance, determine compensation and assess the capital structure of the company. These non-GAAP measures should not be considered in isolation or as a substitute for the most comparable GAAP measures. Investors are cautioned that non-GAAP financial measures utilized by the company may not be comparable to non-GAAP financial measures used by other companies. Reconciliations of all non-GAAP financial measures are set forth in the attached tables and descriptions of certain non-GAAP financial measures are contained in our report on Form 8-K to which this release is attached.















THREE MONTHS ENDED JUNE 30, 2014 - (UNAUDITED)







(in thousands, except percents)

Sales

Operating Income

Net Income (2)

Diluted EPS

2014 Reported Results

$

772,204


$

78,057


$

45,455


$

0.57


2014 Reported Operating Margin


10.1%

 




TMB results:





  Base results

(72,403)


(8,568)


(4,978)


(0.06)


  Depreciation & amortization step-up


3,581


2,314


0.03


Acquisition-related charges


3,396


1,914


0.02


Restructuring and related charges


13,994


13,874


0.17


Loss on divestiture



1,607


0.02


2014 Adjusted Results

699,801


90,460


60,186


0.75


2014 Adjusted Operating Margin


12.9%

 




(2) Represents amounts attributable to Kennametal Shareowners.

 













THREE MONTHS ENDED JUNE 30, 2014 - (UNAUDITED)







(in thousands, except percents)

Industrial

Sales

Infrastructure

Sales

Industrial

Operating Income

Infrastructure

Operating Income

2014 Reported Results

$

415,529


356,675


$

52,598


26,636


2014 Reported Operating Margin



12.7%

 


7.5%

 


TMB results:





  Base sales and operating income

(25,532)


(46,871)


(733)


(7,835)


  Depreciation & amortization step-up



549


3,032


Acquisition-related charges



1,327


2,069


Restructuring and related charges



10,516


3,478


2014 Adjusted Results

389,997


309,804


64,257


27,380


2014 Adjusted Operating Margin



16.5%

 


8.8%

 


 















TWELVE MONTHS ENDED JUNE 30, 2014 - (UNAUDITED)








(in thousands, except percents)

Sales

Operating Income

Net Income (2)

Diluted EPS

2014 Reported Results

$

2,837,190


263,432


$

158,366


$

1.99


2014 Reported Operating Margin


9.3%

 




TMB results:





  Base results

(194,896)


(17,836)


(8,779)


(0.11)


  Depreciation & amortization step-up


9,571


6,130


0.08


  Inventory step-up


15,420


11,518


0.14


Acquisition-related charges


8,674


5,648


0.07


Restructuring and related charges


19,085


17,356


0.22


Tax repatriation expense



7,170


0.09


Loss on divestiture



1,607


0.02


2014 Adjusted Results

$

2,642,294


$

298,346


$

199,016


$

2.50


2014 Adjusted Operating Margin


11.3%

 




(2) Represents amounts attributable to Kennametal Shareowners.

 











FREE OPERATING CASH FLOW (UNAUDITED)


Twelve Months Ended



June 30,

(in thousands)


2014


2013

Net cash flow from operating activities


$

271,873



$

284,150


Purchases of property, plant and equipment


(117,376)



(82,835)


Proceeds from disposals of property, plant and equipment


1,236



3,016


Free operating cash flow


$

155,733



$

204,331


 

RETURN ON INVESTED CAPITAL (UNAUDITED)

June 30, 2014 (in thousands, except percents)




























Invested Capital


6/30/2014


3/31/2014


12/31/2013


9/30/2013


6/30/2013


Average

Debt


$

1,061,783



$

1,135,553



$

1,145,729



$

706,331



$

747,945



$

959,468


Total equity


1,961,608



1,934,558



1,903,304



1,873,194



1,812,293



1,896,991


Total


$

3,023,391



$

3,070,111



$

3,049,033



$

2,579,525



$

2,560,238



$

2,856,459






Three Months Ended

Interest Expense



6/30/2014


3/31/2014


12/31/2013


9/30/2013


Total

Interest expense




$

8,450



$

8,883



$

8,037



$

7,081



$

32,451


Income tax benefit












8,032


Total interest expense, net of tax










$

24,419


Net Income




6/30/2014


3/31/2014


12/31/2013


9/30/2013


Total

Net income attributable to
 
Kennametal, as reported


$

45,455



$

50,865



$

24,209



$

37,837



$

158,366


Acquisition-related
 
charges


1,914



1,703



1,258



775



5,648


Restructuring and
 related
charges


13,874



1,747



1,733





17,356


Tax repatriation expense






7,170





7,170


Loss on divestiture


1,607









1,607


Noncontrolling interest


2,024



1,129



(42)



721



3,832


Net income, adjusted


$

64,874



$

55,444



$

34,328



$

39,333



$

193,979


Total interest expense, net of tax










24,419














$

218,398


Average invested capital










$

2,856,459


Adjusted Return on Invested Capital










7.6%

 


Return on invested capital calculated utilizing net income, as reported is as follows:



Net income attributable to Kennametal, as reported


$

158,366


Total interest expense, net of tax


24,419




$

182,785


Average invested capital


$

2,856,459


Return on Invested Capital


6.4%

 


 

SOURCE Kennametal Inc.



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