Latrobe, PA - Kennametal Inc. today reported fiscal 2013 second-quarter results, with earnings per diluted share (EPS) of $0.52 compared with the prior-year quarter EPS of $0.91.
"We again sustained strong performance, in both profitability and return on invested capital, despite generally lackluster activity in the global industrial markets," said Kennametal Chairman, President and Chief Executive Officer Carlos Cardoso. "While recovery is progressing more slowly than expected, we have kept our organization agile and ready for the resumption of growth. Our Stellite acquisition is contributing to earnings and opening us to new growth opportunities in the energy and power generation industries. In addition, Kennametal remains committed to maximizing our results and maintaining our strong balance sheet to deliver increased shareholder value."
Fiscal 2013 Second Quarter Key Developments
-- Sales were $633 million, compared with $642 million in the same quarter last year. Sales decreased by 1 percent, reflecting a 10 percent organic decline and a 1 percent unfavorable effect from currency exchange, partially offset by a 9 percent increase from Stellite and 1 percent from the effect of more business days.
-- Operating income was $66 million, compared with $94 million in the same quarter last year. Stellite contributed $5 million of operating income in the current year quarter. Operating income decreased due to lower absorption of manufacturing costs related to reduced sales volume and an inventory reduction initiative, as well as an unfavorable sales mix. The company reduced operating expense with additional cost-control measures to partially offset these effects. Excluding Stellite, adjusted operating margin was 10.7 percent, compared with an operating margin of 14.7 percent in the prior year.
-- The results reflect a higher effective tax rate in the current quarter, at 26.4 percent, compared with 17.3 percent in the prior year. The difference includes the impacts of a valuation allowance adjustment in the prior year and lower current quarter earnings contribution from Europe where tax rates are lower than those in the United States.
-- EPS were $0.52, compared with the prior year quarter EPS of $0.91. The current year EPS includes $0.02 per share accretion from Stellite.
-- Adjusted return on invested capital (ROIC) was 12.5 percent as of December 31, 2012.
-- Year to date, the company generated $54 million in cash flow from operating activities, compared with $71 million in the prior year period. Net capital expenditures were $34 million and $33 million for the six months ended December 31, 2012 and 2011, respectively. For the first half of this fiscal year, the company realized free operating cash flow of $21 million compared with $38 million for the same period last year.
-- The company also bought back 560,200 shares of its capital stock. Year-to-date purchases now total approximately 1.3 million shares, under the amended, multiyear share repurchase program announced in July. Approximately 7.2 million shares remain available under the program.
Enhanced Liquidity and Strengthened Financial Position In November 2012, the company further enhanced liquidity and strengthened its financial position by issuing $400 million of 2.65 percent Senior Unsecured Notes due in 2019. Segment Developments for the Fiscal 2013 Second Quarter
-- Industrial segment sales of $361 million declined 12 percent from $410 million in the prior year quarter, reflecting a 10 percent organic decline and a 2 percent unfavorable effect from currency exchange. On an organic basis, sales declined 15 percent in general engineering and 8 percent in transportation, while aerospace and defense sales grew 10 percent. Inventory destocking affected indirect sales in general engineering, as distributors responded to the slow macro environment. The decline in transportation reflected lower vehicle production rates and extended plant shut-downs, while aerospace and defense sales grew with increased production of commercial aircraft. On a regional basis, sales declined approximately 15 percent in Asia, 9 percent in Europe and 8 percent in the Americas.
-- Industrial segment operating income was $37 million compared with $63 million in the prior year. Industrial operating income decreased due to lower absorption of manufacturing costs related to reduced sales volume and an inventory reduction initiative, as well as an unfavorable sales mix. Industrial operating margin was 10.4 percent compared with 15.3 percent in the prior year.
-- Infrastructure segment sales of $272 million increased 17 percent from $232 million in the prior year, driven by 26 percent growth from Stellite, partially offset by an 8 percent organic decline and a 1 percent unfavorable effect from currency exchange. On an organic basis, sales declined by 13 percent in energy and 6 percent in the earthworks markets. Earthworks sales declined from persistently weak coal mining activity in North America, where a number of mine closures further depressed sales. Energy sales fell globally due to reduced drilling activity in oil and gas. On a regional basis excluding the impact of Stellite, sales decreased approximately 12 percent in the Americas and 3 percent in Asia and remained flat in Europe.
-- Infrastructure segment operating income was $31 million, compared with $33 million in the same quarter of the prior year. Operating income benefited from Stellite operating income of $5 million, which was more than offset by the effects of the organic sales decline and lower absorption of manufacturing costs, as well as an unfavorable sales mix. Infrastructure adjusted operating margin was 12.3 percent compared with 14.4 percent in the prior year.
Fiscal 2013 First Half Key Developments
-- Sales were $1,263 million, compared with $1,301 million in the same period last year. Sales decreased by 3 percent, driven by an 8 percent organic decline and 4 percent unfavorable effect from currency exchange, partially offset by a 9 percent increase from Stellite.
-- Operating income was $131 million, compared with $196 million in the same period last year. Stellite contributed $8 million of operating income year to date. Operating income decreased primarily due to lower sales volume, lower absorption of manufacturing costs as well as unfavorable currency exchange. This decrease was partially offset by reduced operating expense achieved with cost control. Excluding Stellite, year to date adjusted operating margin was 10.7 percent, compared with an operating margin of 15.0 percent in the prior year.
-- EPS were $1.09, compared with the prior year period EPS of $1.79. The current year EPS includes $0.02 per share accretion from Stellite. Reconciliations of all non-GAAP financial measures are set forth in the tables attached, and corresponding descriptions are contained in the company's report on Form 8-K, to which this news release is attached.
Due to slower than expected demand in the company's served markets, Kennametal adjusted its full-year outlook given lower sales volumes. However, the company notes that its order rates have remained steady over the past few months, which may reflect that bottoming has occurred.
The company now expects fiscal 2013 sales growth between negative 2 and negative 4 percent, with organic sales ranging from negative 7 to negative 9 percent. Previously, the company had forecast total sales growth ranging from 3 to 6 percent with organic sales growth of flat to negative 3 percent.
Based on the revision, the company has reduced its EPS guidance for fiscal 2013 to range from $2.60 to $2.80, versus its previous expectation of $3.40 to $3.70. Included in this outlook is the accretive contribution of the Stellite acquisition, which is now expected to range between $0.10 and $0.15 per share as compared to the previous range of $0.15 and $0.25 per share, net of integration costs.
The company now expects to generate cash flow from operations between $290 million and $325 million for fiscal 2013, compared with the previous range of $320 million to $385 million. Based on anticipated capital expenditures of approximately $90 million to $100 million, the company expects to generate between $200 million and $225 million of free operating cash flow for the full fiscal year, as compared to the previous range of $225 million to $275 million.
Kennametal also announced that its board of directors declared a quarterly cash dividend of $0.16 per share. The dividend is payable February 20, 2013 to shareowners of record as of the close of business on February 5, 2013.
Kennametal advises shareowners to note monthly order trends, for which the company generally makes a disclosure ten business days after the conclusion of each month. This information is available via the Investor Relations section of Kennametal's corporate website at www.kennametal.com.