Many companies make products that you might never see, yet those companies are vital in helping their customers produce the things you use every day. One of those companies is Kennametal (NYSE:KMT), which makes high-end metal-cutting tools for use in a variety of industrial processes. With businesses in the aerospace, construction, energy, and mining industries all relying on being able to make intricate parts and components to meet their needs, Kennametal's tools play a vital role in the health of the industrial economy. Yet when the company released its financial results for the fiscal second quarter on Thursday morning, it revealed the ongoing struggles it has faced in handling changing industry conditions. Let's take a closer look at how Kennametal did and what to expect from the company throughout 2015.
Kennametal gets impaired
Kennametal's headline results showed just how difficult an environment the company has faced lately. Sales fell 2% for the quarter to $676 million, reversing the 2% gains that most investors had hoped to see. Currency impacts cost the company 4 percentage points of growth, but organic revenue declines of 2% were also troubling.
But the real pain came on the earnings side of the income statement, with the company suffering a loss of $4.89 per share. All of that downward pressure came from Kennametal's preliminary impairment test of goodwill and other intangibles. Kennametal decided to go through this process because of the plunge in oil prices and its resulting impact on the global energy market, which represents a substantial portion of the company's business. Yet even after backing out the $5.24 per-share impairment charge and other one-time items, Kennametal's adjusted earnings of $0.52 per share fell short of the $0.55 per share that analysts expected.
Performance across Kennametal's major segments revealed areas of strength and weakness. The company's Industrial segment kept revenue flat, with 2% organic growth helping to offset currency-related declines. The strongest subcategories in the industrial unit were general engineering and transportation, while defense and aerospace-related sales stayed flat. Sales in Asia strengthened by 14%, but weakness in Europe held back overall growth.
On the other hand, the Infrastructure segment performed the worst, with a 5% decline in revenue to $304 million reflecting both the strong U.S. dollar and a dramatic 8% decline in organic sales. Mining and energy-related sales were especially weak, and while the division performed reasonably well in the Western Hemisphere, both Asia and Europe dragged down revenue.
Kennametal CEO Don Nolan tried to remain upbeat. "While the current weakness in our end markets adversely affected our results," Nolan said, "and the nature and magnitude of the impairment charge is disappointing, they also illustrate many opportunities for improving our operations and business portfolio." Nolan noted that Kennametal would take additional steps to cut costs and become more efficient.
What will Kennametal do to bounce back?
Specifically, Kennametal is looking at adding a second phase to its restructuring efforts, with the expectation of saving $40 million to $50 million in annual expenses on an ongoing basis through cost-cutting measures in manufacturing operations, labor costs, and other expense-reduction programs. With expected charges of $90 million to $100 million, the return on the Phase 2 restructuring won't be as great as Phase 1's, but all told, Kennametal hopes to unlock as much as $105 million in savings every year.
Despite those efforts, though, Kennametal remains extremely uncertain about its future results. The company now expects revenue to fall 6% to 7%, which is far worse than the 2% to 4% growth that it had projected previously. Moreover, Kennametal slashed its guidance for full-year earnings to a range of $1.90 to $2.10 per share, equating to a $0.90 per-share reduction. The company blamed the huge downturn in the energy industry for the dour outlook, along with the weak European economy and the poor outlook for mined commodities.
Unfortunately, Kennametal's business leaves it exposed to the ups and downs of the global industrial economy, and just as the company benefited from strength in the energy sector when oil prices were climbing, investors have to expect a cyclical downturn with weaker energy prices. Kennametal will have to follow through well on its cost-cutting measures in order to set the stage for maximum gains when its core customer segments eventually rebound, but there's no knowing how soon such a recovery will happen. In the meantime, long-term investors in Kennametal will have to remain patient in expecting a turnaround.