Kennametal Announces Strong Fiscal 2019 First Quarter Results

PITTSBURGH, Nov. 5, 2018 /PRNewswire/ -- Kennametal Inc. (NYSE: KMT) (the "Company") today reported results for its fiscal 2019 first quarter ended September 30, 2018, with EPS of $0.68, compared with $0.48 in the prior year quarter, and adjusted EPS of $0.70, compared with $0.55 in the prior year quarter. Reported EPS in the current quarter includes a charge related to U.S. tax reform of $0.01 and restructuring and related charges of $0.01, and for the prior year quarter includes restructuring and related charges of $0.07.

"We delivered strong first quarter results. The continued progress on our strategic initiatives of growth and simplification/modernization, coupled with the ongoing strength of our end markets delivered significant year-over-year improvement in almost all facets of our business," said President and Chief Executive Officer, Chris Rossi.

"In addition to capitalizing on healthy market conditions, we focused on strategically investing in our simplification/modernization initiative where we can improve our customer service and increase productivity. The team is balancing strong demand while executing our operational improvement strategy. Despite headwinds associated with the strengthening U.S. dollar, we are confident that we are on track to deliver our fiscal 2019 adjusted EPS outlook," said Rossi.

Fiscal 2019 First Quarter Key Developments

Sales were $587 million, compared with $542 million in the prior year quarter. Sales increased by 8 percent, driven by 10 percent organic growth, partially offset by a 2 percent unfavorable currency exchange impact. Sales grew in all segments and regions.

In association with the Company's simplification/modernization initiative, pre-tax restructuring and related charges were $1 million, or $0.01 per share, and incremental pre-tax benefits from simplification/modernization restructuring were approximately $2 million. Annualized run-rate pre-tax savings of approximately $10 million are expected to be achieved in connection with these simplification/modernization restructuring programs.

Operating income was $83 million, or 14.2 percent margin, compared to $52 million, or 9.6 percent margin, in the prior year quarter. Adjusted operating income was $84 million, or 14.4 percent margin, compared to $59 million, or 10.9 percent margin, in the prior year quarter. The increase in adjusted operating income is due primarily to organic sales growth and incremental simplification/modernization benefits, partially offset by higher raw material costs and temporary manufacturing inefficiencies in certain locations in part due to strong market demand coupled with modernization efforts in progress. Price realization continued to outpace raw material cost inflation.

The reported effective tax rate (ETR) was 24.9 percent and the adjusted ETR was 23.6 percent. For the prior year quarter, the reported ETR was 19.5 percent and the adjusted ETR was 18.0 percent. The change in the adjusted ETR compared to the prior year period is primarily due to the effects of not having a valuation allowance recorded on U.S. deferred tax assets in the current period and the reduction in the U.S. federal statutory tax rate, partially offset by the tax on global intangible low-taxed income.

Net cash flow from operating activities was $9 million compared to negative $40 million in the prior year period. Free operating cash flow (FOCF) was negative $33 million compared to negative $62 million in the prior year period. The change in FOCF is driven primarily by increased cash flow from operations before changes in certain other assets and liabilities in addition to changes in working capital, partially offset by greater net capital expenditures.

As previously announced, the Company completed early redemption in July 2018 of its previously outstanding $400 million of 2.650 percent Senior Unsecured Notes due 2019.

Outlook

The Company reaffirms its previous outlook for fiscal year 2019, despite anticipated incremental currency headwinds. The Company expects fiscal 2019 adjusted EPS of $2.90 to $3.20 on organic sales growth of 5 to 8 percent, assuming an adjusted ETR in the range of 22 to 25 percent. With anticipated capital spending of $240 to $260 million, FOCF is expected to be $120 to $140 million.

Segment Results

Industrial segment sales of $321 million increased 8 percent from $297 million year-over-year, reflecting organic sales growth of 10 percent, partially offset by a 2 percent unfavorable currency exchange impact. Operating income was $59 million, or 18.3 percent margin, compared to $32 million, or 10.8 percent margin, in the prior year quarter. Adjusted operating income was $59 million, or 18.3 percent margin, compared to $36 million, or 12.1 percent margin, in the prior year quarter. The increase in adjusted operating income is driven primarily by organic sales growth, favorable mix and incremental modernization and simplification restructuring benefits, partially offset by temporary manufacturing inefficiencies in certain locations in part due to strong market demand coupled with modernization efforts in progress, in addition to higher raw material costs.

