Outlook 
At our investor conference in December, we announced a reduction in our full fiscal year expectations. Consistent with that announcement, we have reduced guidance for consolidated adjusted EPS for the full fiscal year to be in the range of  $0.85 to $1.05. This reflects an adjustment of approximately 40 percent at the midpoint from our previous adjusted EPS guidance, which was projected to be in the range of $1.50 to $1.70. See detail of EPS changes below.

Due to the further deterioration of our end markets as evidenced by continued declines in industrial production indices, U.S. and China coal mining, as well as further reductions in oil and gas activity, the company has revised its fiscal 2016 outlook. Further, US industrial production levels in particular have significantly decreased, with Purchasing Managers' Index (PMI) falling below 50 percent after the end of November.

The company now expects fiscal 2016 total sales to decline in the range of 20 to 23 percent and organic sales to decline in the range of 10 to 13 percent. Previously, our October guidance provided in the fiscal first quarter 2016 earnings release, the decline in total sales was projected to be in the range of 10 to 14 percent, with a decline in organic sales of 6 to 10 percent. The current guidance reflects the impact of the sale of non-core businesses, whereas the previous guidance did not reflect this transaction.

Consistent with the change of expectations in December, the company has reduced EPS approximately 40 percent at the midpoint, and now expects consolidated adjusted EPS to be in the range of $0.85 to $1.05 for the full fiscal year. Previously, adjusted EPS was projected to be in the range of $1.50 to $1.70. See detail of EPS changes below.

The company now expects to generate cash flow from operations between $215 million and $245 million for fiscal 2016. Based on anticipated capital expenditures of approximately $125 million to $135 million, the company expects to generate between $90 million and $110 million of free operating cash flow for the fiscal year. Previously, the company had projected cash flow from operations between $275 million and $310 million and free operating cash flow of $115 million to $135 million for the fiscal year.

As previously stated, the impact from the sale of non-core businesses has been reflected in Kennametal's current guidance but was not included in the previous guidance.

Kennametal remains committed to maintaining investment-grade credit ratings. A portion of the proceeds from the divestiture and cash from operations, as well as any working capital reductions, have been used primarily for the purpose of debt reduction, and we will continue to focus on debt reduction in the near term. The company's longer-term capital allocation process will continue to include disciplined capital investments in the business, as well as returning cash to shareholders through dividends and share repurchases.

Dividend Declared
Kennametal also announced that its board of directors declared a quarterly cash dividend of $0.20 per share. The dividend is payable February 26, 2016 to shareholders of record as of the close of business on February 12, 2016.

The company will discuss its fiscal 2016 second quarter results in a live webcast at 11:00 a.m. Eastern Time today, February 3, 2016. 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 also will be available on the company's website through March 3, 2016.

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, and cash flow for fiscal year 2016 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
At the forefront of advanced materials innovation for more than 75 years, Kennametal Inc. is a global industrial technology leader delivering 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 over 12,000 employees are helping customers in more than 60 countries stay competitive. Kennametal generated more than $2.6 billion in revenues in fiscal 2015. Learn more at www.kennametal.com.

FINANCIAL HIGHLIGHTS
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
	Three Months Ended December 31,				Six Months Ended December 31,
(in thousands, except per share amounts)	2015		2014		2015		2014
Sales	$	524,021	$	675,631	$	1,079,376	$	1,370,572
Cost of goods sold	383,215		476,173		787,345		953,015
Gross profit	140,806		199,458		292,031		417,557
Operating expense	123,580		137,459		252,824		285,947
Restructuring and asset impairment charges	112,237		388,839		121,357		390,402
Loss on divestiture	133,307		—		133,307		—
Amortization of intangibles	5,638		6,931		11,886		13,959
Operating loss	(233,956)		(333,771)		(227,343)		(272,751)
Interest expense	6,803		7,960		13,782		16,170
Other (income) expense, net	(732)		2,223		353		409
Loss before income taxes	(240,027)		(343,954)		(241,478)		(289,330)
(Benefit) provision for income taxes	(71,216)		43,751		(66,964)		58,248
Net loss	(168,811)		(387,705)		(174,514)		(347,578)
Less: Net income attributable to noncontrolling interests	416		597		939		1,236
Net loss attributable to Kennametal	$	(169,227)	$	(388,302)	$	(175,453)	$	(348,814)
PER SHARE DATA ATTRIBUTABLE TO KENNAMETAL SHAREHOLDERS
Basic loss earnings per share	$	(2.12)	$	(4.89)	$	(2.20)	$	(4.40)
Diluted loss earnings per share	$	(2.12)	$	(4.89)	$	(2.20)	$	(4.40)
Dividends per share	$	0.20	$	0.18	$	0.40	$	0.36
Basic weighted average shares outstanding	79,840		79,343		79,784		79,229
Diluted weighted average shares outstanding	79,840		79,343		79,784		79,229

