UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): February 1, 2018
Kennametal Inc.
(Exact Name of Registrant as Specified in Its Charter)
Pennsylvania | 1-5318 | 25-0900168 | ||
(State or Other Jurisdiction of Incorporation) | (Commission File Number) | (IRS Employer Identification No.) | ||
600 Grant Street Suite 5100 Pittsburgh, Pennsylvania | 15219-2706 | |||
(Address of Principal Executive Offices) | (Zip Code) | |||
Registrant’s telephone number, including area code: (412) 248-8000
(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR §230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR §240.12b-2). Emerging growth company [ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Item 2.02 Results of Operations and Financial Condition.
On February 1, 2018, Kennametal Inc. (Kennametal or the Company) issued an earnings announcement for its fiscal 2018 second quarter ended December 31, 2017.
The press release contains certain non-generally accepted accounting principles (GAAP) financial measures. The following GAAP financial measures have been presented on an adjusted basis: gross profit and margin; operating expense; operating expense as a percentage of sales; operating income and margin; effective tax rate; net income (loss) attributable to Kennametal Shareholders; earnings per diluted share (EPS) and loss per diluted share (LPS); Industrial operating income and margin; Widia operating income (loss) and margin; and Infrastructure operating income and margin. Adjustments for the three and six months ended December 31, 2017 include (1) restructuring and related charges, (2) impact of out of period adjustment to provision for income taxes and (3) release of U.S. deferred tax valuation allowance. Adjustments for the three and six months ended December 31, 2016 include (1) restructuring and related charges and (2) Australia deferred tax valuation allowance. Management adjusts for these items in measuring and compensating internal performance and to more readily compare the Company’s financial performance period-to-period. The press release also contains free operating cash flow (FOCF), earnings before interest, taxes, depreciation and amortization (EBITDA) and margin, organic sales growth, constant currency end market sales growth and constant currency regional sales growth, which are non-GAAP financial measures and are defined below.
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 utilized by the Company may not be comparable to non-GAAP financial measures used by other companies.
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 Kennametal’s cash generating capability because it better represents cash generated from operations that can be used for dividends, debt repayment, strategic initiatives, and other investing and financing activities.
EBITDA
EBITDA are a non-GAAP financial measure and are defined as net income attributable to Kennametal (which is the most directly comparable GAAP measure), with interest expense, interest income, provision for income taxes, depreciation and amortization added back. Management believes that EBITDA are widely used as a measure of operating performance and are an important indicator of the Company’s operational strength and performance. Nevertheless, the measure should not be considered in isolation or as a substitute for operating income, cash flows from operating activities or any other measure for determining liquidity that is calculated in accordance with GAAP. Additionally, Kennametal will present EBITDA on an adjusted basis. Management uses this information in reviewing operating performance.
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 (1), divestitures(2), business days(3) and foreign currency exchange(4) from year-over-year comparisons. We believe this measure provides investors with a supplemental understanding of underlying sales trends by providing sales growth on a consistent basis. Also, we report organic sales growth at the consolidated and segment levels.
Constant Currency End Market Sales Growth
Constant currency end market sales growth is a non-GAAP financial measure of sales growth (which is the most directly comparable GAAP measure) by end market excluding the impacts of acquisitions(1), divestitures(2) and foreign currency exchange(4) from year-over-year comparisons. We note that, unlike organic sales growth, constant currency end market sales growth does not exclude the impact of business days. We believe this measure provides investors with a supplemental understanding of underlying end market trends by providing end market sales growth on a consistent basis. Also, we report constant currency end market sales growth at the consolidated and segment levels. Widia sales are reported only in the general engineering end market. Therefore, we do not provide constant currency end market sales growth for the Widia segment and, thus, do not include a reconciliation for that metric.
2
Constant Currency Regional Sales Growth
Constant currency regional sales growth is a non-GAAP financial measure of sales growth (which is the most directly comparable GAAP measure) by region excluding the impacts of acquisitions(1), divestitures(2) and foreign currency exchange(4) from year-over-year comparisons. We note that, unlike organic sales growth, constant currency regional sales growth does not exclude the impact of business days. We believe this measure provides investors with a supplemental understanding of underlying regional trends by providing regional sales growth on a consistent basis. Also, we report constant currency regional sales growth at the consolidated and segment levels.
(1) Acquisition impact is calculated by dividing current period sales attributable to acquired businesses by prior period sales.
(2) Divestiture impact is calculated by dividing prior period sales attributable to divested businesses by prior period sales.
(3) Business days impact is calculated by dividing the year-over-year change in weighted average working days (based on mix of sales by country) by prior period weighted average working days.
(4) Foreign currency exchange impact is calculated by dividing the difference between current period sales at prior period foreign exchange rates and prior period sales by prior period sales.
Additionally, during our quarterly earnings teleconference we may use various non-GAAP financial measures to describe the underlying operating results. Accordingly, we have compiled below certain reconciliations as required by Regulation G. These non-GAAP financial measures should not be considered in isolation or as a substitute for the most comparable GAAP measures. Investors are cautioned that non-GAAP financial measures utilized by the Company may not be comparable to non-GAAP financial measures used by other companies.
Primary Working Capital
Primary working capital is a non-GAAP financial measure and is defined as accounts receivable, net plus inventories, net minus accounts payable. The most directly comparable GAAP financial measure is working capital, which is defined as current assets less current liabilities. We believe primary working capital better represents Kennametal’s performance in managing certain assets and liabilities controllable at the segment level and is used as such for internal performance measurement.
