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Kennametal Second-Quarter Earnings Up 15%, In Line With Expectations Despite Economic Softness; Quarterly Dividend Declared
LATROBE, Pa., Jan. 31 /PRNewswire/ -- Kennametal Inc. (NYSE: KMT) today reported solid second-quarter earnings, once more leveraging incremental benefits from operational improvements to achieve targets. Despite weakening North American economic conditions, Kennametal's earnings per share (EPS) increased by 15 percent to $0.47 per share, excluding special items, compared to $0.41 per share last year. On a reported basis, earnings per share were $0.44 against $0.27 last year.
Kennametal President and Chief Executive Officer Markos I. Tambakeras said, "We continue to deliver strong earnings growth despite the weakening economy. This is the result of an intense focus on sales programs, increased operational flexibility and improved efficiency in our balance sheet. We quickly recognized the potential for softening market conditions and activated contingency plans to mitigate any earnings impact from top-line shortfall. Furthermore, although we have reduced expenses significantly, we continue to fund our key growth programs. We also continue to generate cash at a higher- than-expected rate and maintain our unyielding focus on managing debt. I am also particularly pleased that despite top-line pressure our gross margins continue to expand. Finally, we have further continued our management development with the addition of two new executives; Michael P. Wessner as COO at J&L Industrial Supply and Michael R. Gallagher to lead our global metalworking marketing and sales organization. We remain focused on the ongoing transformation of Kennametal; investing in strategic initiatives to drive consistent growth, optimizing our cost structure and the revitalization of JLK."
Second-Quarter Highlights
-- Excluding the unfavorable impact of foreign currency (4 percent) and
fewer business days (3 percent) sales grew 4 percent. Actual sales
were $440.5 million, a decrease of 3 percent compared to last year.
The organic growth in sales was delivered despite weakening in North
American end markets, particularly automotive, and benefited from
significant growth in Europe and Asia.
-- The gross profit margin was 37.9 percent, an improvement of 70 basis
points from the second quarter of fiscal 2000 or 140 basis points
excluding unfavorable foreign currency impact. The improvement in
the gross margin reflects significant progress in improving the
efficiency and effectiveness of operations. Specific benefits were
derived from lean manufacturing initiatives and price discipline
despite highly competitive markets.
-- Operating expense for the quarter, excluding special charges, was
reduced 2 percent to $121.6 million. Cost control and productivity
improvement efforts reduced operating expense on an absolute basis.
This decrease was secured despite incremental funding of key growth
initiatives. Excluding this funding, which includes our e-commerce
initiatives and the global inventory turns improvement program;
operating expense would have declined nearly
4 percent.
-- The effective tax rate for the second quarter was 38.8 percent
compared to 44.5 percent last year, reflecting the combined benefit
of successful tax-planning programs in Europe and the extension of
the Foreign Sales Corporation tax benefit in the United States.
Correspondingly, the full-year tax rate is now forecast to be 39.5
percent.
-- Excluding special items, net income was $14.2 million, an increase of
14 percent compared to $12.4 million last year.
-- Special charges of $1.1 million, or $0.03 per share, were included in
the quarter's results related primarily to the J&L business
improvement plan. Prior-year results included special charges of $7.5
million, or $0.14 per share related to business improvement programs
in the core businesses and a charge for environmental remediation.
-- Cash flow and balance sheet management continued to generate
incremental benefit ahead of expectations. Free operating cash flow
of $38 million benefited from a 290-basis-point reduction in primary
working capital as a percent of sales to 28 percent. Total debt was
$687 million, down from $699 million at the beginning of the year
despite the unforecasted investment in a share repurchase program
($16.5 million), and the JLK buy-in ($40.4 million).
Outlook
In recognition of the weakened economic environment, Kennametal is revising its outlook for the year. Sales are now anticipated to be level with last year based on softer North American markets, and the significant decline in the automotive sector in particular. Nonetheless, earnings are anticipated to increase significantly, with EPS expected to be up between 8 percent and 13 percent.
