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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): May 2, 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 May 2, 2018, Kennametal Inc. (Kennametal or the Company) issued an earnings announcement for its fiscal 2018 third quarter ended March 31, 2018.
The press release contains certain non-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 attributable to Kennametal; earnings per diluted share (EPS); Industrial operating income and margin; Widia operating income and margin; and Infrastructure operating income and margin. Adjustments for the three months ended March 31, 2018 include: (1) restructuring and related charges and (2) tax reform charge. Adjustments for the three months ended March 31, 2017 include restructuring and related charges. Adjustments for the nine months ended March 31, 2018 include (1) restructuring and related charges, (2) impact of out of period adjustment to provision for income taxes and (3) net tax reform charge. Adjustments for the nine months ended March 31, 2017 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; and consolidated and segment organic 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.
Reconciliations to the most directly comparable GAAP financial measures for the following forward-looking non-GAAP financial measures for full fiscal year of 2018 are not presented, including but not limited to: adjusted earnings per share, organic sales growth and free operating cash flow. The most comparable GAAP measures are earnings per share, sales growth and net cash flow from operating activities, respectively. Because the non-GAAP financial measures on a forward-looking basis are subject to uncertainty and variability as they are dependent on many factors - including, but not limited to, the effect of foreign currency exchange fluctuations, impacts from potential acquisitions or divestitures, gains or losses on the potential sale of businesses or other assets, restructuring costs, asset impairment charges, losses from early extinguishment of debt, the tax impact of the items above and the impact of tax law changes or other tax matters - reconciliations to the most directly comparable forward-looking GAAP financial measures are not available without unreasonable effort.
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 is a non-GAAP financial measure and is 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 is 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 presents 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.


2




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 disclosures 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 MARCH 31, 2018
 
 
 
 
 
 
(in thousands, except percents)
3/31/18
12/31/17
9/30/17
6/30/17
3/31/17
Average
Current assets
$
1,240,587

$
1,128,382

$
1,075,915

$
1,113,901

$
1,043,046

 
Current liabilities
477,790

407,621

396,967

461,478

426,799

 
Working capital, GAAP
$
762,797

$
720,761

$
678,948

$
652,423

$
616,247

 
Excluding items:
 
 
 
 
 
 
Cash and cash equivalents
(221,906
)
(159,940
)
(110,697
)
(190,629
)
(100,817
)
 
Other current assets
(70,926
)
(68,057
)
(64,874
)
(55,166
)
(75,061
)
 
    Total excluded current assets
(292,832
)
(227,997
)
(175,571
)
(245,795
)
(175,878
)
 
    Adjusted current assets
947,755

900,385

900,344

868,106

867,168

 
Current maturities of long-term debt and capital leases, including notes payable
(1,399
)
(1,360
)
(1,252
)
(925
)
(1,591
)
 
Other current liabilities
(256,186
)
(215,669
)
(209,373
)
(244,831
)
(234,367
)
 
    Total excluded current liabilities
(257,585
)
(217,029
)
(210,625
)
(245,756
)
(235,958
)
 
    Adjusted current liabilities
220,205

190,592

186,342

215,722

190,841

 
Primary working capital
$
727,550

$
709,793

$
714,002

$
652,384

$
676,327

$
696,011

 
 
Three Months Ended
 
 
 
3/31/18
12/31/17
9/30/17
6/30/17
Total
Sales
 
$
607,936

$
571,345

$
542,454

$
565,025

$
2,286,760

Primary working capital as a percentage of sales
 
 
 
30.4
%


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)
 
March 31,
 
June 30,
(in thousands, except percents)
 
2018
 
2017
Total debt
 
$
697,486

 
$
695,916

Total equity
 
1,226,154

 
1,052,653

Debt to equity, GAAP
 
56.9
%
 
66.1
%
Total debt
 
697,486

 
695,916

Total equity
 
1,226,154

 
1,052,653

Total capital
 
1,923,640

 
1,748,569

Debt to capital
 
36.3
%
 
39.8
%
Total debt
 
697,486

 
695,916

Cash and cash equivalents
 
221,906

 
190,629

Net debt
 
$
475,580

 
$
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)
 
