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Kennametal Inc. reported today that it achieved new records for sales, adjusted EPS and adjusted ROIC for both the quarter and fiscal year ended June 30, 2008. Sales increased over the prior year by 15 percent for the June quarter and by 13 percent for the fiscal year, including organic sales growth of 4 percent for both periods. This marked the company's 18th consecutive quarter of year-over-year organic sales growth.
Reported fiscal 2008 fourth quarter diluted earnings per share (EPS) were $0.77, compared with the prior year quarter EPS of $0.79, a decrease of 3 percent. Reported EPS included charges of $0.08 per share related to its previously announced restructuring actions. Absent these charges, adjusted EPS of $0.85 increased 8 percent compared with prior year quarter EPS.
Fiscal 2008 reported EPS decreased 3 percent to $2.15, compared with prior year reported EPS of $2.22. Fiscal 2008 adjusted EPS were $2.76, compared with prior year adjusted EPS of $2.28, an increase of 21 percent. Adjusted ROIC was 12.3 percent, up 100 basis points from 11.3 percent in the prior year.
Carlos Cardoso, Kennametal's Chairman, President and Chief Executive Officer said, "We are pleased with our results for the quarter as well as for fiscal year 2008. For both periods, we delivered record sales and achieved new milestones for adjusted EPS and ROIC despite weaker market conditions in North America and higher raw material costs. During fiscal 2008, we again generated strong cash flow supported by initiatives in the June quarter aimed at reducing inventory and further shaping our business portfolio by divesting two non-core businesses. We continued to invest in our business and began to implement our previously announced restructuring actions to reduce costs and improve operating efficiencies. Our strong performance in the fourth quarter and throughout fiscal 2008 validates both our strategies and our ability to execute them, while showcasing the resilience and balance of our business."
Reconciliations of all non-GAAP financial measures are set forth in the attached tables.
Highlights of Fiscal 2008 Fourth Quarter
-- Sales for the quarter were $753 million, compared with $657 million in the same quarter last year. Sales grew 15 percent year-over-year and included 4 percent organic growth, 1 percent from acquisitions and 7 percent from foreign currency effects. The current quarter had more workdays than the prior year quarter which increased the overall sales growth by 3 percent.
-- As previously announced, the company began implementing certain restructuring actions to reduce costs and improve efficiencies in its operations. During the June quarter, the company recognized pre-tax charges related to these initiatives of $8 million, or $0.08 per share. Including these charges, the company expects to recognize a total of $40 million to $50 million of pre-tax charges related to these restructuring actions. The remaining charges are expected to be incurred over the next nine to fifteen months. Approximately 90 percent of these charges are expected to be cash expenditures. Annual ongoing benefits from these actions, once fully implemented, are expected to be in the range of $20 million to $25 million.
-- The company divested two non-core businesses within its metalworking segment during the June quarter and recognized a combined pre-tax loss on divestitures of $0.6 million. Cash proceeds received were $20 million.
-- Income from continuing operations was $60 million, compared with $62 million in the prior year quarter. Absent the charges related to restructuring actions, income from continuing operations increased 7 percent to $66 million from $62 million in the prior year quarter. This increase was driven by organic sales growth, favorable foreign currency effects and a lower effective tax rate.
-- The effective tax rate for the current quarter was 20.1 percent compared with 27.0 percent in the prior year quarter. The prior year rate included a provision for a tax uncertainty. In addition, the current quarter rate benefited from the effect of divestitures and a tax benefit associated with a dividend reinvestment plan in China.
-- Reported EPS were $0.77, compared with prior year quarter EPS of $0.79. Adjusted EPS of $0.85 increased 8 percent, compared with prior year quarter EPS of $0.79. A reconciliation follows:
Earnings Per Diluted Share Reconciliation Fourth Quarter FY 2008 Fourth Quarter FY 2007 Reported EPS $0.77 Reported EPS $0.79 Restructuring and related charges 0.08 Adjusted EPS $0.85 $0.79
-- During the June quarter, the company reduced its inventory by $34 million or 7 percent from the March quarter, of which $10 million was related to divestitures.
