Industrial materials and tools company Kennametal (NYSE: KMT) fell short of the market’s revenue expectations in calendar Q3 2026 (fiscal Q1 2027), but sales rose 54.3% year on year to $768.2 million. Next quarter’s revenue guidance of $800 million underwhelmed, coming in 4.9% below analysts’ estimates. Its non-GAAP profit of $3.48 per share was 31.3% above analysts’ consensus estimates.

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StockStory’s take

Kennametal’s latest quarter was met with a negative market response, as the company’s sales missed Wall Street expectations despite a sharp year-over-year increase. Management attributed the results to continued volume growth in its Metal Cutting segment and successful pricing actions across key end markets, particularly in aerospace, defense, and power generation. However, the Infrastructure segment faced volume declines due to customer price sensitivity and regulatory-driven slowdowns in mining, especially in China. CEO Sanjay Chowbey acknowledged, “We have more work to do addressing Infrastructure volume and overall cash conversion.”

Looking ahead, management’s guidance is shaped by the expectation of continued volume recovery in the Infrastructure segment and sustained momentum in Metal Cutting, supported by ongoing lean transformation initiatives. The company is also navigating a volatile tungsten pricing environment, which is expected to impact margins in the coming quarters. CFO Pat Watson noted that the focus remains on improving inventory efficiency and cash conversion, while Chowbey emphasized the importance of portfolio management and product redesign to adapt to fluctuating raw material costs, stating, “We are confident that our strategy will result in long-term value creation for our shareholders.”

Key insights from management’s remarks

Management tied the quarter’s mixed performance to strong execution in Metal Cutting, offset by headwinds in Infrastructure and cash conversion challenges driven by tungsten prices.

• Metal Cutting momentum: The Metal Cutting segment delivered its fourth consecutive quarter of volume growth, led by share gains in aerospace, defense, and energy, particularly power generation for AI data centers.
• Pricing actions and tungsten timing: Kennametal implemented pricing initiatives to offset elevated tungsten costs, which, alongside favorable timing in raw material pricing, drove significant margin expansion. However, these benefits are expected to moderate as tungsten prices stabilize.
• Infrastructure volume declines: Infrastructure saw low double-digit volume declines, especially in energy and earthworks applications, due to customer price sensitivity and delayed recovery in Chinese mining following new safety regulations.
• Lean transformation progress: The company’s ongoing lean initiatives generated over $70 million in gross savings since 2025, involving more than 3,000 employees, and are seen as a key lever for further margin improvement and operational efficiency.
• Cash conversion under pressure: Elevated tungsten prices significantly increased inventory values, causing negative free operating cash flow despite strong reported earnings. Management is working with external partners to optimize payment terms, inventory flows, and supply chain efficiency to improve cash generation.

Drivers of future performance

Kennametal’s outlook is shaped by the interplay between ongoing lean transformation, recovery in Infrastructure volumes, and persistent volatility in raw material costs.

• Infrastructure recovery initiatives: Management expects modest Infrastructure volume recovery in the next quarter, with the majority of improvement weighted toward the second half of the year as mining activity resumes in China and selective pricing wins back customers in price-sensitive segments.
• Margin management amid tungsten volatility: The company’s margin outlook depends on the trajectory of tungsten prices, with recent declines shifting near-term benefits to headwinds later in the year. Management is prioritizing portfolio adjustments, strategic pricing, and product redesign to maintain target EBITDA margins of 16–19% in a high-tungsten environment.
• Cash flow and inventory efficiency: Improving inventory turns and cash conversion are central priorities, as cash flow remains challenged by high working capital tied up in tungsten inventory. Initiatives to optimize supply chain and payment terms are underway, but management does not expect the cash conversion issue to be resolved within the year.

Catalysts in upcoming quarters

In the coming quarters, the StockStory team will watch (1) the pace and sustainability of Infrastructure volume recovery, particularly as Chinese mining resumes and pricing actions take hold; (2) the impact of lean transformation efforts on operational efficiency and margin expansion; and (3) improvements in cash conversion and inventory management as tungsten-driven working capital pressures persist. The company’s ability to adapt its portfolio and product designs for a volatile raw materials environment will also be a key performance indicator.

Kennametal currently trades at $26.32, down from $30.53 just before the earnings. In the wake of this quarter, is it a buy or sell? The answer lies in our full research report (it’s free).

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