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Kennametal Inc. today reported fiscal 2008 second quarter EPS of $0.64, an increase of 68 percent from the prior year quarter reported EPS of $0.38. EPS increased 52 percent compared with prior year quarter adjusted EPS of $0.42. All EPS amounts presented in this announcement reflect the impact of a 2-for-1 stock split completed by the company in December 2007.
For the first six months of fiscal 2008, reported EPS was $1.08, an increase of 40 percent from the prior year reported EPS of $0.77. The current year reported EPS included a non-cash special charge of $0.08 per share for the impact of a German tax reform bill enacted in July 2007. Adjusted EPS of $1.16 for the first half of fiscal 2008 were up 40 percent from the prior year adjusted EPS of $0.83.
Carlos Cardoso, Kennametal's Chairman, President and Chief Executive Officer said, "We continued to make further progress during the December quarter in terms of EPS and ROIC, despite lower than expected organic sales growth. Sluggish conditions in North America along with lower demand in certain market sectors provided a particular challenge in the quarter. However, we grew our sales in several geographic regions and end markets, reflecting the strength and diversity of our global business. We will remain focused on driving ongoing sales growth, while moving forward with programs and initiatives to generate margin expansion and earnings growth in line with our long-term goals."
Reconciliations of all non-GAAP financial measures are set forth in the attached tables.
Highlights of Fiscal 2008 Second Quarter -- Sales for the quarter were $647 million, compared with $569 million in the same quarter last year. Sales grew 14 percent year-over-year and included 2 percent growth on an organic basis, 6 percent from acquisitions and 6 percent from foreign currency effects. -- Income from continuing operations was $50 million, compared with $34 million in the prior year quarter, an increase of 49 percent. This increase was driven by organic sales growth, controlled operating expenses, favorable foreign currency effects, the impact of acquisitions and a lower effective tax rate. -- The effective tax rate for the current quarter was 17.3 percent compared to 30.5 percent in the prior year quarter. The current quarter rate benefited from a continued increase in earnings under the company's pan-European business strategy, the combined effects of other international operations and a tax benefit associated with a dividend reinvestment plan in China. The above were partially offset by a benefit recorded in the prior year quarter from the extension of the research, development and experimental tax credit. -- Reported EPS increased 68 percent to $0.64, compared with prior year quarter reported EPS of $0.38, and increased 52 percent compared with prior year quarter adjusted EPS of $0.42. A reconciliation follows: Earnings Per Diluted Share Reconciliation Second Quarter FY 2008 Second Quarter FY 2007 Reported EPS $0.64 Reported EPS $0.38 No Special Items Electronics impairment and divestiture-related charges 0.04 $0.64 Adjusted EPS $0.42 -- Adjusted ROIC was 12.3 percent, up 120 basis points from 11.1 percent in the prior year quarter. Highlights of Fiscal 2008 First Half -- Sales of $1.3 billion increased 14 percent from $1.1 billion in the same period last year. Sales grew 3 percent on an organic basis, 6 percent from acquisitions and 5 percent from foreign currency effects. -- Income from continuing operations was $85 million, compared with $63 million in the prior year period, an increase of 35 percent. Income from continuing operations, excluding special items was $92 million, an increase of 43 percent compared with $64 million in the prior year period. -- The effective tax rate for the first half of fiscal 2008 was 27.1 percent, which included the unfavorable impact of a $6.6 million non- cash special charge for income taxes related to a German tax reform bill enacted in July 2007. Excluding this special charge, the effective tax rate for the first half of fiscal 2008 was 21.6 percent, compared with 31.1 percent in the prior year period. The lower effective tax rate versus last year was driven by a continued increase in earnings under the company's pan-European business strategy and tax benefits from the dividend reinvestment plan in China. -- Reported EPS increased 40 percent to $1.08, compared with prior year reported EPS of $0.77. Adjusted EPS increased 40 percent to $1.16, compared with prior year period adjusted EPS of $0.83. A reconciliation follows: Earnings Per Diluted Share Reconciliation First Half FY 2008 First Half FY 2007 Reported EPS $1.08 Reported EPS $0.77 Impact of German Adjustment on J&L divestiture tax reform bill 0.08 and transaction-related charges 0.02 Electronics impairment and divestiture-related charges 0.04 Adjusted EPS $1.16 Adjusted EPS $0.83 -- Cash flow from operating activities was $69 million for the first half of fiscal 2008, compared with $36 million in the prior year period. Adjusted free operating cash outflow was $4 million versus adjusted free operating cash inflow of $78 million in the prior year period. The year-over-year change in adjusted free operating cash flow was primarily driven by a $35 million increase in capital expenditures for enhanced manufacturing capabilities and geographic expansion as well as changes in working capital. Business Segment Highlights of Fiscal 2008 Second Quarter
Metalworking Solutions & Services Group (MSSG) delivered further top-line growth in the December quarter driven by organic sales gains as well as favorable foreign currency effects and the impact of acquisitions. Areas of strength included the general engineering, machine tools and distribution sectors, while weakness continued in the automotive market. The Asia Pacific, Indian, Latin American and European markets remained strong. The North American market declined slightly compared with the prior year quarter.
