Kennametal, the industrial tooling giant, just released its third quarter earnings. The headline numbers – a 4% year-over-year sales decrease and a 150 basis point drop in adjusted EBITDA – painted a picture of a company battling through persistent macroeconomic headwinds. But hidden beneath the surface, there's a subtle shift in seasonality that could catapult Kennametal to an unexpected earnings surge in the second half of fiscal year 2024.

During the earnings call, CFO Pat Watson casually mentioned a shift in holiday timing affecting the fourth quarter workday comparison. He explained that Easter, a major holiday in both the Americas and Europe, fell in the third quarter this fiscal year, whereas it occurred in the fourth quarter of the previous year. This seemingly innocuous detail holds the key to unlocking Kennametal’s potential for a second-half rebound.

Why is the timing of Easter so crucial? Kennametal, with its vast global manufacturing footprint and extensive customer base, experiences significant sales fluctuations around holidays. Easter, in particular, brings operations in major markets like the Americas and Europe to a standstill, impacting both production and sales.

The shift of Easter from the fourth quarter of fiscal year 2023 to the third quarter of fiscal year 2024 creates a unique dynamic. The fourth quarter of the current year now enjoys an additional workday compared to the previous year, a boon for a company seeking to offset sluggish demand. This additional workday, combined with Kennametal’s ongoing efforts to optimize inventory and improve working capital, could translate into a substantial sales boost.

But the impact goes beyond sales. Remember, Kennametal’s fourth quarter of fiscal year 2023 was burdened by the holiday slowdown. This year, with Easter already accounted for in the third quarter, the fourth quarter earnings comparison will be unusually favorable, potentially masking the true underlying demand trends.

Hypothetical Impact of Additional Workday on Q4 Earnings

Assuming Kennametal’s fourth quarter revenue is flat organically, the additional workday alone could contribute a 1% sales increase. Further, if we assume a conservative 20% flow-through rate, this translates to a $4 million boost to operating income. This additional income, coupled with the favorable earnings comparison due to the shifted holiday timing, could significantly inflate fourth quarter earnings.

This potential for an artificial earnings boost in the fourth quarter highlights a key factor often overlooked by analysts – the impact of subtle shifts in seasonality. Kennametal’s situation serves as a reminder that headline numbers don't always tell the full story. A deeper dive into operational details, such as holiday timing, can reveal hidden opportunities and potential risks that can significantly impact a company’s performance.

While the macroeconomic headwinds are undeniable, Kennametal’s strategic initiatives, coupled with this subtle shift in seasonality, could be the catalysts for a second-half earnings surprise. Investors and analysts should remain vigilant, paying close attention to not just the headline numbers but also the underlying operational drivers that can make all the difference in Kennametal’s path to a strong fiscal year 2024 finish.

"Fun Fact: Kennametal is a world leader in the production of tungsten carbide, a material so hard it can cut through steel. In fact, tungsten carbide is used in everything from drill bits to jewelry to ballpoint pens!"