Kennametal Announces Fiscal Second Quarter 2014 Results

- Organic sales growth of 2 percent

- Reported EPS of $0.30; adjusted EPS of $0.52

- Year-to-date operating cash flow of $85 million

- ATI's Tungsten Materials Business acquisition closed November 4, 2013

Jan 30, 2014, 08:00 ET from Kennametal Inc.

LATROBE, Pa., Jan. 30, 2014 /PRNewswire/ -- Kennametal Inc. (NYSE: KMT) today reported results for the fiscal second quarter 2014, with earnings per diluted share (EPS) of $0.30, compared with the prior year quarter EPS of $0.52. The current quarter adjusted EPS were $0.52, absent operating results of the Tungsten Materials Business (TMB) acquired from ATI, acquisition-related charges, restructuring charges and tax repatriation expense.

"Kennametal reported solid profitability although margin expansion lagged top-line growth this quarter," said Kennametal Chairman, President and Chief Executive Officer Carlos Cardoso. "With the resumption of growth in our industrial markets, we are dedicating greater resources to serving customers as demand increases. It remains our goal to ensure sustainable growth and expand our through-the-cycle margin levels, just as we demonstrated during the prior growth cycle."

Cardoso added, "During the December quarter, we also completed our recently announced acquisition of the Tungsten Materials Business. This transaction represents a highly complementary fit with Kennametal in product portfolio, strategic assets and talent base. We will continue to focus on bringing productivity improvements and outstanding service to our customers, which now include those from the acquired business. As we move forward, we remain committed to executing our strategies and maximizing margin expansion opportunities to deliver shareholder value."

Fiscal 2014 Second Quarter Key Developments

  • Sales were $690 million, compared with $633 million in the same quarter last year. Sales increased by 9 percent, reflecting a 2 percent organic increase and a 7 percent increase from the TMB acquisition.
  • Operating income was $50 million, compared with $66 million in the same quarter last year. Excluding TMB operating results, acquisition-related charges and restructuring charges, adjusted operating income was $62 million. The decrease in adjusted operating income primarily reflects higher employment and related costs, partially offset by favorable effects of organic growth and lower raw material costs. Operating margin was 7.2 percent and adjusted operating margin was 9.6 percent, compared with an operating margin of 10.5 percent in the prior year.
  • The effective tax rate was 40.8 percent in the quarter, compared with 26.4 percent in the prior year. The increase was primarily driven by tax expense of $7 million related to the repatriation of certain overseas cash. The impact of this charge was partially offset by a lower relative U.S. current year earnings contribution compared with the rest of the world, where tax rates are lower.
  • On November 4, 2013, the company acquired TMB for approximately $607 million. The acquired business brings industry-leading tungsten carbide production wear products and recycling capabilities, as well as a tooling and product portfolio with a strong position in the aerospace, energy and process industries.
  • Related to the acquisition, Kennametal intends to undertake restructuring actions and expects to incur pre-tax charges of approximately $40 million to $50 million within the next three years. Pre-tax restructuring and related charges of $2 million were recorded in the current quarter. Kennametal expects to generate annual savings of approximately $35 million to $45 million once these initiatives are fully implemented.
  • EPS were $0.30, compared with the prior year quarter EPS of $0.52. Adjusted EPS were $0.52. A reconciliation follows:

Earnings Per Diluted Share Reconciliation

Second Quarter FY 2014

Reported EPS

$

0.30

TMB operating results (two months):

TMB base operating results

TMB purchase accounting

0.09

Acquisition-related charges

0.02

Restructuring and related charges

0.02

Tax repatriation expense

0.09

Adjusted EPS

$

0.52

 

  • Adjusted return on invested capital (ROIC) was 8.1 percent as of December 31, 2013.
  • Year-to-date, the company generated $85 million in cash flow from operating activities, compared with $54 million in the prior year period. Net capital expenditures were $48 million and $34 million for the six months ended December 31, 2013 and 2012, respectively. The company realized free operating cash flow of $36 million compared with $21 million for the same period last year.

