Kennametal (KMT) Q1 2027 earnings review
Kennametal's profit jumps on tungsten prices, but inventory drains cash
Kennametal, a maker of industrial cutting tools and mining parts, posted a huge profit windfall while burning cash to restock expensive metal. Sales grew 54% to $768 million, and profit per share reached $3.48 because selling prices jumped ahead of older, cheaper tungsten inventory. Chief executive Sanjay Chowbey raised the full-year profit outlook, but by our math the plan still has second-half profit per share dropping 82% once higher metal costs catch up.
| Sales from businesses owned a year ago | +54% $768.2M total sales |
|---|---|
| Profit per share, excluding one-offs | $3.48 $0.34 a year ago |
| Free operating cash flow | -$211.7M -$5.5M a year ago |
| Full-year profit per share outlook | Raised $0.85 middle of the range: $5.50 |
⚖️ Verdict: ⚪ Neutral
The story is unchanged because the $0.85 full-year profit raise merely passes through the first-quarter timing beat while leaving the rest of the year where it stood. On the positive side, Metal Cutting volumes grew and management set a 16% to 19% long-term cash operating profit margin target. The bad news: tungsten inventory jumped to $1.62 billion, draining $212 million in free operating cash flow and forcing the company to draw a $500 million loan.
The question now is what Kennametal earns and generates in cash once raw material costs match selling prices. One view is that factory cost cuts and aerospace demand leave a 16% to 19% margin business; the other is that the company holds $1.62 billion of peak-priced inventory while Infrastructure volumes are already falling. Third-quarter margins and cash flow will settle it.
🐂 Bull Case
Metal Cutting Volumes and Underlying Profit Improved
Metal Cutting, the division that makes precision tools for factory machines, grew sales 28% to $398.2 million. Sales from businesses owned a year ago rose 29%. Chief executive Sanjay Chowbey said first-quarter results rose "driven primarily by the favorable timing of raw material-related pricing compared to costs and stronger Metal Cutting volumes".
The division earned $118.3 million in operating income, or 29.7% of sales, up from $24.9 million (8.0% of sales) excluding one-offs a year ago. About $65 million of that profit came from selling tools at current tungsten prices while using up cheaper inventory, and $2 million came from cost cuts, partly offset by a $5 million investment write-down. Even without the $65 million timing gain, by our math the division earned $53.3 million, or 13.4% of sales, because higher factory volumes lifted profit.
What to watch: Metal Cutting sales volume growth on the conference call. A reading above the company's 1% to 4% full-year volume target would show the division is winning industrial orders beyond price hikes.
Kennametal Set a 16% to 19% Margin Target
Investors have questioned what the industrial toolmaker will earn once raw material costs catch up to selling prices. Chowbey addressed that debate: "In a steady-state tungsten environment, we expect to deliver a 16 to 19 percent adjusted EBITDA margin profile".
EBITDA is earnings before interest, taxes, depreciation and amortization, a common measure of cash operating profit. The company said tungsten prices have risen eightfold since its 2023 investor day, but that its long-term cash flow and return targets remain intact if tungsten stays at current levels. Before the tungsten boom, cash operating profit margin excluding one-offs was 15.2% in fiscal 2025, so a 16% to 19% floor would improve on its old baseline.
What to watch: cash operating profit margin excluding one-offs in the second half of fiscal 2027. Hitting at least 16% once the inventory timing windfall fades would prove the cost structure has improved.
Positives this quarter didn't test
The earnings release repeated that the company is winning business in key growth markets, but left out the numbers needed to check two standing drivers.
- Aerospace and defense growth: the release did not include the end-market sales table; the quarterly presentation or filing will show whether aerospace outpaced general engineering.
- Power generation and artificial intelligence data center orders: named again as a long-term driver alongside hybrid and electric vehicles, with no dollar sales figure disclosed.
🐻 Bear Case
Higher Profit Plan Only Passes Through First-Quarter Windfall
Kennametal raised its full-year profit per share outlook to $5.00–$6.00 from $4.15–$5.15 after first-quarter profit per share reached $3.48. That $3.48 beat the company's own $2.50–$2.80 plan because of a "favorable timing of raw material-related pricing compared to costs of approximately $323 million". Cost of goods sold — the cost of making the tools — dropped by 35.8 percentage points of sales from a year ago, while operating overhead fell 6.2 percentage points.
The full-year raise is an accounting pass-through, not an upgrade to the rest of the year. The middle of the full-year range rose by $0.85, which matches the $0.83 first-quarter beat against the middle of the prior plan. For the remaining nine months, by our math, the outlook still implies $2.02 of profit per share, matching the $2.00 implied three months ago.
With the second quarter planned at $1.20–$1.50, by our math the second half of the year drops to about $0.67 per share, down 82% from $3.73 a year earlier. What to watch: third-quarter profit per share outlook next quarter. A forecast near $0.30 to $0.35 per share would confirm that earnings step down once high-cost tungsten flows through cost of goods sold.
Tungsten Inventory Drained Cash and Drove Debt Higher
Rising tungsten prices help Kennametal win orders from smaller rivals that cannot secure supply, and price hikes lifted total sales 54%. However, restocking that same metal at eightfold prices is draining cash and adding balance-sheet risk.
Free operating cash flow — cash from operations minus factory equipment spending — was negative $211.7 million, compared with negative $5.5 million a year ago. Kennametal blamed "increased inventory values resulting from unprecedented tungsten price increases, as well as advance payments made to certain suppliers to secure raw material supply". To pay for those supplies, the toolmaker borrowed $500 million on a term loan and repaid $90.6 million of older debt.
