It has been about a month since the last earnings report for Kennametal (KMT). Shares have added about 15.1% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Kennametal due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Kennametal Q4 Earnings Beat Estimates, Decline Y/Y
Kennametal reported mixed results for fourth-quarter fiscal 2020 (ended Jun 30, 2020). Its earnings in the quarter surpassed estimates by 25%, while sales lagged the same by 3.47%.
The machinery company’s adjusted earnings in the reported quarter were 15 cents, surpassing the Zacks Consensus Estimate of 12 cents. However, the bottom line decreased 82.1% from the year-ago figure of 84 cents on weak sales and margin results.
For fiscal 2020, the company’s adjusted earnings were 94 cents per share, below the previous year’s $3.02. However, the fiscal year’s earnings surpassed the Zacks Consensus Estimate of 91 cents.
Kennametal generated revenues of $379.1 million, declining 37% year over year. While organic sales fell 33% in the quarter, forex woes had an impact of 2% and divestitures hurt results by 2%. The quarterly results suffered from the adverse impacts of the pandemic.
Kennametal’s top line lagged the Zacks Consensus Estimate of $393 million.
On a geographical basis, the company generated revenues of $179.4 million from America operations, decreasing 41.8% year over year. Sales in Europe, the Middle East and Africa (EMEA) were down 36.6% to $110.3 million, while the same from the Asia Pacific dropped 26.8% to $89.4 million.
The company reports revenue results under three segments, including Industrial, WIDIA and Infrastructure. Its segmental performance for the fiscal fourth quarter is briefly discussed below:
Industrial revenues of $195.1 million were down 39% year over year. The results were adversely impacted by a 36% decline in organic revenues, a 2% impact from forex woes and a 1% negative impact from business days.
WIDIA revenues were $31.9 million, reflecting a decline of 35% year over year. The results were negatively impacted by an organic sales decline of 32%, forex woes of 2% and a negative impact of 1% from business days.
Infrastructure revenues totaled $152.1 million, declining 36% year over year. The results were affected by 2% from forex woes, a 29% decline in organic sales and a 4% adverse impact of divestitures. Also, business days’ impact was a negative 1%.
For fiscal 2020, the company’s revenues were $1,885.3 million, declining 21% year over year. While organic sales were down 18%, forex woes had an adverse impact of 2% and divestiture’s impact was 1%.
Kennametal’s cost of goods sold in the reported quarter dipped 28.9% year over year to $277.6 million. It represented 73.2% of revenues compared with 64.6% in the year-ago quarter. Gross profit deteriorated 52.5% year over year to $101.5 million, wherein margin contracted 860 basis points (bps) to 26.8%. Operating expenses summed $68.2 million in the quarter under review, decreasing 41.3% year over year. As a percentage of revenues, operating expenses were 18% compared with 19.2% a year ago.
Adjusted operating income in the reported quarter slumped 64.9% year over year to $33.5 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 variable compensation and raw material costs. Adjusted operating margin slipped 700 bps to 8.8%.
Adjusted effective tax rate was 51.2% in the quarter, up from 21% in the prior-year quarter.
Balance Sheet and Cash Flow
Exiting the fiscal fourth quarter, Kennametal had cash and cash equivalents of $606.7 million, increasing from $85.2 million at the end of the last reported quarter. Long-term debt and capital leases inched up 0.1% sequentially to $594.1 million.
In fiscal 2020, the company generated net cash of $223.7 million from operating activities, declining 25.5% from the previous year. Capital invested in purchasing property, plant and equipment came in at $244.2 million, above $212.3 million reported in fiscal 2019. Free cash outflow was $17.8 million against an inflow of $11.2 million in fiscal 2019.
The company noted that it will cease operations in its Johnson City, TN-based manufacturing facility by the end of fiscal 2021 (ending June 2021). The action is part of the footprint rationalization initiative under its ongoing restructuring program for fiscal 2021.
The company predicts annualized savings of $65-$75 million from its restructuring actions in fiscal 2021, higher than $25-$30 million mentioned previously. Pre-tax charges in the year will be $90-$100 million, higher than $55-$60 million stated earlier.
In addition, restructuring actions for fiscal 2020 resulted in savings of $33 million and pre-tax expenses of $54 million.
In the quarters ahead, Kennametal anticipates gaining from simplification/modernization activities, solid product offerings and cost-reduction actions. However, end-market challenges will likely persist due to the coronavirus outbreak.
The company noted that it will combine the results of its Industrial and WIDIA segments into a new segment — Metal Cutting. The other segment, Infrastructure, retains its structure. This change is effective Jul 1, 2020.
The company refrained from issuing financial projections for fiscal 2021 due to the uncertainties related to the pandemic. However, it did mention that capital spending will be $110-$130 million in fiscal 2021.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -66.07% due to these changes.
At this time, Kennametal has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Kennametal has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.
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