Kennametal NYSE: KMT raised its fiscal 2026 sales and adjusted earnings outlook after reporting stronger-than-expected third-quarter results, as higher tungsten-related pricing, modest volume improvement and share gains across key markets lifted revenue and margins.
On the company’s earnings call, President and Chief Executive Officer Sanjay Chowbey said Kennametal delivered a “strong third quarter” as commercial teams advanced growth initiatives in infrastructure and metal cutting. He said the company benefited from construction volume growth, large defense orders and continued momentum in aerospace, defense and energy-related applications tied to AI power generation.
For the quarter, sales rose 22% year over year, including 19% organic growth and a 5% foreign currency benefit, partially offset by the effect of a divestiture completed last year, Chief Financial Officer Patrick Watson said. Sales volume was up in the low single digits. Adjusted earnings per share increased to $0.77 from $0.47 a year earlier, while adjusted EBITDA margin rose to 20.8% from 17.9%.
Tungsten Market Drives Pricing and Working Capital Pressure
A central theme of the call was the sharp rise in tungsten prices and the effect on Kennametal’s pricing, supply chain and cash flow. Chowbey said tungsten prices continued an “unprecedented increase” during the quarter, rising from approximately $900 per metric ton to $3,000 as supply remained constrained.
Chowbey said the environment created both challenges and opportunities. He said Kennametal’s vertical integration gave the company better supply chain control and flexibility than some competitors, allowing it to pursue business where others were turning away orders or extending lead times.
“We have and will continue to implement pricing actions in response to these rising tungsten costs and remain confident in our ability to secure that price,” Chowbey said.
Watson said the company recorded $39 million of favorable timing from price versus raw material costs, primarily in the Infrastructure segment. He also said rising tungsten prices pressured working capital and cash flow. Year-to-date cash from operating activities fell to $70 million from $130 million in the prior-year period, while free operating cash flow declined to $18 million from $63 million.
Primary working capital increased to $819 million from $654 million, or 32.4% of sales. Watson said the business is operating as it normally would during periods of rising tungsten prices, with favorable earnings timing but cash flow headwinds as inventory values rise. However, he said the magnitude of the current price increase is unusual.
Segment Results Show Strength in Infrastructure and Metal Cutting
Infrastructure sales increased 29% on a reported basis and 30% organically. Watson said constant-currency sales rose 42% in the Americas and 35% in Asia Pacific, while EMEA was flat. By end market, Earthworks sales increased 43%, energy rose 34%, general engineering increased 18% and aerospace and defense grew 17%.
Watson said Earthworks growth reflected higher construction demand, customer sourcing challenges at other suppliers and share gains in underground mining. Infrastructure adjusted operating margin rose 680 basis points to 18.3%, driven largely by the favorable timing of price versus raw material costs and $2 million of restructuring savings. Those benefits were partially offset by higher compensation costs and the absence of an $8 million manufacturing tax credit recorded in the prior year.
Metal Cutting sales increased 18% as reported and 12% organically. On a constant-currency basis, sales rose 18% in Asia Pacific, 17% in the Americas and 3% in EMEA. Aerospace and defense increased 27%, energy grew 17%, general engineering rose 13% and transportation increased 1%.
Watson said aerospace and defense benefited from improved build rates in the Americas, easing supply chain pressures in EMEA and deeper market penetration. Energy growth was supported by data center power generation wins. Metal Cutting adjusted operating margin increased 160 basis points to 11.2%, reflecting higher price and tariff surcharges, higher sales and production volumes, and approximately $5 million of year-over-year restructuring savings.
Company Raises Fiscal 2026 Outlook
Kennametal now expects fiscal 2026 sales of $2.33 billion to $2.35 billion. The outlook assumes volume growth of 2% to 3%, net price and tariff surcharges of approximately 16%, and an approximate 2% foreign exchange tailwind.
The company also raised its adjusted EPS forecast to a range of $3.75 to $4.00. Watson said the outlook includes approximately $2.45 per share related to the timing benefit from price versus raw material costs, an increase of $1.50 from the prior outlook. He said the significant majority of that benefit affects the Infrastructure segment.
For the fourth quarter, Kennametal expects net price and tariff surcharges of approximately 35% compared with the prior-year quarter. Watson said the company expects capital expenditures of approximately $85 million for the full year and free operating cash flow of approximately negative 30% of adjusted net income, reflecting tungsten-related working capital pressure. The outlook does not include any effects from the conflict in the Middle East.
Early Fiscal 2027 Framework Points to Elevated Tungsten Effects
Although Kennametal typically waits until later to discuss the following fiscal year, Watson provided an initial framework for fiscal 2027. He said the company assumes tungsten prices remain elevated for some period, implying significant carryover pricing from the fourth-quarter level. That benefit is expected to diminish through fiscal 2027 as the company laps the price increases.
Watson said price/raw material timing benefits should continue through the first half of fiscal 2027 in a flat tungsten environment, with most of the benefit in the first quarter. He also said performance-based compensation should reset to target, creating a $20 million tailwind, while additional restructuring and continuous improvement savings are expected to contribute $10 million.
Chowbey said Kennametal is shifting the timing of some facility closure actions previously planned for fiscal 2027 as it prioritizes growth opportunities created by market recovery, strategic initiatives and tungsten-related supply disruptions. Even with that shift, he said the company is still targeting approximately $110 million in savings from cost takeout actions by the end of fiscal 2027.
Management Sees Share Gain Opportunities, but Notes Dynamic Conditions
During the question-and-answer session, Chowbey said some pre-buying occurred mainly in Infrastructure’s Earthworks construction business, but he said it was not a material factor across the rest of the business. He said Kennametal also captured opportunities in Earthworks and aerospace and defense where competitors faced raw material constraints or longer lead times.
Watson said the disruption provides an opportunity to quote and win business the company might not otherwise have seen, while the challenge is converting those wins into permanent share gains.
Chowbey emphasized that the current tungsten price environment is driven by supply constraints and export controls rather than higher demand. Watson added that Kennametal does not use significant amounts of Chinese material outside of its China operations and benefits from a diversified supply base, recycled material and an integrated supply chain capable of processing tungsten materials at various stages.
Chowbey said the company remains focused on strategic growth initiatives, lean transformation and managing the tungsten supply chain. “We remain confident in our plan for long-term value creation for shareholders,” he said.
About Kennametal NYSE: KMT
Kennametal Inc is a global industrial technology company that designs and manufactures advanced materials, tooling systems, and engineered components for a range of demanding applications. Its solutions support precision metalworking, earthmoving, and wear-resistant environments, catering to customers seeking enhanced productivity, longer tool life, and reduced operating costs.
The company's product portfolio spans indexable cutting tools, solid round tools, tool holders, metalworking fluid systems, wear parts, ceramics and composites, and custom-engineered components.
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