Kennametal Announces Fiscal 2018 Second Quarter Results

PITTSBURGH, Feb. 1, 2018 /PRNewswire/ -- 

Kennametal Inc. (NYSE: KMT) today reported results for its fiscal 2018 second quarter ended December 31, 2017, with EPS of $0.50, compared with EPS of $0.09 in the prior year quarter. Adjusted EPS were $0.52 in the current quarter compared with $0.24 in the prior year quarter.

"I'm pleased to report that Kennametal has posted another strong operating quarter," commented Chris Rossi, Kennametal president and CEO. "The markets are continuing to show strength right now, and our growth initiatives are taking hold. By working on our simplification initiatives, we have put the foundation in place for our modernization program to generate further margin improvement. I believe the plans we have in place now will result in strengthening margins as we move in a disciplined manner through our three-year plan."

Mr. Rossi continued, "As with many companies, the results this quarter were affected by U.S. tax reform. A unique aspect this quarter was the earlier than anticipated release of the valuation allowance on U.S. deferred tax assets due to tax reform. For this quarter, this amounted to an estimated $0.08 negative effect to adjusted EPS. The long-term effects of tax reform, however, are expected to be positive."

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 Current Report on Form 8-K, which was filed with the Securities and Exchange Commission (SEC) on February 1, 2018.

Fiscal 2018 Second Quarter Key Developments

• Sales were $571 million, compared with $488 million in the prior year quarter. Sales increased by 17 percent, driven by 15 percent organic growth and a 3 percent favorable currency exchange impact, partially offset by a 1 percent decrease due to fewer business days.
• Pre-tax restructuring and related charges were $1 million, or $0.00 on a per share basis, and pre-tax benefits from cost savings initiatives were approximately $41 million. In the prior year quarter, pre-tax restructuring and related charges were $12 million, or $0.13 per share, and pre-tax benefits from cost savings initiatives were approximately $24 million.
• Operating income was $68 million, compared to $24 million in the prior year quarter. Adjusted operating income was $70 million, compared to $36 million in the prior year quarter. The increase in adjusted operating income is due primarily to organic sales growth, incremental restructuring benefits, higher productivity and fixed cost absorption and favorable mix, partially offset by higher compensation expense and more overtime costs. Operating margin was 11.9 percent in the current period compared to 4.9 percent in the prior year quarter. Adjusted operating margin was 12.2 percent in the current period compared to 7.3 percent in the prior year quarter.
• The reported ETR was 29.3 percent and the adjusted ETR was 28.4 percent. The difference between the reported and adjusted tax rate in the quarter is driven by a discrete $4 million benefit for the release of the valuation allowance on U.S. deferred tax assets and a discrete $5 million charge for the correction of a prior period item. The enactment of U.S. tax reform in the quarter triggered the earlier than previously expected release of the valuation allowance in place against our U.S. net deferred tax assets. The valuation allowance was originally recorded in the fourth quarter of fiscal 2016. Adjusted EPS decreased an estimated $0.08 per share due to the tax effect of U.S. earnings that previously could not be tax effected. For the prior year quarter, the reported ETR was 50.9 percent and the adjusted ETR was 28.0 percent. The change in the adjusted ETR year-over-year is primarily due to prior year U.S. losses not being tax-effected and current year U.S. income being subject to tax now that a valuation allowance is no longer recorded on U.S. deferred tax assets.
• EPS were $0.50, compared with $0.09 in the prior year quarter. Adjusted EPS were $0.52 in the current quarter and $0.24 in the prior year quarter. Reported results for the fiscal 2018 second quarter include the impact of recording an out of period non-cash charge to provision for income taxes of $0.07 and the one-time non-cash benefit of releasing the U.S. deferred tax valuation allowance of $0.05 per share. Reported results for the fiscal 2017 second quarter include restructuring and related charges of $0.13 per share and expense associated with recording an Australia deferred tax valuation allowance of $0.02 per share.
• Year-to-date free operating cash flow was negative $18 million in both the current and prior year periods. Higher cash from operations before changes in certain other assets and liabilities and lower restructuring payments were offset by higher working capital and capital expenditures.
• EBITDA were $93 million, compared with $49 million in the prior year quarter. Adjusted EBITDA were $94 million in the current quarter and $61 million in the prior year quarter.