Segment Developments for the Fiscal 2014 Second Quarter

  • Industrial segment sales of $371 million increased 10 percent from $336 million in the prior year quarter. This increase was due to 6 percent organic growth and 5 percent growth related to the acquisition of TMB, partially offset by a 1 percent decline due to fewer business days. Excluding TMB, sales increased by 8 percent in transportation and 7 percent in general engineering, 5 percent in energy and 2 percent in aerospace and defense. Transportation market benefited from increased demand in the light vehicle markets in Europe, U.S. and China and general engineering increased due to improvements in demand from distribution channels. Energy sales reflected increased activity in industrial applications. Sales increased in all geographies. On a regional basis sales increased 12 percent in Asia, 7 percent in Europe and 2 percent in the Americas.
  • Industrial segment operating income was $33 million compared with $41 million in the prior year. Industrial operating income was reduced by the effects of TMB purchase accounting, acquisition-related charges and restructuring charges. Industrial adjusted operating margin was 11.6 percent compared with 12.1 percent in the prior year.
  • Infrastructure segment sales of $319 million increased 7 percent from $297 million in the prior year. The increase was driven by 10 percent growth related to the TMB acquisition, partially offset by a 2 percent organic decline and 1 percent unfavorable impact from fewer business days. Excluding TMB, sales increased by 1 percent in energy and 1 percent in general engineering, offset by decreases of 12 percent in transportation and 5 percent in earthworks. Earthworks sales decreased due to persistently weak underground coal mining markets in the U.S. and China, partially offset by continued strength globally in highway construction sales. Energy sales were slightly positive year over year reflecting some improvement in oil and gas drilling activity in the U.S., coupled with gains in production, completion and process applications. On a regional basis sales grew 8 percent in Europe, offset by decreases of 7 percent in the Americas and 4 percent in Asia.
  • Infrastructure segment operating income was $19 million, compared with $28 million in the same quarter of the prior year. Infrastructure operating income was negatively impacted by TMB purchase accounting, acquisition-related charges and restructuring charges. Infrastructure adjusted operating margin was 7.8 percent compared with 9.4 percent in the prior year.

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

Fiscal 2014 First Half Key Developments

  • Sales were $1,310 million, compared with $1,263 million in the same period last year. Sales increased by 4 percent, driven by 4 percent growth related to the TMB acquisition and 1 percent organic growth, partially offset by a 1 percent decline due to fewer business days.
  • Operating income was $109 million, compared with $131 million in the same period last year. Excluding TMB operating loss of $8 million and acquisition-related charges and restructuring charges of $5 million, adjusted operating income was $122 million, and included a non-recurring inventory charge of approximately $6 million. Operating margin was 8.3 percent and adjusted operating margin was 9.6 percent, compared with an operating margin of 10.4 percent in the prior year.
  • EPS were $0.78, compared with the prior year period EPS of $1.09. Adjusted EPS was $1.01. A reconciliation follows:

Earnings Per Diluted Share Reconciliation

First Half FY 2014

Reported EPS

$

0.78

TMB operating results (two months):

TMB base operating results

TMB purchase accounting

0.09

Acquisition-related charges

0.03

Restructuring and related charges

0.02

Tax repatriation expense

0.09

Adjusted EPS

$

1.01

 

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

Kennametal updated its full-year outlook for fiscal year 2014 to reflect the results of the TMB acquisition, which include the impact of transaction costs and purchase accounting. Also, the company lowered its organic sales growth forecast due to a slower than anticipated rebound in the company's served end markets globally in the oil and gas markets, as well as still weak conditions in underground mining in the U.S. and China. However, the company remains confident regarding customer demand growth projected in its served industrial end markets and distribution channels. Based on the revised forecast, Kennametal expects its Industrial segment to continue realizing strong growth, while sales volumes remain weak in its Infrastructure segment.

The company now expects fiscal 2014 total sales growth in the range of 12 to 13 percent. TMB is estimated to contribute 7 to 9 percent sales growth. Organic sales growth is projected to range from 2 to 4 percent. Previously, the company had forecast total sales growth ranging from 5 to 7 percent, with organic sales growth ranging from 4 to 6 percent.

Based on the revision, the company has reduced its EPS guidance for fiscal 2014 to range from $2.60 to $2.75, compared with previous expectation of $2.90 to $3.05. These ranges exclude the impact of the TMB acquisition and related items. 

Regarding the TMB acquisition, the company expects that it will be dilutive to earnings per share in the range of $0.32 to $0.36 per share for fiscal 2014, as detailed below.

