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It has been about a month since the last earnings report for Kennametal (KMT). Shares have added about 3.3% 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 the most recent earnings report in order to get a better handle on the important catalysts.
Kennametal Q1 Earnings Meet Estimates, View Bleak
Kennametal has reported in-line results for first-quarter fiscal 2020 (ended Jun 30, 2019). While earnings in the quarter met estimates, sales surpassed the same by 0.02%.
The machinery company’s adjusted earnings in the reported quarter were 17 cents, meeting the Zacks Consensus Estimate. However, the company’s earnings declined 75.7% from the year-ago figure of 70 cents on weak sales and margin results.
In the quarter under review, Kennametal generated revenues of $518.1 million, declining 11.7% year over year. Organic sales declined 11% in the quarter while forex woes had an adverse impact of 2% and business days had a positive impact of 1%.
The company’s organic performance suffered from weak end markets — including transportation, general engineering and energy — and soft market conditions regionally.
Kennametal’s top line surpassed the Zacks Consensus Estimate of $518 million.
On a geographical basis, it generated revenues of $259.3 million from America operations, declining 10.3% year over year. Sales in Europe, Middle East and Africa (EMEA) were down 10.5% to $153.5 million, while that for the Asia Pacific declined 16.4% to $105.3 million.
The company reports revenue results under three segments — Industrial, WIDIA and Infrastructure. Its segmental performance for the fiscal first quarter is briefly discussed below:
Industrial revenues totaled $280 million, declining 12.9% year over year. The results were adversely impacted by an 11% decline in organic revenues and a 2% impact of forex woes.
WIDIA revenues were $44.1 million, down 9.5% year over year. The results were impacted adversely by forex woes of 1% and an organic sales decline of 10%, partially offset by a 2% impact from business days.
Infrastructure revenues totaled $194 million, declining 10.8% year over year. The results were adversely impacted by 1% from forex woes and an 11% decline in organic sales, partially offset by 1% positive impact from business days.
Kennametal’s cost of goods sold in the reported quarter grew 0.9% year over year to $379.1 million. It represented 73.2% of revenues versus 64% in the year-ago quarter. Gross profit moved down 34.2% year over year to $139 million, wherein margin declined 920 basis points (bps) to 26.8%. Operating expenses totaled $114.2 million in the quarter under review, decreasing 7.4% year over year. As a percentage of revenues, it was 22% versus 21% in the year-ago quarter.
Adjusted operating income in the reported quarter declined 71.1% year over year to $24.3 million. Notably, fall in adjusted operating income resulted from a decline in organic sales, the impacts of simplification/modernization actions, high cost of raw materials and lower absorption of costs (including fixed and volume-related labor costs) in some facilities. However, the adverse impacts were to some extent offset by the benefits of simplification/modernization actions. Adjusted operating margin dipped 970 bps to 4.7%.
Adjusted effective tax rate was 22.5%, down from 23.6% in the year-ago quarter.
Balance Sheet and Cash Flow
Exiting the fiscal first quarter, Kennametal had cash and cash equivalents of $113.5 million, decreasing 37.6% from $182 million at the end of the last reported quarter. Long-term debt and capital leases inched up 0.1% sequentially to approximately $592.9 million.
In the fiscal first quarter, the company generated net cash of $27.5 million from operating activities, surging 199.4% from the year-ago quarter. Capital invested for purchasing property, plant and equipment totaled $72.5 million, above $43.3 million in the year-ago quarter. Free cash inflow was $44.5 million, up from $33.2 million in the year-ago quarter.
In July 2019, the company announced that it is taking certain measures as part of its simplification/modernization initiatives, which are likely to help it simplify the business structure, improve efficiency and boost shareholder value.
In October 2019, it ceased to produce at Lichtenau, Germany-based facility. It expects to divest the specialty alloys business (part of Infrastructure segment) in second-quarter fiscal 2020.
These restructuring moves are likely to be completed in the next two years and help the company to progress toward fiscal 2021 (ending June 2021) targets. The suggested restricting actions are part of its previously announced simplification/modernization drive for fiscal 2020, which will likely yield annualized savings of $35-$40 million and incur pre-tax charges of $55-$65 million by fiscal 2020 end.
The company predicts that facility closures scheduled for fiscal 2021 will result in annualized savings of $25-$30 million. Notably, pre-tax charges will likely be $60-$75 million, combining fiscal 2020 and fiscal 2021 actions.
For fiscal 2020, Kennametal anticipates gaining from simplification/modernization initiatives, meant for simplifying the business structure, improving efficiency and boosting shareholder value. However, end-market conditions will likely be challenging in the year, especially in transportation, general engineering and energy end markets. Also, regionally conditions will likely be difficult.
For fiscal 2020, the company predicts an organic sales decline of 5-9% as compared with previously mentioned fall of 2% to growth of 2%. It expects adjusted earnings per share of $1.70-$2.10, down from $2.80-$3.20 stated earlier.
The company expects effective tax rate of 22-24% for the fiscal year.
It expects capital expenditure of $240-$260 million for fiscal 2020, largely supporting the simplification/modernization initiatives. The company estimates free cash flow of $20-$50 million for the fiscal year, down from $75-$100 million mentioned earlier.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -42.44% due to these changes.
At this time, Kennametal has a subpar Growth Score of D, though it is lagging a bit on the Momentum Score front with an F. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of F. 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 #5 (Strong Sell). We expect a below average return from the stock in the next few months.
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