Segment Developments for the Fiscal 2018 Second Quarter

• Industrial sales of $312 million increased 17 percent from $267 million in the prior year quarter, reflecting organic growth of 14 percent and a 4 percent favorable currency exchange impact, partially offset by a 1 percent decrease due to fewer business days. Constant currency end market sales growth was approximately 19 percent in energy, 14 percent in transportation, 11 percent in general engineering and 9 percent in aerospace and defense. General engineering sales experienced growth from global sales in the indirect channel and in the light and general engineering sector. Growth in transportation sales in Asia Pacific and EMEA to tier suppliers and OEMs were dampened by lower sales to OEMs in the Americas. Oil and gas drilling sales in the Americas continues to provide overall growth in energy, coupled with increases in power generation sales primarily in Asia Pacific. Conditions continue to be favorable in the aerospace sector, with global sales related to engine growth being supplemented by increasing demand related to frames in the Americas. Constant currency regional sales growth was 20 percent in Asia Pacific and 11 percent in both the Americas and EMEA.
• Industrial operating income was $43 million compared to $18 million in the prior year quarter. Adjusted operating income was $43 million compared to $24 million in the prior year quarter, driven primarily by organic sales growth, incremental restructuring benefits and higher productivity and fixed cost absorption, partially offset by higher compensation expense. Industrial operating margin was 13.9 percent compared to 6.8 percent in the prior year quarter. Industrial adjusted operating margin was 13.9 percent compared with 9.0 percent in the prior year quarter.
• Widia sales of $48 million increased 11 percent from $43 million in the prior year quarter, driven by organic growth of 9 percent and a 2 percent favorable currency exchange impact. Widia organic sales growth continues to be positively impacted by the reorganization of distribution in Europe, growth in India related to higher demand trends, in addition to increasing demand in the U.S. energy markets and higher growth rates in emerging markets. Constant currency regional sales growth was 16 percent in EMEA, 8 percent in the Americas and 4 percent in Asia Pacific.
• Widia operating income was $1 million compared to an operating loss of $3 million in the prior year quarter. Adjusted operating income was $1 million compared to an adjusted operating loss of $1 million in the prior year quarter, primarily driven by organic sales growth. Widia operating income margin was 1.8 percent compared to operating loss margin of 6.2 percent in the prior year quarter. Widia adjusted operating income margin was 2.2 percent compared with adjusted operating loss margin of 1.5 percent in the prior year quarter.
• Infrastructure sales of $211 million increased 19 percent from $177 million in the prior year quarter, driven by organic growth of 18 percent and a 2 percent favorable currency exchange impact, partially offset by a 1 percent decrease due to fewer business days. Constant currency end market sales growth was approximately 25 percent in energy, 20 percent in general engineering and 11 percent in earthworks. Oil and gas in the U.S. continues to stabilize, manifesting in high year-over-year growth in energy with average U.S. land rig counts up over 60 percent compared to the prior year quarter. In the earthworks market, underground mining continues to show signs of improvement, while construction sales improved in part due to stronger demand in road rehabilitation. Constant currency regional sales growth was 24 percent in Asia Pacific, 20 percent in the Americas and 1 percent in EMEA.
• Infrastructure operating income was $26 million compared to $10 million in the prior year quarter. Adjusted operating income was $27 million compared to $14 million in the prior year quarter. The change in adjusted operating results was primarily due to organic sales growth, incremental restructuring benefits and favorable mix, partially offset by higher compensation expense, raw material costs and overtime. Infrastructure operating income margin was 12.1 percent compared to 5.8 percent in the prior year quarter. Infrastructure adjusted operating income margin was 12.6 percent compared with 7.9 percent in the prior year quarter.