 
 
MARCH 31, 2018 (in thousands, except debt to adjusted EBITDA)
 
 
 
Three Months Ended
EBITDA
3/31/18
12/31/17
9/30/17
6/30/17
Net income attributable to Kennametal
$
50,866

$
41,601

$
39,183

$
24,643

Add back:
 
 
 
 
  Interest expense
7,468

7,231

7,149

7,367

  Interest income
(1,023
)
(260
)
(257
)
(246
)
  Provision for income taxes
24,130

17,472

9,602

7,494

  Depreciation
23,933

23,284

22,777

22,709

  Amortization
3,690

3,677

3,661

3,912

EBITDA
$
109,064

$
93,005

$
82,115

$
65,879

Adjustments:
 
 
 
 
  Restructuring and related charges
1,681

1,489

6,876

23,165

Adjusted EBITDA
$
110,745

$
94,494

$
88,991

$
89,044

Total debt
 
 
 
$
697,486

Trailing four quarters net income attributable to Kennametal
 
 
156,293

Debt to net income attributable to Kennametal
 
 
 
4.5

Total debt
 
 
 
$
697,486

Trailing four quarters adjusted EBITDA
 
 
 
383,274

Debt to adjusted EBITDA
 
 
 
1.8

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.
CONSTANT CURRENCY END MARKET SALES GROWTH (UNAUDITED)
 
 
 
 
Industrial
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2018
 
General engineering
 
Transportation
 
Aerospace and defense
 
Energy
Constant currency end market sales growth
 
7%
 
4%
 
13%
 
4%
Foreign currency exchange impact
 
8
 
9
 
6
 
6
Divestiture impact
 
—
 
—
 
—
 
—
Acquisition impact
 
—
 
—
 
—
 
—
End market sales growth(5)
 
15%
 
13%
 
19%
 
10%
Widia
 
 
 
 
 
 
Three Months Ended March 31, 2018
 
General engineering
Constant currency end market sales growth
 
8%
Foreign currency exchange impact
 
5
Divestiture impact
 
—
Acquisition impact
 
—
End market sales growth(5)
 
13%

5




Infrastructure
 
 
 
 
 
 
Three Months Ended March 31, 2018
 
Energy
 
Earthworks
 
General engineering
Constant currency end market sales growth
 
14%
 
4%
 
16%
Foreign currency exchange impact
 
2
 
5
 
5
Divestiture impact
 
—
 
—
 
—
Acquisition impact
 
—
 
—
 
—
End market sales growth(5)
 
16%
 
9%
 
21%
Total
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2018
 
General engineering
 
Transportation
 
Aerospace and defense
 
Energy
 
Earthworks
Constant currency end market sales growth
 
10%
 
4%
 
17%
 
11%
 
5%
Foreign currency exchange impact
 
6
 
9
 
6
 
3
 
5
Divestiture impact
 
—
 
—
 
—
 
—
 
—
Acquisition impact
 
—
 
—
 
—
 
—
 
—
End market sales growth(5)
 
16%
 
13%
 
23%
 
14%
 
10%
Constant Currency Regional Sales Growth (Decline)
Constant currency regional sales growth (decline) 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 (decline) 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.