In the December quarter, MSSG sales were higher by 16 percent as a result of 4 percent organic growth, 7 percent favorable foreign currency effects and 5 percent from acquisitions. India and Asia Pacific organic sales increased 15 percent and 11 percent, respectively. Latin America organic sales increased 9 percent and Europe organic sales increased 6 percent. North America organic sales declined 2 percent.
MSSG operating income increased by 37 percent and the operating margin increased 220 basis points from the same quarter last year. The current quarter results benefited from organic growth, continued cost containment, favorable foreign currency effects and the impact of acquisitions. In addition, the prior year quarter included costs associated with a plant closure.
Advanced Materials Solutions Group (AMSG) sales also increased during the December quarter, driven by the effects of acquisitions and favorable foreign currency effects. Organic sales were lower due to softness in certain markets.
AMSG sales increased by 9 percent over the December quarter last year. Of the year-over-year increase in sales, 7 percent came from acquisitions and 5 percent from favorable foreign currency effects. Organic sales declined by 3 percent on lower sales of energy products and surface finishing machines and services, offset partially by higher construction, mining and engineered product sales.
AMSG operating income was down 20 percent and the operating margin was lower than the prior year quarter due primarily to sales mix and higher raw material costs.
Worldwide market conditions support Kennametal's expectation for continued but somewhat lower top-line growth during the remainder of fiscal 2008. The company believes that the softness in the North American market will persist. The company also expects ongoing variability in the demand level among certain individual market sectors. The company also believes that the European market will remain favorable, and that business conditions will continue to be strong in developing economies. While there are some inherent and changing uncertainties and risks within the current macro-economic environment, it appears that fundamental drivers will continue to provide a platform for ongoing growth in global demand.
Kennametal expects total sales growth in the range of 11 to 12 percent for fiscal 2008, including organic sales growth of 3 to 4 percent. This growth rate is slightly lower than previously expected in view of the outlook for more moderate expansion in global demand.
The company has revised adjusted EPS guidance for fiscal 2008 to a range of $2.71 to $2.77 (from $2.80 to $2.85) due to the expectations for more moderate organic sales growth as well as the outlook for sales mix, raw material costs and a lower overall effective tax rate. This guidance represents 19 percent to 21 percent growth, compared with fiscal 2007 adjusted EPS of $2.28. In the third quarter of fiscal 2008, Kennametal expects total sales growth to be in the range of 12 to 13 percent, including organic sales growth of 2 to 3 percent, and EPS to be in the range of $0.72 to $0.75.
Kennametal anticipates cash flow from operating activities of approximately $250 million to $270 million for fiscal 2008. Based on anticipated capital expenditures of $145 million to $155 million, the company expects to generate between $105 million to $115 million of free operating cash flow for fiscal 2008.
Kennametal announced today that its Board of Directors declared a regular quarterly cash dividend of $0.12 per share. The dividend is payable February 20, 2008 to shareowners of record as of the close of business on February 5, 2008.
Kennametal advises shareowners to note monthly order trends, for which the company makes a disclosure ten business days after the conclusion of each month. This information is available on the Investor Relations section of Kennametal's corporate web site at www.kennametal.com.
Second quarter results for fiscal 2008 will be discussed in a live Internet broadcast at 10:00 a.m. Eastern time today. This event will be broadcast live on the company's website, www.kennametal.com. Once on the homepage, select "Corporate," and then "Investor Relations." The replay of this event will also be available on the company's website through February 22, 2008.
