Executive Summary / Key Takeaways

• Deep Structural Transformation Underway: Kennametal is executing an aggressive, multi-year restructuring plan, including six facility consolidations by fiscal 2028, targeting $125 million in annualized pre-tax savings to address structural costs and optimize capacity amidst prolonged market softness.
• Resilient Performance in Challenging Markets: Despite an 8-quarter stretch of broad market weakness, Kennametal has maintained competitive positioning, demonstrating share gains in key regions like Germany and securing strategic wins in high-growth areas such as Aerospace & Defense and AI power generation.
• Technological Edge and Innovation: The company leverages over 85 years of material science expertise in tungsten carbides and super-hard materials, continuously innovating with products like the PrimePoint mining pick and TopSwiss micro machining solutions, reinforced by strategic digital investments.
• Balanced FY2026 Outlook: Management projects FY2026 sales between $1.95 billion and $2.05 billion, with adjusted EPS of $0.90 to $1.30, reflecting continued volume pressure but anticipating significant benefits from restructuring, tariff mitigation, and a mid-40s operating leverage on eventual market recovery.
• Robust Cash Generation and Shareholder Returns: Kennametal generated $208.3 million in operating cash flow and $121 million in free cash flow in FY2025, returning $122 million to shareholders, underscoring financial discipline and commitment to value creation.

A Legacy Forged in Hard Materials

Kennametal Inc. (NYSE:KMT) stands as a global industrial technology leader, its foundation laid in 1938 with a breakthrough in tungsten carbide technology. For over 85 years, the company has honed its expertise in tungsten carbides, ceramics, and super-hard materials, providing critical solutions for metal cutting and extreme wear applications across diverse end markets. This deep material science capability is not merely historical; it remains central to Kennametal's competitive differentiation and its strategic response to evolving industrial demands.

The company operates through two primary segments: Metal Cutting and Infrastructure. The Metal Cutting segment delivers high-performance tooling and solutions for precision manufacturing in industries such as General Engineering, Transportation, Aerospace & Defense, and Energy. Its brands, including Kennametal, WIDIA, WIDIA Hanita, and WIDIA GTD, are synonymous with milling, hole making, turning, and toolmaking systems. The Infrastructure segment, under the Kennametal brand, produces engineered tungsten carbide and ceramic components, earth-cutting tools, and advanced metallurgical powders for Earthworks, General Engineering, Energy, and Aerospace & Defense. These wear-resistant products, from compacts and nozzles for oil and gas to armor solutions for defense, are designed for extreme conditions like corrosion and high temperatures.

Kennametal's global footprint is extensive, with 60% of its consolidated sales in fiscal year 2025 originating outside the United States, supported by operations in Western Europe, China, India, and other regions. This international presence, while offering diversification, also exposes the company to global macroeconomic shifts, currency fluctuations, and geopolitical risks.

Technological Edge: Precision, Durability, and Digital Integration

Kennametal's core technology in tungsten carbides, ceramics, and super-hard materials provides a significant competitive advantage. These advanced materials are engineered to withstand extreme conditions, offering superior hardness, wear resistance, and thermal stability compared to conventional tooling. This translates into tangible benefits for customers, including extended tool life, reduced downtime, and enhanced precision in manufacturing processes. For investors, this technological differentiation underpins Kennametal's ability to command premium pricing, achieve better margins, and secure customer loyalty in critical applications where performance is paramount.

Recent innovations exemplify this commitment. In Q1 FY2025, the company launched the PrimePoint longwall mining pick, featuring a polycrystalline diamond tip. This advanced design enables operators to run longer in the harshest and most abrasive conditions, ideal for coal, salt, and other soft mineral applications. Another notable introduction is the TopSwiss micro machining solution, a suite of high-precision turning tools for the medical, aerospace, and transportation markets. These tools boast ultra-sharp cutting edges for extended tool life and superior surface finishes, particularly effective in challenging materials like titanium and stainless steel. Such product launches directly support Kennametal's strategy to fuel above-market growth by targeting high-value applications.

Beyond material science, Kennametal is investing in digital capabilities. The company utilizes a disciplined stage-gate framework for its R&D efforts, designed to accelerate commercial success and align new product development with customer requirements. Strategic partnerships, such as the investment in Toolpath Labs for AI-powered computer-aided manufacturing (CAM) software and existing relationships with Autodesk (ADSK) and ModuleWorks, aim to expand its digital offerings. These initiatives are intended to enhance customer productivity, streamline manufacturing processes, and further solidify Kennametal's competitive moat in an increasingly digitized industrial landscape.

