Kennametal Inc. Stock

Good morning. I would like to welcome everyone to Kennametal Fourth Quarter and Fiscal 2026 Earnings Conference Call. [Operator Instructions] Please note that this event is being recorded.

I would now like to turn the conference over to Michael Pici, Vice President of Investor Relations. Please go ahead, sir.

Thank you, operator. Welcome, everyone, and thank you for joining us to review Kennametal's Fourth Quarter and Fiscal 2026 results. This morning, we issued our earnings press release and posted our presentation slides on our website. We will be referring to that slide deck throughout today's call. I'm Michael Pici, Vice President of Investor Relations.

Joining me on the call today are Sanjay Chowbey, President and Chief Executive Officer; and Pat Watson, Vice President and Chief Financial Officer. After Sanjay and Pat's prepared remarks, we will open the line for questions.

At this time, I'd like to direct your attention to our forward-looking disclosure statement. Today's discussion contains comments that constitute forward-looking statements and as such, involve a number of assumptions, risks and uncertainties that could cause the company's actual results, performance or achievements to differ materially from those expressed in or implied by such statements. These risk factors and uncertainties are detailed in Kennametal's SEC filings.

In addition, we will be discussing non-GAAP financial measures on the call today. Reconciliations to GAAP financial measures that we believe are most directly comparable can be found on the back of the slide deck and on our Form 8-K on our website.

And with that, I'll turn the call over to Sanjay.

Thank you, Mike. Good morning, and thank you for joining us. I will begin the call today with a brief review of the fiscal year, followed by an aerospace product spotlight and some end market commentary supporting our fiscal '27 outlook. Then Pat will cover the quarterly financial results as well as the fiscal '27 outlook. Finally, I'll make summary comments and then open the line for questions.

Beginning on Slide 3 for an overview of our strong fiscal year results. Throughout fiscal '26, we continue to win new business and expand our share of wallet with key customers across diverse end markets like aerospace and defense, energy, transportation and earthworks.

Our success reflects the strength of our core competencies, which includes material science and process technology, application engineering and a secure global supply chain. This combination of expertise, innovation and global operations is a strong competitive advantage for us.

For the last several years, we have used a systematic approach to our growth initiatives, which includes identifying the most attractive opportunities and allocating the resources needed to capitalize on them. An important aspect of this approach is that it is repeatable and sustainable. I will cover an aerospace and defense example of this in a moment.

We broadened our growth platforms this year through wins tied to AI-powered data centers, defense programs, mining projects and next-generation vehicle powertrains. At the same time, we also advanced new digital machining solutions that enhance customer productivity. In addition to the growth we saw from our own strategic initiatives, we experienced improvements in several of our end markets.

The key external market factors we track all have improved, including IPI, PMI, light vehicle production and aircraft build rates. At the same time, rig counts stabilized during the year. The final component of sales growth is price, driven by higher tungsten costs. Tungsten outside of China has now stabilized but remains at historically high levels. We implemented several pricing actions in response to this environment. As you have heard us say previously, we are committed to offsetting the impact that this additional cost is having on the business.

Finally, we realized $27 million in restructuring savings this year and remain committed to $110 million of savings by the end of fiscal '27.

Now let's move to our full year results. Full year organic sales increased 19% year-over-year, driven by additional price realization and modest volume. From an end market perspective, for fiscal '26, all end markets experienced growth on a constant currency basis.

For the full year, adjusted EPS increased to $4.57 compared to $1.34 in the prior year. Adjusted EBITDA margin was 26.9% compared to 15.2% in the prior year. As expected, free cash flow was adversely impacted by increased working capital requirements directed to tungsten prices.

Cash flow from operating activities was negative $4 million and free operating cash flow was negative $79 million. And finally, we returned $71 million to shareholders, $61 million through dividends and $10 million through share repurchases. More details on our full year performance can be found on Slide 18 in the appendix. Pat will provide a detailed overview on the fourth quarter results in his prepared remarks.

In summary, we are pleased with the way the team executed this year on growth, lean transformation and cost-out initiatives, while also navigating this unique and unprecedented business environment.

Now before I provide an update on end markets, I want to call your attention to Slide 4. This highlights our metal cutting solution to address machining challenges aerospace customers have with carbon fiber reinforced plastics or CFRP. This is one of the most exciting growth stories in our portfolio. CFRP is an extremely strong, rigid and lightweight composite material that is difficult to machine. Due to its high strength to weight ratio, it is widely used in aerospace and automotive manufacturing, where fuel efficiency is a key focus.

We are competing in a roughly $500 million market for cutting tools used on carbon fiber composites in aerospace. This market is expected to grow 9% a year through 2028, one of the fastest-growing material groups we serve. Aerospace demand for lightweight composites remains strong.

What makes this market especially attractive is the economics. Consumption for diamond coating cutting tools for CFRP is almost double that of cutting tools for aluminum. These can't be easily reconditioned. Once they are consumed, customers come back for a replacement. That provides us a durable recurring revenue base.

How we win here is again tied to our core competencies as we are leveraging our engineering and material science expertise. We design innovative solutions using standard and custom tooling with proprietary geometry and material science. This delivered longer tool life and cleaner cuts. We pair that product advantage with deep channel relationships and a well-trained sales and application engineering team. This expands our reach and helps customers solve their manufacturing challenges.

Let me give you an example. A customer recently faced a supply disruption from a competitor. So our team quickly stepped in, delivered a superior product and guaranteed supply, and we won that business outright. This is only one example of growth opportunities driving performance in aerospace.

Since composites are also used in applications across the transportation and general engineering end markets, we are excited about the prospects of leveraging our expertise to serve this growing application. We will apply the same disciplined, repeatable process I discussed earlier to this growth opportunity. This process helps us identify the most attractive opportunities, move resources quickly and drive growth and share gains, while leveraging our global supply chain to deliver innovative solutions on time and to specification.

Turning to Slide 5, I want to frame the end market demand environment supporting our full year fiscal '27 outlook. As a reminder, our full year outlook reflects forecast of specific market drivers and general market conditions. The top half of this slide reflects our sales outlook at the midpoint and includes price, volume and market factors. I will focus on the bottom half of the slide and the market conditions by end market.

Aerospace and defense remains a structural growth engine. On the aerospace side, commercial OEM build rates continue to recover as supply chains normalize and production restrictions ease.

In defense, we are seeing a proposed increase in the U.S. budget, coupled with NATO members planning to significantly raise spending. This provides a durable multiyear demand trajectory.

Aerospace and defense also continues as a strategic growth initiatives for us. You might remember at our last Investor Day, we talked about shifting resources from transportation to aerospace and defense in the Americas to grow our position in that market. That helped us drive share gains and new opportunities like the one I mentioned a few minutes ago.

Coupled with key wins on various defense opportunities, aerospace and defense is now projected to be our third largest end market. General engineering is stable. U.S. and European industrial production are both forecast up low single digits, and China has returned to modest expansion.

Energy growth is anticipated to be strong. The U.S. land-based rig count has turned decisively. Prior estimates were a mid-single-digit decline. Projections now forecast rig counts up high single digits. Customer sentiment has moved from cautious to improving and combined with increased rig counts supports a meaningful upward revision to this end market assumption.

The trend in the market for AI data center power generation continues to experience rapid expansion, which provides further support for growth in this end market. Now there are some offsets we are monitoring. Transportation continues to be soft. Global light vehicle production moved from up about 1 point in fiscal '26 to down about 1 point in fiscal '27, mainly in the Americas and Europe.

In earthworks, mining share gains are partially offset by soft coal markets in the U.S. and China, though customers, they are increasingly consolidating towards reliable suppliers like us. And in road construction, we are assuming that normal seasonality and competitive pressures continue.

Netting it out, our fiscal '27 sales assumptions in constant currency and including price reflect broad-based growth across most end markets. We are confident that this market recovery is broad enough and the pricing environment firm enough to support our outlook and growth trajectory into fiscal '27.