-- Adjusted ROIC was 12.3 percent, up 100 basis points from 11.3 percent in the prior year.
-- Cash flow from operating activities was $280 million in fiscal 2008, compared with $199 million in the prior year. Adjusted free operating cash flow for the current year was $124 million compared with $197 million in the prior year. The change in adjusted free operating cash flow was primarily driven by a $71 million increase in capital expenditures for enhanced manufacturing capabilities and geographic expansion, as well as changes in working capital.
Highlights of Fiscal 2008
-- Sales of $2.7 billion increased 13 percent from $2.4 billion in the prior year. Sales grew 4 percent on an organic basis, 3 percent from acquisitions and 6 percent from foreign currency effects.
-- Income from continuing operations was $168 million, compared with $177 million in the prior year, a decrease of 5 percent. Adjusted income from continuing operations was $216 million, an increase of 21 percent, compared with $178 million in the prior year.
-- The reported effective tax rate was 27.3 percent. On an adjusted basis, the effective tax rate was 21.2 percent, compared with 28.2 percent reported in the prior year. The lower adjusted rate compared with the rate for the prior year was driven by an increase in earnings under the company's pan-European business strategy, the effects of other international operations and benefits from a dividend reinvestment plan in China.
-- Reported EPS decreased 3 percent to $2.15, compared with prior year reported EPS of $2.22. Adjusted EPS increased 21 percent to $2.76, compared with prior year adjusted EPS of $2.28. A reconciliation follows:
Earnings Per Diluted Share Reconciliation FY 2008 FY 2007 Reported EPS $2.15 Reported EPS $2.22 Impact of German tax Electronics impairment and reform bill 0.08 transaction-related charges 0.04 Goodwill impairment charge 0.45 Adjustment on J&L divestiture Restructuring and and transaction-related related charges 0.08 charges 0.02 Adjusted EPS $2.76 Adjusted EPS $2.28 Business Segment Highlights of Fiscal 2008 Fourth Quarter
Metalworking Solutions & Services Group (MSSG) delivered further top-line growth in the June quarter, driven primarily by organic sales gains and favorable foreign currency effects. Industrial activity remained positive in most industry and market sectors on a global basis. Areas of particular strength included aerospace, machine tools and general engineering. On a regional basis, continued growth in Europe, as well as ongoing strength in developing economies, particularly Asia Pacific and India, more than offset continued weakness in the North American market.
In the June quarter, MSSG sales grew by 13 percent as a result of 2 percent organic growth, 8 percent favorable foreign currency effects, 1 percent from acquisitions and 2 percent from more workdays. Asia Pacific and India organic sales increased 13 percent and 18 percent, respectively. Europe and Latin America organic sales increased 4 percent and 6 percent, respectively. North American organic sales declined by 5 percent.
MSSG operating income decreased by 3 percent and the operating margin decreased 230 basis points from the same quarter last year. During the June quarter, MSSG recognized restructuring and related charges of $5 million. Absent these charges, MSSG operating income increased 4 percent and operating margin decreased 130 basis points. The primary drivers of the decline in operating margin were lower manufacturing production to reduce inventory and divestiture-related charges offset somewhat by current quarter benefits from organic growth and favorable foreign currency effects.
Advanced Materials Solutions Group (AMSG) sales increased 17 percent during the June quarter, driven by 8 percent organic growth, 5 percent from favorable foreign currency effects, 2 percent from acquisitions and 2 percent from more workdays. Organic sales increased on stronger construction and mining sales and higher energy-related sales, slightly offset by lower engineered product sales.
AMSG operating income was down 13 percent and operating margin was 430 basis points lower than for the prior year quarter. During the June quarter, AMSG recognized restructuring and related charges of $3 million. Absent these charges, AMSG operating income decreased 6 percent and the operating margin decreased 320 basis points. The decline in operating margin was due to higher raw material costs and lower performance in the surface finishing machines and services business.
Global market indicators support Kennametal's expectation for continued but more moderate top-line growth during fiscal 2009. The company believes that the North American economy will remain challenging for at least the next six to nine months. The company also believes that the European market will continue to grow, but at a slower pace. Growth in India is also expected to moderate while other developing economies should continue to show resilience. 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 moderate growth in global demand.