Tambakeras added, "The second quarter results, in the face of rapidly declining end-markets, demonstrate Kennametal's discipline, flexibility and organizational resolve. Looking ahead to the remainder of our fiscal year, it is prudent to moderate our top-line expectations due to the uncertain outlook for the manufacturing sector in North America. We are confident in our new earnings guidance and fully determined not to be distracted from the implementation of our business strategies."
JLK
In commenting on the company's recent reacquisition of its subsidiary JLK Direct Distribution Inc., Tambakeras added, "We have already completed the integration of JLK and have realigned the organization to optimize efficiencies. Full Service Supply (FSS) will now be managed as a separate unit. J&L Industrial Supply will return to its traditional focus as a catalog and showroom distribution business. The new management team is fully engaged and is continuing the execution of the ongoing business improvement plan. As previously announced, the business improvement plan for both units is expected to incur charges at the high end of our original $15 to $20 million guidance, and we anticipate annual savings of $6 to $8 million. The program will begin to generate the full level of savings by the second half of fiscal 2002. To date, we have already seen significant operational improvements at J&L, but these benefits are dampened by weak sales due to poor conditions in the automotive market. We have a clear strategy in place and are now focused on implementation."
Dividend Announcement
Kennametal also announced its Board of Directors declared a quarterly cash dividend of 17 cents per share, payable February 23, 2001, to holders of record as of February 9, 2001.
Kennametal Inc. aspires to be the premier tooling solutions supplier in the world with operational excellence throughout the value chain and best-in- class manufacturing and technology. Kennametal strives to deliver superior shareowner value through top-tier financial performance. The company provides customers a broad range of technologically advanced tools, tooling systems and engineering services aimed at improving customers' manufacturing competitiveness. With 13,000 employees worldwide, the company's annual sales are approximately $1.9 billion, with a third coming from sales outside the United States. Kennametal has been named one of the Best Places to Work in Pennsylvania and has operations in more than 60 countries. Kennametal operations in Europe are headquartered in Furth, Germany. Kennametal Asia Pacific operations are headquartered in Singapore.
This release contains "forward-looking statements" as defined by Section 21E of the Securities Exchange Act of 1934 as amended. Actual results may differ materially from those expressed or implied in the forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to, the extent that global economic conditions do not change materially, risks associated with integrating businesses and restructuring programs, demands on management resources, risks associated with international markets such as currency exchange rates, and competition. The company undertakes no obligation to publicly release any revisions to forward- looking statements to reflect events or circumstances occurring after the date hereof.
FINANCIAL HIGHLIGHTS
Consolidated financial highlights for Kennametal Inc. (NYSE: KMT) for the quarter and six months ended December 31, 2000 and 1999 are shown in the following tables (in thousands, except per share amounts). All fiscal year 2001 data is subject to year-end (June 30) adjustment and audit by independent public accountants.
Consolidated Statements of Income
Quarter Ended Six Months Ended
December 31 December 31
2000 1999 2000 1999
Operations:
Net sales $440,521 $453,928 $891,226 $896,871
Cost of goods sold 273,583 285,061 555,635 564,675
Gross profit 166,938 168,867 335,591 332,196
Operating expense(A) 121,823 126,702 250,247 249,189
Restructuring and asset
impairment charges 812 3,981 2,347 3,981
Amortization of
intangibles 6,147 6,597 12,470 13,600
Operating income 38,156 31,587 70,527 65,426
Interest expense 13,400 13,753 26,595 28,280
Other expense, net(B) 1,200 510 2,657 252
Income before provision for
income taxes and minority
interest 23,556 17,324 41,275 36,894
Provision for income taxes 9,128 7,709 16,304 16,418
Minority interest 904 1,104 1,506 2,052
Income before extraordinary
loss and cumulative effect
of change in accounting
principle 13,524 8,511 23,465 18,424
Extraordinary loss on early
extinguishments of debt,
net of tax - (267) - (267)
Cumulative effect of change
in accounting principle,
net of tax - - (599) -
Net income $13,524 $8,244 $22,866 $18,157
Per Share Data:
Diluted earnings per share $0.44 $0.27 $0.75 $0.60
Dividends per share $0.17 $0.17 $0.34 $0.34
Diluted weighted average
shares outstanding 30,548 30,330 30,639 30,255
(A) For the quarter and six months ended December 31, 2000, these amounts
include charges of $0.3 million and $2.0 million, respectively,
primarily related to the tender offer to acquire the outstanding
shares of JLK. For the quarter and six months ended December 31,
1999, these amounts include a charge of $3.0 million for
environmental remediation.
