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Kennametal Announces Fiscal 2017 First Quarter Results

PITTSBURGH, Oct. 26, 2016 /PRNewswire/ -- Kennametal Inc. (NYSE: KMT) today reported results for the fiscal 2017 first quarter ended September 30, 2016, with loss per diluted share (LPS) of $0.27, compared with the prior year quarter LPS of $0.08. Adjusted earnings per diluted share (EPS) were $0.11 in the current quarter compared with adjusted EPS of $0.14 in the prior year quarter.

The current period reported results included restructuring and related charges of $0.38 per share. The prior year quarter reported results included restructuring and related charges of $0.14 per share and divestiture-related charges of $0.08 per share.

"Kennametal's 2017 first quarter results were mostly in-line with our expectations except for the unusually high tax rate," commented Ron De Feo President and CEO. "Progress is accelerating internally. We are improving our market position and lowering our costs, despite challenging end markets."

De Feo continued, "Approximately 75% of the previously announced workforce reduction and 65% of the correlating savings have been identified and are in the implementation phase. Longer-term factory and product modernization projects are underway, with substantial opportunities being confirmed. Lastly, selling initiatives are ongoing, but these are the hardest to forecast as market forces are still generally negative. We are increasing our full year outlook range but remain generally cautious on the overall year."

This earnings release contains non-GAAP financial measures. Reconciliations of all non-GAAP financial measures are set forth in the tables attached to this earnings release, and corresponding descriptions are contained in the company's report on Form 8-K, to which this news release is attached.

Fiscal 2017 First Quarter Key Developments

  • Sales were $477 million, compared with $555 million in the same quarter last year. Sales decreased by 14 percent, reflecting a 9 percent decline due to divestiture, a 3 percent organic decline and a 2 percent unfavorable currency exchange impact.

  • Pre-tax restructuring and related charges were $32 million, or $0.38 per share, and pre-tax benefits were approximately $18 million, or $0.19 per share in the quarter. In the same quarter last year, pre-tax restructuring and related charges were $15 million, or $0.14 per share, and pre-tax benefits were approximately $9 million, or $0.08 per share.

  • Operating loss was $9 million, compared to operating income of $7 million in the same quarter last year. Adjusted operating income was flat at $22 million in the current and prior year periods. Year-over-year adjusted operating results reflect the positive effects of lower raw material costs, incremental restructuring benefits and slightly better productivity, offset by the negative impacts of unfavorable mix in all segments, organic sales decline and higher employment-related costs. Adjusted operating margin was 4.7 percent in the current period and 4.3 percent in the prior year period.

  • The reported effective tax rate (ETR) was 29.9 percent (provision on a loss) and the adjusted ETR was 38.7 percent (provision on income). For the first quarter of fiscal 2016, the reported ETR was 292.8 percent (provision on a loss) and the adjusted ETR was 24.9 percent (provision on income). The change in the adjusted ETR year-over-year is driven primarily by tax benefits on losses in the U.S. that were recorded in the prior year which could not be recognized in the current year due to the full valuation allowance on our domestic deferred tax assets.

  • LPS was $0.27, compared with $0.08 in the prior year quarter. Adjusted EPS were $0.11 in the current quarter and $0.14 in the prior year quarter.

  • Year-to-date free operating cash flow was negative $19 million compared to positive $3 million in the same period last year. The decrease in free operating cash flow was primarily attributable to lower cash earnings, comparatively lower reductions in primary working capital and front-end loaded cash requirements for severance related to our headcount reduction initiative. These were offset partially by lower tax payments.

  • Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) were $17 million, compared with $36 million in the prior year quarter. Adjusted EBITDA were $48 million in the current quarter and $54 million in the prior year quarter.

Segment Developments for the Fiscal 2017 First Quarter

As previously announced, in order to take advantage of the growth opportunities of our WIDIA brand, we implemented a new operating structure at the start of fiscal 2017.