PRIMARY WORKING CAPITAL (UNAUDITED) | ||||||||||||||||||
AS OF DECEMBER 31, 2017 | ||||||||||||||||||
(in thousands, except percents) | 12/31/17 | 9/30/17 | 6/30/17 | 3/31/17 | 12/31/16 | Average | ||||||||||||
Current assets | $ | 1,128,382 | $ | 1,075,915 | $ | 1,113,901 | $ | 1,043,046 | $ | 971,745 | ||||||||
Current liabilities | 407,621 | 396,967 | 461,478 | 426,799 | 390,151 | |||||||||||||
Working capital, GAAP | $ | 720,761 | $ | 678,948 | $ | 652,423 | $ | 616,247 | $ | 581,594 | ||||||||
Excluding items: | ||||||||||||||||||
Cash and cash equivalents | (159,940 | ) | (110,697 | ) | (190,629 | ) | (100,817 | ) | (102,001 | ) | ||||||||
Other current assets | (68,057 | ) | (64,874 | ) | (55,166 | ) | (75,061 | ) | (80,375 | ) | ||||||||
Total excluded current assets | (227,997 | ) | (175,571 | ) | (245,795 | ) | (175,878 | ) | (182,376 | ) | ||||||||
Adjusted current assets | 900,385 | 900,344 | 868,106 | 867,168 | 789,369 | |||||||||||||
Current maturities of long-term debt and capital leases, including notes payable | (1,360 | ) | (1,252 | ) | (925 | ) | (1,591 | ) | (2,263 | ) | ||||||||
Other current liabilities | (215,669 | ) | (209,373 | ) | (244,831 | ) | (234,367 | ) | (219,008 | ) | ||||||||
Total excluded current liabilities | (217,029 | ) | (210,625 | ) | (245,756 | ) | (235,958 | ) | (221,271 | ) | ||||||||
Adjusted current liabilities | 190,592 | 186,342 | 215,722 | 190,841 | 168,880 | |||||||||||||
Primary working capital | $ | 709,793 | $ | 714,002 | $ | 652,384 | $ | 676,327 | $ | 620,489 | $ | 674,599 | ||||||
Three Months Ended | ||||||||||||||||||
12/31/17 | 9/30/17 | 6/30/17 | 3/31/17 | Total | ||||||||||||||
Sales | $ | 571,345 | $ | 542,454 | $ | 565,025 | $ | 528,630 | $ | 2,207,454 | ||||||||
Primary working capital as a percentage of sales | 30.6 | % | ||||||||||||||||
3
PRIMARY WORKING CAPITAL (UNAUDITED) | ||||||||||||||||||
AS OF JUNE 30, 2017 | ||||||||||||||||||
(in thousands, except percents) | 6/30/17 | 3/31/17 | 12/31/16 | 9/30/16 | 6/30/16 | Average | ||||||||||||
Current assets | $ | 1,113,901 | $ | 1,043,046 | $ | 971,745 | $ | 991,837 | $ | 1,075,341 | ||||||||
Current liabilities | 461,478 | 426,799 | 390,151 | 402,574 | 427,275 | |||||||||||||
Working capital, GAAP | $ | 652,423 | $ | 616,247 | $ | 581,594 | $ | 589,263 | $ | 648,066 | ||||||||
Excluding items: | ||||||||||||||||||
Cash and cash equivalents | (190,629 | ) | (100,817 | ) | (102,001 | ) | (119,411 | ) | (161,579 | ) | ||||||||
Other current assets | (55,166 | ) | (75,061 | ) | (80,375 | ) | (64,660 | ) | (84,016 | ) | ||||||||
Total excluded current assets | (245,795 | ) | (175,878 | ) | (182,376 | ) | (184,071 | ) | (245,595 | ) | ||||||||
Adjusted current assets | 868,106 | 867,168 | 789,369 | 807,766 | 829,746 | |||||||||||||
Current maturities of long-term debt and capital leases, including notes payable | (925 | ) | $ | (1,591 | ) | (2,263 | ) | (1,381 | ) | (1,895 | ) | |||||||
Other current liabilities | (244,831 | ) | (234,367 | ) | (219,008 | ) | (225,189 | ) | (243,341 | ) | ||||||||
Total excluded current liabilities | (245,756 | ) | (235,958 | ) | (221,271 | ) | (226,570 | ) | (245,236 | ) | ||||||||
Adjusted current liabilities | 215,722 | 190,841 | 168,880 | 176,004 | 182,039 | |||||||||||||
Primary working capital | $ | 652,384 | $ | 676,327 | $ | 620,489 | $ | 631,762 | $ | 647,707 | $ | 645,734 | ||||||
Three Months Ended | ||||||||||||||||||
6/30/17 | 3/31/17 | 12/31/16 | 9/30/16 | Total | ||||||||||||||
Sales | $ | 565,025 | $ | 528,630 | $ | 487,573 | $ | 477,140 | $ | 2,058,368 | ||||||||
Primary working capital as a percentage of sales | 31.4 | % | ||||||||||||||||
Debt to Capital
Debt to capital is a non-GAAP financial measure and is defined by Kennametal as total debt divided by the sum of total equity plus total debt. The most directly comparable GAAP financial measure is debt to equity, which is defined as total debt divided by total equity. Management believes that debt to capital provides additional insight into the underlying capital structure and performance of the Company.
Net Debt
Net debt is a non-GAAP financial measure and is defined by Kennametal as total debt less cash and cash equivalents. The most directly comparable GAAP financial measure is total debt. Management believes that net debt aids in the evaluation of the Company’s financial condition.