6




CONSTANT CURRENCY REGIONAL SALES GROWTH (DECLINE) (UNAUDITED)
 
 
Three Months Ended March 31, 2018
 
Americas
 
EMEA
 
Asia Pacific
Industrial
 
 
 
 
 
 
 
Constant currency regional sales growth
 
12%
 
7%
 
—%
 
Foreign currency exchange impact
 
—
 
15
 
7
 
Divestiture impact
 
—
 
—
 
—
 
Acquisition impact
 
—
 
—
 
—
Regional sales growth(6)
 
12%
 
22%
 
7%
 
 
 
 
 
 
 
 
Widia
 
 
 
 
 
 
 
Constant currency regional sales growth
 
1%
 
14%
 
15%
 
Foreign currency exchange impact
 
1
 
11
 
7
 
Divestiture impact
 
—
 
—
 
—
 
Acquisition impact
 
—
 
—
 
—
Regional sales growth(6)
 
2%
 
25%
 
22%
 
 
 
 
 
 
 
 
Infrastructure
 
 
 
 
 
 
 
Constant currency regional sales growth (decline)
 
14%
 
(5)%
 
19%
 
Foreign currency exchange impact
 
1
 
13
 
7
 
Divestiture impact
 
—
 
—
 
—
 
Acquisition impact
 
—
 
—
 
—
Regional sales growth(6)
 
15%
 
8%
 
26%
 
 
 
 
 
 
 
 
Total
 
 
 
 
 
 
 
Constant currency regional sales growth
 
12%
 
5%
 
8%
 
Foreign currency exchange impact
 
1
 
14
 
7
 
Divestiture impact
 
—
 
—
 
—
 
Acquisition impact
 
—
 
—
 
—
Regional sales growth(6)
 
13%
 
19%
 
15%
(5) Aggregate sales for all end markets sum to the sales amount presented on the company's financial statements.
(6) Aggregate sales for all regions sum to the sales amount presented on the company's financial statements.

Item 9.01 Financial Statements and Exhibits.
(d) Exhibits
99.1 Fiscal 2018 Third Quarter Earnings Announcement

7




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:
May 2, 2018
 
 
By:
 
/s/ Patrick S. Watson
 
 
 
 
 
 
 
 
 
Patrick S. Watson
 
 
 
 
 
 
 
 
 
Vice President Finance and Corporate Controller
 
 

8
Exhibit


Exhibit 99.1
https://cdn.kscope.io/9172be28793d6d511e70d95711381d30-kmtheadera01a01a01a12.jpg
FOR IMMEDIATE RELEASE:
DATE: May 2, 2018             
Investor Relations
CONTACT: Kelly Boyer
PHONE: 412-248-8287
Corporate Relations - Media
CONTACT: Christina Sutter
PHONE: 724-539-5708
KENNAMETAL ANNOUNCES STRONG FISCAL 2018 THIRD QUARTER RESULTS
–
Year-over-year sales growth of 15 percent; organic sales growth of 11 percent
–
Year-to-date net cash flow from operating activities of $181 million; free operating cash flow of $54 million
–
Reported earnings per diluted share (EPS) of $0.61; adjusted EPS of $0.70
–
Raising midpoint of adjusted EPS outlook; increasing free operating cash flow outlook for full fiscal year 2018
–
Modernization starting to drive improved results along with continuing benefits from simplification
–
Price realization outpaced raw material inflation in the quarter; trend expected to continue for the fiscal year
PITTSBURGH, (May 2, 2018) – Kennametal Inc. (NYSE: KMT) today reported results for its fiscal 2018 third quarter ended March 31, 2018, with EPS of $0.61, compared with EPS of $0.48 in the prior year quarter. Adjusted EPS was $0.70 in the current quarter compared with $0.60 in the prior year quarter.
“I am pleased to report another strong operating quarter for Kennametal,” commented Chris Rossi, Kennametal president and CEO. “Our end markets are robust, and the work we are doing on our three initiatives - growth, simplification and modernization - is driving improvements to results and margins. We are intensely focused on executing our multi-year plan.”
Mr. Rossi continued, “We are aggressively pursuing our simplification efforts and starting to get traction on the execution of our modernization initiatives, which contributed to our strong results. We expect to see increased benefits from these initiatives going forward in line with our multi-year plan. In addition, even in the face of rising raw material costs, price realization outpaced raw material cost inflation, and we expect to sustain that trend for the fiscal year. As a result of the combination of these factors, we are raising the midpoint of our adjusted EPS outlook and expectations for cash flow."
This earnings release contains non-GAAP financial measures, reconciliations for which 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 May 2, 2018.

