Kennametal increases sales 3% YOY
For its fourth quarter, Kennametal Inc. reported sales were $550 million compared with $530 million in the same quarter last year. Sales increased by 4%, driven by 7% organic growth, partially offset by an unfavorable currency exchange effect of 2% and an unfavorable business days effect of 1%.
"In fiscal year 2023 we generated $169 million in free operating cash flow, the highest level in eight years. For the full year, we delivered on our revenue and EPS outlook despite macroeconomic uncertainties and headwinds from inflation, foreign exchange, supply chain disruptions and a slower recovery in China," said President and CEO Christopher Rossi.
"Now as we look ahead to fiscal year 2024, we remain confident in our strategy and growth initiatives and the actions we will continue to take to improve margins," he continued. "We look forward to sharing more details on the company's growth and innovation strategy, as well as outlining our operational and financial targets to fiscal year 2027, at our upcoming Investor Day on September 8."
Fiscal 2023 Fourth Quarter Key Developments
To better align with the company's strategic goals and initiatives, certain of the end markets that are reported externally and used to analyze sales performance have been redefined. The changes include (1) defense sales were moved from general engineering and are now combined with aerospace sales for a new "aerospace and defense" end market, (2) certain Metal Cutting sales have been reclassified from general engineering to the aerospace and defense end market, and (3) Infrastructure's ceramics sales have been reclassified from energy to the general engineering end market.
During the quarter, the company announced an initiative to streamline its cost structure while continuing to invest in our high-return Commercial and Operational Excellence initiatives. This action is currently expected to deliver annualized run rate pre-tax savings of approximately $20 million by the end of fiscal 2024. Total charges of approximately $20 million are expected to be incurred in connection with the execution of this initiative, approximately $7 million of which were recognized during the quarter. Restructuring and related charges in the current quarter also include a reversal of approximately $1 million related to prior actions.
Operating income was $56 million, or 10.2% margin, compared with $63 million, or 11.8% margin, in the same quarter last year. The decrease in operating income was primarily due to higher raw material costs of approximately $11 million, higher restructuring and related charges of approximately $5 million, higher wages and general inflation, lower sales volumes in the Infrastructure segment and unfavorable foreign currency exchange of approximately $2 million. These factors were partially offset by higher price realization. Adjusted operating income was $63 million, or 11.4% margin, compared with $65 million, or 12.3% margin, in the prior year quarter.
Fiscal 2023 Key Developments
Sales of $2,078 million increased from $2,012 million in the prior year. Sales increased by 3%, driven by 9% organic growth, partially offset by an unfavorable currency exchange effect of 5% and an unfavorable business days effect of 1%.
Operating income was $192 million, or 9.3% margin, compared with $218 million, or 10.8% margin, in the prior year. The decrease in operating income was primarily due to higher raw material costs of approximately $72 million, higher wages and general inflation, unfavorable foreign currency exchange of approximately $18 million, under-absorption of approximately $10 million within the Infrastructure segment, temporary supply chain disruptions of approximately $5 million and higher restructuring and related charges of approximately $2 million. These factors were partially offset by higher price realization and, in the Metal Cutting segment, higher sales volumes. Adjusted operating income was $199 million, or 9.6% margin, compared with $224 million, or 11.1% margin, in the prior year.
Net cash flow provided by operating activities in fiscal 2023 was $258 million compared to $181 million in the prior year. The change in net cash flow from operating activities was driven primarily by working capital changes including improved inventory levels, partially offset by lower net income. Free operating cash flow (FOCF) was $169 million compared to $85 million in the prior year. The increase in FOCF was driven primarily by working capital changes including improved inventory levels and proceeds received from the disposal of property, plant and equipment, partially offset by lower net income and lower capital expenditures.
In fiscal 2023, Kennametal continued its focus on delivering shareholder value by returning $114 million to the shareholders through $49 million in share repurchases and $65 million in dividends, while investing $94 million in capital expenditures.
Outlook
The Company's expectations for the first quarter of fiscal 2024 and the full year are as follows:
Quarterly Outlook:
- Sales expected to be $485 - $510 million; foreign exchange anticipated to be flat compared to the first quarter of fiscal 2023
- Adjusted ETR is expected to be approximately 5%
- Adjusted EPS is expected to be $0.30 - $0.40
Annual Outlook:
- Sales expected to be $2.1 - $2.2 billion
- Interest expense is expected to be approximately $28 million
- Adjusted EPS is expected to be $1.75 - $2.15
- Pricing actions expected to cover raw material costs, wages and general inflation
- Infrastructure margin improvement
- Free operating cash flow of 100% of adjusted net income
- Primary working capital as a% of sales maintained at 30 - 32% throughout the year
- Capital spending expected to be approximately $100 - $110 million
- Adjusted ETR is expected to be approximately 24%
- $200 million three-year share repurchase program to continue
INDUSTRIAL SUPPLY MAGAZINE
The March/April issue of Industrial Supply magazine features an in-depth cover story about Joyce Lansdale and Vallen. Plus, we're featuring articles by contributing writers Dirk Beveridge, Frank Hurtte, and David Kahle, as well as interviews with numerous product and distribution industry experts.