Now let me turn the call over to Pat, who will review the fourth quarter financial performance.

Thank you, Sanjay, and good morning, everyone. I will begin on Slide 6 with a review of our fourth quarter operating results. Q4 was the fourth consecutive quarter of organic sales growth with an organic sales increase of 42%. Our results for the quarter reflect strong price realization from our decisive pricing actions driven by the unprecedented rise in tungsten costs and continued volume improvements in metal cutting.

At the segment level, sales increased organically 22% in metal cutting and 74% in infrastructure. On a constant currency basis, Americas sales increased 60%, Asia Pacific increased 28% and EMEA increased 24%.

We experienced growth in all our end markets on a constant currency basis. Energy increased 101% Earthworks 76%; Aerospace and Defense, 43%; General Engineering, 28%; and Transportation, 7%. I will provide more color when I review the segment results in a moment.

We achieved record adjusted EBITDA and operating margins of 46.8% and 41.5%, respectively, versus 14.8% and 7.4% in the prior year quarter. The margin increase was driven by favorable timing of raw material pricing compared to costs of $252 million, non-raw material-related pricing and tariff surcharges in Metal Cutting, higher sales and production volumes and incremental year-over-year restructuring savings of approximately $5 million. These were partially offset by higher compensation costs tariffs and general inflation.

Adjusted earnings per share was $2.96 in the quarter, a record high for the company versus $0.34 in the prior year period. The main drivers of our EPS performance are highlighted on the bridge on Slide 7.

The year-over-year effect of operations this quarter was $2.55. This reflects approximately $2.43 of favorable timing of raw material pricing compared to costs, non-raw material-related pricing and tariff surcharges in Metal Cutting, higher sales and production volume and incremental restructuring benefits of $0.05 per share. These were partially offset by higher compensation costs, tariffs and general inflation. A lower effective tax rate contributed a $0.09 benefit in the quarter, driven by geographic mix.

The headwind of $0.07 in other is mainly driven by higher share count and slightly higher interest expense. You can also see $0.04 of transaction gains related to preferential Bolivia exchange rates. Currency and pension effects offset each other, and there is a $0.01 gain from the Inflation Reduction Act tax credit.

Slides 8 and 9 detail the performance of our segments this quarter. Metal Cutting sales grew 22% organically and 24% on a reported basis. We outperformed the public peers again this quarter. That marks the fourth quarter in a row and extends a favorable trend that started 4 years ago. Regionally, on a constant currency basis, the Americas increased 29%, Asia Pacific increased 20% and EMEA increased 16%.

Looking at sales by end market on a constant currency basis, Energy increased 36% this quarter. The growth was driven by price and continued AI data center project wins.

Aerospace and Defense grew 35% year-over-year as we capitalize on higher build rates and accelerate share of wallet gains in tier suppliers in the Americas and EMEA.

General Engineering grew 25% year-over-year, driven by higher price realization and share gains in the indirect channel. For an example, in the Americas, we leveraged our strategic partnership with a large national distributor to expand our reach.

And lastly, Transportation increased 7% year-over-year as higher price was partially offset by prior year project wins in Asia Pacific, including EV-related program activity.

Metal Cutting adjusted operating margin was 27.3% compared to 7.9% in the prior year, driven by favorable timing of raw material-related pricing compared to cost of $54 million. non-raw material pricing and tariff surcharges, higher sales and production volume and restructuring savings of $4 million, partially offset by higher compensation costs and general inflation.

Turning to Slide 9 for Infrastructure. Organic sales grew by 74% year-over-year with favorable foreign exchange of 1% and a favorable business day effect of 1%, partially offset by a divestiture effect of 3%.

Regionally, on a constant currency basis, sales in the Americas increased 103%, EMEA grew 46% and Asia Pacific grew 40%. Looking at sales by end market on a constant currency basis, Energy grew 135%, mainly driven by price in the Americas, partially offset by volume as we prioritized other end markets.

Earthworks grew 76%, driven by price and higher volume in surface mining and construction from share gains due to availability of materials.

Aerospace and Defense grew 63%, driven by price and continued execution of our strategic initiatives in the Americas and EMEA. And lastly, General Engineering grew 37% from price and volume growth in EMEA, partially offset by volume prioritization in the Americas.

Adjusted operating margin increased to 58.4% compared to 6.8%, primarily due to favorable timing of raw material pricing compared to cost of $198 million, partially offset by lower sales and production volume, higher compensation costs and general inflation.

Now turning to Slide 10 to review our free operating cash flow and balance sheet. Free operating cash flow as a percent of adjusted net income was modestly better than we anticipated. Our full year free operating cash flow was negative $79 million compared to positive $121 million reported in the prior year. The change in free operating cash flow was primarily the result of increased working capital required by higher tungsten prices.

Net capital expenditures were $75 million compared to $87 million in the prior year. In total, we returned $71 million to shareholders, $61 million through dividends and $10 million from share repurchases. Our share repurchase program remained positive this quarter as a result of the higher tungsten pricing and corresponding working capital needs.

During the quarter, we took actions to enhance liquidity, extend debt maturities to position the company to capture near-term growth opportunities. These actions provide additional liquidity to support near-term tungsten-related working capital needs and preserve financial flexibility to respond to future market developments, while maintaining balance sheet discipline.

At quarter end, we had combined cash and revolver availability of approximately $926 million, which includes the additional $200 million available by exercising the accordion feature on our revolver, and we are well within our financial covenants. Additionally, we had full availability of our new $500 million term loan.

As is customary, this facility is a use it or lose it proposition. So we intend to fully draw the new term loan during the September quarter and pay down any revolver borrowings. Going forward, the term loan can be paid down within the 3-year term, which gives us the flexibility to scale down the balance sheet if working capital needs decline.

With the refinancing of the 2028 notes, the remaining $91 million of outstanding notes were redeemed on July 1, we have meaningfully extended our debt maturity profile. Our nearest debt maturity is July 2029, and our public notes maturities are now extended to 2031 and 2036, respectively. The full balance sheet can be found on Slide 22 in the appendix.

Turning to Slide 11 regarding our full year outlook. We are providing a range for both the full year and the first quarter, beginning with the full year. We expect FY '27 sales to be between $3.33 billion and $3.45 billion, with volume ranging from 1% to 4%, price and tariff surcharges ranging from approximately 40% to 43% and a neutral effect from foreign exchange. We have been successful and remain committed to achieving price.

As Sanjay noted earlier in his remarks, most end market indicators maintained positive momentum into FY '27. At the midpoint at constant currency and including price, we expect all end markets to increase high double digits year-over-year.

Our annual outlook also assumes that tungsten will remain stable at the current level. Additionally, we are assuming that there is no material effect on customer activity as a result of the conflict in the Middle East.

Approximately $10 million of rollover savings from our previously announced restructuring initiative has been included. We expect interest expense of approximately $50 million due to the additional borrowings to fund working capital requirements and an effective tax rate of approximately 25%. We expect adjusted EPS in the range of $4.15 to $5.15.

On the cash side, the full year outlook for working capital expenditures is $85 million and the outlook for primary working capital is 45% by fiscal year-end. Taken together, we expect free operating cash flow to be approximately 20% of adjusted net income, reflecting the working capital pressure from the rising cost of tungsten.

The bridge on Slide 12 highlights the main drivers impacting EPS at the midpoint of our outlook. The bridge walks you from our FY '26 adjusted EPS of $4.57 to the midpoint of our FY '27 outlook of $4.65, pretty flat on the surface. Underneath that roughly flat headline number, the core earnings engine of the business continues to strengthen. There's a lot going on underneath, so let me unpack it.

Starting with the tailwinds. First, operations adds about $0.53. Favorability of raw material pricing compared to costs is positive $0.39 for the full year with favorability occurring in the first half of the year, most significantly in the first quarter.

