Kennametal’s Earnings Report: Navigating Headwinds in a Challenging Market

Investors are set to scrutinize Kennametal (KMT) tomorrow as the industrial toolmaker reports its fiscal third-quarter 2025 results. With the company facing headwinds from weakening demand in Europe, Middle East, and Africa (EMEA), along with higher tax rates, the earnings call will be critical in assessing whether management can stabilize margins and execute its restructuring plan. Here’s what to watch for.

Key Metrics to Monitor in Tomorrow’s Report

1. Revenue Performance: Analysts expect sales of $488.8 million, down 5.2% year-over-year, reflecting KMT’s revised full-year guidance of $1.95–$2.0 billion. The EMEA region, which contributed to 20% of revenue in Q2, remains a key concern due to soft industrial demand and geopolitical risks.
2. Adjusted EPS: Estimates point to $0.24, at the lower end of KMT’s guided range of $0.20–$0.30. This reflects the 27.5% adjusted effective tax rate, up from 26.9% in Q2, and currency headwinds.
3. Margin Stability: Gross margins improved to 30.1% in Q2, thanks to lower raw material costs. Investors will look for whether this progress persists amid rising wage inflation and restructuring costs.

Segment-Specific Risks and Opportunities

• Metal Cutting Segment: Organic sales declined 7% in Q2 due to weaker demand in EMEA and North America. While pricing actions are offsetting cost pressures, volumes remain a drag. Management’s ability to stabilize this core business will be pivotal.
• Infrastructure Segment: Improved to an 8.6% operating margin in Q2, driven by tax credits and insurance recoveries. This segment’s performance could provide a buffer against Metal Cutting’s struggles.

Restructuring Progress and Cost Discipline

KMT announced $25 million in restructuring charges in January 2025 to deliver $15 million in annual savings by year-end. Investors will want clarity on:
- How much of the $100 million structural cost improvement target (set in 2023) has been achieved.
- Whether the restructuring will meaningfully reduce operational leverage in weak demand environments.

Risks to the Outlook

1. EMEA Market Deterioration: CEO Sanjay Chowbey has cited this as the primary driver of lowered guidance. A further slowdown could force additional cost cuts or delays in margin recovery.
2. Currency and Tax Pressures: A 3% foreign exchange headwind in Q3 and the higher tax rate could squeeze EPS below expectations.
3. Peer Performance: Competitors like ESAB and Hillman have shown mixed results in 2025, underscoring sector-wide volatility.

Cash Flow and Shareholder Returns

Despite earnings headwinds, KMT’s free operating cash flow (FOCF) rose to $57 million year-to-date, up from $36 million in 2024. This liquidity strength supports its $200 million share repurchase program, with $30 million deployed year-to-date. Investors should ask whether the dividend (currently $0.20 per share) remains sustainable if margins compress further.

Conclusion: A Cautionary Buy with Long-Term Potential

While KMT’s earnings report is unlikely to surprise positively, the stock’s valuation offers a compelling entry point. At a trailing P/E of 12.3x, it trades at a discount to its five-year average of 16.2x. Key catalysts include:
- Execution of the $100 million cost-savings plan.
- A rebound in EMEA demand, which could lift full-year sales to the upper end of the $2.0 billion guidance.
- FCF exceeding 125% of adjusted net income, as guided.

However, risks remain elevated. If margins continue to erode or EMEA weakness persists, KMT’s stock could underperform. For now, the buy rating holds, but investors should maintain a close watch on management’s ability to navigate these challenges.

In summary, tomorrow’s earnings will be a litmus test for KMT’s resilience. While short-term hurdles are significant, the company’s cash flow strength and restructuring efforts position it for recovery if macro conditions stabilize.