Competitive Landscape and Strategic Positioning

The industrial tooling and advanced materials market is fragmented, characterized by a mix of large global players and numerous smaller, niche businesses. Kennametal competes with industry giants like Sandvik AB (SAND), Kyocera Corporation (KYOCY), and Sumitomo Electric Industries (SMTOY), each bringing distinct strengths to the market.

Sandvik, a diversified industrial engineering company, offers a broad portfolio of metal cutting tools and advanced materials. It often exhibits strong profitability margins and cash flow, driven by its scale and extensive R&D. Kennametal differentiates itself from Sandvik through its specialized expertise in extreme wear applications and a focus on custom solutions supported by direct customer engagement. While Sandvik may lead in broad digital integration and global reach, Kennametal's application-specific knowledge and customer service foster strong loyalty in segments requiring tailored performance.

Kyocera Corporation, known for its advanced ceramics and electronic components, also competes in cutting tools. Kyocera's strength lies in its technological prowess in ceramics and diversified business model. Kennametal's tungsten carbide-based tools often offer superior durability in high-stress metal cutting, particularly in energy and infrastructure applications. Kennametal's strategy emphasizes comprehensive solutions, while Kyocera's integration of electronics positions it well for smart manufacturing trends.

Sumitomo Electric Industries, a global manufacturer of advanced materials and components, competes through supply chain efficiency and product reliability. Kennametal's focus on efficient manufacturing processes for wear-resistant materials can lead to lower operating costs for customers in specific applications, such as energy components. While Sumitomo benefits from scalable production and exposure to high-demand areas like electrification, Kennametal's expertise in extreme conditions provides an edge in aerospace and oil and gas.

Kennametal's competitive advantages stem from its premium brand positions, global presence, and deep application expertise. The company sells products based on the value-added productivity delivered to customers, rather than solely on price. Despite the challenging market, Kennametal's Metal Cutting segment matched the performance of publicly traded peers in Q1 FY2025 and outperformed the broader market in Germany, indicating effective execution of its growth initiatives and a resilient competitive stance.

Strategic Transformation Amidst Persistent Headwinds

Kennametal has faced a prolonged period of market weakness, enduring eight consecutive quarters of broad market softness. This environment, characterized by weak global industrial production, declining U.S. land-based rig counts, and slowing light vehicle production (particularly in EMEA), has pressured the company's financial performance. Foreign exchange headwinds and supply chain disruptions have added to these challenges.

In response, CEO Sanjay Chowbey has prioritized a deep structural transformation, aiming to "fix the structural cost issues holding back our performance." This strategic pivot acknowledges that past modernization efforts, while upgrading capabilities, resulted in excess capacity relative to current market conditions. The company's restructuring efforts, initiated in fiscal 2024, are now being significantly expanded. By the end of fiscal 2025, Kennametal achieved approximately $65 million in annualized run-rate pre-tax savings from these actions.

The updated plan, announced in August 2025, is more aggressive, targeting a total of six facility consolidations by the end of fiscal 2028, exceeding the original Investor Day target of three to five plants. This expanded program aims to deliver $125 million in annualized pre-tax cost savings, with expected cash restructuring costs of $125 million. These are structural, sustainable changes designed to enable efficient operations in the current environment while maintaining flexibility for a more robust market recovery. Leadership changes, including the appointment of Faisal Hamadi to lead Infrastructure and Dave Bersaglini to Metal Cutting, are intended to drive these initiatives with renewed focus on commercial excellence and continuous improvement.

Financial Performance and Liquidity

Fiscal year 2025 reflected the impact of these market headwinds and the initial phases of restructuring. Consolidated sales decreased 4% year-over-year to $1.97 billion, driven by a 4% organic sales decline and a 1% unfavorable currency effect. Operating income fell to $143.1 million, representing a 7.3% margin, down from $170.2 million (8.3% margin) in the prior year. This decline was primarily due to lower sales and production volumes, higher wages, general inflation, and a $6 million unfavorable foreign currency impact, along with a $4 million net effect from increased tariffs.

