Kennametal (KMT) Q4 2026 earnings review
Record Earnings Masked by Working Capital Hemorrhage
Kennametal delivered a massive top- and bottom-line beat in Q4, but the numbers require a significant asterisk. Sales skyrocketed 43% YoY to $737M, and Adjusted EPS reached a record $2.96. However, this explosion in profitability was almost entirely driven by an unprecedented spike in tungsten prices—creating a massive $252M 'price-vs-raw cost timing' tailwind in Q4 alone. The dark side of this dynamic is on the balance sheet: the soaring cost of tungsten forced inventory values up to $1.1B, plunging full-year Free Operating Cash Flow (FOCF) into negative territory (-$79M). While management is aggressively capturing share in a supply-constrained environment, earnings quality is low and cash conversion remains a major concern heading into FY27.
🐂 Bull Case
Kennametal is successfully flexing its pricing power. The company passed on massive tungsten price hikes to customers, leading to a 42% organic growth rate in Q4 and expanding adjusted operating margins to 41.5%.
Vertical integration and secured supply lines are allowing the company to win business from competitors who cannot source tungsten, particularly in Aerospace & Defense and Earthworks end markets.
🐻 Bear Case
The price of securing supply has devastated cash flow. FY26 operating cash flow reversed from +$208M last year to -$4M. Working capital requirements are suffocating capital return programs.
The record earnings are a temporary illusion built on the lag between pricing actions and raw material costs flowing through the P&L. If tungsten prices stabilize or fall, these massive margins will evaporate instantly.
⚖️ Verdict: ⚪
Neutral. The commercial execution in a chaotic supply environment is impressive, but the earnings are mechanically inflated. Until the inventory burn normalizes and free cash flow turns sustainably positive, the stock carries elevated commodity risk.
Key Themes
Tungsten Volatility as a Margin Weapon
Accelerating. The lag between Kennametal raising prices and the higher raw tungsten costs hitting the income statement created a staggering $252 million benefit in Q4 alone (and $316M for the full year). This dynamic artificially pushed the Q4 adjusted operating margin to a breathtaking 41.5%, up from 7.4% a year ago. This is a mechanical accounting tailwind, not a structural efficiency gain.
Working Capital and Inventory Spikes
Reversing. The flip side of the tungsten margin boom is a cash flow crisis. The company ended FY26 with $1.1B in inventory, more than double the $538M held at the end of FY25. This inventory absorption is the primary reason FY26 FOCF collapsed to negative $79M. Management noted they also had to make advance payments to secure raw material supply.
Infrastructure Segment Propels Growth
Accelerating. The Infrastructure segment was the standout beneficiary of the current environment, posting 74% organic sales growth in Q4. Operating margins in this segment soared to 58.4% (up from 6.8% a year ago), driven by a $198M raw material timing benefit. This highlights strong share capture in Earthworks and Energy markets where competitors are struggling to fulfill orders.
Pricing vs. True Volume Illusion
While organic growth was 42% in Q4, a vast majority of this appears to be price and tariff surcharges rather than unit volume growth. The lack of detailed disclosure on base unit volumes in the Q4 release makes it difficult to assess true underlying demand recovery, although earlier quarters indicated only modest mid-single-digit unit volume recovery.
Structural Restructuring Continues
Stable. Despite the noise from raw materials, the company continues to execute its underlying cost-out initiatives. Kennametal recognized incremental year-over-year restructuring savings of $5 million in Q4 and $27 million for the full fiscal year.
Other KPIs
Accelerating dramatically. Jumped from 7.4% in 25Q4 to 41.5% in 26Q4. This is highly anomalous and driven by the $252 million price-to-raw material cost timing benefit. When this timing lag normalizes, margins will compress significantly back toward historical norms.
Accelerating. Inventory values skyrocketed 106% YoY from $538.2M. This is a combination of higher raw tungsten costs and strategic stockpiling to ensure supply continuity. This massive buildup is the core driver of the company's negative cash flow.
Guidance
Accelerating. Represents implied growth of roughly 41% to 46% vs FY26 ($2.36B). This implies that management expects tungsten prices to remain elevated and the massive carryover pricing benefits to persist throughout the upcoming fiscal year.
Stable. The midpoint of $4.65 is relatively flat compared to the record $4.57 delivered in FY26. This suggests that the massive price/raw timing benefits seen in FY26 will eventually catch up, stabilizing earnings growth even as top-line revenue surges.
Accelerating. Compares to $498 million in 26Q1, representing approximately 50% to 55% YoY growth, driven almost entirely by the carryover effects of massive price increases implemented in late FY26.
Reversing slightly from negative, but still extremely weak. At the midpoint of EPS guidance, this implies FOCF of roughly $70M-$80M for FY27. This indicates that the working capital drain and inventory overhang will continue to pressure liquidity well into the next year.
Key Questions
True Unit Volume Growth
With organic sales up 42% in Q4, exactly how much of this was driven by pure unit volume growth versus list price increases and surcharges tied to tungsten?
Margin Normalization Timeline
Your Q4 adjusted operating margin was highly anomalous at 41.5% due to the $252 million timing benefit. When exactly in FY27 do you expect the cost of raw materials to catch up with pricing, and what is the normalized structural margin profile once that occurs?
Inventory Unwind Strategy
You are holding $1.1B in inventory, dragging FOCF conversion down to a guided 20% for FY27. Is this $1.1B the new structural floor due to tungsten prices, or do you have a path to aggressively unwind this and return to historical 100%+ cash conversion rates?