A key attribute of the new structure is the establishment of the WIDIA operating segment. In order to better leverage the opportunities that lie in this business, in addition to being more agile and competitive in the marketplace, we are placing higher levels of focus, determination and leadership in the business. Industrial and WIDIA in 2017 are formed from the previously reported Industrial segment. We now have three reportable operating segments: Industrial, WIDIA and Infrastructure. Restated quarterly segment results are included in this press release.

  • Industrial segment sales of $269 million remained relatively flat compared to $270 million in the prior year quarter, reflecting organic growth of 3 percent, offset by 2 percent unfavorable currency exchange and 1 percent due to divestiture. Excluding the impact of currency exchange and divestiture, sales increased approximately 6 percent in aerospace and defense, 5 percent in general engineering and 1 percent in transportation, offset partially by a decrease of approximately 11 percent in energy. Activity in the aerospace sector remains elevated with sales growing globally. General engineering sales in Americas and Asia have benefited from stability in the indirect channel stock levels, offsetting the general industrial weakness caused by the continued decline in the energy sector. The transportation market was mixed with more projects contributing to higher sales in Asia, partially offset by less favorable conditions in Europe and the Americas. On a segment regional basis excluding the impact of currency exchange and divestiture, sales increased 7 percent in Asia and 4 percent in the Americas, offset partially by a decrease of 1 percent in Europe.

  • Industrial segment operating income was $6 million compared with $21 million in the prior year. Adjusted operating income was $24 million compared to $27 million in the prior year quarter, driven primarily by higher employment-related costs and unfavorable mix, partially offset by incremental restructuring benefits and organic sales growth. Industrial adjusted operating margin was 9.0 percent compared with 10.0 percent in the prior year.

  • The WIDIA segment, selling primarily in the general engineering end market, recorded sales of $41 million, a decrease of 5 percent from $43 million in the prior year quarter due to organic decline of 3 percent, unfavorable currency exchange of 1 percent and a 1 percent decrease due to fewer business days. On a regional basis excluding the impact of currency exchange, sales decreased 10 percent in Europe and 5 percent in the Americas, partially offset by an increase of 5 percent in Asia.

  • WIDIA segment operating loss was $6 million compared to $2 million in the prior year. Adjusted operating loss was $3 million compared to $1 million in the prior year quarter, primarily driven by organic sales decline and unfavorable mix. WIDIA adjusted operating loss margin was 6.7 percent compared with 2.3 percent in the prior year.

  • Infrastructure segment sales of $167 million decreased 31 percent from $242 million in the prior year quarter. The decrease was driven by divestiture impact of 20 percent, 10 percent organic sales decline and 1 percent unfavorable currency exchange. Excluding the impact of currency exchange and divestiture, sales decreased by approximately 22 percent in earthworks, 6 percent in energy and 4 percent in general engineering. Key energy markets, particularly in North America, continued to see contraction in the first quarter, with U.S. rig counts declining over 40 percent year-over-year. In addition, conditions in underground mining in North America declined further, with sales down 36 percent year-over-year. As previously disclosed, this weakness is expected to continue for the foreseeable future. On a segment regional basis excluding the impact of divestiture and currency exchange, sales decreased 16 percent in the Americas, 8 percent in Asia and 3 percent in Europe.

  • Infrastructure segment operating loss was $8 million, flat compared to the same quarter of the prior year. Adjusted operating income was $2 million compared to adjusted operating loss of $3 million in the prior year quarter. The change in adjusted operating results was primarily due to lower raw material costs and incremental restructuring benefits, partially offset by lower organic sales and unfavorable mix. Infrastructure adjusted operating income margin was 1.4 percent compared with adjusted operating loss margin of 1.4 percent in the prior year.

Restructuring Programs

Restructuring programs are currently expected to produce combined annual ongoing pre-tax permanent savings of $140-$155 million. In total, pre-tax charges for these initiatives are expected to be approximately $155-$175 million.

