Kennametal's tungsten windfall is already spent: record margins, a flat guide, a cash cliff

FY26 rode a tungsten super-cycle to record EPS and margins, but FY27 is flat by design as price/raw flips to a headwind and inventory swallows the cash.

KMT · Earnings Call · 2026-08-05

A record built on a commodity spike

Kennametal just closed the most anomalous fiscal year in its modern history, and it wants investors to look through it. A tungsten rally to historic highs — driven by export controls and mine-supply constraints, not demand — let the $2.7B toolmaker push through pricing that inflated every line. Fiscal Q4 organic sales rose 42%, adjusted EPS hit $2.96 against $0.34 a year earlier, and adjusted EBITDA margin reached a record 46.8%. “Q4 was the fourth consecutive quarter of organic sales growth with an organic sales increase of 42%,” — Patrick Watson, Chief Financial Officer · 2026-08-05 CFO Pat Watson opened. The full year was equally extreme: organic sales +19%, adjusted EPS $4.57 versus $1.34, EBITDA margin 26.9% versus 15.2% — the whole surge driven by raw material pricing as tungsten rose through the chain. The catch — and the entire FY27 story — is that this is a timing arbitrage, not an earnings engine.

The flat guide hides a violent rotation

Management frames FY27's $4.65 midpoint, essentially flat against $4.57, as “pretty flat on the surface. Underneath that roughly flat headline number, the core earnings engine of the business continues to strengthen.” — Patrick Watson, Chief Financial Officer · 2026-08-05 But the components are so different that the "normalized" number became a point of friction. Angel Castillo pressed: strip out the $3.11 remembered from FY26 and the $0.39 embedded in FY27, and what is left? "I'm coming to kind of a core ex price cost of about $1.15," Castillo summarized; Pat defended a cleaner ~$1.64 once the tungsten stack, variable-comp reset, and one-time timing are handled — noting on the May call the clean number had been $1.63 off a $3.88 midpoint before the Q4 beat stuffed in more price/raw. The tungsten prices benefit, in other words, is effectively the whole year's growth.

And so you just have these fundamental 2 halves, where you're going to have strong price raw in the first half. And then on a year-over-year basis, it's going to be a headwind for us.
Patrick Watson, Chief Financial Officer · 2026-08-05

The bridge exposes how many non-operational drags sit on top. A 23% Bolivia FX headwind (government ended a preferential exchange-rate program) is a $0.23 hit; interest expense rises $0.25 from the financing the working-capital build forced; share count adds $0.07 — partially offset by a $0.17 IRA advanced-manufacturing credit, $0.10 of restructuring savings and lower incentive comp. All buried in a flat headline. The key target is the FY27 exit run-rate: a clean Q4 EBITDA margin in the mid-teens as the "jump-off point" for FY28.

Cash is the mirror image

The P&L's price/raw benefit appears on the balance sheet as inventory. The year closed with free operating cash flow negative $79 million, and the quarterly lens is stark: FCF swung to -$30M, a -5.1% FCF margin, as inventory valuation stepped up. To fund it, KMT added a new $500M term loan and exercised the $200M revolver accordion, taking effective net cash to -$491M and, after the new facilities, deeper. The CFO's cash cadence makes the squeeze concrete — Q1 FY27 will be a roughly

…$200 million [draw]… that's going to basically be, call it, the high watermark,
Patrick Watson, Chief Financial Officer · 2026-08-05

inflecting positive in Q3 as inventory peaks. This is the mirror image of the earnings inflation, and the reason free operating cash flow is the number to watch into 2027. It is also a theme the whole market is touching this quarter: IEEPA refund is crowded across reporting companies, and KMT is no exception — “we have applied for refunds, and we have received some, but it was immaterial to report.” — Sanjay Chowbey, President and Chief Executive Officer · 2026-08-05 Management plans to reinvest any proceeds into supply-chain security, a defensive posture that underscores how structural the tariff/tungsten regime has become.

Growth that outlasts the spike

If tungsten is the cyclical distortion, the durable story is aerospace and defense — now projected to be KMT's third-largest end market, led by carbon-fiber-reinforced-plastic machining (a ~$500M, 9%-CAGR niche with diamond-coated tools that consume nearly double the tooling of aluminum) — plus power generation for AI data centers, where the energy end market grew 36% in Q4 Metal Cutting. The tungsten shortage itself handed KMT a window: share gain as competitors turned away orders, with Sanjay admitting “we could actually take more business if we can go get a lot more tungsten material.” — Sanjay Chowbey, President and Chief Executive Officer · 2026-08-05 Management counts 100–200bp of structural outgrowth inside the 1%–4% FY27 volume guide; the durability of those supply-driven wins is the open question once the commodity normalizes. The market has already voted on the normalization: KMT is down ~23% over 90 days, 30% off its May peak, still trading at roughly 19x net income — optically reasonable, but rich against a cleaner ~$1.6 normalized EPS once tungsten timing fades. The commodity gave Kennametal a spectacular year; the bill comes due in cash flow and comparables.