Higher sales and production volume as end markets continue to improve and we execute on the share gain initiatives, together with lower incentive compensation of approximately $0.18 and about $0.10 of restructuring savings, partially offset by higher raw material costs as tungsten remains at elevated levels and higher wages and general inflation. We also expect a $0.17 benefit from the IRA advanced manufacturing credit.

Now to the headwinds. Year-over-year, we will see a 23% Bolivia FX headwind as the Bolivian government has ended the preferential program. Higher interest expense is a $0.25 drag, reflecting our higher debt levels following the recent financing actions and other items of about $0.08, primarily a higher share count of $0.07. Taxes and pension are $0.04 and $0.02, respectively. Netted all together, and we arrive at an FY '27 midpoint of $4.65.

The key takeaway is that our operational momentum, price realization, volume and cost discipline is essentially offsetting a set of largely nonoperational headwinds related to FX, interest and a higher tax rate. The FY '27 midpoint reflects a $0.39 EPS price raw tungsten impact as compared to $3.11 in the prior year. Our first quarter outlook can be found on Slide 13.

We expect Q1 sales to be between $745 million and $775 million, with volume ranging from 1% to 4%, price and tariff surcharges in the range of 50% to 53% and neutral foreign exchange.

Let me share some details on the sales assumptions affecting the Q1 outlook. Once again, similar to the full year impact, the combination of improving end market conditions, focus on share gain initiatives and price, we anticipate each end market to be up high double digits on a constant currency basis.

Foreign exchange is neutral on both the sales and operating income basis. Interest expense is assumed to be approximately $11 million and an effective tax rate of approximately 25%. We expect adjusted EPS in the range of $2.50 to $2.80, which includes approximately $2.25 of favorable timing of raw material pricing compared to costs.

Finally, as we discussed on our last call, I'll provide you some assumptions to help you model a FY '28 and beyond view of the business if tungsten were to remain at this elevated level.

First, some context on the FY '27 quarterly cadence. We have provided the impact for Q1 and the full year effect of tungsten on the business. The FY '27 price raw benefit will be materially behind us by the beginning of the third quarter as we expect tungsten pricing and costing will be on the same level in the second half.

The working capital build will follow the same pattern, and we expect free operating cash flow to turn positive in the second half. Assuming tungsten remains stable at the current level, we expect Q4 EBITDA margins in the mid-teens, which represents a clean quarter to use as a jump-off point to model FY '28 and beyond.

In the current high price tungsten environment, we expect volume leverage to be in the mid-30s. This volume leverage estimate reflects the substantially higher raw material costs in the business as well as a sales mix that is more heavily weighted toward the infrastructure business.

We remain committed to executing share gain initiatives to drive above-market growth, continuous improvement actions to enhance our margins and evaluating opportunities to optimize our portfolio.

And with that, I'll turn it back over to Sanjay.

Thank you, Pat. Turning to Slide 14. Let me take a moment to summarize. We delivered a solid fiscal '26, driven by price and modest improvements in our end markets, project wins on the commercial side and cost improvement actions. We continue to make steady progress on our strategic growth initiatives, lean transformation and structural cost improvement, while also exploring ways to strengthen our portfolio over time.

We are well positioned to continue to deliver on our commitments in fiscal '27 and remain confident in our plan for long-term value creation for our shareholders.

And with that, operator, please open the line for questions.

[Operator Instructions] And our first question today will come from Angel Castillo with Morgan Stanley.

Congrats on a strong quarter. I would just love to go back to the normalized and the bridge that you provided. I guess you gave a lot of good color on the slides, but can you just help me reconcile a couple of things. If I just take the $0.39 EPS from raw material timing for fiscal year '27 and then also layering in the $3.11 that I think you had in the fiscal year '26 guide, it implies an underlying kind of normalized of $1.15, if I just kind of leave everything else unchanged. So just it seems like there's a number of puts and takes, but as I kind of look at the normalized earnings, I used to think about it as closer to $1.60. So has anything changed in terms of what you view as kind of the underlying kind of normalized run rate of the earnings bridge for this -- for the business? And as you think about that exit rate of fiscal year '27, just help us kind of level set what am I missing or what has changed?

No, I think, Angel, there's 2 things to consider, right? And let's go back to a simple view of, let's say, FY '26, right? And so when we talked a quarter ago, we talked about a midpoint of $3.88 and price raw effect in the year of about $2.45 and about $0.20 tailwind going into '27 from a comp perspective, and that kind of gets you a clean FY '26 of $1.63, right?

I would say if you think about those numbers in the context now of what actually happened in the fourth quarter, EPS came in a bit higher, $4.57, really driven by a little bit of pricing, a little bit of raw material. That's why that price raw number went from $2.45 to $3.11, right? And then that comp number came in a little bit tighter. And so that's an $0.18 tailwind going into FY '27, so $1.64. So $1.63 in terms of what we thought that number was 90 days ago, $1.64 kind of in the world we're living in now.

I think as well, as you think about what's happening in the context of FY '27, yes, you have $0.39 for the full year, right? But I think you got to figure into that, that the first half of that -- of the year is going to be positive, right? And as we talked about in the prepared remarks, in the third -- beginning of the third quarter, that price raw tailwind is going to be substantially behind us at that point in time.

And so the benefit that we saw in FY '26, the $0.39 in Q3, the $2.43 in Q4 goes away, okay? 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.

So just maybe kind of putting all that together, the dots together, you had the $1.63 was before. What would you kind of consider now your normalized

In terms of last year for FY '26, $1.64.

No, for fiscal year '27 I -- kind of all that stuff.

From a fiscal year '27 perspective, then you just -- you simply need to take back out the full amount of tungsten, right, from a FY '26 perspective, $2.43 plus the $0.39.

And then just maybe as a second question here, just in terms of the organic growth, could you just help us understand for the fiscal or 4Q, was volume for the total company up? Or was there a little bit of a drag when you kind of put all the pieces together? And then just curious, you talked about acceleration or good kind of improvements in some of the end markets here. Just curious how your kind of order trends right now are shaping up versus that 1% to 4% volume growth outlook?

Yes, certainly. So as we think about across the business, I'd say the business in total, low single digits from a volume perspective, a little bit different in terms of what's going on between the 2 businesses. Metal Cutting, a bit higher, mid-single-digit volume performance in Q4.

Infrastructure, as we talked about, was volumetrically more flat. And there's -- inside of Infrastructure there, we did make some choices around portfolio in terms of customers we serve and how we're utilizing our material to drive ultimately the best return on the tungsten we have.

Sanjay, do you want to add anything to that from a market perspective?

Yes. Angel, I'm just going to add to your second part of the question. Of course, as you know, that we have had 3 years of slow burn industrial production being soft. So '26 was the first year, where we saw mid-single digit, low single-digit type of numbers throughout the year.

And then now as we are looking at it, we do expect the low single digit at the midpoint, we have given you 2.5% volume for fiscal '27. So that is definitely a positive news because that's going to build upon the base that we have in fiscal '26. And I will give you more color here at the -- by segment level.

Aerospace and defense will be the strongest of that. The next will be energy. And following that will be general engineering, where we continue to see improvement in IPI across the board. And then you come into earthworks, which is flattish and transportation being the one that is negative slightly.

And our next question will come from Steve Barger with KeyBanc Capital Markets.

In Infrastructure, you took share in earthworks due to availability of materials. You just talked about that. But you also -- when you're prioritizing volume in energy and general engineering, does that mean on the whole, you were short material and lost potential sales due to the prioritization?

No, Steve. We are not short. What we're saying is that if as we see the growth in overall volume, including in aerospace and defense and the areas, where we do consume a lot more tungsten, we did prioritize what will drive the best return for our shareholders and how we get the best return on tungsten that we have.