Fiscal 2018 Third Quarter Key Developments
 
•
Sales were $608 million, compared with $529 million in the prior year quarter. Sales increased by 15 percent, driven by 11 percent organic growth and a 6 percent favorable currency exchange impact, partially offset by a 2 percent decrease due to fewer business days. Sales grew in all segments, end markets and regions.

•
Pre-tax restructuring and related charges were $2 million, or $0.01 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 $10 million, or $0.12 per share, and pre-tax benefits were approximately $30 million.

1



•
Operating income was $85 million, compared to $58 million in the prior year quarter. Adjusted operating income was $87 million, compared to $68 million in the prior year quarter. The increase in adjusted operating income is due primarily to organic sales growth, incremental restructuring benefits, favorable currency exchange and mix, partially offset by higher raw material costs, decreased manufacturing efficiency in part due to modernization efforts in progress, salary inflation and higher variable compensation expense due to higher than expected operating results. Price realization outpaced raw material cost inflation. Operating margin was 14.0 percent in the current period compared to 11.0 percent in the prior year quarter. Adjusted operating margin was 14.3 percent in the current period compared to 12.8 percent in the prior year quarter.

•
The reported effective tax rate (ETR) was 31.2 percent and the adjusted ETR was 23.1 percent. The difference between the reported and adjusted ETR in the quarter is driven primarily by a discrete charge of $6 million, or $0.08 per share, to record adjustments to the provisional toll tax associated with U.S. tax reform. For the prior year quarter, the reported ETR was 19.0 percent and the adjusted ETR was 15.3 percent. The change in the adjusted ETR year-over-year is primarily due to U.S. income in the prior year quarter not being tax-effected and current quarter U.S. income being tax-effected now that a valuation allowance is no longer recorded on U.S. deferred tax assets.

•
EPS was $0.61, compared with $0.48 in the prior year quarter. Adjusted EPS was $0.70 in the current quarter and $0.60 in the prior year quarter. Reported EPS in the current quarter includes a charge related to U.S. tax reform of $0.08 and restructuring and related charges of $0.01, and for the prior year quarter includes restructuring and related charges of $0.12.

•
Year-to-date net cash flow from operating activities was $181 million compared to $83 million in the prior year period. Year-to-date free operating cash flow was $54 million compared to negative $7 million in the prior year period. The change in free operating cash flow is driven primarily by higher cash from operations before changes in certain other assets and liabilities and lower restructuring payments, offset partially by higher working capital and capital expenditures.

•
Net income attributable to Kennametal was $51 million compared with $39 million in the prior year quarter. EBITDA was $109 million, compared with $82 million in the prior year quarter. Adjusted EBITDA was $111 million in the current quarter and $91 million in the prior year quarter.

Segment Developments for the Fiscal 2018 Third Quarter
 
•
Industrial sales of $333 million increased 15 percent from $289 million in the prior year quarter, reflecting organic sales growth of 10 percent and an 8 percent favorable currency exchange impact, partially offset by a 3 percent decrease due to fewer business days.

•
Industrial operating income was $53 million compared to $39 million in the prior year quarter. Adjusted operating income was $54 million compared to $44 million in the prior year quarter, driven primarily by organic sales growth, incremental restructuring benefits and favorable currency exchange impact, partially offset by decreased manufacturing efficiency in part due to modernization efforts in progress, higher variable compensation expense due to higher than expected operating results, and salary inflation. Industrial operating margin was 15.9 percent compared to 13.3 percent in the prior year quarter. Industrial adjusted operating margin was 16.2 percent compared with 15.1 percent in the prior year quarter.

•
Widia sales of $52 million increased 13 percent from $46 million in the prior year quarter, driven by organic sales growth of 9 percent and a 5 percent favorable currency exchange impact, partially offset by a 1 percent decrease due to fewer business days.