However, restructuring benefits of $23 million, pricing actions, and lower raw material costs provided some offset. The Infrastructure segment notably benefited from a $13 million advanced manufacturing production credit under the Inflation Reduction Act and a $12 million net benefit related to a tornado at its Rogers, Arkansas facility, contributing to an improved operating margin of 7.8% (up from 5.2% in FY2024). The Metal Cutting segment's operating margin declined to 7.1% from 10.4% in FY2024, reflecting the sharper impact of volume declines and tariffs.

Despite these pressures, Kennametal demonstrated strong cash flow generation. Operating cash flow for FY2025 was $208.3 million, and free cash flow stood at $121 million.

The company maintained a healthy balance sheet with $140.5 million in cash and cash equivalents and $700 million in available revolving credit as of June 30, 2025. Total debt was $597.8 million, and its senior credit ratings are investment grade. This robust liquidity position supports continued investment in strategic initiatives and shareholder returns, with $122 million returned to shareholders in FY2025 through share repurchases and dividends.

Outlook and Investment Implications

Kennametal's outlook for fiscal year 2026 reflects a balanced view of persistent market softness and the anticipated benefits of its aggressive structural changes. The company projects FY2026 sales between $1.95 billion and $2.05 billion. This forecast incorporates a volume range from negative 5% to flat, approximately 4% combined from price and tariff surcharge realization, and a 2% foreign exchange tailwind. The recent divestiture of its Goshen, Indiana subsidiary represents an approximate 1.5% impact on FY2025 sales.

Adjusted EPS for FY2026 is expected to be in the range of $0.90 to $1.30. This guidance includes approximately $35 million in restructuring savings, weighted 40% in the first half and 60% in the second half. Management anticipates fully mitigating the estimated $80 million annual impact of tariffs through operational adjustments and surcharges. However, approximately $0.15 in prior-year one-time benefits (IRA credits and tornado insurance proceeds) will not recur, creating a headwind. Capital expenditures are projected at $90 million, with free operating cash flow expected to be approximately 120% of adjusted net income.

The company's strategic emphasis on rightsizing capacity and structural costs is expected to yield significant operating leverage, with management anticipating mid-40s leverage when sales volumes eventually recover. This implies that once market conditions improve, a larger portion of incremental revenue should flow directly to the bottom line, enhancing profitability.

Risks and Challenges

Investing in Kennametal carries several risks. The company's performance is highly sensitive to macroeconomic and global conditions, including inflation, geopolitical conflicts (Ukraine, Middle East), and potential economic recessions. Its significant international operations expose it to currency fluctuations, trade barriers, and political instability.

Tariffs and trade policies pose a material risk, potentially increasing raw material costs (especially tungsten) and impacting global manufacturing flexibility, which could erode operating margins if cost increases cannot be fully passed on to customers. The ongoing MachiningCloud, Inc. lawsuit, seeking over $330 million in damages, represents a significant litigation risk, though Kennametal intends to vigorously defend the action.

Furthermore, the cyclical nature of raw material prices, particularly tungsten, can introduce volatility in costs and profitability. Compliance with evolving environmental, health, and safety regulations, including those related to hard metal dust and climate change, could lead to increased compliance and manufacturing costs. Cybersecurity threats to its IT infrastructure also remain a concern, with potential for operational disruptions and reputational damage.

Conclusion

Kennametal Inc. is at a pivotal juncture, actively reshaping its operational and cost structure to unlock long-term value in a persistently challenging industrial landscape. The company's deep-rooted expertise in material science, coupled with continuous innovation in specialized tooling and digital solutions, provides a robust competitive foundation. While current market headwinds have impacted recent financial performance, management's aggressive restructuring, capacity optimization, and tariff mitigation strategies are designed to create a leaner, more agile enterprise.

The commitment to $125 million in structural cost savings and a projected mid-40s operating leverage on recovery underscores a clear path to enhanced profitability when industrial demand eventually rebounds. Kennametal's strong cash flow generation and consistent shareholder returns further reinforce its financial resilience. For investors, the narrative is one of a company proactively addressing its structural challenges, leveraging its technological leadership, and positioning itself for sustainable growth and improved margins as global industrial markets stabilize and long-term megatrends materialize. The successful execution of its expanded restructuring plan and effective management of geopolitical and raw material risks will be critical indicators of its future success.