Kennametal Earnings Call: Growth Surges, Cash Strains

Kennametal Inc ((KMT)) has held its Q3 earnings call. Read on for the main highlights of the call.

Kennametal’s latest earnings call struck an upbeat tone as management highlighted strong sales growth, expanding margins and share gains in key end markets while acknowledging serious near‑term cash flow pressure from a spike in tungsten prices. Executives framed most headwinds as temporary, emphasizing pricing power, vertical integration and a strategy geared toward above‑market growth.

Revenue Growth and Upgraded Outlook

Kennametal reported a robust 22% year‑over‑year increase in sales, with 19% organic growth and a 5% foreign‑exchange tailwind. Management responded by raising its fiscal 2026 sales outlook to a range of $2.33 billion to $2.35 billion and lifted adjusted EPS guidance to $3.75 to $4.00, citing additional pricing actions and volume as key drivers.

Margin Expansion and Profitability Strength

Profitability improved meaningfully as adjusted EPS rose to $0.77 in the quarter from $0.47 a year earlier. Adjusted EBITDA margin expanded to 20.8% from 17.9%, and adjusted operating margin climbed to 13.8% from 10.3%, reflecting favorable mix, pricing and ongoing cost discipline despite inflation and higher compensation.

Segment Momentum and Share Gains

Both major segments posted strong organic growth, with Infrastructure up 30% and Metal Cutting up 12%. End‑market performance was particularly strong in Earthworks, up 43%, Energy, up 28%, and Aerospace and Defense, up 23% on a constant‑currency basis, and management pointed to share gains in earthworks and aerospace/defense.

Pricing Power Amid Tungsten Volatility

Tungsten cost inflation allowed Kennametal to exercise significant pricing power, with the company capturing substantial price realization through surcharges and list price changes. For the fourth quarter, net price and tariff surcharges are expected to be roughly 35% higher year‑over‑year, and fiscal 2026 EPS guidance includes about $2.45 of benefit from timing between price and raw material costs.

Strategic Wins and Growth Initiatives

Operationally, Kennametal reported large new defense orders and growing traction in power generation applications tied to data centers and artificial intelligence. The company is also advancing promotional campaigns and digital tools for small and mid‑sized customers, underscoring a strategy focused on targeted share gains and sustained above‑market growth.

Higher Cost Savings Ambitions

Management raised its cost takeout ambition and now targets roughly $110 million of savings by the end of fiscal 2027, an increase of $10 million over prior plans. The savings are expected to come from restructuring and continuous‑improvement initiatives, with additional efficiencies slated to flow through earnings into fiscal 2027 as projects mature.

Regional Performance Led by Americas and Asia

Geographically, Kennametal delivered broad‑based growth, with constant‑currency sales rising 27% in the Americas and 25% in Asia Pacific. Europe, the Middle East and Africa lagged with just 2% constant‑currency growth, reflecting softer demand in some European end markets and underscoring an uneven regional recovery.

Working Capital and Cash Flow Under Strain

The downside of the tungsten shock is visible in cash flow, as year‑to‑date operating cash generation fell to $70 million from $130 million a year ago. Free operating cash flow dropped to $18 million from $63 million, as inventory valuation ballooned with higher raw material costs, putting pressure on liquidity metrics despite strong earnings.

Tungsten Price Spike Drives Volatility

Tungsten prices surged from roughly $900 per metric ton to about $3,000 over the period, which management described as unprecedented in both magnitude and speed. The spike has created significant volatility in supply and pricing, forced heavy working capital investment and added uncertainty around when raw material markets will stabilize.

Elevated Working Capital and Share Buyback Pause

Primary working capital swelled to $819 million from $654 million year‑over‑year and now stands at 32.4% of sales, weighing on balance sheet efficiency. Given this backdrop, Kennametal chose to pause share repurchases despite having bought back $70 million to date under its authorization, signaling a priority on liquidity over capital returns for now.

Weak Free Cash Flow Outlook

Looking ahead, management expects full‑year fiscal 2026 free operating cash flow to equal roughly negative 30% of adjusted net income, reflecting continued tungsten‑driven working capital drag. This weak near‑term cash profile is a key reason for the more cautious capital allocation stance, even as earnings power improves.

Uneven Performance in EMEA and Transportation

While overall growth was strong, the call highlighted pockets of softness, particularly in EMEA and the Transportation segment. Constant‑currency sales in EMEA were up only 2%, and Transportation end‑market sales increased about 1%, indicating that not all regions and sectors are participating equally in the recovery.

Inflation and One‑Off Headwinds

Cost pressures remain a challenge as higher performance‑based compensation, tariffs and general inflation partially offset margin gains from pricing and efficiency. Year‑over‑year comparisons were also held back by the absence of an approximately $8 million manufacturing tax credit that benefited the prior‑year quarter but did not recur.

Restructuring Delays in Favor of Growth

Kennametal is deliberately stretching out its timeline for certain facility closures that had been planned for fiscal 2027, choosing to prioritize growth opportunities over rapid footprint reduction. While this pushes some optimization actions into later periods, management reiterated that the overall cost savings target of roughly $110 million remains intact.

Guidance and Forward‑Looking Commentary

For fiscal 2026, Kennametal now guides to sales of $2.33 billion to $2.35 billion on 2% to 3% volume growth, around 16% net price and tariff surcharges for the year and a modest foreign‑exchange tailwind. Adjusted EPS is pegged at $3.75 to $4.00, supported by price‑raw timing benefits, while capex should run near $85 million and free operating cash flow is expected to remain under pressure as tungsten‑linked working capital stays elevated.

Kennametal’s earnings call painted a picture of a company executing well on growth and margin expansion but grappling with a rare raw‑material shock that weighs on cash flow and capital returns. For investors, the key takeaway is a stronger earnings outlook and clear pricing power, balanced against working capital risk and regional pockets of demand weakness that could shape near‑term stock performance.