DEBT TO CAPITAL AND NET DEBT (UNAUDITED) | December 31, | June 30, | ||||||
(in thousands, except percents) | 2017 | 2017 | ||||||
Total debt | $ | 697,082 | $ | 695,916 | ||||
Total equity | 1,163,948 | 1,052,653 | ||||||
Debt to equity, GAAP | 59.9 | % | 66.1 | % | ||||
Total debt | 697,082 | 695,916 | ||||||
Total equity | 1,163,948 | 1,052,653 | ||||||
Total capital | 1,861,030 | 1,748,569 | ||||||
Debt to capital | 37.5 | % | 39.8 | % | ||||
Total debt | 697,082 | 695,916 | ||||||
Cash and cash equivalents | 159,940 | 190,629 | ||||||
Net debt | $ | 537,142 | $ | 505,287 | ||||
Debt to EBITDA
Debt to EBITDA is a non-GAAP financial measure and is defined by Kennametal as total debt divided by the sum of the four trailing quarters of EBITDA. The most directly comparable GAAP financial measure is debt to net income attributable to Kennametal. Management believes that debt to EBITDA provides additional insight into the underlying capital structure, liquidity and performance of the Company. Additionally, Kennametal will present debt to EBITDA on an adjusted basis.
4
DEBT TO ADJUSTED EBITDA (UNAUDITED) | ||||||||||||
DECEMBER 31, 2017 (in thousands, except debt to adjusted EBITDA) | ||||||||||||
Three Months Ended | ||||||||||||
EBITDA | 12/31/17 | 9/30/17 | 6/30/17 | 3/31/17 | ||||||||
Net income attributable to Kennametal | $ | 41,601 | $ | 39,183 | $ | 24,643 | $ | 38,890 | ||||
Add back: | ||||||||||||
Interest expense | 7,231 | 7,149 | 7,367 | 7,331 | ||||||||
Interest income | (260 | ) | (257 | ) | (246 | ) | (306 | ) | ||||
Provision for income taxes | 17,472 | 9,602 | 7,494 | 9,301 | ||||||||
Depreciation | 23,284 | 22,777 | 22,709 | 22,375 | ||||||||
Amortization | 3,677 | 3,661 | 3,912 | 4,245 | ||||||||
EBITDA | $ | 93,005 | $ | 82,115 | $ | 65,879 | $ | 81,836 | ||||
Adjustments: | ||||||||||||
Restructuring and related charges | 1,489 | 6,876 | 23,165 | 9,623 | ||||||||
Adjusted EBITDA | $ | 94,494 | $ | 88,991 | $ | 89,044 | $ | 91,459 | ||||
Total debt | $ | 697,082 | ||||||||||
Trailing four quarters net income attributable to Kennametal | 144,317 | |||||||||||
Debt to net income attributable to Kennametal | 4.8 | |||||||||||
Total debt | $ | 697,082 | ||||||||||
Trailing four quarters adjusted EBITDA | 363,988 | |||||||||||
Debt to adjusted EBITDA | 1.9 | |||||||||||
Item 9.01 Financial Statements and Exhibits.
(d) Exhibits
5
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
KENNAMETAL INC. | |||||||||
Date: | February 1, 2018 | By: | /s/ Patrick S. Watson | ||||||
Patrick S. Watson | |||||||||
Vice President Finance and Corporate Controller | |||||||||
6
Exhibit 99.1
FOR IMMEDIATE RELEASE:
DATE: February 1, 2018
Investor Relations
CONTACT: Kelly Boyer
PHONE: 412-248-8287
Corporate Relations - Media
CONTACT: Christina Sutter
PHONE: 724-539-5708
KENNAMETAL ANNOUNCES FISCAL 2018 SECOND QUARTER RESULTS
• | Stronger than expected operating results in Q2 FY18: |
– | Year-over-year sales growth of 17 percent |
– | Reported earnings per diluted share (EPS) of $0.50; adjusted EPS of $0.52 includes estimated $0.08 increased tax expense triggered by tax reform |
• | Increasing outlook expectations for full fiscal year: |
– | Organic sales growth outlook of 9%-11% increased from previous outlook of 5%-7% |
– | Adjusted EPS outlook increased from $2.30-$2.60 to $2.40-$2.70; includes higher estimated tax expense of $0.15-$0.20 per share triggered by tax reform |
– | Tax reform not expected to have a material effect on cash flows in fiscal 2018 |
• | Long-term effect of tax reform expected to be positive: |
– | Adjusted effective tax rate (ETR) outlook expectation changes from mid-20s to low-20s |
PITTSBURGH, (February 1, 2018) – Kennametal Inc. (NYSE: KMT) today reported results for its fiscal 2018 second quarter ended December 31, 2017, with EPS of $0.50, compared with EPS of $0.09 in the prior year quarter. Adjusted EPS were $0.52 in the current quarter compared with $0.24 in the prior year quarter.
“I’m pleased to report that Kennametal has posted another strong operating quarter,” commented Chris Rossi, Kennametal president and CEO. “The markets are continuing to show strength right now, and our growth initiatives are taking hold. By working on our simplification initiatives, we have put the foundation in place for our modernization program to generate further margin improvement. I believe the plans we have in place now will result in strengthening margins as we move in a disciplined manner through our three-year plan."
Mr. Rossi continued, “As with many companies, the results this quarter were affected by U.S. tax reform. A unique aspect this quarter was the earlier than anticipated release of the valuation allowance on U.S. deferred tax assets due to tax reform. For this quarter, this amounted to an estimated $0.08 negative effect to adjusted EPS. The long-term effects of tax reform, however, are expected to be positive."