Widia sales of $49 million increased 8 percent from $45 million year-over-year, driven by organic sales growth of 11 percent, partially offset by a 3 percent unfavorable currency exchange impact.  Operating income was $2 million, or 4.3 percent margin, compared to operating loss of less than $1 million, or 0.7 percent loss margin, in the prior year quarter. Adjusted operating income was $2 million, or 4.4 percent margin, compared to less than $1 million, or 1.1 percent margin, in the prior year quarter. The increase in adjusted operating income is driven primarily by organic sales growth.

Infrastructure sales of $217 million increased 9 percent from $200 million year-over-year, driven by organic sales growth of 10 percent, partially offset by a 1 percent unfavorable currency exchange impact. Operating income was $24 million, or 11.0 percent margin, compared to $20 million, or 10.2 percent margin, in the prior year quarter. Adjusted operating income was $25 million, or 11.4 percent margin, compared to $22 million, or 11.2 percent margin, in the prior year quarter. The increase in adjusted operating income is primarily driven by organic sales growth and favorable mix, partially offset by higher raw material costs.

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 November 28, 2018 to shareholders of record as of the close of business on November 13, 2018.

The Company will discuss its fiscal 2019 first quarter results in a live webcast at 8:00 a.m. Eastern Time, Tuesday, November 6, 2018. The conference call will be broadcast via real-time audio on the Kennametal website at  www.kennametal.com. Once on the homepage, select "About Us", "Investor Relations" and then "Events." A replay of the call will be available on the Company's website on the Investor Relations/Events page beginning on November 6, 2018 at 10:00 a.m. through December 6, 2018.

This earnings release contains non-GAAP financial measures. Reconciliations and descriptions of all non-GAAP financial measures are set forth in the tables that follow.

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 2019 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: downturns in the business cycle or the economy; our ability to achieve all anticipated benefits of restructuring, simplification and modernization initiatives; risks related to 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; 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 10,000 employees are helping customers in more than 60 countries stay competitive. Kennametal generated nearly $2.4 billion in revenues in fiscal 2018. Learn more at www.kennametal.com.

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: operating income and margin; ETR; net income attributable to Kennametal shareholders; diluted EPS; Industrial operating income and margin; Widia operating income and margin; Infrastructure operating income and margin; FOCF; and consolidated and segment organic sales growth (all of which are non-GAAP financial measures), to the most directly comparable GAAP financial measures. Adjustments for the three months ended September 30, 2018 include: (1) restructuring and related charges and (2) effect of tax reform. Adjustments for the three months ended September 30, 2017 include restructuring and related charges. 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 in the tax impact of the adjustments.

Management believes that presentation of these non-GAAP financial measures provides useful information about the results of operations of the Company for the current and past periods. 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 used by management may not be comparable to non-GAAP financial measures used by other companies. Reconciliations and descriptions of all non-GAAP financial measures are set forth in the disclosures below.

Reconciliations to the most directly comparable GAAP financial measures for the following forward-looking non-GAAP financial measures for full fiscal year of 2019 have not been provided, including but not limited to: adjusted EPS, adjusted ETR, organic sales growth and FOCF. The most comparable GAAP financial measures are earnings per share, ETR, sales growth and net cash flow from operating activities, respectively. Because the non-GAAP financial measures on a forward-looking basis are subject to uncertainty and variability as they are dependent on many factors - including, but not limited to, the effect of foreign currency exchange fluctuations, impacts from potential acquisitions or divestitures, gains or losses on the potential sale of businesses or other assets, restructuring costs, asset impairment charges, gains or losses from early extinguishment of debt, the tax impact of the items above and the impact of tax law changes or other tax matters - reconciliations to the most directly comparable forward-looking GAAP financial measures are not available without unreasonable effort.

Free Operating Cash Flow (FOCF)
FOCF is a non-GAAP financial measure and is defined by the Company as cash provided by operations (which is the most directly comparable GAAP financial measure) less capital expenditures plus proceeds from disposals of fixed assets. Management considers FOCF to be an important indicator of the Company's cash generating capability because it better represents cash generated from operations that can be used for dividends, debt repayment, strategic initiatives (such as acquisitions) and other investing and financing activities.

Organic Sales Growth
Organic sales growth is a non-GAAP financial measure of sales growth (which is the most directly comparable GAAP measure) excluding the impacts of acquisitions, divestitures, business days and foreign currency exchange from year-over-year comparisons. Management believes this measure provides investors with a supplemental understanding of underlying sales trends by providing sales growth on a consistent basis. Management reports organic sales growth at the consolidated and segment levels.

View original content:http://www.prnewswire.com/news-releases/kennametal-announces-strong-fiscal-2019-first-quarter-results-300744020.html

SOURCE Kennametal Inc.