Restructuring and related charges and savings (pre-tax)



Estimated Charges

Current Quarter Charges

Charges To Date

Estimated Annualized Savings

Approximate Current Quarter Savings

Expected Completion Date

Headcount reduction initiatives

$50M

$27M

$30M

$65M

$4M

6/30/2017

Other

$105M-$125M

$5M

$73M

$75M-$90M

$14M

12/31/2018

Total

$155M-$175M

$32M

$103M

$140M-$155M

$18M














 

Outlook

The company now expects consolidated adjusted EPS for the full fiscal year to be in the range of $1.20 and $1.50 per share, an increase from its previous guidance of $1.10 to $1.40 per share. This increase reflects restructuring benefits related to its headcount initiative, partially offset by continued end market headwinds and a higher than originally anticipated tax rate.

The company's expectations of full year free operating cash flow of $90 million to $110 million remains unchanged, as the front-loaded severance for headcount initiatives will be largely offset by cash savings from this program in the fiscal year.

Dividend Declared

Kennametal also announced that its board of directors declared a quarterly cash dividend of $0.20 per share. The dividend is payable November 29, 2016 to shareholders of record as of the close of business on November 11, 2017.

The company will discuss its fiscal 2017 first quarter results in a live webcast at 8:30 a.m. Eastern Time Thursday, October 27, 2016. This event will be broadcast live on the company's website, www.kennametal.com. To access the webcast, select "About Us", "Investor Relations" and then "Events." A recorded replay of this event also will be available on the company's website through November 27, 2016.

Certain statements in this release may be forward-looking in nature, or "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are statements that do not relate strictly to historical or current facts. For example, statements about Kennametal's outlook for earnings, sales volumes, and cash flow for fiscal year 2017 and our expectations regarding future growth and financial performance are forward-looking statements. Any forward looking statements are based on current knowledge, expectations and estimates that involve inherent risks and uncertainties. Should one or more of these risks or uncertainties materialize, or should the assumptions underlying the forward-looking statements prove incorrect, our actual results could vary materially from our current expectations. There are a number of factors that could cause our actual results to differ from those indicated in the forward-looking statements. They include: economic recession; our ability to achieve all anticipated benefits of restructuring initiatives; our foreign operations and international markets, such as currency exchange rates, different regulatory environments, trade barriers, exchange controls, and social and political instability; changes in the regulatory environment in which we operate, including environmental, health and safety regulations; potential for future goodwill and other intangible asset impairment charges; our ability to protect and defend our intellectual property; continuity of information technology infrastructure; competition; our ability to retain our management and employees; demands on management resources; availability and cost of the raw materials we use to manufacture our products; product liability claims; integrating acquisitions and achieving the expected savings and synergies; global or regional catastrophic events; demand for and market acceptance of our products; business divestitures;  energy costs; commodity prices; labor relations; and implementation of environmental remediation matters. Many of these risks and other risks are more fully described in Kennametal's latest annual report on Form 10-K and its other periodic filings with the Securities and Exchange Commission. We can give no assurance that any goal or plan set forth in forward-looking statements can be achieved and readers are cautioned not to place undue reliance on such statements, which speak only as of the date made. We undertake no obligation to release publicly any revisions to forward-looking statements as a result of future events or developments.

About Kennametal
At the forefront of advanced materials innovation for more than 75 years, Kennametal Inc. is a global industrial technology leader delivering productivity to customers through materials science, tooling and wear-resistant solutions. Customers across aerospace, earthworks, energy, general engineering and transportation turn to Kennametal to help them manufacture with precision and efficiency. Every day approximately 12,000 employees are helping customers in more than 60 countries stay competitive. Kennametal generated nearly $2.1 billion in revenues in fiscal 2016. Learn more at www.kennametal.com.

 

 

FINANCIAL HIGHLIGHTS

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)




Three Months Ended
September 30,

(in thousands, except per share amounts)

2016


2015

Sales

$

477,140



$

555,354


Cost of goods sold

333,610



404,130


     Gross profit

143,530



151,224


Operating expense

119,865



129,243


Restructuring and asset impairment charges

28,605



9,120


Amortization of intangibles

4,271



6,247


     Operating (loss) income

(9,211)



6,614


Interest expense

6,993



6,979


Other expense, net

118



1,087


Loss before income taxes

(16,322)



(1,452)


Provision for income taxes

4,879



4,252


Net loss

(21,201)



