KMT Q2 Deep Dive: Structural Cost Actions and End-Market Weakness Shape Outlook

Industrial materials and tools company Kennametal (NYSE:KMT) fell short of the market’s revenue expectations in Q2 CY2025, with sales falling 4.9% year on year to $516.4 million. Next quarter’s revenue guidance of $475 million underwhelmed, coming in 2.9% below analysts’ estimates. Its non-GAAP profit of $0.34 per share was 13.1% below analysts’ consensus estimates.

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StockStory’s Take

Kennametal’s second quarter was marked by continued end-market softness and execution of structural cost initiatives, with the company missing Wall Street’s expectations for both revenue and profit. Management cited lower global production volumes, declines in U.S. land-based rig counts, and slowing vehicle production—especially in Europe—as the main drivers of the shortfall. CEO Sanjay Chowbey acknowledged, “The results reflect the continued broad market weakness that has impacted our end markets for the past 8 quarters,” and pointed to restructuring savings and portfolio optimization as partial offsets against these headwinds.

Looking ahead, Kennametal’s outlook remains cautious, shaped by expectations of ongoing volume declines in key segments and a renewed focus on cost structure. Management emphasized that further plant consolidations, footprint rationalization, and portfolio optimization will be necessary to address persistent demand challenges. Chowbey noted, “We are prioritizing rightsizing capacity and our cost structure to set the company up for long-term success,” while CFO Pat Watson highlighted that ongoing tariff and raw material cost pressures will continue to weigh on margins, even as restructuring benefits ramp up later in the year.

Key Insights from Management’s Remarks

Kennametal’s management detailed how ongoing market weakness, restructuring efforts, and supply chain challenges defined quarterly performance and shaped their forward strategy.

• Structural cost reduction focus: Management accelerated restructuring, closing facilities in Massachusetts and Spain and achieving $6 million in quarterly savings. The company is targeting $90 million in annualized savings by the end of next year through a two-phase program aimed at reducing its manufacturing footprint.
• Portfolio optimization underway: The sale of the Goshen facility marks the first move in a renewed push to streamline operations and shed underperforming assets. Chowbey said, “We made modest progress on portfolio optimization by completing the sale of our Goshen facility in early June.”
• End-market pressure persists: Weakness in industrial production, energy, and transportation continued to weigh on results. General Engineering, Transportation, and Earthworks all faced low- to mid-single-digit declines due to stagnant global production and lower mining activity.
• Tariff and raw material headwinds: Higher raw material costs, particularly tungsten, and new tariffs impacted margins. While price increases and surcharges were implemented, Watson acknowledged, “These unfavorable items were not offset by higher prices, restructuring benefits and the positive net effect from the tornado which occurred in the prior year.”
• Segment-specific performance issues: Metal Cutting saw declines in EMEA and the Americas, with Aerospace & Defense showing only modest growth. Infrastructure was affected by lower mining activity and unfavorable business days, partially offset by project wins in defense.

Drivers of Future Performance

Management expects near-term results to be shaped by continued volume declines, cost reduction initiatives, and exposure to raw material and tariff pressures.

• Volume declines across core markets: Chowbey noted that Transportation, Oil & Gas, and Earthworks are all anticipated to see mid-single-digit volume declines, driven by lower OEM production, customer supply chain shifts, and reduced rig counts. Management described the outlook as a "balanced view" reflecting both company-specific and broader macro factors.
• Restructuring and cost actions: The company is prioritizing rightsizing capacity, with two phases of plant consolidations and a target of $125 million in savings by the end of 2027. These actions are meant to address structural cost issues and improve efficiency, but management cautioned that benefits will ramp gradually, with most realized in the second half of next year.
• Tariff and material cost uncertainty: While price increases and surcharges are expected to partially offset higher raw material and tariff costs, Watson warned that margin recovery will depend on both successful cost pass-through and stabilization in tungsten prices. The company expects margin pressure to persist until volumes recover or commodity prices normalize.

Catalysts in Upcoming Quarters

Looking ahead, our analyst team will be closely monitoring (1) the pace and impact of plant consolidations and restructuring savings, (2) whether volume trends in Transportation, Energy, and Earthworks stabilize or deteriorate further, and (3) the company’s ability to offset raw material and tariff-related margin pressures through pricing and surcharges. Execution on portfolio optimization and early signs of recovery in key end markets will also be essential indicators.

Kennametal currently trades at $20.33, down from $25.12 just before the earnings. Is the company at an inflection point that warrants a buy or sell? Find out in our full research report (it’s free).

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