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Kennametal (KMT) Beats Q1 Earnings and Sales Estimates

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Zacks Equity Research
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Kennametal Inc. KMT reported better-than-expected results for first-quarter fiscal 2021 (ended Sep 30, 2020). Its earnings in the quarter surpassed estimates by 50%, while sales beat the same by 4%.

The machinery company’s adjusted earnings in the reported quarter were 3 cents, surpassing the Zacks Consensus Estimate of 2 cents. However, the bottom line decreased 82.4% from the year-ago figure of 17 cents on weak sales and margin results.

Revenue Details

Kennametal generated revenues of $400.3 million, declining 23% year over year. While organic sales fell 21% in the quarter, forex woes had an adverse impact of 1% and divestitures hurt results by 1%. The quarterly results suffered from weakness in end markets, including energy, aerospace, earthworks, transportation and general engineering.

However, Kennametal’s top line surpassed the Zacks Consensus Estimate of $385 million.

It is worth noting here that the company’s quarterly top line improved 6% on a sequential basis.

On a geographical basis, its revenues from America operations decreased 31% year over year, while that from the Europe, the Middle East and Africa (EMEA) region declined 20%. Sales from the Asia Pacific dropped 7%.

Effective Jul 1, the company started reporting its results under two business segments — Metal Cutting (comprising of the former Industrial and WIDIA segments) and Infrastructure (same as before). Its segmental performance for the fiscal first quarter is briefly discussed below:

Metal Cutting revenues of $247.9 million were down 24% year over year. The results were adversely impacted by a 23% decline in organic revenues and a 1% impact from forex woes.

Infrastructure revenues totaled $152.4 million, declining 21% year over year. The results were affected by an 18% decline in organic sales and a 4% adverse impact of divestitures. However, business days’ impact was a positive 1%.

Margin Profile

Kennametal’s cost of goods sold in the reported quarter dipped 22.1% year over year to $295.2 million. It represented 73.8% of revenues compared with 73.2% in the year-ago quarter. Adjusted gross profit deteriorated 24% year over year to $108.1 million, wherein margin contracted 50 basis points (bps) to 27%. Operating expenses summed $93.3 million in the quarter under review, decreasing 18.3% year over year. As a percentage of revenues, operating expenses were 23.3% compared with 22% a year ago.

Adjusted operating income in the reported quarter slumped 53% year over year to $11.5 million. Notably, the downside is caused by a decline in organic sales, lower absorption of costs (including fixed and volume-related labor costs) and restructuring charges. However, the adverse impacts were partly offset by the benefits of simplification/modernization actions, gains from cost-reduction actions and a fall in raw material costs. Adjusted operating margin slipped 180 bps to 2.9%.

Adjusted effective tax rate was 33.4% in the quarter, up from 22.5% in the prior-year quarter.

Balance Sheet and Cash Flow

Exiting the fiscal first quarter, Kennametal’s cash and cash equivalents was $98.3 million, down 83.8% from the previous quarter’s figure of $606.7 million. Long-term debt and capital leases edged down 0.1% sequentially to $593.3 million.

In the fiscal first quarter, the company generated net cash of $9.6 million from operating activities, declining 65.1% from the previous year. Capital invested in purchasing property, plant and equipment (net of the amount received on disposals) came in at $39 million, below $72.1 million reported in the year-ago quarter. Free cash outflow was $29.4 million, down from an outflow of $44.5 million in the first quarter of fiscal 2020.

Concurrent with the earnings release, the company announced that its board of directors approved the payment of a quarterly cash dividend of 20 cents per share to its shareholders of record as of Nov 10, 2020. The dividend will be paid out on Nov 24.

Restructuring Actions

The company predicts annualized savings of $65-$75 million from its restructuring actions in fiscal 2021. Pre-tax charges in the year will be $90-$100 million. Inception to date, the company has realized savings of $40 million (including $10 million in the first quarter of fiscal 2021) and incurred costs of $70 million (including $27 million in the reported quarter).

As part of the fiscal 2021 program, the company will cease operations in its Johnson City, TN-based manufacturing facility by the end of fiscal 2021 (ending June 2021).

In addition, restructuring actions for fiscal 2020 resulted in savings of $35 million (including $7 million in the first quarter of fiscal 2021) and pre-tax expenses of $55 million (including $2 million in the first quarter of fiscal 2021). Measures under this program are substantially complete.

Notably, the company’s incremental benefits from simplification/modernization actions were $22 million in the quarter under review.

Outlook

In the quarters ahead, Kennametal anticipates gaining from simplification/modernization activities, solid product offerings, cost-reduction actions and growth initiatives. However, end-market uncertainties related to the pandemic and a lack of visibility remain concerning. It refrained from issuing financial projections for fiscal 2021.

For the fiscal second quarter (ended December 2020), the company anticipates a year-over-year sales increase in low- to mid-single digits.

Capital spending is predicted to be $110-$130 million in fiscal 2021.

Kennametal Inc. Price, Consensus and EPS Surprise

Kennametal Inc. Price, Consensus and EPS Surprise
Kennametal Inc. Price, Consensus and EPS Surprise

Kennametal Inc. price-consensus-eps-surprise-chart | Kennametal Inc. Quote

Zacks Rank & Stocks to Consider

With a market capitalization of $2.6 billion, Kennametal currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the Zacks Industrial Products sector are Altra Industrial Motion Corp. AIMC, EnPro Industries, Inc. NPO and Graco Inc. GGG. While both Altra Industrial and EnPro Industries sport a Zacks Rank #1 (Strong Buy) at present, Graco carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

In the past 30 days, earnings estimates for Altra Industrial and Graco improved for the current year, while the same has been unchanged for EnPro Industries. Further, earnings surprise for the last reported quarter was 77.55% for Altra Industrial, 980% for EnPro Industries and 40.48% for Graco.

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Graco Inc. (GGG) : Free Stock Analysis Report
 
EnPro Industries (NPO) : Free Stock Analysis Report
 
Kennametal Inc. (KMT) : Free Stock Analysis Report
 
Altra Industrial Motion Corp. (AIMC) : Free Stock Analysis Report
 
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