(5,704)


Less: Net income attributable to noncontrolling interests

455



522


Net loss attributable to Kennametal

$

(21,656)



$

(6,226)


PER SHARE DATA ATTRIBUTABLE TO KENNAMETAL SHAREHOLDERS








Basic loss per share

$

(0.27)



$

(0.08)


Diluted loss per share

$

(0.27)



$

(0.08)


Dividends per share

$

0.20



$

0.20


Basic weighted average shares outstanding

80,054



79,728


Diluted weighted average shares outstanding

80,054



79,728


 

 

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)



(in thousands)

September 30, 2016


June 30, 2016

 

 ASSETS




Cash and cash equivalents

$

119,411



$

161,579


Accounts receivable, net

348,470



370,916


Inventories

459,296



458,830


Other current assets

64,660



84,016


Total current assets

991,837



1,075,341


Property, plant and equipment, net

735,448



730,640


Goodwill and other intangible assets, net

501,589



505,695


Other assets

78,559



51,107


Total assets

$

2,307,433



$

2,362,783


 

 LIABILITIES




Current maturities of long-term debt and capital leases, including notes payable

$

1,381



$

1,895


Accounts payable

176,004



182,039


Other current liabilities

225,189



243,341


Total current liabilities

402,574



427,275


Long-term debt and capital leases

694,027



693,548


Other liabilities

243,488



246,159


Total liabilities

1,340,089



1,366,982


KENNAMETAL SHAREHOLDERS' EQUITY

934,996



964,323


NONCONTROLLING INTERESTS

32,348



31,478


Total liabilities and equity

$

2,307,433



$

2,362,783


 

 

SEGMENT DATA (UNAUDITED)

Three Months Ended September 30,

(in thousands)

2016

2015

Outside Sales:



Industrial (1)

$

269,043


$

270,191


WIDIA (1)

41,015


43,142


Infrastructure

167,082


242,021


Total outside sales

$

477,140


$

555,354


Sales By Geographic Region:



North America

$

215,211


$

253,149


Western Europe

119,982


155,721


Rest of World

141,947


146,484


Total sales by geographic region

$

477,140


$

555,354


Operating (Loss) Income:



Industrial (1)

$

5,556


$

21,459


WIDIA (1)

(5,756)


(1,709)


Infrastructure

(7,587)


(8,428)


Corporate (2)

(1,424)


(4,708)


Total operating (loss) income

$

(9,211)


$

6,614



(1)  Amounts for the three months ended September 30, 2015 have been restated to reflect the change in reportable operating segments

(2)  Represents unallocated corporate expenses

 

In addition to reported results under generally accepted accounting principles in the United States of America (GAAP), the following financial highlight tables include, where appropriate, a reconciliation of adjusted results including: sales; gross profit and margin; operating expense; operating expense as a percentage of sales; operating (loss) income and margin; net (loss) income; diluted (LPS) EPS; effective tax rate; Industrial sales, operating income and margin; WIDIA operating loss and margin; Infrastructure sales, operating (loss) income and margin; free operating cash flow and EBITDA (which are non-GAAP financial measures), to the most directly comparable GAAP measures. For those adjustments that are presented 'net of tax', the tax effect of the adjustment can be derived by calculating the difference between the pre-tax and the post-tax adjustments presented. The tax effect on adjustments is calculated by preparing an overall tax calculation including the adjustments and then a tax calculation excluding the adjustments. The difference between these calculations results is the tax impact of the adjustments.

Management believes that investors should have available the same information that management uses to assess operating performance, determine compensation and assess the capital structure of the company. These non-GAAP measures should not be considered in isolation or as a substitute for the most comparable GAAP measures. Investors are cautioned that non-GAAP financial measures utilized by the company may not be comparable to non-GAAP financial measures used by other companies. Reconciliations of all non-GAAP financial measures are set forth in the attached tables and descriptions of certain non-GAAP financial measures are contained in our report on Form 8-K to which this release is attached.