•
Widia operating income was $2 million compared to $1 million in the prior year quarter. The increase was due primarily to organic sales growth, partially offset by slightly unfavorable mix. Widia operating margin was 3.1 percent compared with 1.3 percent in the prior year quarter. Widia adjusted operating margin was 3.2 percent compared with 2.3 percent in the prior year quarter.

•
Infrastructure sales of $223 million increased 15 percent from $193 million in the prior year quarter, driven by organic sales growth of 14 percent and a 3 percent favorable currency exchange impact, partially offset by a 2 percent decrease due to fewer business days.

2



•
Infrastructure operating income was $32 million compared to $20 million in the prior year quarter. Adjusted operating income was $32 million compared to $24 million in the prior year quarter, primarily driven by organic sales growth, favorable mix, favorable currency exchange impact and incremental restructuring benefits, partially offset by higher raw material costs, decreased manufacturing efficiency in part due to modernization efforts in progress and higher compensation expense. Infrastructure operating margin was 14.3 percent compared to 10.3 percent in the prior year quarter. Infrastructure adjusted operating margin was 14.6 percent compared with 12.3 percent in the prior year quarter.

Fiscal 2018 Year-to-Date Key Developments

•
Sales were $1,722 million, compared to $1,493 million in the prior year. Sales increased by 15 percent, driven by organic growth of 13 percent and a 3 percent favorable currency exchange impact, partially offset by a 1 percent decrease due to fewer business days.

•
Operating income was $210 million, compared to $73 million in prior year. Adjusted operating income was $220 million in the current period, compared to $126 million in the prior year. Adjusted operating income increased due primarily to organic sales growth, incremental restructuring benefits, favorable mix and favorable currency exchange impact, partially offset by salary inflation, higher raw material costs and higher variable compensation expense due to higher than expected operating results. Operating margin was 12.2 percent, compared to 4.9 percent in the prior year. Adjusted operating margin was 12.8 percent, compared to 8.4 percent in the prior year.

•
EPS was $1.59 in the current year, compared with $0.30 in the prior year. Adjusted EPS was $1.78 in the current year and $0.95 in the prior year.

Outlook

The company now expects adjusted EPS for the full fiscal year to be in the range of $2.55 to $2.65 per share on organic sales growth at the top end of the prior outlook of 9 to 11 percent, a change from the previous adjusted EPS outlook of $2.40 to $2.70 per share. The company now expects free operating cash flow to be $60 to $75 million, which includes expected net capital expenditures near the low end of the previous outlook of $210 to $230 million. The previous outlook of free operating cash flow was $0 to $30 million.

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 May 30, 2018 to shareholders of record as of the close of business on May 15, 2018.
The company will discuss its fiscal 2018 third quarter results in a live webcast at 8:00 a.m. Eastern Time, Thursday, May 3, 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 June 2, 2018.


3


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 March 31,
Nine Months Ended March 31,
(in thousands, except per share amounts)
2018
 
2017
2018
 
2017
Sales
$
607,936

 
$
528,630

$
1,721,734

 
$
1,493,343

Cost of goods sold
388,475

 
342,365

1,124,736

 
1,015,926

     Gross profit
219,461

 
186,265

596,998

 
477,417

Operating expense
129,151

 
116,939

369,131

 
347,808

Restructuring and asset impairment charges
1,264

 
7,169

6,834

 
44,230

Amortization of intangibles
3,690

 
4,245

11,028

 
12,665

     Operating income
85,356

 
57,912

210,005

 
72,714

Interest expense
7,468

 
7,331

21,848

 
21,475

Other expense, net
647

 
1,626

2,046

 
2,470

Income before income taxes
77,241

 
48,955

186,111

 
48,769

Provision for income taxes
24,130

 
9,301

51,204

 
22,401

Net income
53,111

 
39,654

134,907

 
26,368

Less: Net income attributable to noncontrolling interests
2,245

 
764

3,256

 
1,873

Net income attributable to Kennametal
$
50,866

 
$
38,890

$
131,651

 
$
24,495

PER SHARE DATA ATTRIBUTABLE TO KENNAMETAL SHAREHOLDERS
 
 
 