Fiscal Year 2014 TMB EPS Impact:

TMB base operations

$0.10 - $0.15

TMB purchase accounting:

Inventory step-up

($0.14 - $0.14)

  Depreciation and amortization related to fixed     and intangible asset step-up and     acquisition-related charges

($0.09 - $0.13)

Restructuring and related charges

($0.10 - $0.15)

Tax repatriation expense

($0.09 - $0.09)

($0.32 - $0.36)

 

The company now expects to generate cash flow from operations between $280 million and $310 million for fiscal 2014, based on anticipated capital expenditures of approximately $130 million to $140 million, the company expects to generate between $150 million and $170 million of free operating cash flow for the full fiscal year.

Dividend Declared

Kennametal also announced that its board of directors declared a quarterly cash dividend of $0.18 per share. The dividend is payable February 26, 2014 to shareowners of record as of the close of business on February 11, 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 second-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 March 3, 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 2014 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 its 75th year 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 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

December 31,

Six Months Ended

December 31,

(in thousands, except per share amounts)

2013

2012

2013

2012

Sales

$

689,936

$

633,144

$

1,309,743

$

1,262,603

Cost of goods sold

482,965

433,697

904,536

854,808

Gross profit

206,971

199,447

405,207

407,795

Operating expense

148,421

127,778

282,685

266,638

Restructuring charges

2,310

2,310

Amortization of intangibles

6,524

5,200

11,667

10,307

Operating income

49,716

66,469

108,545

130,850

Interest expense

8,037

6,970

15,118

12,926

Other expense (income), net

856

655

1,466

(246)

Income from continuing operations before income taxes

40,823

58,844

91,961

118,170

Provision for income taxes

16,656

15,535

29,236

27,815

Net income

24,167

43,309

62,725

90,355

Less: Net income attributable to noncontrolling interests

(42)

1,167

679

1,823

Net income attributable to Kennametal

$

24,209

$

42,142

$

62,046

$

88,532

PER SHARE DATA ATTRIBUTABLE TO KENNAMETAL SHAREOWNERS

Basic earnings per share

$

0.31

$

0.53

$

0.79

$

1.11

Diluted earnings per share

$

0.30

$

0.52

$

0.78

$

1.09

Dividends per share

$

0.18

$

0.16

$

0.36

$

0.32

Basic weighted average shares outstanding

78,729

79,713

78,587

79,980

Diluted weighted average shares outstanding

79,776

80,986

79,597

81,164

 

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands)

December 31,

2013

June 30,

2013

ASSETS

Cash and cash equivalents

$

163,289

$

377,316

Accounts receivable, net

467,759

445,322

Inventories

730,678

578,795

Other current assets

117,112

98,040

Total current assets

1,478,838

1,499,473

Property, plant and equipment, net

874,378

741,482

Goodwill and other intangible assets, net

1,333,225

944,520

Other assets

121,759

115,564

Total assets

$

3,808,200

$

3,301,039

LIABILITIES

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

payable

$

110,096

$

44,319

Accounts payable

188,614

190,623

Other current liabilities

240,599

232,651

Total current liabilities

539,309

467,593

Long-term debt and capital leases

1,035,633

703,626

Other liabilities

329,954

317,527

Total liabilities

1,904,896

1,488,746

KENNAMETAL SHAREOWNERS' EQUITY

1,871,997

1,781,826

NONCONTROLLING INTERESTS

31,307

30,467

Total liabilities and equity

$

3,808,200

$

3,301,039

 

SEGMENT DATA (UNAUDITED)

 

Three Months Ended

December 31,

Six Months Ended

December 31,

(in thousands)

2013

2012

2013

2012

Outside Sales:

Industrial

$

370,647

$

336,007

$

708,876

$

671,201

Infrastructure

319,289

297,137

600,867

591,402

Total outside sales

$

689,936

$

633,144

$

1,309,743

$

1,262,603

Sales By Geographic Region:

North America

$

302,032

$

279,943

$

571,566

$

563,167

Western Europe

215,688

184,433

403,289

360,587

Rest of World

172,216

168,768

334,888

338,849

Total sales by geographic region

$

689,936

$

633,144

$

1,309,743

$

1,262,603

Operating Income:

Industrial

$

33,218

$

40,677

$

73,038

$

80,004

Infrastructure

18,604

27,906

40,294

55,503

Corporate (1)

(2,106)

(2,114)

(4,787)

(4,657)

Total operating income

$

49,716

$

66,469

$

108,545

$

130,850

(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 DECEMBER 31, 2013 - (UNAUDITED)

(in thousands, except percents)

Sales

Operating Income

Net Income (3)

Diluted EPS

2014 Reported Results

$

689,936

49,716

$

24,209

$

0.30

2014 Reported Operating Margin

7.2%

TMB operating results:

  TMB base operating results

(44,825)

(1,888)

90

  TMB purchase accounting

9,772

7,077

0.09

Acquisition-related charges (2)

1,738

1,258

0.02

Restructuring and related charges

2,310

1,733

0.02

Tax repatriation expense

7,170

0.09

2014 Adjusted Results

$

645,111

$

61,648

$

41,537

$

0.52

2014 Adjusted Operating Margin

9.6%

(2) TMB acquisition-related charges.