 

THREE MONTHS ENDED SEPTEMBER 30, 2016 (UNAUDITED)



(in thousands, except
percents and per share
data)

Sales

Gross
profit

Operating
expense

Operating
(loss)
income

Net (loss) 
income(3)

Diluted
(LPS)
EPS

Effective
tax rate

Reported results

$

477,140


$

143,530


$

119,865


$

(9,211)


$

(21,656)


$

(0.27)


(29.9)

%

Reported margins



30.1

%

25.1

%

(1.9)

%




Restructuring and related 
     charges (4)



1,995


(1,057)


31,657


30,603


0.38


68.6


Adjusted results

$

477,140


$

145,525


$

118,808


$

22,446


$

8,947


$

0.11


38.7

%

Adjusted margins



30.5

%

24.9

%

4.7

%





(3)  Represents amounts attributable to Kennametal Shareholders.

(4)  Includes pre-tax restructuring related charges recorded in corporate of $13.

 

 


Industrial

WIDIA

Infrastructure

(in thousands, except
percents)

Sales

Operating
income

Sales

Operating
loss

Sales

Operating
(loss) income

Reported results

$

269,043


$

5,556


$

41,015


$

(5,756)


$

167,082


$

(7,587)


Reported operating margin


2.1

%


(14.0)

%


(4.5)

%

Restructuring and related 
     charges (5)


18,708



3,026



9,910


Adjusted results

$

269,043


$

24,264


$

41,015


$

(2,730)


$

167,082


$

2,323


Adjusted operating margin


9.0

%


(6.7)

%


1.4

%


(5)  Excludes pre-tax restructuring related charges recorded in corporate of $13.

 

 

THREE MONTHS ENDED SEPTEMBER 30, 2015 (UNAUDITED)



(in thousands, except
percents and per share
data)

Sales

Gross
profit

Operating
expense

Operating
(loss)
income

Net (loss)
income(3)

Diluted
(LPS)
EPS

Effective
tax rate

Reported results

$

555,354


$

151,224


$

129,243


$

6,614


$

(6,226)


$

(0.08)


(292.8)

%

Reported margins


27.2

%

23.3

%

1.2

%




Restructuring and related 
     charges (6)


1,627


(4,363)


15,111


11,154


0.14


42.8


Divestiture-related charges





6,368


0.08


276.2


Operations of divested 
     businesses

(51,206)


(7,643)


(6,062)


82


256



(1.3)


Adjusted results

$

504,148


$

145,208


$

118,818


$

21,807


$

11,552


$

0.14


24.9

%

Adjusted margins


28.8

%

23.6

%

4.3

%





(6)  Includes pre-tax restructuring related charges recorded in corporate of $3,333.

 

 


Industrial (1)

WIDIA (1)

Infrastructure

(in thousands, except percents)

Sales

Operating
income

Sales

Operating
loss

Sales

Operating
(loss)
income

Reported results

$

270,191


$

21,459


$

43,142


$

(1,709)


$

242,021


$

(8,428)


Reported operating margin


7.9

%


(4.0)

%


(3.5)

%

Restructuring and related 
     charges (7)


5,462



722



5,594


Operations of divested 
     businesses

(2,543)


(78)




(48,663)


160


Adjusted results

$

267,648


$

26,843


$

43,142


$

(987)


$

193,358


$

(2,674)


Adjusted operating margin


10.0

%


(2.3)

%


(1.4)

%


(7)  Excludes pre-tax restructuring related charges recorded in corporate of $3,333.

 

 

FREE OPERATING CASH FLOW (UNAUDITED)


Three Months Ended



September 30,

(in thousands)


2016


2015

Net cash flow from operating activities


$

21,860



$

38,707


Purchases of property, plant and equipment


(42,264)



(37,217)


Proceeds from disposals of property, plant and equipment


1,138



1,933


Free operating cash flow


$

(19,266)



$

3,423


 

 

EBITDA (UNAUDITED)


Three Months Ended



September 30,

(in thousands)


2016


2015

Net loss attributable to Kennametal, reported

$

(21,656)



$

(6,226)


Add back:




  Interest expense

6,993



6,979


  Interest income

(248)