There was no shortage, but we were definitely allocating what we have. While there was no shortage, let's just say that even if we mentioned even supply, which we did secure, we were allocating based on where we can get the best return.

But I mean, so you have enough material for everybody, but you didn't sell to everybody because you want to drive those returns.

Yes. I think as you might have heard from even others that we could actually take more business if we can go get a lot more tungsten material. But there's no -- that doesn't mean that we have shortage. We are managing our overall supply chain and processing capacity because remember, it's not just about the ore. In our business, processing capacity is also one of the competitive advantage, which we do have. So that's where we have to manage how we allocate that capacity also.

Okay. Well, when I look at the 1% to 4% volume guidance for FY '27 in the context of the cycle inflection, how much of that is what the market is giving you? And how much is share gain would you estimate?

Yes. We are not breaking it down specifically, but I can tell you that it will be coming from both. As we have said before that above-market growth, 100 basis points to 200 basis points is our target. But whatever market does, we want to definitely do 100 basis points to 200 basis points better than market. So that gives you a rough idea. That's where we will be in terms of breakdown between market versus the strategic growth or so-called our own initiatives.

So just to clarify, I mean, if the market is up 1% or 2% and your guidance is 1% to 4%, your outgrowth should account for basically all of that.

No. So let me go -- sorry, go ahead, finish your question.

No, no, I was just trying to break apart what you consider outgrowth versus share gain.

Yes. So if you look at the overall volume growth that we have said, 1% to 4% in that share gain will be 1% to 2%. rest is market.

And our next question will come from Chris Dankert with D.A. Davidson.

I guess, apologies, a quick just clarification. I got a little bit lost on the explanation on price cost for fiscal '27 specifically. So again, if we take the $3.11 from this year and the $0.39 of raw material timing that we're benefiting from in '27, back that out, I'm coming to kind of a core ex price cost of about $1.15, is that right? And if not, could you just -- one more time run me through that, apologies.

I think -- yes, Chris, I think you've got to take in the other factors that are in play there as you build it up, right? And so clearly, in terms of -- versus the prior year, and if you're bridging it all the way back, you've got the Bolivia FX, you got to take out of there, too, right, since the Bolivian government ended that preferential exchange rate program here this quarter, right?

And so when I think about that price raw, certainly, we've got the $0.39 going on here in FY '27, right? We've got the $3.11 going on from the prior year. That's the double stack, so to speak, right, if you pull all of that out.

And then I haven't seen anything in the presentation, was there any IEEPA benefit anywhere in the numbers here? Do we expect any benefit? Maybe just stake out anything around the tariff recovery.

Yes, Chris, we have applied for refunds, and we have received some, but it was immaterial to report. We continue to apply. Our overall plan at this point is that we will reinvest that to strengthen our overall supply chain security, supply network optimization and also product and service development to serve our customers better.

But I would like to take the opportunity also to tell you that as you look at this situation that we were dealing with over the last 1.5 years, initially, we did incur some cost and then we implemented surcharges, but that was not our first action.

First thing we did is to make sure that we have production moves. We moved several thousand parts around the world. We did supply chain network optimization, and then we passed along some of the surcharges. Of course, even with the new policies in place, tariffs are more or less in the similar zone. So that's how we are looking at it, and we're managing it in an overall sense, and we'll continue to monitor and take appropriate actions.

And our next question will come from Steve Volkmann with Jefferies.

Pat, thank you for the sort of cadence through '27. Obviously, the key and at least in my humble opinion, is sort of when we get back to kind of the core earnings of the company. So you talked about, I think, mid-teens EBITDA margin as sort of the 4Q exit rate for '27. I just want to make sure I had that right. And then okay, good. All right.

So 2 questions about that. One is, I guess, we sort of give up the timing arbitrage on the raws here, obviously. But revenue will sort of stay in the ZIP code it's in, I guess, assuming that tungsten stays where it is. So as I just do the sort of the dumb math, it feels like you're talking about kind of a $600 million-ish in EBITDA run rate to exit -- annual run rate to exit 4Q, mid-teens margin on $3-ish billion of sales. Is that the right way to think about the annualized way to do that? Sorry if this is confusing.

Yes. I guess the way I would think about that, Steve, and so let's think about this from the standpoint of FY '27 from an overall outlook perspective, you've got basically that they're, let's call it, $3.4 billion roughly, okay?

You think about that and you take that now forward a year, right, in a flat tungsten environment, that's the number you're going to kind of iterate off of small amount of incremental price, whatever you think the incremental volume is, right? That's kind of where I would take that forward.

From an EBITDA perspective, yes, that fourth quarter, mid-teens EBITDA, right, that we expect based on what we know today, that's going to be a clean price raw quarter, right? And so then you can apply, say, normal seasonality of the business then going forward to really generate what that FY '28 EBITDA profile would be.

And then switching to the free cash flow. Just you mentioned that, that turns positive, I think, in the second half of FY '27. Is this a situation where we're going to get like 150% or 200% free cash flow at some point and kind of recapture this? Or does it just kind of slowly go back to something higher than 20%?

Yes. I would say when you think about this year and then how we've talked about what's going on from a price raw perspective, talking about cash flow effectively being the mirror image of that, right? And so when I think about how cash flow is going to develop this year, Q1 is going to be a sizable cash draw. And to put a fine point on that, probably in terms of just dollars around $200 million. And I would expect that, that's going to basically be, call it, the high watermark, right, for the cash draw here.

And then in Q2, that would step down a little bit, right? And then in Q3, expectation is that now inflects positive, right? And that's more or less matching up with what's happening on the income statement on the price raw benefit, okay? It's just, again, somewhat the mirror image of that. And that's really driven by inventory valuation, right?

And so obviously, you've seen there's a significant step-up here in inventory in the fourth quarter, anticipating another sizable inventory build here on valuation in Q3 and inventory will basically hit its peak for us here in the second quarter. [ Now we get into the ] back half of the year, back half of the year should have good positive cash flow to it.

And is FY '28 like way above $100 million or just directionally?

I would simply say with respect to FY '28 and kind of beyond, we would get -- we would return to a normalized cash generation profile. Again assuming, it comes [indiscernible].

[Operator Instructions] And our next question will be a follow-up from Chris Dankert with D.A. Davidson.

Hoping you can help me out on one other aspect of the fiscal '27 guide. So if I look at the operations bucket, we're looking at $0.53 for the year. If I back out the things you flagged there, the raw materials, lower incentive comp, restructuring, I'm kind of left with a core volume wage inflation number looks like a negative $0.15, $0.18, whatever EPS impact. So like how are we getting negative contribution on kind of the core volume? And just again, apologies if I'm misinterpreting that.

Yes. The way I look at that in terms of what's sitting in there, right, you got the $0.53. You got -- obviously, you got favorability in the raw material timing of $0.39. You've got the favorability on the comp coming in as well, right? You should have some favorability coming through, obviously, on the restructuring. We're going to have a little bit of, I'll just call it, the normal wage inflation and things like that, that are going on in the course of the business. And again, this is obviously at the midpoint as well, right?

When you think about this over the context of the outlook, the outlook has some variability built to price into it as well, just again, given the sheer amount of tungsten going through the business today and how much price we're going after.

And this will conclude our question-and-answer session. I'd like to turn the conference back over to Sanjay Chowbey for any closing remarks.

Thank you, operator, and thank you, everyone, for joining the call today. As always, we appreciate your interest and support. Please don't hesitate to reach out to Mike if you have any questions. Have a great day.

A replay of this event will be available approximately 1 hour after its conclusion. To access the replay, you may dial toll-free within the United States at (855) 669-9658. Outside of the United States, you may dial (412) 317-0088. You will be prompted to enter your conference ID 2709076 then the pound or hash symbol. You will be asked to record your name and company. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.

Good morning. I would like to welcome everyone to Kennametal's Q3 Fiscal 2026 Earnings Conference Call. [Operator Instructions] Please note that today's event is being recorded. I would now like to turn the conference over to Michael Pici, Vice President of Investor Relations. Please go ahead.