This earnings release contains non-GAAP financial measures. Reconciliations of all non-GAAP financial measures are set forth in the tables attached to this earnings release, and corresponding descriptions are contained in the company’s Current Report on Form 8-K, which was filed with the Securities and Exchange Commission (SEC) on February 1, 2018.
1
Fiscal 2018 Second Quarter Key Developments
• | Sales were $571 million, compared with $488 million in the prior year quarter. Sales increased by 17 percent, driven by 15 percent organic growth and a 3 percent favorable currency exchange impact, partially offset by a 1 percent decrease due to fewer business days. |
• | Pre-tax restructuring and related charges were $1 million, or $0.00 on a per share basis, and pre-tax benefits from cost savings initiatives were approximately $41 million. In the prior year quarter, pre-tax restructuring and related charges were $12 million, or $0.13 per share, and pre-tax benefits from cost savings initiatives were approximately $24 million. |
• | Operating income was $68 million, compared to $24 million in the prior year quarter. Adjusted operating income was $70 million, compared to $36 million in the prior year quarter. The increase in adjusted operating income is due primarily to organic sales growth, incremental restructuring benefits, higher productivity and fixed cost absorption and favorable mix, partially offset by higher compensation expense and more overtime costs. Operating margin was 11.9 percent in the current period compared to 4.9 percent in the prior year quarter. Adjusted operating margin was 12.2 percent in the current period compared to 7.3 percent in the prior year quarter. |
• | The reported ETR was 29.3 percent and the adjusted ETR was 28.4 percent. The difference between the reported and adjusted tax rate in the quarter is driven by a discrete $4 million benefit for the release of the valuation allowance on U.S. deferred tax assets and a discrete $5 million charge for the correction of a prior period item. The enactment of U.S. tax reform in the quarter triggered the earlier than previously expected release of the valuation allowance in place against our U.S. net deferred tax assets. The valuation allowance was originally recorded in the fourth quarter of fiscal 2016. Adjusted EPS decreased an estimated $0.08 per share due to the tax effect of U.S. earnings that previously could not be tax effected. For the prior year quarter, the reported ETR was 50.9 percent and the adjusted ETR was 28.0 percent. The change in the adjusted ETR year-over-year is primarily due to prior year U.S. losses not being tax-effected and current year U.S. income being subject to tax now that a valuation allowance is no longer recorded on U.S. deferred tax assets. |
• | EPS were $0.50, compared with $0.09 in the prior year quarter. Adjusted EPS were $0.52 in the current quarter and $0.24 in the prior year quarter. Reported results for the fiscal 2018 second quarter include the impact of recording an out of period non-cash charge to provision for income taxes of $0.07 and the one-time non-cash benefit of releasing the U.S. deferred tax valuation allowance of $0.05 per share. Reported results for the fiscal 2017 second quarter include restructuring and related charges of $0.13 per share and expense associated with recording an Australia deferred tax valuation allowance of $0.02 per share. |
• | Year-to-date free operating cash flow was negative $18 million in both the current and prior year periods. Higher cash from operations before changes in certain other assets and liabilities and lower restructuring payments were offset by higher working capital and capital expenditures. |
• | EBITDA were $93 million, compared with $49 million in the prior year quarter. Adjusted EBITDA were $94 million in the current quarter and $61 million in the prior year quarter. |
Segment Developments for the Fiscal 2018 Second Quarter
• | Industrial sales of $312 million increased 17 percent from $267 million in the prior year quarter, reflecting organic growth of 14 percent and a 4 percent favorable currency exchange impact, partially offset by a 1 percent decrease due to fewer business days. Constant currency end market sales growth was approximately 19 percent in energy, 14 percent in transportation, 11 percent in general engineering and 9 percent in aerospace and defense. General engineering sales experienced growth from global sales in the indirect channel and in the light and general engineering sector. Growth in transportation sales in Asia Pacific and EMEA to tier suppliers and OEMs were dampened by lower sales to OEMs in the Americas. Oil and gas drilling sales in the Americas continues to provide overall growth in energy, coupled with increases in power generation sales primarily in Asia Pacific. Conditions continue to be favorable in the aerospace sector, with global sales related to engine growth being supplemented by increasing demand related to frames in the Americas. Constant currency regional sales growth was 20 percent in Asia Pacific and 11 percent in both the Americas and EMEA. |
2
• | Industrial operating income was $43 million compared to $18 million in the prior year quarter. Adjusted operating income was $43 million compared to $24 million in the prior year quarter, driven primarily by organic sales growth, incremental restructuring benefits and higher productivity and fixed cost absorption, partially offset by higher compensation expense. Industrial operating margin was 13.9 percent compared to 6.8 percent in the prior year quarter. Industrial adjusted operating margin was 13.9 percent compared with 9.0 percent in the prior year quarter. |
