PITTSBURGH, May 6, 2019 /PRNewswire/ -- Kennametal Inc. (NYSE: KMT) (the "Company") today reported results for its fiscal 2019 third quarter ended March 31, 2019, with EPS of $0.82, compared with $0.61 in the prior year quarter, and adjusted EPS of $0.77, compared with $0.70 in the prior year quarter.

"We delivered organic sales growth in every business segment, on increasingly tougher comparables, and end markets remained generally positive except for automotive," said President and Chief Executive Officer, Chris Rossi. "Earnings improved, and our adjusted EBITDA margin for the quarter increased notably year-over-year which is in-line with the fiscal 2021 targets outlined at our most recent Investor Day."

Rossi continued, "We are seeing the increasing benefits from simplification/modernization in our financial results. Moving forward, we expect the associated restructuring efforts to further reduce structural costs while maintaining customer commitments."

Simplification/Modernization Restructuring

The Company today announced details of the next phase of restructuring associated with simplification /modernization. These actions are expected to reduce structural costs and are currently estimated to achieve $35-$40 million of annualized savings by the end of fiscal 2020. The Company is expected to incur pre-tax charges of $55-$65 million through fiscal 2019 and 2020 for these restructuring activities.

Fiscal 2019 Third Quarter Key Developments

Sales of $597 million decreased 2 percent from $608 million year-over-year, reflecting 4 percent unfavorable currency exchange effect and a 1 percent unfavorable business day effect, partially offset by 3 percent organic sales growth.

In connection with the Company's simplification/modernization initiative, pre-tax restructuring and related charges were $3 million, or $0.03 per share, and incremental pre-tax benefits from simplification/modernization restructuring were approximately $3 million in the quarter. Annualized run-rate pre-tax benefits of approximately $12 million have been achieved in connection with these substantially completed simplification/modernization initiatives.

Operating income was $82 million, or 13.7 percent margin, compared to $81 million, or 13.3 percent margin, in the prior year quarter. Adjusted operating income was $85 million, or 14.3 percent margin, compared to $83 million, or 13.6 percent margin, in the prior year quarter. The increase in adjusted operating income was due primarily to organic sales growth, incremental simplification/modernization benefits and lower compensation expense, partially offset by unfavorable volume-related labor and fixed cost absorption in certain facilities in part due to simplification/modernization efforts in progress, higher raw material costs and unfavorable currency exchange. Price realization exceeded raw material cost inflation.

The reported effective tax rate (ETR) for the quarter was 11.0 percent and the adjusted ETR was 19.8 percent, compared to reported ETR of 31.2 percent and adjusted ETR of 23.1 percent in the prior year quarter. The change in the adjusted ETR was primarily due to U.S. tax reform.

Reported EPS in the current quarter includes a non-recurring benefit related to U.S. tax reform of $0.08 and restructuring and related charges of $0.03. Reported EPS in the prior year quarter includes a non-recurring charge related to U.S. tax reform of $0.08 and restructuring and related charges of $0.01.

Net cash flow provided by operating activities was $157 million compared to $158 million in the prior year period. Free operating cash flow (FOCF) was $15 million compared to $54 million in the prior year period. The change in FOCF was driven primarily by higher working capital and greater net capital expenditures due in part to simplification/modernization initiatives, partially offset by increased cash flow from operations before changes in certain other assets and liabilities.

Outlook

The Company updated its outlook for fiscal year 2019:

• Adjusted EPS of $3.00 to $3.10 on organic sales growth of approximately 5 percent
• Adjusted ETR of approximately 22 percent
• Capital spending of $200 to $220 million
• Free operating cash flow of $120 to $140 million

Segment Results

Industrial sales of $319 million decreased 4 percent from $333 million year-over-year, reflecting a 5 percent unfavorable currency exchange impact, partially offset by organic sales growth of 1 percent. Operating income was $57 million, or 18.0 percent margin, compared to $50 million, or 15.1 percent margin, in the prior year quarter. Adjusted operating income was $58 million, or 18.3 percent margin, compared to $51 million, or 15.4 percent margin, in the prior year quarter. The increase in adjusted operating income was driven primarily by organic sales growth and incremental simplification/modernization benefits, partially offset by unfavorable volume-related labor and fixed cost absorption in certain facilities in part due to simplification/modernization efforts in progress and unfavorable currency exchange.

Widia sales of $51 million decreased 2 percent from $52 million year-over-year, driven by a 4 percent unfavorable currency exchange impact and an unfavorable business day effect of 1 percent, partially offset by organic sales growth of 3 percent. Operating income was break-even, compared to $1 million, or 2.4 percent margin, in the prior year quarter. Adjusted operating income was $1 million, or 1.3 percent margin, compared to $1 million, or 2.4 percent margin, in the prior year quarter. The change in adjusted operating income was driven primarily by lower margins from one-time costs associated with simplification efforts to streamline the product portfolio, partially offset by organic sales growth.

