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Kennametal (KMT) Beats Q3 Earnings Estimates, Withdraws View

Zacks Equity Research

Kennametal Inc. KMT reported better-than-expected results for third-quarter fiscal 2020 (ended Mar 31, 2020), with earnings surpassing estimates by 43.75%. However, the quarterly sales lagged the consensus mark by 5.74%.

This machinery company’s adjusted earnings in the reported quarter were 46 cents, surpassing the Zacks Consensus Estimate of 32 cents. However, the bottom line decreased 40.3% from the year-ago figure of 77 cents on weak sales and margin results.

Revenue Details

Kennametal generated revenues of $483.1 million, declining 19% year over year. While organic sales fell 17% in the quarter, forex woes had an impact of 1% and divestitures hurt results by 1%. The quarterly results suffered from the slowdown in global manufacturing activities due to the pandemic.

Kennametal’s top line lagged the Zacks Consensus Estimate of $512.5 million.

On a geographical basis, the company generated revenues of $242.4 million from America operations, decreasing 20% year over year. Sales in Europe, the Middle East and Africa (EMEA) were down 19% to $146.8 million, while the same from the Asia Pacific dropped 166.9% to $93.8 million.

The company reports revenue results under three segments, including Industrial, WIDIA and Infrastructure. Its segmental performance for the fiscal third quarter is briefly discussed below:

Industrial revenues of $260.7 million were down 18% year over year. The results were adversely impacted by a 17% decline in organic revenues and a 2% impact from forex woes, partially offset by a 1% positive impact from business days.

WIDIA revenues were $42.7 million, reflecting a decline of 16% year over year. The results were negatively impacted by an organic sales decline of 16% and forex woes of 1%, partially offset by a positive impact of 1% from business days.

Infrastructure revenues totaled $179.6 million, declining 21% year over year. The results were affected by 1% from forex woes, a 17% decline in organic sales and a 3% adverse impact of divestitures.

Margin Profile

Kennametal’s cost of goods sold in the reported quarter dipped 16.2% year over year to $326.1 million. It represented 67.5% of revenues compared with 65.2% in the year-ago quarter. Gross profit deteriorated 24.5% year over year to $157 million, wherein margin contracted 230 basis points (bps) to 32.5%. Operating expenses summed $98.5 million in the quarter under review, decreasing 18% year over year. As a percentage of revenues, operating expenses were 20.4% compared with 20.1% a year ago.

Adjusted operating income in the reported quarter slumped 30.8% year over year to $59.1 million. Notably, the downside is caused by a decline in organic sales, the negative impacts of simplification/modernization actions, lower absorption of costs (including fixed and volume-related labor costs) and restructuring charges. However, the adverse impacts were to partly offset by the benefits of simplification/modernization actions, and a fall in variable compensation and raw material costs. Adjusted operating margin slipped 210 bps to 12.2%.

Adjusted effective tax rate was 28.5% in the quarter, up from 19.8% in the prior year.

Balance Sheet and Cash Flow

Exiting the fiscal third quarter, Kennametal had cash and cash equivalents of $85.2 million, decreasing 19% from $105.2 million at the end of the last reported quarter. Long-term debt and capital leases inched up 0.1% sequentially to $593.6 million.

In the first nine months of fiscal 2020, the company generated net cash of $146.1 million from operating activities, declining 7.2% from the year-ago period. Capital invested in purchasing property, plant and equipment came in at $206.1 million, above $145.9 million in the year-earlier period. Free cash outflow was $57.2 million compared with an inflow of $15.1 million in the first nine months of fiscal 2019.

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 May 12, 2020. The dividend will be paid out on May 27.

Restructuring Actions

In July 2019, the company announced that it is undertaking certain measures as part of its simplification/modernization initiatives, which are likely to help it streamline the business structure, improve efficiency and boost shareholder value. The restructuring moves are likely to be completed within the next two years.

The suggested restructuring actions will likely yield annualized savings of $30-$35 million (down from $35-$40 million mentioned earlier) in fiscal 2020 (ending June 2020). Pre-tax charges associated with the efforts will be $55-$60 million (versus the previously stated $$55-$65 million).

The company predicts that facility closures scheduled for fiscal 2021 (ending June 2021) will lead to annualized savings worth $25-$30 million. Pre-tax charges in the year will be $55-$65 million.

Outlook

In the quarters ahead, Kennametal anticipates gaining from simplification/modernization activities, solid liquidity position and cost-reduction actions. However, end-market challenges will likely persist due to the coronavirus outbreak.

The company withdrew its financial projections for fiscal 2020.

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 billion, Kennametal currently carries a Zacks Rank #5 (Strong Sell).

Some better-ranked stocks in the Zacks Industrial Products sector are Silgan Holdings Inc. SLGN, Superior Uniform Group, Inc. SGC and Graphic Packaging Holding Company GPK. While Silgan currently sports a Zacks Rank #1 (Strong Buy), both Superior Uniform and Graphic Packaging carry 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 Silgan and Graphic Packaging improved for the current year, while have been unchanged for Superior Uniform. Further, earnings surprise for the last reported quarter was 16.33% for Silgan Holdings, 57.14% for Superior Uniform and 24% for Graphic Packaging.

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