• | Widia sales of $48 million increased 11 percent from $43 million in the prior year quarter, driven by organic growth of 9 percent and a 2 percent favorable currency exchange impact. Widia organic sales growth continues to be positively impacted by the reorganization of distribution in Europe, growth in India related to higher demand trends, in addition to increasing demand in the U.S. energy markets and higher growth rates in emerging markets. Constant currency regional sales growth was 16 percent in EMEA, 8 percent in the Americas and 4 percent in Asia Pacific. |
• | Widia operating income was $1 million compared to an operating loss of $3 million in the prior year quarter. Adjusted operating income was $1 million compared to an adjusted operating loss of $1 million in the prior year quarter, primarily driven by organic sales growth. Widia operating income margin was 1.8 percent compared to operating loss margin of 6.2 percent in the prior year quarter. Widia adjusted operating income margin was 2.2 percent compared with adjusted operating loss margin of 1.5 percent in the prior year quarter. |
• | Infrastructure sales of $211 million increased 19 percent from $177 million in the prior year quarter, driven by organic growth of 18 percent and a 2 percent favorable currency exchange impact, partially offset by a 1 percent decrease due to fewer business days. Constant currency end market sales growth was approximately 25 percent in energy, 20 percent in general engineering and 11 percent in earthworks. Oil and gas in the U.S. continues to stabilize, manifesting in high year-over-year growth in energy with average U.S. land rig counts up over 60 percent compared to the prior year quarter. In the earthworks market, underground mining continues to show signs of improvement, while construction sales improved in part due to stronger demand in road rehabilitation. Constant currency regional sales growth was 24 percent in Asia Pacific, 20 percent in the Americas and 1 percent in EMEA. |
• | Infrastructure operating income was $26 million compared to $10 million in the prior year quarter. Adjusted operating income was $27 million compared to $14 million in the prior year quarter. The change in adjusted operating results was primarily due to organic sales growth, incremental restructuring benefits and favorable mix, partially offset by higher compensation expense, raw material costs and overtime. Infrastructure operating income margin was 12.1 percent compared to 5.8 percent in the prior year quarter. Infrastructure adjusted operating income margin was 12.6 percent compared with 7.9 percent in the prior year quarter. |
Fiscal 2018 First Half Key Developments
• | Sales were $1,114 million, compared to $965 million in the same period last year. Sales increased by 15 percent, driven by organic growth of 14 percent and a 2 percent favorable currency exchange impact, partially offset by a 1 percent decrease due to fewer business days. |
• | Operating income was $125 million, compared to $15 million in the same period last year. Adjusted operating income was $133 million in the current period, compared to adjusted operating income of $58 million in the prior year. Adjusted operating income increased due primarily to organic sales growth, incremental restructuring benefits and favorable mix, partially offset by higher compensation expense, raw material costs and overtime costs. Operating margin was 11.2 percent, compared to 1.5 percent in the prior year. Adjusted operating margin was 11.9 percent, compared to 6.0 percent in the prior year. |
• | EPS were $0.98 in the current year period, compared with loss per diluted share (LPS) of $0.18 in the prior year period. Adjusted EPS were $1.08 in the current year period and $0.35 in the prior year period. |
Outlook
The company now expects consolidated adjusted EPS for the full fiscal year to be in the range of $2.40 to $2.70 per share on organic sales growth of 9% to 11%, a change from the previous outlook of $2.30 to $2.60 per share on organic sales growth of 5% to 7%. The updated adjusted EPS outlook includes higher estimated tax expense of $0.15 to $0.20 per share triggered by tax reform. The company currently expects free operating cash flow to be $0 to $30 million, which is reflective of our continued investments in modernization.
3
Mr. Rossi commented, "We are raising our adjusted EPS outlook despite the adverse effects of tax changes. We are making progress on our initiatives, and end market demand has strengthened more than anticipated, which we expect will result in higher organic sales growth."
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 February 28, 2018 to shareholders of record as of the close of business on February 13, 2018.
The company will discuss its fiscal 2018 second quarter results in a live webcast at 8:00 a.m. Eastern Time, Friday, February 2, 2018. This event will be broadcast live on the company’s website, www.kennametal.com. To access the webcast, select "About Us", “Investor Relations” and then “Events.” A recorded replay of this event will also be available on the company’s website through March 1, 2018.
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 2018 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: economic recession; our ability to achieve all anticipated benefits of restructuring initiatives; 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; energy costs; commodity prices; 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 80th 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 11,000 employees are helping customers in more than 60 countries stay competitive. Kennametal generated nearly $2.1 billion in revenues in fiscal 2017. Learn more at www.kennametal.com.
4
FINANCIAL HIGHLIGHTS
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended December 31, | Six Months Ended December 31, | |||||||||||||
(in thousands, except per share amounts) | 2017 | 2016 | 2017 | 2016 | ||||||||||
Sales | $ | 571,345 | $ | 487,573 | $ | 1,113,799 | $ | 964,713 | ||||||
Cost of goods sold | 378,800 | 339,950 | 736,261 | 673,560 | ||||||||||
Gross profit | 192,545 | 147,623 | 377,538 | 291,153 | ||||||||||