This release contains "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. You can identify forward- looking statements by the fact they use words such as "should," "anticipate," "estimate," "approximate," "expect," "may," "will," "project," "intend," "plan," "believe" and other words of similar meaning and expression in connection with any discussion of future operating or financial performance or event. Forward looking statements in this release concern, among other things, Kennametal's expectations regarding future growth, end markets, and financial performance for future periods, all of which are based on current expectations that involve inherent risks and uncertainties. Among the factors that could cause the actual results to differ materially from those indicated in the forward-looking statements are risks and uncertainties related to: global and regional economic conditions; availability and cost of the raw materials we use to manufacture our products; our ability to protect our intellectual property in foreign jurisdictions; our foreign operations and international markets, such as currency exchange rates, different regulatory environments, trade barriers, exchange controls, and social and political instability; energy costs; commodity prices; competition; integrating recent acquisitions, as well as any future acquisitions, and achieving the expected savings and synergies; business divestitures; demands on management resources; future terrorist attacks or acts of war; labor relations; demand for and market acceptance of new and existing products; and implementation of restructuring plans and environmental remediation matters. Should one or more of these risks or uncertainties materialize, or should the assumptions underlying the forward-looking statements prove incorrect, actual outcomes could vary materially from those indicated. These 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.
Kennametal Inc. is a leading global supplier of tooling, engineered components and advanced materials consumed in production processes. The company improves customers' competitiveness by providing superior economic returns through the delivery of application knowledge and advanced technology to master the toughest of materials application demands. Companies producing everything from airframes to coal, from medical implants to oil wells and from turbochargers to motorcycle parts recognize Kennametal for extraordinary contributions to their value chains. Customers buy approximately $2.4 billion annually of Kennametal products and services - delivered by our 14,000 talented employees in over 60 countries - with approximately 50 percent of these revenues coming from outside the United States. Visit us at www.kennametal.com [KMT-E]
FINANCIAL HIGHLIGHTS CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended Six Months Ended December 31, December 31, (in thousands, except per share amounts) 2007 2006 2007 2006 Sales $647,423 $569,321 $1,262,499 $1,112,132 Cost of goods sold 426,485 371,171 829,470 726,951 Gross profit 220,938 198,150 433,029 385,181 Operating expense 147,921 140,329 292,953 275,373 Loss on divestiture - - - 1,686 Amortization of intangibles 3,626 1,955 6,571 3,895 Operating income 69,391 55,866 133,505 104,227 Interest expense 8,531 7,286 16,330 14,713 Other income, net (993) (625) (2,096) (3,631) Income from continuing operations before income taxes and minority interest 61,853 49,205 119,271 93,145 Provision for income taxes 10,670 15,006 32,337 28,935 Minority interest expense 1,037 642 1,909 1,199 Income from continuing operations 50,146 33,557 85,025 63,011 Income from discontinued operations (a) - (3,506) - (2,599) Net income $50,146 $30,051 $85,025 $60,412 Basic earnings per share: (b) Continuing operations $0.65 $0.44 $1.10 $0.82 Discontinued operations (a) - (0.05) - (0.03) $0.65 $0.39 $1.10 $0.79 Diluted earnings per share: (b) Continuing operations $0.64 $0.43 $1.08 $0.80 Discontinued operations(a) - (0.05) - (0.03) $0.64 $0.38 $1.08 $0.77 Dividends per share (b) $0.12 $0.10 $0.23 $0.19 Basic weighted average shares outstanding (b) 77,111 76,662 77,272 76,540 Diluted weighted average shares outstanding (b) 78,647 78,450 78,821 78,284 (a) Income from discontinued operations reflects divested results of the Kemmer Praezision Electronics business (Electronics) - AMSG and the consumer retail product line, including industrial saw blades (CPG) - MSSG. (b) Per share amounts and shares outstanding have been restated to reflect the company's 2-for-1 stock split completed in December 2007. