KMT Q1 FY14 lags Est, Guidance Down

Kennametal Inc. (KMT) reported financial results for the first quarter of fiscal year 2014 (ended Sep 30, 2013) on Oct 24, 2013. Adjusted earnings per share in the quarter came in at 53 cents, below 57 cents earnings reported in the year-ago and the Zacks Consensus Estimate of 55 cents.

Adjusted earnings per share exclude 4 cents of non-recurring inventory charges and 1 cent of acquisition related charges.

Revenue

Kennametal reported a 1.5% year-over-year decline in its revenue that settled at $619.8 million in the first quarter of fiscal 2014. The decline can be attributed to a fall of 3% in organic revenue, offset partially by 1% positive impact from more business days.

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

Industrial segment revenue in the quarter grew 0.9% year over year and came in at $338.2 million. The increase can be attributed to improvements in general engineering, transportation and energy, offset partially by weakness in aerospace and defense. On a geographical basis, revenues in Europe grew, remained flat in Americas and plummeted in Asia.

Infrastructure segment reported 4.3% year-over-year decline in revenue that came in at $281.6 million. The decline can be attributed to weak results in the earthworks, energy and transportation markets, offset by strength seen in general engineering. Revenues in Europe grew but declined in the Americas and Asia.

On a geographical basis, revenue in North America plummeted 4.8% year over year to $269.5 million; revenue from Western Europe was $187.6 million, up 5.2% year over year while revenue from Rest of the World was about $162.7 million, down 3.1% year over year.

Margins

Cost of revenue in the first quarter went up 0.1% year over year and represented 68.0% of total revenue; up from 66.9% in the year-ago quarter. Operating expenses, as a percentage of total revenue, stood at 21.7%. Adjusted operating margin in the quarter was 9.7%, down 110 basis points year over year.

Balance Sheet

Exiting the fiscal first quarter 2014, cash and cash equivalents of Kennametal stood at $333.3 million, down 11.7% from $377.3 million in the previous quarter. Long-term debt and capital leases slightly declined to $703.4 million versus $703.6 million in the previous quarter.

Cash Flow

Kennametal reported $44.4 million net cash flow from operating activities in the first quarter of fiscal 2014, way above $3.1 million generated in the year-ago quarter. Capital expenditure in the quarter increased 58.0% year over year to $25.0 million. Free cash flow was approximately $19.6 million compared with ($12.2) million in the year-ago quarter.

During the quarter, Kennametal bought back 100,000 shares under its share buyback program announced in Jul 2013. Roughly 10.3 million shares buyback authorization is left.

Besides the financial result announcement, Kennametal also announced to have received its board of directors approval for payment of a quarterly cash dividend of 18 cents. The dividend will be paid on Nov 26, 2013 to shareholders of record on Nov 5, 2013.

Outlook

For fiscal 2014, management of Kennametal anticipates total sales growth to vary within 5%-7% range versus 4%-6% range expected earlier. Organic revenue growth is anticipated to be within 4%-6% range compared with 5%-7% range expected earlier.

Earnings per share guidance has been lowered to a range of $2.90-$3.05 from $2.90-$3.10 expected earlier.

Kennametal anticipates cash flow from operating activities to range within $330-$380 million, capital expenditure to be within the $130-$150 million range and free cash flow to be within the $200-$230 million range.

Kennametal currently carries a Zacks Rank #3 (Hold). Other stocks to watch out for in the industry are Sandvik AB (SDVKY), Colfax Corporation (CFX) and Timken Co. (TKR), each with a Zacks Rank #2 (Buy).

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