Operating expense | 120,649 | 111,004 | 239,980 | 230,869 | ||||||||||
Restructuring and asset impairment charges | 45 | 8,456 | 5,570 | 37,061 | ||||||||||
Amortization of intangibles | 3,677 | 4,150 | 7,338 | 8,421 | ||||||||||
Operating income | 68,174 | 24,013 | 124,650 | 14,802 | ||||||||||
Interest expense | 7,231 | 7,151 | 14,379 | 14,144 | ||||||||||
Other expense, net | 1,313 | 726 | 1,401 | 844 | ||||||||||
Income (loss) before income taxes | 59,630 | 16,136 | 108,870 | (186 | ) | |||||||||
Provision for income taxes | 17,472 | 8,221 | 27,074 | 13,100 | ||||||||||
Net income (loss) | 42,158 | 7,915 | 81,796 | (13,286 | ) | |||||||||
Less: Net income attributable to noncontrolling interests | 557 | 653 | 1,011 | 1,108 | ||||||||||
Net income (loss) attributable to Kennametal | $ | 41,601 | $ | 7,262 | $ | 80,785 | $ | (14,394 | ) | |||||
PER SHARE DATA ATTRIBUTABLE TO KENNAMETAL SHAREHOLDERS | ||||||||||||||
Basic earnings (loss) per share | $ | 0.51 | $ | 0.09 | $ | 0.99 | $ | (0.18 | ) | |||||
Diluted earnings (loss) per share | $ | 0.50 | $ | 0.09 | $ | 0.98 | $ | (0.18 | ) | |||||
Dividends per share | $ | 0.20 | $ | 0.20 | $ | 0.40 | $ | 0.40 | ||||||
Basic weighted average shares outstanding | 81,477 | 80,206 | 81,274 | 80,131 | ||||||||||
Diluted weighted average shares outstanding | 82,778 | 81,026 | 82,446 | 80,131 | ||||||||||
5
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands) | December 31, 2017 | June 30, 2017 | |||||
ASSETS | |||||||
Cash and cash equivalents | $ | 159,940 | $ | 190,629 | |||
Accounts receivable, net | 392,923 | 380,425 | |||||
Inventories | 507,462 | 487,681 | |||||
Other current assets | 68,057 | 55,166 | |||||
Total current assets | 1,128,382 | 1,113,901 | |||||
Property, plant and equipment, net | 779,665 | 744,388 | |||||
Goodwill and other intangible assets, net | 490,670 | 491,894 | |||||
Other assets | 77,144 | 65,313 | |||||
Total assets | $ | 2,475,861 | $ | 2,415,496 | |||
LIABILITIES | |||||||
Current maturities of long-term debt and capital leases, including notes payable | $ | 1,360 | $ | 925 | |||
Accounts payable | 190,592 | 215,722 | |||||
Other current liabilities | 215,669 | 244,831 | |||||
Total current liabilities | 407,621 | 461,478 | |||||
Long-term debt and capital leases | 695,722 | 694,991 | |||||
Other liabilities | 208,570 | 206,374 | |||||
Total liabilities | 1,311,913 | 1,362,843 | |||||
KENNAMETAL SHAREHOLDERS’ EQUITY | 1,126,405 | 1,017,294 | |||||
NONCONTROLLING INTERESTS | 37,543 | 35,359 | |||||
Total liabilities and equity | $ | 2,475,861 | $ | 2,415,496 | |||
SEGMENT DATA (UNAUDITED) | Three Months Ended December 31, | Six Months Ended December 31, | ||||||||||||
(in thousands) | 2017 | 2016 | 2017 | 2016 | ||||||||||
Outside Sales: | ||||||||||||||
Industrial | $ | 312,448 | $ | 267,492 | $ | 609,912 | $ | 536,536 | ||||||
Widia | 47,744 | 42,874 | 92,987 | 83,888 | ||||||||||
Infrastructure | 211,153 | 177,207 | 410,900 | 344,289 | ||||||||||
Total sales | $ | 571,345 | $ | 487,573 | $ | 1,113,799 | $ | 964,713 | ||||||
Sales By Geographic Region: | ||||||||||||||
Americas | $ | 275,488 | $ | 238,031 | $ | 537,877 | $ | 468,669 | ||||||
EMEA | 174,611 | 150,154 | 341,165 | 298,734 | ||||||||||
Asia Pacific | 121,246 | 99,388 | 234,757 | 197,310 | ||||||||||
Total sales | $ | 571,345 | $ | 487,573 | $ | 1,113,799 | $ | 964,713 | ||||||
Operating Income (Loss): | ||||||||||||||
Industrial | $ | 43,292 | $ | 18,067 | $ | 78,104 | $ | 23,603 | ||||||
Widia | 856 | (2,666 | ) | 918 | (8,403 | ) | ||||||||
Infrastructure | 25,511 | 10,274 | 47,580 | 2,687 | ||||||||||
Corporate (1) | (1,485 | ) | (1,662 | ) | (1,952 | ) | (3,085 | ) | ||||||
Total operating income | $ | 68,174 | $ | 24,013 | $ | 124,650 | $ | 14,802 | ||||||
(1) Represents unallocated corporate expenses
6
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: gross profit and margin; operating expense; operating expense as a percentage of sales; operating income and margin; effective tax rate; net income (loss) attributable to Kennametal shareholders; diluted EPS and LPS; Industrial operating income and margin; Widia operating income (loss) and margin; Infrastructure operating income and margin; free operating cash flow, EBITDA and margin, organic sales growth (consolidated and segment-level), constant currency end market sales growth and constant currency regional sales growth (which are non-GAAP financial measures), to the most directly comparable GAAP financial measures. 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 is the tax impact of the adjustments.
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 utilized by the company may not be comparable to non-GAAP financial measures used by other companies. Reconciliations of all non-GAAP financial measures are set forth in the tables below and descriptions of certain non-GAAP financial measures are contained in our report on Form 8-K filed with the SEC on February 1, 2018.
THREE MONTHS ENDED DECEMBER 31, 2017 (UNAUDITED) | ||||||||||||||||||||
(in thousands, except percents and per share data) | Sales | Gross profit | Operating expense | Operating income | Effective tax rate | Net income(2) | Diluted EPS | |||||||||||||
Reported results | $ | 571,345 | $ | 192,545 | $ | 120,649 | $ | 68,174 | 29.3 | % | $ | 41,601 | $ | 0.50 | ||||||
Reported margins | 33.7 | % | 21.1 | % | 11.9 | % | ||||||||||||||
Restructuring and related charges | — | 1,231 | (214 | ) | 1,489 | 1.5 | 192 | — | ||||||||||||
Impact of out of period adjustment to provision for income taxes(3) | — | — | — | — | (8.9 | ) | 5,297 | 0.07 | ||||||||||||
Release of U.S. deferred tax valuation allowance(4) | — | — | — | — | 6.5 | (3,886 | ) | (0.05 | ) | |||||||||||
Adjusted results | $ | 571,345 | $ | 193,776 | $ | 120,435 | $ | 69,663 | 28.4 | % | $ | 43,204 | $ | 0.52 | ||||||
Adjusted margins | 33.9 | % | 21.1 | % | 12.2 | % | ||||||||||||||
(2) Attributable to Kennametal Shareholders.