Basic earnings per share
$
0.62

 
$
0.48

$
1.62

 
$
0.31

Diluted earnings per share
$
0.61

 
$
0.48

$
1.59

 
$
0.30

Dividends per share
$
0.20

 
$
0.20

$
0.60

 
$
0.60

Basic weighted average shares outstanding
81,793

 
80,398

81,445

 
80,219

Diluted weighted average shares outstanding
83,109

 
81,381

82,670

 
80,965


5


CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands)
March 31, 2018
 
June 30, 2017
 
 ASSETS
 
 
 
Cash and cash equivalents
$
221,906

 
$
190,629

Accounts receivable, net
410,550

 
380,425

Inventories
537,205

 
487,681

Other current assets
70,926

 
55,166

Total current assets
1,240,587

 
1,113,901

Property, plant and equipment, net
804,954

 
744,388

Goodwill and other intangible assets, net
491,109

 
491,894

Other assets
81,212

 
65,313

Total assets
$
2,617,862

 
$
2,415,496

 
 LIABILITIES
 
 
 
Current maturities of long-term debt and capital leases, including notes payable
$
1,399

 
$
925

Accounts payable
220,205

 
215,722

Other current liabilities
256,186

 
244,831

Total current liabilities
477,790

 
461,478

Long-term debt and capital leases
696,087

 
694,991

Other liabilities
217,831

 
206,374

Total liabilities
1,391,708

 
1,362,843

KENNAMETAL SHAREHOLDERS’ EQUITY
1,187,325

 
1,017,294

NONCONTROLLING INTERESTS
38,829

 
35,359

Total liabilities and equity
$
2,617,862

 
$
2,415,496


SEGMENT DATA (UNAUDITED)
Three Months Ended March 31,
Nine Months Ended March 31,
(in thousands)
2018
 
2017
2018
 
2017
Outside Sales:
 
 
 
 
 
 
Industrial
$
333,012

 
$
289,455

$
942,922

 
$
825,990

Widia
52,217

 
46,297

145,204

 
130,186

Infrastructure
222,707

 
192,878

633,608

 
537,167

Total sales
$
607,936

 
$
528,630

$
1,721,734

 
$
1,493,343

Sales By Geographic Region:
 
 
 
 
 
 
Americas
$
294,189

 
$
261,346

$
832,065

 
$
730,014

EMEA
192,876

 
161,979

534,040

 
460,713

Asia Pacific
120,871

 
105,305

355,629

 
302,616

Total sales
$
607,936

 
$
528,630

$
1,721,734

 
$
1,493,343

Operating Income (Loss):
 
 
 
 
 
 
Industrial
$
53,029

 
$
38,535

$
131,132

 
$
62,138

Widia
1,638

 
606

2,556

 
(7,797
)
Infrastructure
31,767

 
19,770

79,347

 
22,457

Corporate (1)
(1,078
)
 
(999
)
(3,030
)
 
(4,084
)
Total operating income
$
85,356

 
$
57,912

$
210,005

 
$
72,714

(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; ETR; net income attributable to Kennametal shareholders; diluted EPS; Industrial operating income and margin; Widia operating income and margin; Infrastructure operating income and margin; free operating cash flow; EBITDA and margin; and consolidated and segment organic 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 non-GAAP financial measures are set forth in the tables below and descriptions of certain non-GAAP financial measures are contained in our current report on Form 8-K filed with the SEC on May 2, 2018.
Reconciliations to the most directly comparable GAAP financial measures for the following forward-looking non-GAAP financial measures for full fiscal year of 2018 are not presented, including but not limited to: adjusted earnings per share, organic sales growth and free operating cash flow. The most comparable GAAP measures are earnings per share, sales growth and net cash flow from operating activities, respectively. Because the non-GAAP financial measures on a forward-looking basis are subject to uncertainty and variability as they are dependent on many factors - including, but not limited to, the effect of foreign currency exchange fluctuations, impacts from potential acquisitions or divestitures, gains or losses on the potential sale of businesses or other assets, restructuring costs, asset impairment charges, losses from early extinguishment of debt, the tax impact of the items above and the impact of tax law changes or other tax matters - reconciliations to the most directly comparable forward-looking GAAP financial measures are not available without unreasonable effort.
THREE MONTHS ENDED MARCH 31, 2018 (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
$
607,936