Kennametal expects total sales growth of 5 percent to 7 percent for fiscal 2009, including organic sales growth of 2 percent to 4 percent.
The company expects fiscal 2009 EPS to be in the range of $3.00 to $3.15, excluding charges that occur relating to the previously announced restructuring actions. Consistent with historical seasonal patterns, the company expects approximately 65 percent of the forecasted EPS to be realized in the second half of the fiscal year.
In the first quarter of fiscal 2009, Kennametal expects total sales growth to be in the range of 7 percent to 8 percent, including organic growth of 2 percent to 3 percent, and EPS to be in the range of $0.50 and $0.55, excluding charges that occur relating to the previously announced restructuring actions.
Kennametal anticipates cash flow from operating activities of approximately $310 million to $330 million for fiscal 2009. Based on anticipated capital expenditures of $155 million, the company expects to generate between $155 million and $175 million of free operating cash flow for fiscal 2009.
Kennametal announced today that its Board of Directors declared a regular quarterly cash dividend of $0.12 per share. The dividend is payable August 20, 2008 to shareowners of record as of the close of business on August 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.
Fourth quarter and full year 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 "Investor Relations" and then "Events." The replay of this event will also be available on the company's website through August 23, 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, financial performance for future periods and its intended restructuring activities, 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; implementation of restructuring plans and environmental remediation matters; demand for and market acceptance of new and existing products; future terrorist attacks or acts of war; and labor relations. 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. We undertake no obligation to release publicly any revisions to forward-looking statements as a result of future events or developments.
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 $2.7 billion annually of Kennametal products and services -- delivered by our 14,000 talented employees in over 60 countries -- with more than 50 percent of these revenues coming from outside North America. Visit us at www.kennametal.com. [KMT-E]
FINANCIAL HIGHLIGHTS CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended Year Ended June 30, June 30, (in thousands, except per share amounts) 2008 2007 2008 2007 Sales $752,961 $657,477 $2,705,129 $2,385,493 Cost of goods sold 500,616 421,934 1,781,889 1,543,931 Gross profit 252,345 235,543 923,240 841,562 Operating expense 161,590 142,328 605,004 554,634 Restructuring and asset impairment charges 4,891 - 39,891 5,970 Loss on divestitures 582 - 582 1,686 Amortization of intangibles 3,806 4,149 13,864 9,852 Operating income 81,476 89,066 263,899 269,420 Interest expense 7,393 7,513 31,728 29,141 Other income, net (930) (3,783) (2,641) (9,217) Income from continuing operations before income taxes and minority interest 75,013 85,336 234,812 249,496 Provision for income taxes 15,104 23,014 64,057 70,469 Minority interest expense 329 229 2,980 2,185 Income from continuing operations 59,580 62,093 167,775 176,842 Loss from discontinued operations (a) - - - (2,599) Net income $59,580 $62,093 $167,775 $174,243 Basic earnings (loss) per share: (b) Continuing operations $0.78 $0.80 $2.18 $2.30 Discontinued operations (a) - - - (0.03) $0.78 $0.80 $2.18 $2.27 Diluted earnings (loss) per share: (b) Continuing operations $0.77 $0.79 $2.15 $2.25 Discontinued operations (a) - - - (0.03) $0.77 $0.79 $2.15 $2.22 Dividends per share (b) $0.12 $0.10 $0.47 $0.41 Basic weighted average shares outstanding (b) 76,346 77,235 76,811 76,788 Diluted weighted average shares outstanding (b) 77,614 78,977 78,201 78,545
