Kennametal (KMT) Third-quarter earnings and revenue beat estimates

Kennametal Inc. KMT reported better-than-expected results for the third quarter of fiscal 2022 (ended March 31, 2022). KMT’s earnings topped the Zacks consensus estimate by 11.9%. Additionally, quarterly sales exceeded estimates by 0.7%.

Adjusted earnings for the quarter under review were 47 cents per share, beating Zacks’ consensus estimate of 42 cents. Net income jumped 46.9% from the previous year’s figure of 32 cents thanks to revenue growth and improved margins.

Income Details

In the quarter under review, Kennametal’s revenue was $512 million, reflecting a 6% increase over the year-ago quarter. Organic sales for the quarter increased by 8%, while working days left an accretive impact of 2%. The foreign currency headwind left a negative impact of 4%. Activity in the energy, general engineering, aerospace and earthmoving markets prospered during the quarter. Weakness in the transportation market due to supply chain restrictions was a spoilsport.

KMT’s revenue exceeded Zacks’ consensus estimate of $509 million and exceeded management’s lower bound projection of $500-520 million.

On a geographic basis, its revenue from US operations increased 15.1% year-over-year to $250 million, while sales in the Europe, Middle East and Africa region were 152 $.6 million, almost flat with the prior year quarter. Asia-Pacific belt sales decreased 4.6% to $109.6 million.

Kennametal reports results in two business segments, namely Metal Cutting and Infrastructure. Its segment performance for the third fiscal quarter is briefly discussed below:

Metal Cutting revenue of $314 million was up 2% year over year. Organic sales growth in the quarter was 5%, while working days had an accretive impact of 2%. Forex misfortunes had a negative impact of 5%.

Infrastructure revenue totaled $198 million, up 12% year-over-year. Results benefited from organic sales growth of 12% and a positive impact of 1% from working days, while currency movements had a negative impact of 1%.

Kennametal Inc. Price, Consensus, and EPS Surprise

Kennametal Inc. Price, Consensus, and EPS Surprise

Kennametal Inc. price-consensus-eps-surprise-chart | Quote from Kennametal Inc.

Margin profile

Kennametal’s cost of goods sold in the reported quarter increased 3.9% year over year to $347.6 million. This represented 67.9% of revenue compared to 69% in the prior year quarter. Gross profit increased 9.6% year-over-year to $164.6 million, while margin increased 110 basis points (bps) to 32.1%. Operating expenses totaled $107.1 million in the quarter under review, down 0.9% year-over-year. Expressed as a percentage of revenues, operating expenses were 20.9% compared to 22.3% a year ago.

Adjusted operating profit in the reported quarter jumped 38.1% year-over-year to $58 million. Adjusted operating margin increased 280 basis points year over year to 11.4%. Results benefited from favorable pricing and product mix, organic sales growth, reversal of restructuring and other charges, and simplification/modernization efforts. However, high manufacturing costs and rising raw material costs have been spoilsports.

Interest expense in the reported quarter was $6.4 million, down 69.4% from the prior year quarter figure. The adjusted effective tax rate was 27.7% in the quarter under review, compared to 20.6% in the prior year quarter.

Balance sheet and cash flow

At the end of the third fiscal quarter, Kennametal’s cash and cash equivalents were $100 million, down 1.8% from the previous quarter’s figure of $101.8 million. Long-term debt was $593.1 million, up from $592.7 million in the prior quarter.

During the nine months of the fiscal year, Kennametal generated $93 million in net cash from operating activities, down 33.2% from the prior year figure. Capital invested in the purchase of property, plant and equipment (net of the amount received on disposals) was $59.4 million, down 36.1% from $92.9 million in the same period last year. Free cash flow was $33.6 million, compared to $46.3 million a year earlier.

During the quarter, KMT’s dividend payments totaled $17 million and it repurchased shares worth $15 million.

Kennametal announced that its board of directors has approved the payment of a quarterly cash dividend of 20 cents per share to its shareholders of record as of May 10, 2022. The payment will be made on May 24.

Outlook

For the fourth quarter of fiscal 2022 (ending June 2022), Kennametal forecasts sales of $510 million to $530 million, suggesting the number will be flat at 3% from the number in the comparable quarter of the previous year. On a sequential basis, strengthening end markets will be beneficial. Activity in the transport market should be stable.

Adjusted operating profit for the quarter is expected to be $55 million (at least).

For fiscal 2022 (ending June 2022), cost headwinds related to control measures taken in the prior year are expected to be $25 million for the first half of fiscal 2022. The rate of adjusted tax should be 26-28%. Free cash flow should represent 75% of net income (adjusted).

Capital expenditures are expected to be $105 million, while free cash flow is expected to be 100% of net income.

Zacks Ranking and Stocks to Consider

With a market cap of $2.2 billion, KMT currently holds a Zacks rank of #4 (sell).

Some top-ranked companies in the industrial products sector are featured below.

Applied Industrial Technologies, Inc. AIT currently sports a No. 1 Zacks rank. AIT has delivered a four-quarter earnings surprise of 25.4% on average. You can see today’s full list of Zacks #1 Rank (Strong Buy) stocks here.

AIT’s earnings estimates have risen 5.4% for fiscal 2022 (ending June 2022) over the past 60 days. Its shares are up 12.7% over the past three months.

Roper Technologies, Inc. ROP currently has a Zacks Rank #2 (Buy). Its earnings surprise over the past four quarters averaged 2%.

Over the past 60 days, ROP earnings estimates have risen 1.1% for 2022. The stock has edged up 1.8% over the past three months.

Ferguson plc FERG is currently ranked No. 2 to Zacks. FERG’s earnings surprise over the past four quarters averaged 14.2%.

Over the past 60 days, earnings estimates for the stock have risen 6.5% for fiscal year 2022 (ending July 2022). The same has decreased by 17.8% in the last three months.

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