Latrobe, PA - Kennametal Inc. reported results for the fiscal first-quarter 2014, with earnings per diluted share (EPS) of $0.48, including non-recurring items of $0.05, compared with the prior year quarter EPS of $0.57. "Due to our company-specific initiatives, Kennametal again delivered solid profitability this quarter even with persistent macroeconomic uncertainties," said Kennametal Chairman, President and Chief Executive Officer Carlos Cardoso. "More importantly, as the economic climate shows signs of improvement, we will accelerate our growth strategies to maximize revenues and earnings, as well as maintain our ongoing cost discipline."
"Also, our recently announced agreement to acquire ATI's Tungsten Materials Business will provide excellent growth opportunities. This represents a winning business combination that enhances our talent base, provides complementary strategic assets and further balances our portfolio."
Fiscal 2014 First Quarter Key Developments
-- Sales were $620 million, compared with $629 million in the same quarter last year. Sales decreased by 2 percent, reflecting a 3 percent organic decline, partially offset by a 1 percent favorable impact from more business days.
-- Operating income was $59 million, compared with $64 million in the same quarter last year. Operating income declined due to lower organic sales partially offset by reduced operating expense reflecting the company's continued cost discipline. Operating income included a non-recurring inventory charge of approximately $6 million and $1 million of acquisition-related expenses. Operating margin was 9.5 percent, compared with an operating margin of 10.2 percent in the prior year. Non-recurring charges unfavorably impacted operating margin 110 basis points.
-- The effective tax rate was 24.6 percent in the period, compared with 20.7 percent in the prior year. The increase was primarily driven by a favorable effective tax audit settlement in Europe in the prior year.
-- EPS were $0.48, compared with the prior year quarter EPS of $0.57. The current year quarter includes non-recurring inventory charges of $0.04 per share and acquisition-related charges of $0.01 per share.
-- Adjusted return on invested capital (ROIC) was 8.9 percent as of September 30, 2013.
-- The company generated $44 million in cash flow from operating activities, compared with $3 million in the prior year period. Net capital expenditures were $25 million and $15 million for the three months ended September 30, 2013 and 2012, respectively. The company realized free operating cash inflow of $20 million compared with $12 million free operating cash outflow for the same period last year.
-- During the quarter, the company acquired the operating assets of Comercializadora Emura S.R.L. and certain related entities (Emura), based in La Paz, Bolivia, and secured related material sourcing agreements. Emura is the region's principal operation engaged in collection, testing, processing and exporting tungsten ore material, and is a long-standing supplier to Kennametal. The addition of Emura enhances the company's strategic tungsten sourcing capabilities to serve growth globally.
-- The company announced during the quarter that it has signed a definitive agreement to acquire ATI's Tungsten Materials Business for $605 million. The acquisition is aligned with the company's growth strategy and positions the company to further diversify its portfolio.
-- Consistent with the company's priority uses of cash, 100,000 shares of capital stock were repurchased during the quarter, under the amended, multi-year share repurchase program announced in July 2013. Approximately 10.3 million shares remain available for purchase under the program.
Segment Developments for the Fiscal 2014 First Quarter
As previously announced, at the start of fiscal 2014, the company enhanced its organizational structure to align a broader base management team with customer-facing products and technology platforms, as well as to further increase cross-selling opportunities. This operating structure supports the company's stated growth objectives across diverse market sectors, preserves the focus on customers and increases product innovation. Previously disclosed Industrial and Infrastructure segment results were restated for certain sales reclassifications based on products and technologies.
-- Industrial segment sales of $338 million increased 1 percent from $335 million in the prior year quarter due to the favorable impact of more business days. Organic growth was flat. Sales increased by 2 percent in general engineering, 2 percent in transportation and 1 percent in energy, partially offset by a 2 percent decline in aerospace and defense. General engineering increased due to improvements in production and overall demand for machinery and the transportation market increased due to improvement in the light vehicle market. The decline in aerospace and defense is due to the timing of orders. On a regional basis, sales increased approximately 6 percent in Europe, remained relatively flat in the Americas and decreased by 5 percent in Asia. WIDIA reflected an increase year-over-year in all geographic regions.
-- Industrial segment operating income was $40 million compared with $39 million in the prior year. Industrial operating margin was 11.8 percent compared with 11.7 percent in the prior year.
-- Infrastructure segment sales of $282 million declined 4 percent from $294 million in the prior year. The decrease was driven by a 6 percent organic decline, partially offset by 2 percent favorable impact from more business days. Sales declined by 8 percent in earthworks markets, 4 percent in energy and 1 percent in transportation, partially offset by a 11 percent increase in general engineering. Earthworks and energy sales decreased due to overall global demand softness. General engineering and transportation reflects higher volumes from integrators and distributors. On a regional basis sales grew 3 percent in Europe, offset by a 7 percent decrease in Asia as well as the Americas.
-- Infrastructure segment operating income was $22 million, compared with $28 million in the same quarter of the prior year. Operating income decreased due to lower organic sales and a non-recurring inventory charge of approximately $6 million. Infrastructure operating margin was 7.7 percent compared with 9.4 percent in the prior year. The inventory charge unfavorably impacted operating margin 200 basis points.
Outlook
Kennametal refined its full-year outlook due to a slower than anticipated recovery in the company's served end markets globally in underground mining as well as oil and gas markets. However, the company notes that its order rates have reflected increased activity, primarily in its industrial end markets and distribution channels. The company now expects fiscal 2014 sales growth in the range of 5 to 7 percent, with organic sales growth ranging from 4 to 6 percent. Previously, the company had forecast total sales growth ranging from 4 to 6 percent with organic sales growth of 5 to 7 percent. Based on the revision, the company has reduced its EPS guidance for fiscal 2014 to range from $2.90 to $3.05, versus its previous expectation of $2.90 to $3.10.
The company still expects to generate cash flow from operations between $330 million and $380 million for fiscal 2014, based on anticipated capital expenditures of approximately $130 million to $150 million, the company expects to generate between $200 million and $230 million of free operating cash flow for the full fiscal year. Note that the company's outlook does not reflect any impact related to the planned acquisition of ATI's Tungsten Materials Business.
Dividend Declared
Kennametal also announced that its board of directors declared a quarterly cash dividend of $0.18 per share. The dividend is payable November 26, 2013 to shareowners of record as of the close of business on November 5, 2013.