Thank you, operator. Welcome, everyone, and thank you for joining us to review Kennametal's Third Quarter Fiscal 2026 results. This morning, we issued our earnings press release and posted our presentation slides on our website. We will be referring to that slide deck throughout today's call.

I'm Michael Pici, Vice President of Investor Relations. Joining me on the call today are Sanjay Chowbey, President and Chief Executive Officer; and Pat Watson, Vice President and Chief Financial Officer. After Sanjay and Pat's prepared remarks, we will open the line for questions. At this time, I'd like to direct your attention to our forward-looking disclosure statement.

Today's discussion contains comments that constitute forward-looking statements and as such, involve a number of assumptions, risks and uncertainties that could cause the company's actual results, performance or achievements to differ materially from those expressed in or implied by such statements. These risk factors and uncertainties are detailed in Kennametal's SEC filings.

In addition, we will be discussing non-GAAP financial measures on the call today. Reconciliations to GAAP financial measures that we believe are most directly comparable can be found at the back of the slide deck and on our Form 8-K on our website. And with that, I'll turn the call over to Sanjay.

Thank you, Mike. Good morning, and thank you for joining us. I will begin with an overview of the quarter, including end market commentary followed by a discussion on unit volume trends. From there, Pat will cover the quarterly financial results and the fiscal year '26 outlook, along with an early look at fiscal '27. Finally, I'll make some summary comments, and then we'll open the line for questions.

Turning to Slide 3. Let me begin by addressing some of the highlights from our strong third quarter. Our global commercial teams continued to advance our strategic growth initiatives. The infrastructure team delivered solid growth. In construction, we saw volume growth from strong product performance and the advantage we have as a secure source of tungsten in a tight supply environment.

Additionally, we received large orders in our defense business, further securing ongoing growth in this market as we head into fiscal '27. In metal cutting, we continue to increase our share of wallet with key accounts, especially in aerospace and defense and build upon our momentum in energy from AI power generation initiatives.

In general engineering, we have been winning new customers through targeted promotional campaigns and improvements to our digital customer experience, especially for our small- to medium-sized customers. As you know, we continue to prioritize above-market growth as a strategic imperative, and these wins position us well in our key end markets.

Turning now to the broader tungsten environment. Prices continued their unprecedented increase throughout the quarter, rising from approximately $900 per metric ton to $3,000 as the supply of material continued to be constrained. This tungsten price and supply environment have created both challenges and opportunities. On the challenges front, we have seen a highly competitive market for material, but our supply chain has held up relatively well. We have and will continue to implement pricing actions in response to these rising tungsten costs and remain confident in our ability to secure that price.

We are also focused on managing the working capital and balance sheet implications of higher tungsten costs. In terms of opportunities, our vertical integration has been a real strength in this market, providing us better supply chain control and flexibility compared to some competitors. For example, as competitors are turning away orders or extending lead times, we are well positioned to capture business that is aligned with our strategic priorities.

During the quarter, we capitalized on these opportunities in each of our business segments, specifically earthworks within infrastructure and aerospace and defense in metal cutting. These new opportunities also facilitate shaping our product portfolio away from lower margin to higher-margin solutions.

As such, we are seeing a unique combination of three factors that are opening the door to sales opportunities. First, continued market recovery; second, solid execution on our strategic growth initiatives; and third, a window of opportunity from the current tungsten market, which is likely to persist in the near term.

Given those dynamics, we are prioritizing our time and attention on growth opportunities over restructuring initiatives in the near term. And we are shifting the time line for facility closure actions we had previously planned to complete in fiscal '27. We will provide additional detail on the restructuring time line as appropriate. Even with that shift, we are still targeting approximately $110 million in savings from cost takeout actions by the end of fiscal '27, which is $10 million above what we outlined at Investor Day.

Now let's move to our quarterly results, which once again exceeded our sales and EPS outlook. Compared to outlook, sales were mostly driven by increased price realization and better-than-expected volume in both segments. EPS benefited from the additional price raw timing of $0.09, positive volume and lower-than-anticipated tax rate. Year-over-year, sales increased 19% organically. Please note, this was our third consecutive quarter of organic growth, driven by additional price realization, strategic growth initiatives and continued recovery in several end markets.

Adjusted EPS increased to $0.77 compared to $0.47 in the prior year quarter. And adjusted EBITDA margin was 20.8% compared to 17.9% in the prior year quarter. Cash from operating activities year-to-date was $70 million compared to $130 million in the prior year period. Free operating cash flow year-to-date was $18 million compared to $63 million in the prior year. Free cash flow was adversely impacted by increased working capital requirements related to tungsten prices.

Finally, we returned $15 million to shareholders through dividends. As it relates to our outlook, today, we are raising our sales and EPS outlook for fiscal '26. This update reflects the additional price due to the continued rise in tungsten and additional volume. Pat will provide more details on our updated outlook shortly.

In summary, we are pleased with this quarter's results and how the team is navigating these unique business conditions. As I mentioned, there are opportunities and challenges in this market, and we remain focused on delivering on our commitments throughout fiscal '26 and setting ourselves up for a successful fiscal '27.

Now let's turn to Slide 4 for an end market update. As a reminder, our full year outlook reflects forecast of specific market drivers and general market conditions. The top half of this slide reflects our sales outlook at the midpoint and includes price, volume and market factors. My comments will focus on the bottom half of the slide and address transportation and energy, which are the only end markets that changed since our last call.

IHS estimates for transportation slightly improved from the previous estimate, up in the low single-digit range, mostly driven by improvements in Asia Pacific market. Energy improved slightly relative to our prior outlook as customer sentiment improved. The tone is now cautiously optimistic, which is an improved stance compared to what customers were previously signaling.

Turning to Slide 5. As we have talked about over the last several years, customer activity rates and our sales volumes have been below the pre-COVID peak. I want to take some time to provide insight into unit volume and how those trends have improved over the last few quarters. This chart uses units sold volume and excludes the impact of price and foreign exchange. It also excludes infrastructure defense sales as these are lumpy and not tied to industrial production metrics.

Now let me spend a moment on what is driving the volume recovery and just as importantly, why we believe it's sustainable. As the call-out indicates, we are now experiencing the second consecutive quarter of year-over-year trailing 12-month unit volume growth despite a macro backdrop that has been uneven. Volumes are strengthening in the Americas and Asia Pacific, but EMEA continues to lag, and that is consistent with what we are seeing in PMI and industrial production data.

A key driver continues to be aerospace and defense, which remains strong across both metal cutting and infrastructure. Importantly, this strength isn't simply tied to OEM build rates, which are still roughly 20% below pre-COVID levels, but rather to share gains and deeper penetration with tier suppliers. That gives us confidence there is still additional runway as production rates normalize over time. We are also starting to see early signs of stabilization in general engineering and energy, even while headline indicators remain soft.

In Energy, power generation continues to see meaningful momentum. And while U.S. land rig counts are still about 30% below pre-COVID levels, we are seeing enough stabilization to suggest we are past the trough. In infrastructure, earthworks has delivered volume gains for 2 consecutive quarters, driven by share gains.

Stepping back, if you look at the chart, global volumes are now up approximately 3% from the Q1 fiscal '26 trough following 36 months of stagnant industrial production. Our performance is not just the result of a market recovery. It's shaped by where we compete, how we allocate resources and where we are winning share. We know we operate in cyclical end markets, but we are quite confident in the long-term growth potential of these markets and our ability to capture share within them.

Now let me turn the call over to Pat, who will review the third quarter financial performance and the outlook.

Thank you, Sanjay, and good morning, everyone. I will begin on Slide 6 with a review of our Q3 operating results. Sales were up 22% year-over-year with an organic increase of 19% and favorable foreign currency exchange of 5%, which was slightly offset when adjusting for the divestiture we concluded last year.