(3) Non-cash charge associated with the out-of-period impact of recording an adjustment to deferred tax charges associated with intra-entity product transfers.
(4) Non-cash benefit associated with the release of the valuation allowance on U.S. deferred tax assets as a result of application of a provision in the Tax Cuts and Jobs Act of 2017. The provision required a one-time transition tax on previously untaxed accumulated earnings and profits of non-U.S. companies. This transition tax resulted in a toll charge of $77 million which was fully offset by our U.S. deferred tax assets, which were still subject to a full valuation allowance. After the effect of the toll charge and utilization of existing tax attributes, deferred tax assets were remeasured and the valuation allowance was released. The toll charge is based on a reasonable estimate and is subject to finalization of collecting all information and analyzing the calculation in reasonable detail to complete the accounting.
Industrial | Widia | Infrastructure | ||||||||||||||||
(in thousands, except percents) | Sales | Operating income | Sales | Operating income | Sales | Operating income | ||||||||||||
Reported results | $ | 312,448 | $ | 43,292 | $ | 47,744 | $ | 856 | $ | 211,153 | $ | 25,511 | ||||||
Reported operating margin | 13.9 | % | 1.8 | % | 12.1 | % | ||||||||||||
Restructuring and related charges | — | 116 | — | 199 | — | 1,174 | ||||||||||||
Adjusted results | $ | 312,448 | $ | 43,408 | $ | 47,744 | $ | 1,055 | $ | 211,153 | $ | 26,685 | ||||||
Adjusted operating margin | 13.9 | % | 2.2 | % | 12.6 | % | ||||||||||||
7
THREE MONTHS ENDED DECEMBER 31, 2016 (UNAUDITED) | ||||||||||||||||||||
(in thousands, except percents and per share data) | Sales | Gross profit | Operating expense | Operating income | Effective tax rate | Net income(2) | Diluted EPS | |||||||||||||
Reported results | $ | 487,573 | $ | 147,623 | $ | 111,004 | $ | 24,013 | 50.9 | % | $ | 7,262 | $ | 0.09 | ||||||
Reported margins | 30.3 | % | 22.8 | % | 4.9 | % | ||||||||||||||
Restructuring and related charges | — | 2,405 | (922 | ) | 11,783 | (14.9 | ) | 10,904 | 0.13 | |||||||||||
Australia deferred tax valuation allowance | — | — | — | — | (8.0 | ) | 1,288 | 0.02 | ||||||||||||
Adjusted results | $ | 487,573 | $ | 150,028 | $ | 110,082 | $ | 35,796 | 28.0 | % | $ | 19,454 | $ | 0.24 | ||||||
Adjusted margins | 30.8 | % | 22.6 | % | 7.3 | % | ||||||||||||||
Industrial | Widia | Infrastructure | ||||||||||||||||
(in thousands, except percents) | Sales | Operating income | Sales | Operating loss | Sales | Operating income | ||||||||||||
Reported results | $ | 267,492 | $ | 18,067 | $ | 42,874 | $ | (2,666 | ) | $ | 177,207 | $ | 10,274 | |||||
Reported operating margin | 6.8 | % | (6.2 | )% | 5.8 | % | ||||||||||||
Restructuring and related charges | — | 5,998 | — | 2,013 | — | 3,766 | ||||||||||||
Adjusted results | $ | 267,492 | $ | 24,065 | $ | 42,874 | $ | (653 | ) | $ | 177,207 | $ | 14,040 | |||||
Adjusted operating margin | 9.0 | % | (1.5 | )% | 7.9 | % | ||||||||||||
SIX MONTHS ENDED DECEMBER 31, 2017 (UNAUDITED) | ||||||||||||
(in thousands, except percents) | Sales | Operating income | Net income(2) | Diluted EPS | ||||||||
Reported results | $ | 1,113,799 | $ | 124,650 | $ | 80,785 | $ | 0.98 | ||||
Reported operating margin | 11.2 | % | ||||||||||
Restructuring and related charges | — | 8,366 | 6,570 | 0.08 | ||||||||
Impact of out of period adjustment to provision for income taxes(3) | — | — | 5,297 | 0.07 | ||||||||
Release of U.S. deferred tax valuation allowance(4) | — | — | (3,886 | ) | (0.05 | ) | ||||||
Adjusted results | $ | 1,113,799 | $ | 133,016 | $ | 88,766 | $ | 1.08 | ||||
Adjusted operating margin | 11.9 | % | ||||||||||
SIX MONTHS ENDED DECEMBER 31, 2016 (UNAUDITED) | ||||||||||||
(in thousands, except percents) | Sales | Operating income | Net (loss) income(2) | Diluted (LPS) EPS | ||||||||
Reported results | $ | 964,713 | $ | 14,802 | $ | (14,394 | ) | $ | (0.18 | ) | ||
Reported operating margin | 1.5 | % | ||||||||||
Restructuring and related charges | — | 43,441 | 41,507 | 0.52 | ||||||||
Australia deferred tax valuation allowance | — | — | 1,288 | 0.01 | ||||||||
Adjusted results | $ | 964,713 | $ | 58,243 | $ | 28,401 | $ | 0.35 | ||||
Adjusted operating margin | 6.0 | % | ||||||||||
8
FREE OPERATING CASH FLOW (UNAUDITED) | Three Months Ended December 31, | Six Months Ended December 31, | |||||||||||||
(in thousands) | 2017 | 2016 | 2017 | 2016 | |||||||||||
Net cash flow from operating activities (5) | $ | 86,647 | $ | 25,147 | $ | 66,774 | $ | 48,699 | |||||||
Purchases of property, plant and equipment | (43,117 | ) | (28,309 | ) | (85,223 | ) | (70,573 | ) | |||||||
Proceeds from disposals of property, plant and equipment | 419 | 2,371 | 846 | 3,509 | |||||||||||
Free operating cash flow | $ | 43,949 | $ | (791 | ) | $ | (17,603 | ) | $ | (18,365 | ) | ||||
(5) Amounts for the three and six months ended December 31, 2016 have been restated to reflect adoption of FASB ASU 2016-09.