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) December 31, June 30, (in thousands) 2007 2007 ASSETS Cash and cash equivalents $63,473 $50,433 Accounts receivable, net 440,069 466,690 Inventories 463,341 403,613 Other current assets 96,462 95,766 Total current assets 1,063,345 1,016,502 Property, plant and equipment, net 694,745 614,019 Goodwill and intangible assets, net 840,598 834,290 Other assets 127,968 141,416 Total $2,726,656 $2,606,227 LIABILITIES Current maturities of long-term debt and capital leases, including notes payable $60,965 $5,430 Accounts payable 161,802 189,301 Other current liabilities 249,601 292,506 Total current liabilities 472,368 487,237 Long-term debt and capital leases 385,991 361,399 Other liabilities 284,724 255,500 Total liabilities 1,143,083 1,104,136 MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 20,276 17,624 SHAREOWNERS' EQUITY 1,563,297 1,484,467 Total $2,726,656 $2,606,227 SEGMENT DATA (Unaudited) Three Months Ended Six Months Ended December 31, December 31, (in thousands) 2007 2006 2007 2006 Outside Sales: Metalworking Solutions and Services Group $434,733 $373,995 $842,430 $731,079 Advanced Materials Solutions Group 212,690 195,326 420,069 381,053 Total outside sales $647,423 $569,321 $1,262,499 $1,112,132 Sales By Geographic Region: United States $278,238 $268,299 $561,318 $535,162 International 369,185 301,022 701,181 576,970 Total sales by geographic region $647,423 $569,321 $1,262,499 $1,112,132 Operating Income (Loss): Metalworking Solutions and Services Group $61,986 $45,208 $117,338 $90,874 Advanced Materials Solutions Group 27,197 33,993 57,177 61,379 Corporate and eliminations(c) (19,792) (23,335) (41,010) (48,026) Total operating income $69,391 $55,866 $133,505 $104,227 (c) Includes corporate functional shared services and intercompany eliminations.
In addition to reported results under generally accepted accounting principles in the United States of America (GAAP), the following financial highlight tables also include, where appropriate, a reconciliation of gross profit, operating expense, operating income, effective tax rate, income from continuing operations, net income and diluted earnings per share (which are GAAP financial measures), in each case excluding special items, as well as adjusted free operating cash flow and adjusted return on invested capital (which are non-GAAP financial measures), to the most directly comparable GAAP measures. Management believes that the investor 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 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.
RECONCILIATION TO GAAP - THREE MONTHS ENDED DECEMBER 31, 2006 (Unaudited) (in thousands, except per share amounts) Income from Gross Operating Operating Continuing Net Diluted Profit Expense Income Operations Income EPS(d) 2007 Reported Results $198,150 $140,329 $55,866 $33,557 $30,051 $ 0.38 Electronics impairment and divestiture- related charges - - - - 3,213 0.04 2007 Results, excl. special items $198,150 $140,329 $55,866 $33,557 $33,264 $ 0.42 RECONCILIATION TO GAAP - SIX MONTHS ENDED DECEMBER 31, 2007 (Unaudited) (in thousands, except percents and per share amounts) Income from Effective Continuing Net Diluted Tax Rate Operations Income EPS(d) 2008 Reported Results 27.1% $85,025 $85,025 $1.08 Impact of German tax reform bill (5.5) 6,594 6,594 0.08 2008 Adjusted Results 21.6% $91,619 $91,619 $1.16 RECONCILIATION TO GAAP - SIX MONTHS ENDED DECEMBER 31, 2006 (Unaudited) (in thousands, except per share amounts) Income from Gross Operating Operating Continuing Net Diluted Profit Expense Income Operations Income EPS(d) 2007 Reported Results $385,181 $275,373 $104,227 $63,011 $60,412 $ 0.77 Adjustment on J&L divestiture and transaction- related charges - (333) 2,019 1,252 1,252 0.02 Electronics impairment and divestiture- related charges - - - - 3,213 0.04 2007 Adjusted Results $385,181 $275,040 $106,246 $64,263 $64,877 $ 0.83 (d) Per share amounts have