(a) Loss 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) Share and per share amounts have been restated to reflect the company's 2-for-1 stock split completed in December 2007.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) June 30, June 30, (in thousands) 2008 2007 ASSETS Cash and cash equivalents $67,986 $50,433 Accounts receivable, net 512,794 466,690 Inventories 460,800 403,613 Other current assets 91,914 95,766 Total current assets 1,133,494 1,016,502 Property, plant and equipment, net 749,755 614,019 Goodwill and intangible assets, net 802,722 834,290 Other assets 79,884 141,416 Total $2,765,855 $2,606,227 LIABILITIES Current maturities of long-term debt and capital leases, including notes payable $15,106 $5,430 Accounts payable 189,050 189,301 Other current liabilities 298,661 292,506 Total current liabilities 502,817 487,237 Long-term debt and capital leases 313,052 361,399 Other liabilities 280,552 255,500 Total liabilities 1,096,421 1,104,136 MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 21,527 17,624 SHAREOWNERS' EQUITY 1,647,907 1,484,467 Total $2,765,855 $2,606,227 SEGMENT DATA (Unaudited) Three Months Ended Year Ended June 30, June 30, (in thousands) 2008 2007 2008 2007 Outside Sales: Metalworking Solutions and Services Group $488,022 $430,630 $1,789,859 $1,577,234 Advanced Materials Solutions Group 264,939 226,847 915,270 808,259 Total outside sales $752,961 $657,477 $2,705,129 $2,385,493 Sales By Geographic Region: United States $318,405 $306,848 $1,174,003 $1,134,752 International 434,556 350,629 1,531,126 1,250,741 Total sales by geographic region $752,961 $657,477 $2,705,129 $2,385,493 Operating Income (Loss): Metalworking Solutions and Services Group $67,727 $69,729 $260,744 $221,387 Advanced Materials Solutions Group 32,858 37,974 83,925 131,323 Corporate and eliminations ( c )(19,109) (18,637) (80,770) (83,290) Total operating income $81,476 $89,066 $263,899 $269,420
( 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 include, where appropriate, a reconciliation of adjusted results including gross profit, operating expense, operating income, MSSG operating income, AMSG operating income, effective tax rate, income from continuing operations, net income and diluted earnings per share (which are GAAP financial measures), 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 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 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 JUNE 30, 2008 (Unaudited) (in thousands, Income from except per Gross Operating Operating Continuing Net Diluted share amounts) Profit Expense Income Operations Income EPS 2008 Reported Results $252,345 $161,590 $81,476 $59,580 $59,580 $0.77 Restructuring and related charges 1,441 (1,916) 8,248 6,635 6,635 0.08 2008 Adjusted Results $253,786 $159,674 $89,724 $66,215 $66,215 $0.85 MSSG AMSG Operating Operating (in thousands) Income Income 2008 Reported Results $67,727 $32,858 Restructuring and related charges 4,856 3,012 2008 Adjusted Results $72,583 $35,870 RECONCILIATION TO GAAP - YEAR ENDED JUNE 30, 2008 (Unaudited) (in thousands, except percents Effect- and per ive Income from share Tax Gross Operating Operating Continuing Net Diluted amounts) Rate Profit Expense Income Operations Income EPS(d) 2008 Reported Results 27.3% $923,240 $605,004 $263,899 $167,775 $167,775 $2.15 Impact of German tax reform bill (2.4) - - - 6,594 6,594 0.08 Goodwill impairment charge (3.6) - - 35,000 35,000 35,000 0.45 Restructuring and related charges (0.1) 1,441 (1,916) 8,248 6,635 6,635 0.08 2008 Adjusted Results 21.2% $924,681 $603,088 $307,147 $216,004 $216,004 $2.76 RECONCILIATION TO GAAP - YEAR ENDED JUNE 30, 2007 (Unaudited) (in thousands, Income from except per Operating Operating Continuing Net Diluted share amounts) Expense Income Operations Income EPS(d) 2007 Reported Results $554,634 $269,420 $176,842 $174,243 $2.22 Electronics impairment