Sales volume in the quarter was up low single digits. At the segment level, organic sales increased 30% in Infrastructure and 12% in Metal Cutting. On a constant currency basis, Americas sales increased 27%, Asia Pacific sales increased 25% and EMEA was up 2%. The sales performance this quarter exceeded the expectations we provided last quarter on higher sales volumes from better market conditions and share capture. We also had higher-than-expected price, primarily in infrastructure from the continued rapid increase in tungsten prices.

By end market, on a constant currency basis, Earthworks grew 43%, Energy increased 28%, Aerospace and defense grew 23%, General engineering grew 14% and Transportation increased 1%. I will provide more color when reviewing the segment performance in a moment. Adjusted EBITDA and operating margins were 20.8% and 13.8%, respectively, versus 17.9% and 10.3% in the prior year quarter.

The margin increase was driven by favorable price raw of $39 million within the Infrastructure segment, pricing and tariff surcharges in Metal Cutting, increased sales and production volumes and year-over-year restructuring benefits of $7 million.

These are partially offset by higher compensation costs, which are mostly performance-based, tariffs and general inflation and a prior year benefit from an advanced manufacturing tax credit of approximately $8 million that did not repeat in the current year.

Adjusted earnings per share was $0.77 in the quarter versus $0.47 in the prior year period. The main drivers of our EPS performance are highlighted on the bridge on Slide 7. The year-over-year effect of operations this quarter was positive $0.36. This reflects approximately $39 million of favorable timing of price raw material costs, price and tariff surcharges in Metal Cutting, higher sales and production volume and incremental restructuring benefits of $7 million. These are partially offset by higher compensation costs, tariffs, general inflation and higher raw material costs in Metal Cutting.

There was a headwind of $0.08 related to the net prior year manufacturing tax credit. You can also see the $0.02 of transaction gains related to preferential Bolivia exchange rates. Currency, other and pension impacts offset each other.

Slides 8 and 9 detail the performance of our segments this quarter. Reported Metal Cutting sales were up 18% compared to the prior year quarter with 12% organic growth and favorable foreign currency exchange of 6% Regionally, excluding currency exchange, Asia Pacific increased 18%, the Americas increased 17% and EMEA increased 3%.

Looking at sales by end market on a constant currency basis, Aerospace and defense increased 27% year-over-year due to improved build rates in Americas and easing supply chain pressures in EMEA, combined with our global focus on deeper market penetration.

Energy grew 17% this quarter from data center power generation wins. General engineering increased 13% year-over-year due to price, volume gains in Asia Pacific and stronger distribution sales in the Americas. And lastly, transportation increased 1% year-over-year due to price and market softness, primarily in EMEA.

Metal Cutting adjusted operating margin of 11.2% increased 160 basis points year-over-year, primarily due to higher price and tariff surcharges, higher sales and production volumes and incremental year-over-year restructuring savings of approximately $5 million. These factors were partially offset by higher compensation, tariffs and general inflation and higher raw material costs.

Turning to Slide 9 for Infrastructure. Reported Infrastructure sales increased 29% year-over-year with organic growth of 30% and favorable foreign currency exchange of 4%, partially offset by a divestiture effect of negative 5%.

Regionally, on a constant currency basis, Americas sales increased 42%, Asia Pacific increased 35% and EMEA sales were flat.

Looking at sales by end market on a constant currency basis, Earthworks increased 43% from higher demand in construction as we were able to provide product to customers who are unable to source product from other players and share gain in underground mining. Energy increased 34%, mainly driven by price. General engineering increased 18% due to price and higher powder demand in Asia Pacific, partially offset by lower demand in EMEA. And lastly, Aerospace and Defense increased 17% due to defense orders, driven by continued focus on growth initiatives and timing in the Americas.

Adjusted operating margin increased 680 basis points year-over-year to 18.3%, primarily from the favorable timing of pricing compared to raw material costs of $39 million and year-over-year restructuring savings of $2 million. These items were partially offset by higher compensation costs and a prior year manufacturing tax credit of $8 million that did not repeat in the current year.

Now turning to Slide 10 to review our free operating cash flow and balance sheet. Our third quarter year-to-date net cash flow from operating activities was $70 million compared to $130 million in the prior year period. This change was driven primarily by higher working capital from higher tungsten prices and increased volumes of tungsten to secure our supply chain.

Our third quarter year-to-date free operating cash flow decreased to $18 million from $63 million in the prior year, primarily due to the increased primary working capital changes I just referenced, partially offset by lower capital expenditures. On a dollar basis, year-over-year, primary working capital increased to $819 million from $654 million. On a percentage of sales basis, primary working capital increased to 32.4%.

It's important to note that from both an earnings and cash flow perspective, the business is operating as it normally would when the price of tungsten rises. In periods of rising tungsten prices, we always experienced favorable price raw timing effects in sales and earnings, while we experienced headwinds to cash flow as primary working capital grows based on tungsten valuation.

What is unique about the current circumstance is the magnitude of the rise in tungsten prices. In no recent time have we experienced a ninefold increase. Due to the uncertain nature of tungsten pricing and the corresponding pressure it has placed on working capital, we once again made the decision not to repurchase shares.

Net capital expenditures decreased to $52 million compared to $67 million in the prior year quarter. In total, we returned $15 million to shareholders through dividends. Inception to date, we have repurchased $70 million or 3 million shares under our $200 million authorization.

We remain committed to returning cash to shareholders while executing our strategy to drive growth and margin improvement. We continue to maintain a healthy balance sheet and debt maturity profile. At quarter end, we had ample liquidity to support the business with combined cash and revolver availability of approximately $742 million. And as always, we remain well within our financial covenants. The full balance sheet can be found on Slide 16 in the appendix.

Now on Slide 11, regarding our full year outlook. We now expect FY '26 sales to be between $2.33 billion and $2.35 billion, with volume ranging from 2% to 3%, net price and tariff surcharge combined of approximately 16%, and we anticipate an approximate 2% tailwind from foreign exchange. The increased outlook reflects additional pricing actions related to the increase in cost of tungsten since our February call.

Specifically, within the fourth quarter, we expect net price and tariff surcharges combined of approximately 35% compared to the prior year quarter. We now expect adjusted EPS in the range of $3.75 to $4. This outlook includes approximately $2.45 related to the timing of price raw benefit due to the rise in tungsten prices, the significant majority of which affects the Infrastructure segment. This effect increased $1.50 from the prior outlook.

On the cash side, the full year outlook for capital expenditures is now anticipated to be approximately $85 million. And free operating cash flow is expected to be approximately negative 30% of adjusted net income, reflecting the working capital pressure from the rising cost of tungsten as discussed earlier.

It's important to note our outlook does not include any effects from the conflict in the Middle East. The other assumptions in our outlook are noted on the slide. While it is earlier than normal, I would like to take a moment to provide a bit of a framework to help you think about FY '27. First off, our current assumption is that tungsten prices will remain elevated for some period of time going forward. That implies there will be significant carryover pricing given the 35% price expectation for the fourth quarter.

This carryover pricing will diminish as FY '27 progresses since we would fully lap it in the fourth quarter. Keep in mind that this assumption holds price at the fourth quarter level. Also, we would expect price raw timing benefits in a flat tungsten environment will continue through the first half of FY '27 with the bulk of the benefit occurring in the first quarter. Outside of tungsten, we would expect normal cost inflation going into FY '27.

However, we would see performance-based compensation reset the target, providing a $20 million tailwind. We will also see additional savings from restructuring and continuous improvement of $10 million. We will provide the rest of the details, including market expectations for FY '27 on our call in August.

Back to you, Sanjay.

Thank you, Pat. Turning to Slide 12. Let me take a few minutes to summarize. We have delivered 3 strong quarters so far in fiscal '26, driven by price and modest improvements in various end markets, project wins on the commercial side and productivity and cost improvement actions.