(3) Represents amounts attributable to Kennametal Shareowners.

THREE MONTHS ENDED DECEMBER 31, 2013 - (UNAUDITED)

(in thousands, except percents)

Industrial Sales

Infrastructure Sales

Industrial Operating Income

Infrastructure Operating Income

2014 Reported Results

$

370,647

$

319,289

$

33,218

$

18,604

2014 Reported Operating Margin

9.0%

5.8%

TMB operating results:

  TMB base operating results

(15,723)

(29,102)

(9)

(1,879)

  TMB purchase accounting

6,147

3,625

Acquisition-related charges (2)

609

1,129

Restructuring and related charges

1,085

1,225

2014 Adjusted Results

$

354,924

$

290,187

$

41,050

$

22,704

2014 Adjusted Operating Margin

11.6%

7.8%

 

SIX MONTHS ENDED DECEMBER 31, 2013 - (UNAUDITED)

(in thousands, except percents)

Sales

Operating Income

Net Income (3)

Diluted EPS

2014 Reported Results

$

1,309,743

$

108,545

$

62,046

$

0.78

2014 Reported Operating Margin

8.3%

 

TMB operating results:

  TMB base operating results

(44,825)

(1,888)

90

  TMB purchase accounting

9,772

7,077

0.09

Acquisition-related charges (2)

2,836

2,065

0.03

Restructuring and related charges

2,310

1,700

0.02

Tax repatriation expense

7,170

0.09

2014 Adjusted Results

$

1,264,918

$

121,575

$

80,148

$

1.01

2014 Adjusted Operating Margin

9.6%

 

 

FREE OPERATING CASH FLOW (UNAUDITED)

Six Months Ended

December 31,

(in thousands)

2013

2012

Net cash flow from operating activities

$

84,617

$

54,235

Purchases of property, plant and equipment

(48,804)

(34,372)

Proceeds from disposals of property, plant and equipment

444

704

Free operating cash flow

$

36,257

$

20,567

 

RETURN ON INVESTED CAPITAL (UNAUDITED)

December 31, 2013 (in thousands, except percents)

Invested Capital

12/31/2013

9/30/2013

6/30/2013

3/31/2013

12/31/2012

Average

Debt

$

1,145,729

$

706,331

$

747,945

$

751,030

$

706,859

$

811,579

Total equity

1,903,304

1,873,194

1,812,293

1,753,834

1,744,443

1,817,414

Total

$

3,049,033

$

2,579,525

$

2,560,238

$

2,504,864

$

2,451,302

$

2,628,993

Three Months Ended

Interest Expense

12/31/2013

9/30/2013

6/30/2013

3/31/2013

Total

Interest expense

$

8,037

$

7,081

$

7,042

$

7,504

$

29,664

Income tax benefit

7,594

Total interest expense, net of tax

$

22,070

Net Income

12/31/2013

9/30/2013

6/30/2013

3/31/2013

Total

Net income attributable to

Kennametal, as reported

$

24,209

$

37,837

$

60,818

$

53,916

$

176,780

Acquisition-related

charges

1,258

775

2,033

Restructuring and related

charges

1,733

1,733

Tax repatriation expense

7,170

7,170

Noncontrolling interest

(42)

721

1,366

460

2,505

Net income, adjusted

$

34,328

$

39,333

$

62,184

$

54,376

$

190,221

Total interest expense, net of tax

22,070

$

212,291

Average invested capital

$

2,628,993

Adjusted Return on Invested Capital

8.1%

 

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

Net income attributable to Kennametal, as reported

$

176,780

Total interest expense, net of tax

22,070

$

198,850

Average invested capital

$

2,628,993

Return on Invested Capital

7.6%

 

 

SOURCE Kennametal Inc.



RELATED LINKS

http://www.kennametal.com