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Kennametal posts loss on restructuring, lower sales

| Tuesday, May 5, 2015, 9:03 a.m.

Kennametal Inc. will close or sell at least 20 percent of its manufacturing footprint in the next few years, an acceleration of cost cutting and layoffs as the Unity-based toolmaker downsizes to match a steeper-than-expected drop in demand from the energy industry.

CEO Don Nolan on Tuesday announced a third phase of a cost-reduction initiative that started at the end of last year and led to four plants closing and one being sold.

The company said it will sell less-profitable parts of its business that it no longer considers a core part of its operations. It said the operations it is targeting generate annual sales between $150 million and $400 million. Kennametal's sales last year totaled $2.8 billion.

The quarter “was dramatically impacted by lower oil and gas drilling activity and a continued slowdown in mining,” Nolan told analysts on a conference call to discuss the company's fiscal third-quarter results.

“We are not anticipating much improvement in the current market trends,” he said.

Adding the third phase of restructuring, Nolan said cost-cutting is expected to generate annual savings of between $115 million and $135 million by March 2017, up from an earlier estimate of $90 million to $105 million in yearly savings.

The company is experiencing a severe decline in demand for drilling tools used by the oil and gas and coal mining industries. Coal producers are facing depressed prices because of competition and tougher emissions standards on coal fired-plants, while falling oil prices have crimped exploration by oil and gas producers.

Sales to the energy industry dropped 23 percent in the quarter, interim Chief Financial Officer Martha Fusco said.

“Energy sales were impacted by an accelerated decline in demand for oil and gas products in all regions,” she said

Nolan did not specify which parts of the company would be put up for sale, only noting that they have “margins significantly lower than the corporate average.”

He also didn't identify specific plants that could be closed or sold, only saying that “we believe that we can reduce our manufacturing footprint by roughly 20 percent to 25 percent over the next several years.”

The downsizing comes on top of four plants in the United States and Europe that were closed and a plant in the United Kingdom that was sold since the end of last year. Spokeswoman Christina Sutter declined to identify the factories that were closed or how many workers were affected.

The Tribune-Review previously reported that Kenna­metal closed plants in Derry; Grant, Ala.; and Switzerland.

Sutter declined to comment on the number of white-collar workers who accepted a severance package that was offered to 1,000 employees in February.

The company had 32 U.S. plants and 32 international plants, as of August. It employed about 5,000 people in the United States and 8,500 in other parts of the world, as of June 30.

The cost-cutting plans were announced as the company reported its earnings worsened in the just-completed quarter.

Investors cheered the cost-cutting; Kennametal's shares rose 6 percent to close at $38.40.

Jim Corridore, an analyst at S&P Capital IQ, raised his estimate for full-year earnings at Kennametal after the quarterly results were released.

Kennametal is “facing a weak operating environment, but is cutting costs and generating good cash flows, in our view,” he said in a research note to investors.

The company reported a net loss of $46.2 million, or 58 cents a share, in the January-March quarter, the third in its fiscal year. The result compared to net income of $50.9 million, or 64 cents a share, in the same quarter last year.

Excluding one-time items, adjusted net income in the quarter was 46 cents a share, the company said. Analysts had predicted 44 cents a share in adjusted net income.

Sales were $639 million, down 15 percent from $755.2 million a year ago.

Alex Nixon is a staff writer for Trib Total Media.

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