$
219,461

$
129,151

$
85,356

31.2
 %
$
50,866

$
0.61

Reported margins
 
36.1
%
21.2
%
14.0
%
 
 
 
Restructuring and related charges
—

694

277

1,681

0.2

1,230

0.01

Tax reform charge(3)
—

—

—

—

(8.3
)
6,382

0.08

Adjusted results
$
607,936

$
220,155

$
129,428

$
87,037

23.1
 %
$
58,478

$
0.70

Adjusted margins
 
36.2
%
21.3
%
14.3
%
 
 
 
(2) Attributable to Kennametal
(3) Additional charge recorded to reflect adjustments to the provisional amounts recorded in the December quarter of fiscal 2018 for the application of a measure of the Tax Cuts and Jobs Act of 2017 requiring a one-time transition tax on previously untaxed accumulated earnings and profits of non-U.S. companies. The toll tax 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
$
333,012

$
53,029

$
52,217

$
1,638

$
222,707

$
31,767

Reported operating margin
 
15.9
%
 
3.1
%
 
14.3
%
Restructuring and related charges
—

1,023

—

17

—

641

Adjusted results
$
333,012

$
54,052

$
52,217

$
1,655

$
222,707

$
32,408

Adjusted operating margin
 
16.2
%
 
3.2
%
 
14.6
%

7


THREE MONTHS ENDED MARCH 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
$
528,630

$
186,265

$
116,939

$
57,912

19.0
 %
$
38,890

$
0.48

Reported margins
 
35.2
%
22.1
%
11.0
%
 
 
 
Restructuring and related charges
—

1,644

(809
)
9,623

(3.7
)
9,961

0.12

Adjusted results
$
528,630

$
187,909

$
116,130

$
67,535

15.3
 %
$
48,851

$
0.60

Adjusted margins
 
35.5
%
22.0
%
12.8
%
 
 
 
 
Industrial
Widia
Infrastructure
(in thousands, except percents)
Sales
Operating income
Sales
Operating income
Sales
Operating income
Reported results
$
289,455

$
38,535

$
46,297

$
606

$
192,878

$
19,770

Reported operating margin
 
13.3
%
 
1.3
%
 
10.3
%
Restructuring and related charges
—

5,142

—

466

—

3,974

Adjusted results
$
289,455

$
43,677

$
46,297

$
1,072

$
192,878

$
23,744

Adjusted operating margin
 
15.1
%
 
2.3
%
 
12.3
%
NINE MONTHS ENDED MARCH 31, 2018 (UNAUDITED)
 
(in thousands, except percents)
Sales
Operating income
Net income(2)
Diluted EPS
Reported results
$
1,721,734

$
210,005

$
131,651

$
1.59

Reported operating margin
 
12.2
%
 
 
Restructuring and related charges
—

10,048

7,800

0.10

Impact of out of period adjustment to provision for income taxes(4)
—

—

5,297

0.06

Net tax reform charge(5)
—

—

2,496

0.03

Adjusted results
$
1,721,734

$
220,053

$
147,244

$
1.78

Adjusted operating margin
 
12.8
%
 
 
(4) Non-cash charge associated with the out-of-period impact of recording an adjustment to deferred tax charges associated with intra-entity product transfers.
(5) Net tax charge associated with the Tax Cuts and Jobs Act of 2017 (TCJA). TCJA required a one-time transition tax on previously untaxed accumulated earnings and profits of non-U.S. companies. This transition tax of $83 million resulted in an estimated toll charge, which was mostly offset by our U.S. tax carryforwards, which were 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 in the December quarter of fiscal 2018, yielding a net benefit of $4 million in that quarter. An additional $6 million expense was recorded in the third quarter to reflect adjustments to the toll charge. The toll charge of $83 million 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.
NINE MONTHS ENDED MARCH 31, 2017 (UNAUDITED)
 