(B) For the quarters ended December 31, 2000 and 1999, these amounts
include charges of $1.6 million and $1.3 million, respectively, for
fees incurred in connection with the company's accounts receivable
securitization program. For the six months ended December 31, 2000
and 1999, these amounts include similar charges of $3.2 million and
$2.5 million, respectively. For the six months ended December 31,
1999, these amounts include one-time gains of $1.4 million from the
sales of underutilized assets.
Supplemental Data Sheet
SELECTED OPERATING DATA:
Quarter Ended Six Months Ended
December 31 December 31
2000 1999(A) 2000 1999(A)
Sales:
Metalworking Services and
Solutions Group $244,065 $253,450 $490,881 $495,614
Advanced Materials
Solutions Group 83,613 82,936 170,392 167,736
JLK/Industrial Supply 112,843 117,542 229,953 233,521
Total $440,521 $453,928 $891,226 $896,871
Sales By Geographic Region:
Within the United States $293,037 $296,687 $595,470 $592,782
International 147,484 157,241 295,756 304,089
Total $440,521 $453,928 $891,226 $896,871
Operating Income (Loss),
including special charges:
Metalworking Services and
Solutions Group $31,014 $26,049 $58,936 $55,306
Advanced Materials
Solutions Group 8,735 7,941 19,922 18,564
JLK/Industrial Supply 4,352 7,089 4,904 14,068
Corporate and Eliminations (5,945) (9,492) (13,235) (22,512)
Total $38,156 $31,587 $70,527 $65,426
Operating Income (Loss),
excluding special charges:
Metalworking Services and
Solutions Group $31,051 $29,568 $58,940 $58,825
Advanced Materials
Solutions Group 8,760 8,312 19,948 18,935
JLK/Industrial Supply 5,364 7,089 9,233 14,068
Corporate and Eliminations (5,944) (6,301) (13,254) (19,321)
Total $39,231 $38,668 $74,867 $72,507
Diluted EPS excluding
special charges and
amortization expense $0.67 $0.63 $1.25 $1.19
Diluted EPS excluding
special charges $0.47 $0.41 $0.84 $0.74
Free Operating Cash Flow:
Net Income $13,524 $8,244 $22,866 $18,157
Non-cash Items (997) 6,401 1,992 6,481
Depreciation & Amortization 24,499 25,221 49,065 51,285
Change in Working Capital 12,655 22,560 30,159 47,717
Capital Expenditures (11,509) (10,897) (22,980) (21,676)
Free Operating Cash Flow $38,172 $51,529 $81,102 $101,964
Supplemental Data Sheet (Continued)
SELECTED BALANCE SHEET DATA:
Quarter Ended
12/31/2000 09/30/2000 06/30/2000 12/31/1999
Accounts Receivable $203,344 $218,863 $231,917 $224,022
Inventory 389,460 392,741 410,885 417,473
Accounts Payable (102,217) (111,873) (118,908) (111,056)
Total Primary Working
Capital (PWC) $490,587 $499,731 $523,894 $530,439
PWC % Sales(B) 28.0% 28.5% 29.4% 30.9%
Debt $687,487 $672,593 $699,242 $771,417
Debt/Total Capital 46.7% 44.7% 45.6% 48.9%
(A) Kennametal now reports three global business units consisting of
Metalworking Services and Solutions Group, Advanced Materials
Solutions Group and JLK/Industrial Supply, and corporate functional
shared services. Certain amounts in prior year sales and operating
income (loss) have been restated to conform to this new reporting
structure.
(B) Calculated by averaging the current and the previous four quarter-end
balances for PWC, divided by sales for the most recent 12-month
period.
SOURCE Kennametal Inc.
Web site: http: //www.kennametal.com
CONTACT: Beth A. Riley, Director, Investor Relations of Kennametal, 724-539-3470