Fiscal 2018 First Half Key Developments

• Sales were $1,114 million, compared to $965 million in the same period last year. Sales increased by 15 percent, driven by organic growth of 14 percent and a 2 percent favorable currency exchange impact, partially offset by a 1 percent decrease due to fewer business days.
• Operating income was $125 million, compared to $15 million in the same period last year. Adjusted operating income was $133 million in the current period, compared to adjusted operating income of $58 million in the prior year. Adjusted operating income increased due primarily to organic sales growth, incremental restructuring benefits and favorable mix, partially offset by higher compensation expense, raw material costs and overtime costs. Operating margin was 11.2 percent, compared to 1.5 percent in the prior year. Adjusted operating margin was 11.9 percent, compared to 6.0 percent in the prior year.
• EPS were $0.98 in the current year period, compared with loss per diluted share (LPS) of $0.18 in the prior year period. Adjusted EPS were $1.08 in the current year period and $0.35 in the prior year period.

Outlook

The company now expects consolidated adjusted EPS for the full fiscal year to be in the range of $2.40 to $2.70 per share on organic sales growth of 9% to 11%, a change from the previous outlook of $2.30 to $2.60 per share on organic sales growth of 5% to 7%. The updated adjusted EPS outlook includes higher estimated tax expense of $0.15 to $0.20 per share triggered by tax reform. The company currently expects free operating cash flow to be $0 to $30 million, which is reflective of our continued investments in modernization.

Mr. Rossi commented, "We are raising our adjusted EPS outlook despite the adverse effects of tax changes. We are making progress on our initiatives, and end market demand has strengthened more than anticipated, which we expect will result in higher organic sales growth."

Dividend Declared

Kennametal also announced that its board of directors declared a quarterly cash dividend of $0.20 per share. The dividend is payable on February 28, 2018 to shareholders of record as of the close of business on February 13, 2018.

The company will discuss its fiscal 2018 second quarter results in a live webcast at 8:00 a.m. Eastern Time, Friday, February 2, 2018. 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 will also be available on the company's website through March 1, 2018.

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, cash flow and capital expenditures for fiscal year 2018 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
Celebrating its 80^th year as an industrial technology leader, Kennametal Inc. delivers 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 11,000 employees are helping customers in more than 60 countries stay competitive. Kennametal generated nearly $2.1 billion in revenues in fiscal 2017. Learn more at www.kennametal.com.

⁽¹⁾  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: gross profit and margin; operating expense; operating expense as a percentage of sales; operating income and margin; effective tax rate; net income (loss) attributable to Kennametal shareholders; diluted EPS and LPS; Industrial operating income and margin; Widia operating income (loss) and margin; Infrastructure operating income and margin; free operating cash flow, EBITDA and margin, organic sales growth (consolidated and segment-level), constant currency end market sales growth and constant currency regional sales growth (which are non-GAAP financial measures), to the most directly comparable GAAP financial 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 financial measures should not be considered in isolation or as a substitute for the most comparable GAAP financial 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 tables below and descriptions of certain non-GAAP financial measures are contained in our report on Form 8-K filed with the SEC on February 1, 2018.

⁽²⁾  Attributable to Kennametal Shareholders.

⁽³⁾  Non-cash charge associated with the out-of-period impact of recording an adjustment to deferred tax charges associated with intra-entity product transfers.

⁽⁴⁾ Non-cash benefit associated with the release of the valuation allowance on U.S. deferred tax assets as a result of application of a provision in the Tax Cuts and Jobs Act of 2017. The provision required a one-time transition tax on previously untaxed accumulated earnings and profits of non-U.S. companies. This transition tax resulted in a toll charge of $77 million which was fully offset by our U.S. deferred tax assets, which were still subject to a full valuation allowance. After the effect of the toll charge and utilization of existing tax attributes, deferred tax assets were remeasured and the valuation allowance was released. The toll charge is based on a reasonable estimate and is subject to finalization of collecting all information and analyzing the calculation in reasonable detail to complete the accounting.

⁽⁵⁾ Amounts for the three and six months ended December 31, 2016 have been restated to reflect adoption of FASB ASU 2016-09.

⁽⁶⁾ Aggregate sales for all end markets sum to the sales amount presented on the company's financial statements.

⁽⁷⁾ Aggregate sales for all regions sum to the sales amount presented on the company's financial statements.

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SOURCE Kennametal Inc.