(in thousands, except percents)
Sales
Operating income
Net income(2)
Diluted EPS
Reported results
$
1,493,343

$
72,714

$
24,495

$
0.30

Reported operating margin
 
4.9
%
 
 
Restructuring and related charges
—

53,064

51,469

0.63

Australia deferred tax valuation allowance
—

—

1,288

0.02

Adjusted results
$
1,493,343

$
125,778

$
77,252

$
0.95

Adjusted operating margin
 
8.4
%
 
 

8


FREE OPERATING CASH FLOW (UNAUDITED)
 
Three Months Ended March 31,
Nine Months Ended March 31,
 
 
(in thousands)
 
2018
 
2017
2018
 
2017
Net cash flow from operating activities(6)
 
$
113,813

 
$
34,094

$
180,586

 
$
82,793

Purchases of property, plant and equipment
 
(43,087
)
 
(23,522
)
(128,310
)
 
(94,095
)
Proceeds from disposals of property, plant and equipment
 
1,350

 
343

2,196

 
3,852

Free operating cash flow
 
$
72,076

 
$
10,915

$
54,472

 
$
(7,450
)
(6) Amounts for the three and nine months ended March 31, 2017 have been restated to reflect adoption of FASB ASU 2016-09.
EBITDA (UNAUDITED)
 
Three Months Ended March 31,
Nine Months Ended March 31,
 
 
(in thousands)
 
2018
 
2017
2018
 
2017
Net income attributable to Kennametal
 
$
50,866

 
$
38,890

$
131,651

 
$
24,495

Add back:
 
 
 
 
 
 
 
  Interest expense
 
7,468

 
7,331

21,848

 
21,475

  Interest income
 
(1,023
)
 
(306
)
(1,540
)
 
(759
)
  Provision for income taxes
 
24,130

 
9,301

51,204

 
22,401

  Depreciation
 
23,933

 
22,375

69,994

 
68,369

  Amortization of intangibles
 
3,690

 
4,245

11,028

 
12,665

EBITDA
 
$
109,064

 
$
81,836

$
284,185

 
$
148,646

Margin
 
17.9
%
 
15.5
%
16.5
%
 
10.0
%
 
 
 
 
 
 
 
 
Adjustments:
 
 
 
 
 
 
 
Restructuring and related charges
 
1,681

 
9,623

10,048

 
53,064

Adjusted EBITDA
 
$
110,745

 
$
91,459

$
294,233

 
$
201,710

Adjusted margin
 
18.2
%
 
17.3
%
17.1
%
 
13.5
%
ORGANIC SALES GROWTH (UNAUDITED)
 
 
 
 
Three Months Ended March 31, 2018
 
Industrial
 
Widia
 
Infrastructure
 
Total
Organic sales growth
 
10%
 
9%
 
14%
 
11%
Foreign currency exchange impact
 
8
 
5
 
3
 
6
Business days impact
 
(3)
 
(1)
 
(2)
 
(2)
Divestiture impact
 
—
 
—
 
—
 
—
Acquisition impact
 
—
 
—
 
—
 
—
Sales growth
 
15%
 
13%
 
15%
 
15%
Nine Months Ended March 31, 2018
 
Total
Organic sales growth
 
13%
Foreign currency exchange impact
 
3
Business days impact
 
(1)
Divestiture impact
 
—
Acquisition impact
 
—
Sales growth
 
15%

9