EBITDA (UNAUDITED) | Three Months Ended December 31, | Six Months Ended December 31, | |||||||||||||
(in thousands) | 2017 | 2016 | 2017 | 2016 | |||||||||||
Net income (loss) attributable to Kennametal | $ | 41,601 | $ | 7,262 | $ | 80,785 | $ | (14,394 | ) | ||||||
Add back: | |||||||||||||||
Interest expense | 7,231 | 7,151 | 14,379 | 14,144 | |||||||||||
Interest income | (260 | ) | (206 | ) | (518 | ) | (453 | ) | |||||||
Provision for income taxes | 17,472 | 8,221 | 27,074 | 13,100 | |||||||||||
Depreciation | 23,284 | 22,827 | 46,061 | 45,994 | |||||||||||
Amortization of intangibles | 3,677 | 4,150 | 7,338 | 8,421 | |||||||||||
EBITDA | $ | 93,005 | $ | 49,405 | $ | 175,119 | $ | 66,812 | |||||||
Margin | 16.3 | % | 10.1 | % | 15.7 | % | 6.9 | % | |||||||
Adjustments: | |||||||||||||||
Restructuring and related charges | 1,489 | 11,783 | 8,366 | 43,441 | |||||||||||
Adjusted EBITDA | $ | 94,494 | $ | 61,188 | $ | 183,485 | $ | 110,253 | |||||||
Adjusted margin | 16.5 | % | 12.5 | % | 16.5 | % | 11.4 | % | |||||||
ORGANIC SALES GROWTH (UNAUDITED) | ||||||||
Three Months Ended December 31, 2017 | Industrial | Widia | Infrastructure | Total | ||||
Organic sales growth | 14% | 9% | 18% | 15% | ||||
Foreign currency exchange impact | 4 | 2 | 2 | 3 | ||||
Business days impact | (1) | — | (1) | (1) | ||||
Divestiture impact | — | — | — | — | ||||
Acquisition impact | — | — | — | — | ||||
Sales growth | 17% | 11% | 19% | 17% | ||||
Six Months Ended December 31, 2017 | Total | |
Organic sales growth | 14% | |
Foreign currency exchange impact | 2 | |
Business days impact | (1) | |
Divestiture impact | — | |
Acquisition impact | — | |
Sales growth | 15% | |
9
CONSTANT CURRENCY END MARKET SALES GROWTH (UNAUDITED) | ||||||||
Industrial | ||||||||
Three Months Ended December 31, 2017 | General Engineering | Transportation | Aerospace and Defense | Energy | ||||
Constant currency end market sales growth | 11% | 14% | 9% | 19% | ||||
Foreign currency exchange impact | 4 | 4 | 2 | 3 | ||||
Divestiture impact | — | — | — | — | ||||
Acquisition impact | — | — | — | — | ||||
End market sales growth(6) | 15% | 18% | 11% | 22% | ||||
Infrastructure | ||||||
Three Months Ended December 31, 2017 | Energy | Earthworks | General Engineering | |||
Constant currency end market sales growth | 25% | 11% | 20% | |||
Foreign currency exchange impact | 1 | 2 | 2 | |||
Divestiture impact | — | — | — | |||
Acquisition impact | — | — | — | |||
End market sales growth(6) | 26% | 13% | 22% | |||
CONSTANT CURRENCY REGIONAL SALES GROWTH (UNAUDITED) | |||||||
Three Months Ended December 31, 2017 | Americas | EMEA | Asia Pacific | ||||
Industrial | |||||||
Constant currency regional sales growth | 11% | 11% | 20% | ||||
Foreign currency exchange impact | 1 | 8 | 3 | ||||
Divestiture impact | — | — | — | ||||
Acquisition impact | — | — | — | ||||
Regional sales growth(7) | 12% | 19% | 23% | ||||
Widia | |||||||
Constant currency regional sales growth | 8% | 16% | 4% | ||||
Foreign currency exchange impact | 1 | 6 | 3 | ||||
Divestiture impact | — | — | — | ||||
Acquisition impact | — | — | — | ||||
Regional sales growth(7) | 9% | 22% | 7% | ||||
Infrastructure | |||||||
Constant currency regional sales growth | 20% | 1% | 24% | ||||
Foreign currency exchange impact | 1 | 5 | 2 | ||||
Divestiture impact | — | — | — | ||||
Acquisition impact | — | — | — | ||||
Regional sales growth(7) | 21% | 6% | 26% | ||||
(6) Aggregate sales for all end markets sum to the sales amount presented on the company's financial statements.
(7) Aggregate sales for all regions sum to the sales amount presented on the company's financial statements.
10