Infrastructure sales of $228 million increased 2 percent from $223 million year-over-year, driven by organic sales growth of 6 percent, partially offset by an unfavorable currency exchange impact of 3 percent and an unfavorable business day effect of 1 percent. Operating income was $25 million, or 11.0 percent margin, compared to $30 million, or 13.5 percent margin, in the prior year quarter. Adjusted operating income was $27 million, or 11.7 percent margin, compared to $31 million, or 13.8 percent margin, in the prior year quarter. The decrease in adjusted operating income was primarily driven by higher raw material costs and manufacturing expenses, partially offset by organic sales growth and incremental simplification/modernization benefits.

Dividend Declared

Kennametal also announced that its Board of Directors declared a quarterly cash dividend of $0.20 per share. The dividend is payable on May 29, 2019 to shareholders of record as of the close of business on May 14, 2019.

The Company will discuss its fiscal 2019 third quarter results in a live webcast at 8:00 a.m. Eastern Time, Tuesday, May 7, 2019.

The conference call will be broadcast via real-time audio on the Kennametal website at www.kennametal.com. Once on the homepage, select "About Us", "Investor Relations" and then "Events." A replay of the call will be available on the Company's website on the Investor Relations/Events page beginning on May 7, 2019 at 10:00 a.m. through June 4, 2019.

This earnings release contains non-GAAP financial measures. Reconciliations and descriptions of all non-GAAP financial measures are set forth in the tables that follow.

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, cash flow and capital expenditures for fiscal year 2019 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: downturns in the business cycle or the economy; our ability to achieve all anticipated benefits of restructuring, simplification and modernization initiatives; risks related to 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; 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 KennametalWith over 80 years as an industrial technology leader, Kennametal Inc. delivers 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 approximately 10,000 employees are helping customers in more than 60 countries stay competitive. Kennametal generated nearly $2.4 billion in revenues in fiscal 2018. Learn more at www.kennametal.com. Follow @Kennametal: Twitter, Instagram, Facebook, LinkedIn and YouTube.

NON-GAAP RECONCILIATIONS (UNAUDITED)

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: operating income and margin; ETR; net income attributable to Kennametal shareholders; diluted EPS; Industrial operating income and margin; Widia operating income and margin; Infrastructure operating income and margin; FOCF; EBITDA and consolidated and segment organic sales growth (all of which are non-GAAP financial measures), to the most directly comparable GAAP financial measures. Adjustments for the three months ended March 31, 2019 and 2018 include: (1) restructuring and related charges; and (2) non-recurring effect of tax reform. 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 in the tax impact of the adjustments.

Management believes that presentation of these non-GAAP financial measures provides useful information about the results of operations of the Company for the current and past periods. 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 financial measures should not be considered in isolation or as a substitute for the most comparable GAAP financial measures. Investors are cautioned that non-GAAP financial measures used by management may not be comparable to non-GAAP financial measures used by other companies. Reconciliations and descriptions of all non-GAAP financial measures are set forth in the disclosures below.

Reconciliations to the most directly comparable GAAP financial measures for the following forward-looking non-GAAP financial measures for the full fiscal year of 2019 have not been provided, including but not limited to: adjusted EPS, adjusted ETR, organic sales growth and FOCF. The most comparable GAAP financial measures are earnings per share, ETR, sales growth and net cash flow from operating activities, respectively. Because the non-GAAP financial measures on a forward-looking basis are subject to uncertainty and variability as they are dependent on many factors - including, but not limited to, the effect of foreign currency exchange fluctuations, impacts from potential acquisitions or divestitures, gains or losses on the potential sale of businesses or other assets, restructuring costs, asset impairment charges, gains or losses from early extinguishment of debt, the tax impact of the items above and the impact of tax law changes or other tax matters - reconciliations to the most directly comparable forward-looking GAAP financial measures are not available without unreasonable effort.

Free Operating Cash Flow (FOCF)FOCF is a non-GAAP financial measure and is defined by the Company as net cash flow provided by operating activities (which is the most directly comparable GAAP financial measure) less capital expenditures plus proceeds from disposals of fixed assets. Management considers FOCF to be an important indicator of the Company's cash generating capability because it better represents cash generated from operations that can be used for dividends, debt repayment, strategic initiatives (such as acquisitions) and other investing and financing activities.

Earnings before interest, taxes, depreciation and amortization (EBITDA)EBITDA is a non-GAAP financial measure and is defined as net income attributable to Kennametal (which is the most directly comparable GAAP measure and is sometimes referred to as "earnings"), with interest expense, interest income, provision for income taxes, depreciation and amortization added back. Management believes that EBITDA is widely used as a measure of operating performance and is an important indicator of the Company's operational strength and performance. Nevertheless, the measure should not be considered in isolation or as a substitute for operating income, cash flows from operating activities or any other measure for determining liquidity that is calculated in accordance with GAAP. Additionally, Kennametal will present EBITDA on an adjusted basis. Management uses this information in reviewing operating performance.

Organic Sales GrowthOrganic sales growth is a non-GAAP financial measure of sales growth (decline) (which is the most directly comparable GAAP measure) excluding the impacts of acquisitions, divestitures, business days and foreign currency exchange from year-over-year comparisons. Management believes this measure provides investors with a supplemental understanding of underlying sales trends by providing sales growth on a consistent basis. Management reports organic sales growth at the consolidated and segment levels.

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