Going forward, we will remain focused on the strategic growth initiatives and lean transformation we have underway while also exploring ways to strengthen our portfolio over time. Additionally, we will continue to actively manage our tungsten supply chain. And in summary, we remain confident in our plan for long-term value creation for shareholders.

With that, operator, please open the line for questions.

[Operator Instructions] And today's first question comes from Steve Volkmann with Jefferies.

Can we just start with what do you think -- what was the incremental margin on the volume in the quarter?

Yes. I think the volume incremental margin was pretty normal for us, Steve. I think there's a couple of things, obviously, in the quarter that are kind of masking that because we've got some big numbers being thrown around there. Obviously, you've got the $39 million worth of price raw timing benefit coming through. In the prior year, we had that $8 million advanced manufacturing tax credit. And then I'd say the third component there that's just unusual for us is variable compensation.

So last year, we would have been on the low side of accruing for variable compensation. This year, given performance, we're a bit on the high side. In the quarter, that's like an $18 million number there in and of itself. And then, of course, you have some benefits coming through for restructuring. But when you pull all that back, volume leverage is pretty normal for the business.

Okay. And then it sounds like you've adjusted price. You obviously have a big forecast for the fiscal fourth quarter. Are we like where we need to be today in terms of price? Or will there be more price that sort of flows through in the fourth quarter and maybe even later into the summer?

Yes. Steve, this is Sanjay. As you know, this is a very dynamic situation that we are managing, and we'll continue to monitor how that moves. As even the last call, you talked about that how it was moving on a daily basis, hourly basis. So that's why we will just tell you that we are looking at different market variables. And our -- definitely, our goal here is to fully offset the cost implication of tungsten.

I would just add to that, we did put price in here in the market, various states by region, but effectively in the April, May time frame.

April, May...

And the next question comes from Steven Fisher with UBS.

Congrats on managing all the complexities here. Just a follow-up on that last question. Just curious about the differences between metal cutting and infrastructure. I know with infrastructure, it does tend to be fairly quick to capture that pricing. I'm just curious -- confidence that you can really fully pass on the price increases within the metal cutting and what the frequency of timing you can put that through?

Essentially, are the customers that are going to these distributors, are they really seeing a 35% increase on the shelf there from these products? Just curious if there's any real differences there in dynamics between metal cutting and infrastructure.

Yes, sure, Steve. I think, first of all, like in the past, we have talked about the metal cutting is a list price business. And also when you look at the material flow, even there is more lag in that, but infrastructure sees that first. And based on the different product, we also have like different content of how much tungsten is used.

So that will reflect -- when you look at the growth numbers, sales growth numbers by different end markets within the different segments, you will see, in some cases, very, very high number. Many cases, those are driven by the higher content of tungsten. So we have in infrastructure, many customers who are on the index price basis, but many others are not. And we do move relatively quicker on infrastructure pricing. In metal cutting, there's a 3- to 6-month lag generally. And then based on the list price change, we implement that.

Okay. And then maybe just a little more color on what you're seeing in energy and how you see that evolving for the next few months.

Just curious what you are hearing from your customers there? And is that something you're preparing for kind of a bit more of a ramp-up?

Yes. On the energy, I'll divide the equation into two pieces here. First is the AI power generation-related energy demands, which we see more so in the metal cutting side. Definitely, as you know, there's a lot of industrial activities driven around the world, but a lot in the U.S. also. And we are very well positioned with our innovative solutions, application support and custom solutions for our customers, and we are doing a pretty good job in winning share there.

And I do believe that, that will continue. And as you have seen in even this quarter report, we talked about that quite a bit. When it comes to the other side of energy, which is more or less, let's say, oil and gas, it will definitely touch a little bit metal cutting, but a lot more in the infrastructure side. As we talked about it, that there is a little bit of optimistic view, but it's cautiously optimistic view.

The rig count projection right now has gone from 527 to 532. But if you look at the market, there are 2 camps. There are people who are saying that there will be a lot more investment coming up here. And there are people who are saying that this is temporary and things like that. But our overall conclusion based on what we see, the trough is behind us, and we should see some steady improvement going forward.

And our next question is from Julian Mitchell with Barclays.

Just maybe a first question, just to try and clarify the tungsten related sort of tailwind to EPS, I think you said $2.45 for fiscal '26 in aggregate.

In the fourth quarter, is it around $1.75? Is that roughly the right math? Just wanted to check that.

Yes. I think if you kind of back into that, Julian, we had about an EPS terms of about $0.16, I think, in Q2, $0.39 here in Q3. And so we just forced the rest out of Q4.

That's great. And then maybe, Pat, help us understand those moving parts around the sort of cash flow, year-ending leverage, when you might look to resume the share repurchase program?

Help us understand what that free cash flow in the fourth fiscal quarter is looking like? And how quickly does it sort of reverse following that based on where tungsten is today?

Yes. So I would think about it this way, and we talk about this from a -- how does the cost structure lag from an income statement perspective, that obviously, the balance sheet is following that, too. So as tungsten has ramped, we're going to continue to see inventory build on a valuation basis here in the fourth quarter. That's really what's driving that negative free operating cash flow for the full year.

And so as that kind of builds up, we would anticipate you get about a quarter or two out. Again, from a change in tungsten, we would kind of get flatlined. The business would then move back to its normal pattern in terms of its cash generation ability.

Obviously, as I said kind of in the scripted remarks here, the magnitude of what we're dealing with here is just significantly larger than what we've seen in the past, right? Think about that from a share repurchase perspective. Look, we've been very committed to returning cash to shareholders through the dividend program as well as through our repurchase program. Our desires have been at a minimum to offset dilution from equity compensation programs. We just fundamentally think that's good housekeeping. In the current environment, what would we want to see to really resume that?

We really want to see some stabilization and clarity about where tungsten is headed. Our obvious thesis here at the moment is that tungsten should be relatively stable. That being said, it's a very dynamic marketplace today.

The next question is from Steve Barger with KeyBanc Capital Markets.

Steve, you may be muted on your side.

You talked about good activity in aerospace and defense and some share gains in infrastructure and earthworks. But at the same time, I think you said some competitors are turning away orders, presumably on price cost.

So can you talk about what you think is happening with prebuy and just people scrambling to get product due to inflation? And then how does that map to the longer-term durability of share gains?

Yes. Steve, this is Sanjay. I'll take that first. First of all, we did see some prebuy, but it was mostly in the infrastructures earthwork construction business. Beyond that, there was not much material impact on prebuys in the rest of the business.

We did see opportunities also in the earthworks business within infrastructure and also in aerospace and defense in metal cutting, where we did see some evidence, where we were able to capture, where competitors were not able to either provide proper lead time or even just meet the demand. So that's how we saw that.

Does that answer your question?

I think so. Just so I'm clear, why do you think the competitors are not able to meet demand right now?

Yes. What we have seen some competitors are definitely having problem in getting raw material. And even if they're getting raw materials, they're also pretty booked and they're putting longer lead times. So in some cases, we are able to provide a better lead time, and that's how we got it.

I would say that, I mean, the opportunity, obviously there, Steve, is that there is short-term disruption in the marketplace. That gives us an opportunity to quote and win business that maybe we wouldn't normally have seen the same opportunities on. The opportunity for us and the challenge to our sales organization, quite frankly, is to convert that to permanent long-term share capture.

Yes. One more thing, Steve, I will add to that. I think for investors who may be listening to us first time, I do want to mention that this situation that we have with tungsten is not driven by higher demand. It is driven by supply constraints. As in past, you have seen some of the times, tungsten went up. At the same time, oil and gas and some of the other industry, which consumes a lot of tungsten went up.

This time, it is because of supply constraints and also export controls. So just simply, in a big portion of market, there is less supply right now.