 

 

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands)	December 31, 2015		June 30, 2015
ASSETS
Cash and cash equivalents	$	138,978	$	105,494
Accounts receivable, net	333,402		445,373
Inventories	477,499		575,531
Other current assets	113,113		132,148
Total current assets	1,062,992		1,258,546
Property, plant and equipment, net	719,529		815,825
Goodwill and other intangible assets, net	514,002		704,058
Other assets	143,729		71,100
Total assets	$	2,440,252	$	2,849,529
LIABILITIES
Current maturities of long-term debt and capital leases, including notes payable	$	5,942	$	15,702
Accounts payable	151,597		187,381
Other current liabilities	237,444		279,661
Total current liabilities	394,983		482,744
Long-term debt and capital leases	700,711		735,885
Other liabilities	190,281		255,465
Total liabilities	1,285,975		1,474,094
KENNAMETAL SHAREHOLDERS' EQUITY	1,124,848		1,345,807
NONCONTROLLING INTERESTS	29,429		29,628
Total liabilities and equity	$	2,440,252	$	2,849,529

 

 

SEGMENT DATA (UNAUDITED)	Three Months Ended December 31,				Six Months Ended December 31,
(in thousands)	2015		2014		2015		2014
Outside Sales:
Industrial	$	310,883	$	371,557	$	624,217	$	749,415
Infrastructure	213,138		304,074		455,159		621,157
Total outside sales	$	524,021	$	675,631	$	1,079,376	$	1,370,572
Sales By Geographic Region:
North America	$	233,647	$	319,495	$	486,797	$	654,065
Western Europe	145,842		183,583		301,563		374,437
Rest of World	144,532		172,553		291,016		342,070
Total sales by geographic region	$	524,021	$	675,631	$	1,079,376	$	1,370,572
Operating Income (Loss):
Industrial	$	7,360	$	41,795	$	27,109	$	85,812
Infrastructure	(237,738)		(371,920)		(246,166)		(352,699)
Corporate (1)	(3,578)		(3,646)		(8,286)		(5,864)
Total operating loss	$	(233,956)	$	(333,771)	$	(227,343)	$	(272,751)

(1)  Represents unallocated corporate expenses.

 

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 (loss) income and margin, net (loss) income, diluted (LPS) EPS, effective tax rate, Industrial operating income and margin, Infrastructure operating (loss) income and margin and free operating cash flow (which are non-GAAP financial measures), to the most directly comparable GAAP 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 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. Reconciliations of all non-GAAP financial measures are set forth in the attached tables and descriptions of certain non-GAAP financial measures are contained in our report on Form 8-K to which this release is attached.

THREE MONTHS ENDED DECEMBER 31, 2015 - (UNAUDITED)
(in thousands, except percents and per share data)	Sales		Gross profit		Operating expense		Operating (loss) income		Net (loss) income (2)		Diluted (LPS) EPS		Effective tax rate
Reported results	$	524,021	$	140,806	$	123,580	$	(233,956)	$	(169,227)	$	(2.12)	29.7%
Reported margins			26.9%		23.6%		(44.6)%
Restructuring and related charges (3)	—		1,676		(3,405)		8,862		6,393		0.08		—
Goodwill and other intangible asset impairment charges	—		—		—		108,456		78,239		0.98		(25.0)
Loss on divestiture	—		—		—		133,307		96,167		1.20		(17.8)
Adjusted results	$	524,021	$	142,482	$	120,175	$	16,669	$	11,572	$	0.14	(13.1)%
Adjusted margins			27.2%		22.9%		3.2%

(2) Represents amounts attributable to Kennametal Shareholders.

