Kennametal's (KMT) Q4 Earnings and Revenues Lag Estimates

Kennametal Inc. (KMT) reported earnings of 57 cents per share in fourth-quarter fiscal 2014 (ended Jun 30, 2014). The bottom line came 25% below the year-ago earnings of 76 cents. Excluding 18 cents of one-time charges, adjusted earnings came in at 75 cents per share, down compared with the Zacks Consensus Estimate of 89 cents.

GAAP earnings were 57 cents per share, down from 76 cents earned in the year-ago quarter.

For fiscal 2014, adjusted earnings were $2.50 per share, lagging the Zacks Consensus Estimate of $2.65 by 5.7%.

Kennametal Inc - Earnings Surprise | FindTheBest

Revenue

Kennametal generated net revenues of $772.2, representing year-over-year growth of 15%. The improvement can be attributed to a 5% hike in organic revenues and an 11% contribution from Tungsten Materials Business (TMB.TO) acquisition. However, these positives were partially offset by 1% negative impact from reduced working days.

Excluding the $72.4 million contribution from the TMB acquisition, adjusted revenues were $699.8 million, below the Zacks Consensus Estimate of $780 million

Performance of Kennametal's segments is briefly discussed below:

The Industrial segment generated revenues of $415.5 million, up 14.6% year over year. Organic growth of 8% 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 15% in Asia, 4% in Europe and 6% in the Americas. Adjusted revenues, excluding a $25.5 million one-time gain, were $390 million.

The Infrastructure segment’s revenues were $356.7 million, reflecting an increase of 15.5% year over year. Organic revenues edged up 1% year over year. Revenues in Europe climbed 2% while remaining flat in the Americas and Asia. Adjusted revenues, excluding $46.9 million of one-time gain, were $309.8 million.

On a geographical basis, Kennametal’s revenues from North America rose 20.7% year over year to $353.6 million; revenues from Western Europe were $232.3 million, up 14.9% year over year, while revenues from Rest of the World were $186.3 million, up 5.7% year over year.

For fiscal 2014, Kennametal's net revenues were $2,837.2 million, up 9.6% year over year. Excluding $194.9 million of one-time gains, adjusted revenues came in at $2,642.3 million.

Margins

Kennametal’s cost of goods sold grew 17.3% year over year and represented 67.3% of total revenues, increasing 140 basis points (bps) year over year. Operating expenses, as a percentage of total revenue, was 20%, up 20 bps year over year.

Adjusted operating margin in the quarter was 12.9%.

Balance Sheet

Exiting fourth-quarter fiscal 2014, Kennametal had cash and cash equivalents of $177.9 million, up 10% from $161.8 million in the preceding quarter. Long-term debt and capital leases decreased 4% to $981.7 million from $1,022.1 million in the previous quarter.

Cash Flow

In fiscal 2014, Kennametal generated cash of $271.9 million from its operating activities versus $284.2 million in fiscal 2013. Capital spent on purchases of property, plant and equipment was $117.4 million, up from $82.8 million in the previous year.

Free cash flow was approximately $155.7 million, down 23.8% year over year.

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 Aug 26 to shareholders of record as on Aug 12.

Outlook

For fiscal 2015, Kennametal anticipates total sales growth to be within 5−7%, including organic growth of 3−5%. Earnings are predicted in the $2.90−$3.20 per share range.

Cash flow from operating activities is expected in the range of $290−$320 million, while capital expenditure will be within $110−$120 million. Free cash flow is likely to be in the band of $180−$200 million.

Restructuring activities, once fully implemented, will result in annual pre-tax savings of $35−$45 million.

With a market capitalization of $3.3 billion, Kennametal currently carries a Zacks Rank #4 (Sell). Some better-ranked stocks to watch out for in the industry include Blount International Inc. (BLT), NN Inc. (NNBR) and Proto Labs, Inc. (PRLB). While Blount International and NN Inc. sport a Zacks Rank #1 (Strong Buy), Proto Labs holds a Zacks Rank #2 (Buy).

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