been restated to reflect the company's 2-for-1 stock split completed in December 2007. RECONCILIATION OF ADJUSTED FREE OPERATING CASH FLOW (Unaudited) Six Months Ended December 31, (in thousands) 2007 2006 Net cash flow provided by operating activities $68,934 $35,820 Purchases of property, plant and equipment (79,559) (44,929) Proceeds from disposals of property, plant and equipment 1,891 781 Free operating cash flow (8,734) (8,328) Adjustments: Income taxes paid during first quarter 4,659 86,236 Adjusted free operating cash flow $(4,075) $77,908 RETURN ON INVESTED CAPITAL (Unaudited) December 31, 2007 (in thousands, except percents) Invested Capital 12/31/2007 09/30/2007 06/30/2007 Debt $446,956 $377,051 $366,829 Minority interest 20,276 19,122 17,624 Shareowners' equity 1,563,297 1,531,051 1,484,467 Total $2,030,529 $1,927,224 $1,868,920 Invested Capital 03/31/2007 12/31/2006 Average Debt $371,521 $376,472 $387,766 Minority interest 16,896 15,807 17,945 Shareowners' equity 1,431,235 1,369,748 1,475,960 Total $1,819,652 $1,762,027 $1,881,670 Three Months Ended 12/31/2007 9/30/2007 6/30/2007 3/31/2007 Total Interest Expense Interest expense $8,531 $7,799 $7,513 $6,915 $30,758 Securitization fees 5 8 5 5 23 Total interest expense $8,536 $7,807 $7,518 $6,920 $30,781 Income tax benefit 8,434 Total interest expense, net of tax $22,347 Total Income 12/31/2007 9/30/2007 6/30/2007 3/31/2007 Total Net income, as reported $50,146 $34,879 $62,093 $51,738 $198,856 Impact of German tax reform bill - 6,594 - - 6,594 Minority interest expense 1,037 872 229 757 2,895 Total income, adjusted $51,183 $42,345 $62,322 $52,495 $208,345 Total interest expense, net of tax 22,347 $230,692 Average invested capital $1,881,670 Adjusted Return on Invested Capital 12.3% Return on invested capital calculated utilizing net income, as reported is as follows: Net income, as reported $198,856 Total interest expense, net of tax 22,347 $221,203 Average invested capital $1,881,670 Return on Invested Capital 11.8% RETURN ON INVESTED CAPITAL (Unaudited) December 31, 2006 (in thousands, except percents) Invested Capital 12/31/2006 09/30/2006 06/30/2006 Debt $376,472 $409,592 $411,722 Accounts receivable securitized - - - Minority interest 15,807 15,177 14,626 Shareowners' equity 1,369,748 1,319,599 1,295,365 Total $1,762,027 $1,744,368 $1,721,713 Invested Capital 03/31/2006 12/31/2005 Average Debt $365,906 $410,045 $394,748 Accounts receivable securitized 106,106 100,295 41,280 Minority interest 18,054 16,918 16,116 Shareowners' equity 1,115,110 1,045,974 1,229,159 Total $1,605,176 $1,573,232 $1,681,303 Three Months Ended 12/31/2006 9/30/2006 6/30/2006 3/31/2006 Total Interest Expense Interest expense $7,286 $7,427 $7,478 $7,728 $29,919 Securitization fees 6 22 1,288 1,241 2,557 Total interest expense $7,292 $7,449 $8,766 $8,969 $32,476 Income tax benefit 11,237 Total interest expense, net of tax $21,239 Total Income 12/31/2006 9/30/2006 6/30/2006 3/31/2006 Total Net income, as reported $30,051 $30,361 $164,196 $32,903 $257,511 Gain on divestiture of J&L - 1,045 (132,001) - (130,956) J&L transaction- related charges - 207 2,796 1,160 4,163 Loss on divestiture of Electronics, impairment and transaction-related charges 3,213 - 15,366 - 18,579 Tax impact of cash repatriation under AJCA - - 11,176 - 11,176 Loss on divestiture of CPG, goodwill impairment and transaction-related charges - 368 (2,192) 5,030 3,206 Loss on divestiture of Presto - - 1,410 8,047 9,457 Favorable resolution of tax contingencies - - (10,873) - (10,873) Minority interest expense 642 557 525 782 2,506 Total income, adjusted $33,906 $32,538 $50,403 $47,922 $164,769 Total interest expense, net of tax 21,239 $186,008 Average invested capital $1,681,303 Adjusted Return on Invested Capital 11.1% Return on invested capital calculated utilizing net income, as reported is as follows: Net income, as reported $257,511 Total interest expense, net of tax 21,239 $278,750 Average invested capital $1,681,303 Return on Invested Capital 16.6%
First Call Analyst:
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SOURCE: Kennametal Inc.
CONTACT: Investors, Quynh McGuire, +1-724-539-6559, or Media, Joy
Chandler, +1-724-539-4618, both of Kennametal Inc.
Web site: http://www.kennametal.com/