(3) Includes pre-tax restructuring related charges recorded in corporate of $2,281.

 

(in thousands, except percents)	Industrial sales		Industrial operating income		Infrastructure sales		Infrastructure operating loss
Reported results	$	310,883	$	7,360	$	213,138	$	(237,738)
Reported operating margin			2.4%				(111.5)%
Restructuring and related charges (4)	—		4,767		—		1,814
Goodwill and other intangible asset impairment charges	—		2,345		—		106,111
Loss on divestiture	—		7,258		—		126,049
Adjusted results	$	310,883	$	21,730	$	213,138	$	(3,764)
Adjusted operating margin			7.0%				(1.8)%

(4) Excludes pre-tax restructuring related charges recorded in corporate of $2,281.

 

THREE MONTHS ENDED DECEMBER 31, 2014 - (UNAUDITED)
(in thousands, except percents and per share data)	Sales		Gross profit		Operating expense		Operating (loss) income		Net (loss) income (2)		Diluted (LPS) EPS		Effective tax rate
Reported results	$	675,631	$	199,458	$	137,459	$	(333,771)	$	(388,302)	$	(4.89)	(12.7)%
Reported margins			29.5%		20.3%		(49.4)%
Restructuring and    related charges (5)	—		2,677		(3,415)		12,930		10,385		0.13		2.3
Goodwill and other    intangible asset    impairment charges	—		—		—		382,000		419,273		5.28		28.1
Adjusted results	$	675,631	$	202,135	$	134,044	$	61,159	$	41,356	$	0.52	17.7%
Adjusted margins			29.9%		19.8%		9.1%

(5) Includes pre-tax restructuring related charges recorded in corporate of $1,844.

 

(in thousands, except percents)	Industrial sales		Industrial operating income		Infrastructure sales		Infrastructure operating (loss) income
Reported results	$	371,557	$	41,795	$	304,074	$	(371,920)
Reported operating margin			11.2%				(122.3)%
Restructuring and related charges(6)	—		5,921		—		5,165
Goodwill and other intangible asset    impairment charges	—		—		—		382,000
Adjusted results	$	371,557	$	47,716	$	304,074	$	15,245
Adjusted operating margin			12.8%				5.0%

(6) Excludes pre-tax restructuring related charges recorded in corporate of $1,844.

 

SIX MONTHS ENDED DECEMBER 31, 2015 - (UNAUDITED)
(in thousands, except percents)	Sales		Operating (loss) income		Net (loss) income		Diluted (LPS) EPS
Reported results	$	1,079,376	$	(227,343)	$	(175,453)	$	(2.20)
Reported operating margin			(21.1)%
Restructuring and related charges	—		23,974		17,736		0.22
Goodwill and other intangible asset impairment charges	—		108,456		80,236		1.01
Loss on divestiture and related charges	—		133,307		100,349		1.26
Adjusted results	$	1,079,376	$	38,394	$	22,868	$	0.29
Adjusted operating margin			3.6%

 

SIX MONTHS ENDED DECEMBER 31, 2014 - (UNAUDITED)
(in thousands, except percents)	Sales		Operating (loss) income		Net (loss) income		Diluted (LPS) EPS
Reported results	$	1,370,572	$	(272,751)	$	(348,814)	$	(4.40)
Reported operating margin			(19.9)%
Restructuring and related charges	—		20,375		15,941		0.20
Goodwill and other intangible asset impairment charges	—		382,000		419,273		5.29
Adjusted results	$	1,370,572	$	129,624	$	86,400	$	1.09
Adjusted operating margin			9.5%

 

FREE OPERATING CASH FLOW (UNAUDITED)		Six Months Ended
		December 31,
(in thousands)		2015			2014
Net cash flow from operating activities		$	102,790		$	135,322
Purchases of property, plant and equipment		(61,175)			(54,672)
Proceeds from disposals of property, plant and equipment		4,402			978
Free operating cash flow		$	46,017		$	81,628

 

SOURCE Kennametal Inc.

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