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Kennametal Announces Strong Fiscal 2019 First Quarter Results

Kennametal Announces Strong Fiscal 2019 First Quarter Results

Kennametal Inc. has reported results for its fiscal 2019 first quarter which ended September 30, 2018, with EPS of USD 0.68, compared with USD 0.48 in the prior year quarter, and adjusted EPS of USD 0.70, compared with USD 0.55 in the prior year quarter. Reported EPS in the current quarter includes a charge related to U.S. tax reform of USD 0.01 and restructuring and related charges of USD 0.01, and for the prior year quarter includes restructuring and related charges of USD 0.07.

“We delivered strong first quarter results. The continued progress on our strategic initiatives of growth and simplification/modernisation, 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 capitalising on healthy market conditions, we focused on strategically investing in our simplification/modernisation 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 USD 587 million, compared with USD 542 million in the prior year quarter. Sales increased by eight percent, driven by ten percent organic growth, partially offset by a two percent unfavourable currency exchange impact. Sales grew in all segments and regions.

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

Operating income was USD 83 million, or 14.2 percent margin, compared to USD 52 million, or 9.6 percent margin, in the prior year quarter. Adjusted operating income was USD 84 million, or 14.4 percent margin, compared to USD 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/modernisation benefits, partially offset by higher raw material costs and temporary manufacturing inefficiencies in certain locations in part due to strong market demand coupled with modernisation efforts in progress. Price realisation 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 USD 9 million compared to negative USD 40 million in the prior year period. Free operating cash flow (FOCF) was negative USD 33 million compared to negative USD 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 USD 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 USD 2.90 to USD 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 USD 240 to USD 260 million, FOCF is expected to be USD 120 to USD 140 million.

Segment Results

Industrial segment sales of USD 321 million increased 8 percent from USD 297 million year-over-year, reflecting organic sales growth of 10 percent, partially offset by a 2 percent unfavoruable currency exchange impact. Operating income was USD 59 million, or 18.3 percent margin, compared to USD 32 million, or 10.8 percent margin, in the prior year quarter. Adjusted operating income was USD 59 million, or 18.3 percent margin, compared to USD 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 modernisation 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 USD 49 million increased 8 percent from USD 45 million year-over-year, driven by organic sales growth of 11 percent, partially offset by a 3 percent unfavourable currency exchange impact.  Operating income was USD 2 million, or 4.3 percent margin, compared to operating loss of less than USD 1 million, or 0.7 percent loss margin, in the prior year quarter. Adjusted operating income was USD 2 million, or 4.4 percent margin, compared to less than USD 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 USD 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 USD 24 million, or 11.0 percent margin, compared to USD 20 million, or 10.2 percent margin, in the prior year quarter. Adjusted operating income was USD 25 million, or 11.4 percent margin, compared to USD 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 USD 0.20 per share. The dividend was payable on November 28, 2018 to shareholders of record as of the close of business on November 13, 2018.

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