(475)


  Provision for income taxes, reported

4,879



4,252


  Depreciation


23,167



25,312


  Amortization


4,271



6,247


EBITDA


$

17,406



$

36,089







Adjustments:




  Restructuring and related charges

30,603



11,154


  Divestiture-related charges




6,368


  Operations of divested businesses



256


Adjusted EBITDA


$

48,009



$

53,867


 

SUPPLEMENTAL INFORMATION FOR SELECTED FISCAL YEAR 2016 FINANCIAL RESULTS (UNAUDITED)
(in thousands, except percents)

Previously disclosed segment results were restated for establishment of the WIDIA segment. This supplemental information regarding selected fiscal year 2016 financial results should be read in connection with the company's Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on August 11, 2016. The information includes non-GAAP financial measures and, in accordance with SEC Regulation G, the company has provided a reconciliation for each non-GAAP financial measure to the most directly comparable GAAP financial measure.

 

TWELVE MONTHS ENDED JUNE 30, 2016
(UNAUDITED)

Industrial

WIDIA


Sales

Operating
income

Sales

Operating
loss

Reported results

$

1,098,439


$

90,324


$

170,723


$

(9,081)


Reported margin


8.2

%


(5.3)

%

Restructuring and related charges


24,291



3,734


Fixed asset disposal charges


2,635



746


Goodwill and other intangible asset impairment charges




2,345


Operations of divested businesses

(4,106)





Loss on divestiture


3,610




Adjusted results

$

1,094,333


$

120,860


$

170,723


$

(2,256)


Adjusted margin


11.0

%


(1.3)

%

 

 

THREE MONTHS ENDED JUNE 30, 2016 (UNAUDITED)

Industrial

WIDIA


Sales

Operating
income

Sales

Operating
(loss) income

Reported results

$

285,547


$

30,469


$

43,027


$

(1,028)


Reported margin


10.7

%


(2.4)

%

Restructuring and related charges


6,697



1,031


Fixed asset disposal charges


2,635



746


Loss on divestiture


29




Adjusted results

$

285,547


$

39,830


$

43,027


$

749


Adjusted margin


13.9

%


1.7

%

 

 

THREE MONTHS ENDED MARCH 31, 2016
(UNAUDITED)

Industrial

WIDIA


Sales

Operating
income

Sales

Operating
loss

Reported results

$

274,123


$

26,371


$

42,249


$

(1,679)


Reported margin


9.6

%


(4.0)

%

Restructuring and related charges


8,091



1,255


Loss on divestiture


(3,677)




Adjusted results

$

274,123


$

30,785


$

42,249


$

(424)


Adjusted margin


11.2

%


(1.0)

%

 

 

THREE MONTHS ENDED DECEMBER 31, 2015
(UNAUDITED)

Industrial

WIDIA

Sales

Operating
income

Sales

Operating
loss

Reported results

$

268,578


$

12,025


$

42,305


$

(4,665)


Reported margin


4.5

%


(11.0)

%

Restructuring and related charges


4,041



726


Goodwill and other intangible asset impairment charges




2,345


Operations of divested businesses

(1,563)


78




Loss on divestiture


7,258




Adjusted results

$

267,015


$

23,402


$

42,305


$

(1,594)


Adjusted margin


8.8

%


(3.8)

%

 

 

THREE MONTHS ENDED SEPTEMBER 30, 2015
(UNAUDITED)

Industrial

WIDIA

Sales

Operating
income

Sales

Operating
loss

Reported results

$

270,191


$

21,459


$

43,142


$

(1,709)


Reported margin


7.9

%


(4.0)

%

Restructuring and related charges


5,462



722


Operations of divested businesses

(2,543)


(78)




Adjusted results

$

267,648


$

26,843


$

43,142


$

(987)


Adjusted margin


10.0

%


(2.3)

%

 

 

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SOURCE Kennametal Inc.

Investor Relations: CONTACT: Kelly Boyer, PHONE: 412-248-8287; Corporate Relations - Media: CONTACT: Christina Sutter, PHONE: 724-539-5708