and transaction-related charges - - - 3,213 0.04 Adjustment on J&L divestiture and transaction-related charges (333) 2,019 1,252 1,252 0.02 2007 Adjusted Results $554,301 $271,439 $178,094 $178,708 $2.28 (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): Year Ended June 30, (in thousands) 2008 2007 Net cash flow provided by operating activities $279,786 $199,006 Purchases of property, plant and equipment (163,489) (92,001) Proceeds from disposals of property, plant and equipment 2,839 3,455 Free operating cash flow 119,136 110,460 Adjustments: Income taxes paid during first quarter 4,659 86,236 Adjusted free operating cash flow $123,795 $196,696 RETURN ON INVESTED CAPITAL (Unaudited) June 30, 2008 (in thousands, except percents) Invested Capital 6/30/2008 3/31/2008 12/31/2007 9/30/2007 6/30/2007 Average Debt $328,158 $428,456 $446,956 $377,051 $366,829 $389,490 Minority interest 21,527 21,879 20,276 19,122 17,624 20,086 Share- owners' equity 1,647,907 1,615,568 1,563,297 1,531,378 1,484,467 1,568,523 Total $1,997,592 $2,065,903 $2,030,529 $1,927,551 $1,868,920 $1,978,099 Three Months Ended Interest Expense 6/30/2008 3/31/2008 12/31/2007 9/30/2007 Total Interest expense $7,393 $8,005 $8,531 $7,799 $31,728 Securitization fees 4 5 5 8 22 Total interest expense $7,397 $8,010 $8,536 $7,807 $31,750 Income tax benefit 6,731 Total interest expense, net of tax $25,019 Total Income 6/30/2008 3/31/2008 12/31/2007 9/30/2007 Total Net income, as reported $59,580 $23,170 $50,146 $34,879 $167,775 Impact of German tax reform bill - - - 6,594 6,594 Goodwill impairment charge - 35,000 - - 35,000 Restructuring and related charges 6,635 - - - 6,635 Minority interest expense 329 742 1,037 872 2,980 Total income, adjusted $66,544 $58,912 $51,183 $42,345 $218,984 Total interest expense, net of tax 25,019 $244,003 Average invested capital $1,978,099 Adjusted Return on Invested Capital 12.3% Return on invested capital calculated utilizing net income, as reported is as follows: Net income, as reported $167,775 Total interest expense, net of tax 25,019 $192,794 Average invested capital $1,978,099 Return on Invested Capital 9.7% RETURN ON INVESTED CAPITAL (Unaudited) June 30, 2007 (in thousands, except percents) Invested Capital 6/30/2007 3/31/2007 12/31/2006 9/30/2006 6/30/2006 Average Debt $366,829 $371,521 $376,472 $409,592 $411,722 $387,227 Minority interest 17,624 16,896 15,807 15,177 14,626 16,026 Share- owners' equity 1,484,467 1,431,235 1,369,748 1,319,599 1,295,365 1,380,083 Total $1,868,920 $1,819,652 $1,762,027 $1,744,368 $1,721,713 $1,783,336 Three Months Ended Interest Expense 6/30/2007 3/31/2007 12/31/2006 9/30/2006 Total Interest expense $7,513 $6,915 $7,286 $7,427 $29,141 Securitization fees 5 5 6 22 38 Total interest expense $7,518 $6,920 $7,292 $7,449 $29,179 Income tax benefit 8,258 Total interest expense, net of tax $20,921 Total Income 6/30/2007 3/31/2007 12/31/2006 9/30/2006 Total Net income, as reported $62,093 $51,738 $30,051 $30,361 $174,243 Adjustment on J&L divestiture and transaction- related charges - - - 1,252 1,252 Electronics impairment and transaction- related charges - - 3,213 - 3,213 Loss on divestiture of CPG and transaction-related charges - - - 368 368 Minority interest expense 229 757 642 557 2,185 Total income, adjusted $62,322 $52,495 $33,906 $32,538 $181,261 Total interest expense, net of tax 20,921 $202,182 Average invested capital $1,783,336 Adjusted Return on Invested Capital 11.3% Return on invested capital calculated utilizing net income, as reported is as follows: Net income, as reported $174,243 Total interest expense, net of tax 20,921 $195,164 Average invested capital $1,783,336 Return on Invested Capital 10.9%
First Call Analyst:
FCMN Contact: firstname.lastname@example.org
SOURCE: Kennametal Inc.
CONTACT: Investors, Quynh McGuire, +1-724-539-6559, or Media, Joy
Chandler +1-724-539-4618, both for Kennametal Inc.
Web site: http://www.kennametal.com/