- Inventories: $1.62 billion, up 46% from three months ago and up 186% from a year ago
- Net debt (total debt minus cash): $861.3 million, up 39% from $621.7 million three months ago by our math
- Interest expense: $11.5 million, up 85% from $6.2 million a year ago
This matters because the company now carries $1.62 billion of inventory valued at peak commodity prices. If tungsten prices fall, the company faces both lower selling prices and inventory write-downs. What to watch: inventory dollars and free operating cash flow in the second quarter. A second quarter of inventory growth above $1.62 billion would threaten the full-year cash plan.
Infrastructure Volumes Fell Behind the Price Windfall
Infrastructure, the division that makes wear-resistant parts for mining, energy and construction, nearly doubled sales to $370.0 million, up 98% from a year ago. Reported operating income reached $261.7 million, or 70.7% of sales, compared with $16.5 million (8.8% of sales) excluding one-offs a year earlier.
The headline numbers hide weaker customer demand and fading cost savings. Timing between selling prices and tungsten costs contributed $258 million of the division's profit, and a US government manufacturing tax credit added $4 million, while fixed-asset write-offs cost $3 million. Without the $258 million raw-material timing gain, by our math Infrastructure operating income was $3.7 million, or 1.0% of sales, because customer sales volumes fell and inflation rose. Across the whole company, incremental savings from factory restructuring slowed to $3 million, down from $5 million last quarter and $8 million a year ago.
What to watch: Infrastructure operating margin once raw material costs match selling prices in the second half. A margin below the 8.8% earned a year ago would show that lower volumes and inflation outweighed cost cuts.
Risks this quarter didn't answer
Three standing risks could not be checked from the earnings release and depend on the conference call or quarterly filing.
- Split between volume and price: the release gave 54% underlying sales growth overall, without breaking out how many points came from volume versus tungsten price surcharges.
- Retention of customers won during the tungsten shortage: no data on whether orders from rivals' customers are turning into multi-year contracts.
- Supplier financing obligations: the quarterly filing will show whether accounts payable relied further on bank-intermediated supplier finance.
💲 Other KPIs
Sales rose in all three regions, led by the Americas. Americas sales jumped 76.3% from a year ago to $436.5 million. EMEA (Europe, the Middle East and Africa) grew 33.4% to $204.5 million, and Asia Pacific rose 30.9% to $127.1 million, as price increases for tungsten rolled through customer contracts.
Spending on property, plant and equipment fell 53.0% from $23.0 million a year ago. That equalled 1.4% of sales, down from 4.6% a year earlier. The lower spending saved $12.2 million of cash during a quarter of heavy inventory outflows, while the full-year spending plan stays at $85 million.
Diluted shares rose 1.7% from 76.8 million a year ago. The US company spent $38 thousand on share buybacks, down from $10.0 million in the prior-year quarter, because management paused the buyback programme to fund tungsten inventory. It paid $15.2 million in cash dividends ($0.20 per share).
🔮 Guidance
New. The plan calls for $800 million at the middle of the range, up 51.1% from a year ago and up 4.1% from the first quarter, with currency having no effect. By our math, that leaves second-half sales at $1.82 billion, or 37.1% growth from a year ago as tungsten price comparisons get tougher.
New. At the $1.35 middle of the range, profit per share rises 187.2% from $0.47 a year ago but falls 61.2% from the first quarter's $3.48. The drop from the first quarter happens because higher-cost tungsten inventory begins flowing through cost of goods sold, shrinking the timing spread.
Unchanged. Management kept the full-year target at $3.39 billion at the middle of the range, or 43.8% growth from fiscal 2026, with neutral currency. Keeping the annual sales plan unchanged after a $8.2 million first-quarter beat against the middle of the range leaves the rest of the year in line with prior expectations.
Raised. The middle of the range moved up $0.85 to $5.50, or 20.4% growth from fiscal 2026. The $0.85 raise matches the $0.83 first-quarter beat. By our math, subtracting first-quarter actuals and the second-quarter plan leaves $0.67 per share for the second half, down 82.0% from $3.73 in the second half of fiscal 2026.
Unchanged. The toolmaker still plans to turn about 20% of full-year profit excluding one-offs into free operating cash flow. Because the profit outlook rose, 20% represents slightly more dollar cash flow, and requires generating more than $300 million of cash over the next three quarters to recover from the $211.7 million first-quarter outflow.
Unchanged. Full-year capital spending stays at about $85 million, up from $76.9 million in fiscal 2026. After spending only $10.8 million in the first quarter, the plan implies about $74 million of factory equipment spending across the remaining three quarters.
❓ Key Questions
How much did volumes grow or shrink by division?
The release gave 54% underlying sales growth overall, 29% in Metal Cutting and 97% in Infrastructure, and noted that Infrastructure volumes fell. Without the exact split between volume and price surcharges, investors cannot measure real tool demand.
When will tungsten inventory and supplier advances peak?
Inventories jumped $508 million in three months to $1.62 billion, and advance payments to suppliers pushed other current assets up $42 million. Hitting the full-year cash target depends on when working capital stops absorbing cash.
What protects the $1.62 billion inventory if tungsten falls?
With tungsten prices up eightfold since 2023 and funded by $500 million in new term debt, a drop in metal prices could force inventory write-downs and customer price cuts at the same time.
Why did incremental restructuring savings slow to $3 million?
Year-over-year cost savings from restructuring dropped from $8 million a quarter early last year to $5 million in the fourth quarter and $3 million this quarter. That slowdown makes the $110 million run-rate savings target harder to verify.