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Kennametal Inc. (KMT) reported adjusted earnings per share of 74 cents in third-quarter fiscal 2014 (ended Mar 31, 2014). The bottom-line result was 2 cents above the Zacks Consensus Estimate of 72 cents and increased 13.8% year over year.

GAAP earnings per share in the quarter came in at 64 cents versus 67 cents earned in the year-ago quarter.

Revenue

Kennametal’s revenues in third-quarter fiscal 2014 were $755.2 million, up 15.2% year over year. The year-over-year increase can be attributed to a 3% hike in organic revenues, 1% gain from more working days in the quarter and a 12% contribution from the acquisition of Tungsten Materials Business (TMB) from ATI in Nov 2013.

Excluding the $77.7 million contribution from the TMB acquisition, adjusted revenues in the quarter were $677.6 million, lagging the Zacks Consensus Estimate of $746.0 million

A brief discussion on the segments of Kennametal is given below:

The Industrial segment’s revenues in the quarter increased 13.3% year over year to $399.7 million. Organic growth of 5% was driven by improvements in general engineering and transportation end markets, offset by declines in aerospace and defense end markets.

On a geographical basis, revenues increased 11% in Asia, 9% in Europe and 1% in the Americas. Adjusted revenues, excluding the $28.4 million gain from TMB acquisition, were $371.3 million.  

The Infrastructure segment generated revenues of $355.6 million, reflecting an increase of 17.5% year over year. Organic growth in the quarter was flat year over year. Revenues in Europe grew 4% and in North America increased by 3%, offset partially by 9% decline in Asia. Adjusted revenues, excluding $49.3 million of gain from TMB acquisition, were $306.3 million.

On a geographical basis, Kennametal’s revenues from North America increased 21.4% year over year to $351.5 million; revenues from Western Europe were $238.3 million, up 19.6% year over year while revenues from Rest of the World was about $165.5 million, down 0.7% year over year.

Margins

Cost of revenue in fiscal third-quarter increased 15.6% year over year and represented 68.4% of total revenue; up from 68.2% in the year-ago quarter. Operating expenses, as a percentage of total revenue, stood at 20.2%, up 60 basis points year over year.

Adjusted operating margin in the quarter was 12.7%.

Balance Sheet

Exiting third-quarter fiscal 2014, Kennametal had cash and cash equivalents of $161.8 million versus $163.3 million in the preceding quarter. Long-term debt and capital leases decreased sequentially to $1,022.1 million from $1,035.6 million in the previous quarter.
 
Cash Flow

In the 9 months ended Mar 31, 2014, Kennametal generated cash of $153.2 million versus $150.4 million in the year-ago period. Capital spent on purchases of property, plant and equipment was $86.0 million, up from $53.8 million in the 9 months ended Mar 31, 2013.

Free cash flow was approximately $68.2 million compared with $98.3 million in the year-ago period.

In conjunction with the earnings release, Kennametal announced that its board of directors has approved a quarterly cash dividend payment of 18 cents per share on May 28 to shareholders of record as of May 13, 2014.
   
Outlook

For fiscal 2014, Kennametal lowered its total sales growth guidance to a range of 10−11% from the 12−13% range expected earlier. The revised guidance includes a roughly 7−8% (versus 7−9% expected earlier) contribution from the TMB acquisition.

Organic revenue growth is anticipated to be within the 2−3% range versus 2−4% expected earlier.

Earnings per share guidance has been lowered to a range of $2.60−$2.70 from $2.60-$2.75 expected earlier.

Kennametal anticipates cash flow from operating activities to range within the $280−$310 million range. Capital expenditure is predicted to be in the $130−$140 million range, while free cash flow is likely to be within $150−$170 million.

Kennametal currently has a market capitalization of $3.7 billion and carries a Zacks Rank #3 (Hold). Other stocks to watch out for in the industry include NN Inc. (NNBR), Stanley Black & Decker, Inc. (SWK) and Timken Co. (TKR). While NN Inc. holds a Zacks Rank #1 (Strong Buy), Stanley Black & Decker and Timken carry a Zacks Rank #2 (Buy).

 
KENNAMETAL INC (KMT): Free Stock Analysis Report
 
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TIMKEN CO (TKR): Free Stock Analysis Report
 
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