Yes. Understood. That actually is a good segue to my next question. If I heard you right, you're slowing facility closures. And last quarter, you expected restructuring savings of $125 million. Now that's $110 million. Are those 2 things related? And if so, why -- maybe I missed it, why are you slowing facility closure?

Yes, very good question. As we said in the prepared remarks, and I will clarify that a little bit more. Obviously, we are seeing right now more growth opportunities, which is driven by all 3 factors: market improving, then also share gain through our routine strategic growth initiatives that we have talked about it in the past. And on top of that, a window of opportunity from the tungsten situation.

So we look at how we can create the best value for all our stakeholders. And we feel right now that allocating more resources on growth opportunities and driving our routine business leverage will create more shareholder value for now. And that's how we are making the shift.

However, we are not stopping the work on footprint optimization. We'll continue to work on it. Time line will shift a little bit. We'll come back and give you more information on that at appropriate time.

Our next question is from Tami Zakaria with JPMorgan.

First question is on tariffs. I think IEEPA got struck down. Do you expect to file any refunds? And if so, what kind of -- what amount of refund would you expect to collect?

Yes, Tami, First of all, as you know, this is also one of the very dynamic situation. We still have tariffs in place. And so we are not taking any hasty action on this yet. I think we'll continue to monitor. And based on that, we'll make decisions. So nothing more to share at this point in today's call.

Understood. That's fair. And my second question is, for the fourth quarter, I just wanted to clarify, do you expect volume growth to be in that 2% to 3% full year range or it could come in above that?

Yes. It's the full year range. I would say it's depending on where you're at in that range, Tami, it's going to be low to at the high end, maybe up into the mid-single digits. You obviously factor in 35% price we talked about from a script perspective. Don't forget, we had a divestiture in the prior year, and you got a little bit of FX in there as well. So that kind of is the math there in terms of you think about the top line.

I would emphasize, as we just think about the profitability that obviously, we're going to see sequentially profitability step up pretty significantly here based on that price raw. And given the circumstances that we're in today, it is unusual, we're going to have some of that price raw realization in Metal Cutting, too. So when you think about, again, the margin performance of the business as a whole in the two segments, pretty big ramp-up for both of them.

And the next question comes from Angel Castillo with Morgan Stanley.

Just maybe first, I wanted to start out on the market share gains. That's been a meaningful driver, I guess, of the organic growth that you've been seeing. Just curious if you could unpack that a little bit more. I guess I'm trying to understand if it's possible to, I guess, separate how much of the share gains you think was maybe driven by value proposition or project wins that tend to be a little bit stickier versus where it's maybe related to kind of competitor supply constraints.

And in particular, I guess, to the latter bucket, curious if you kind of expect that over time as kind of supply perhaps normalizes, if you would expect to kind of get that back or if there's any kind of stickiness to some of those shifts that we might be seeing on the kind of supply-driven angle?

And also if you could comment on the promotional campaigns you talked about as well, that would be helpful.

Yes. Sure, Angel. First of all, again, it is a combination of all 3 factors: market improving, and we think that, that should continue. Then second will be in our strategic growth initiatives, and we have talked about in the past, those will include, for example, what we have done in aerospace and defense and energy and general engineering, earthworks and so on and so forth, how we have gone about winning bigger share of wallet with existing customers, but also going out and winning business at different tiers of the supply chain or our customer value chain.

And those I will tell you that are very sustainable because we're winning those using our core competencies from product and innovation and our commercial excellence and our operational capabilities.

Now the third piece of the volume that we have also talked about, the window of opportunity we have from tungsten Dynamics. We also think that those are sustainable, at least in the near term that we see that. In the long term, we'll see how that plays out. But we are being very strategic about which opportunities that we go and capitalize. We are selective on what opportunities we think are going to be longer-term sustainable for us.

So all in all, of course, it's a mix of 3 things, and I won't be able to quantify break down or don't want to disclose it in public domain on that. But I can tell you that as we have talked about in past, that driving growth above market has been one of our strategic imperatives, and it will continue to be.

In last 2 years, 3 years, actually, I will go a little bit beyond that, we have shown our ability to outperform or at least hold our own in our metal cutting business where we have in public peer data. And this is going to continue to be one of the focus. So in short, I will just say that it is going to be a meaningful piece of our overall volume story.

Very helpful. And then if you could bear with me, I guess, a 3-part question here just on tungsten. Hoping to better understand, I guess, a couple of things. One, any more color you can add in terms of the sourcing that you're doing and how that differs versus competitors that allows you in a market that you described as very competitive in terms of sourcing to make sure that you're able to have the right amount of supply. So just any color you can add on that?

And then maybe a little bit more longer term or medium to longer term, on the tungsten side, I think your preliminary fiscal year '27 outlook talked about that as being kind of stable at current levels. Just anything you can add in terms of the supply-demand that you're seeing progressing from here in terms of -- I think there might be some capacity that's coming online in 2027.

So just to the extent that, I guess, any implications from that or the recently kind of lower prices of tungsten in China as to what -- where that commodity heads in 2027? And then just kind of lastly, implications of that to the price and the market share gains that you talked about on the supply basis.

Yes, certainly. So I'll try to take each one of those in terms. When I think about the advantages we have, I want to go beyond, quite frankly, just the sourcing aspect. And from a sourcing perspective, -- as we've talked about in the past, we do not use significant amounts of Chinese material outside of our Chinese operation. Outside of China, we've got a diversified supply base and partners we've been with for a long period of time in getting material from Bolivia, other East Asian sources and as well as a nice slug of recycled material.

But a lot of the strength that we have as a company vis-a-vis some of the competition that's out there is also the integrated nature of our supply chain, right? So we are -- we have the ability basically to take in tungsten materials at various stages and turn them ultimately into a final product. You think about that from our ability to take raw materials, which is virgin ore in and process that, there is only a handful of companies in the industry that can do that as well. And so that provides us, I think, a durable strategic advantage here in this set of circumstances.

As you think about where it is from an overall pricing perspective, yes, our assumption at the moment is the tungsten prices are stable. I think the last couple of quarters that we've gone through in terms of the magnitude of this price change, I don't think that many market participants would have envisioned us going from a couple of hundred dollars a ton to over $3,000 a ton, excuse me, as we have over the last 12 months.

Certainly, there has been some softening in China the last week or so in terms of the prices, unclear at the moment in time, whether or not that's indicative of a larger trend that will be more durable. We'll obviously continue to monitor and watch that.

And then your last question in terms of what supply is coming online, yes, there's a variety of new mine projects that are out there that will come online. We would anticipate in the fullness of time, that would help moderate the tungsten prices here a little bit on a global basis. I think the other reality of the situation here is, in particular, we've got the export controls in China that are in place, number one. And then number two, we've got lower Chinese mine production over the last 2 years as it relates to -- based on some information in the public domain, lower quality ore potentially out there as well as I would emphasize lower mining permits provided by the Chinese government.

So the market has been in a period of shortage, additional supply obviously would help alleviate some of that. And as that market continues to unfold, obviously, that will inform our pricing decisions and how we set, I'll say, our inventory objectives here in terms of holding inventory as well.

And the next question is a follow-up from Steve Barger with KeyBanc Capital Markets.

Pat, just to level set expectations for the models. You said price raw timing benefit from tungsten flows through into the first half, mostly in 1Q. Is the right way to think about FY '27 kind of reverse order from this year, high point by far in 1Q trailing back down to your quarterly average of like $0.40 towards the end of FY '27.

Yes. A couple of ways that I think about that. Steve, first off, just let me give you some like the basic walk, and I'll start from the midpoint, right? Midpoint of the outlook this year is $3.88. We said we've got $2.45 of price raw in there, probably have about 0.20 worth of variable compensation that would reset.

So let's think of like a clean FY '26, removing those items, about $1.63 in EPS terms, right?

And then kind of moving forward next year, you're going to add $0.10 in for the additional restructuring that we talked about. That gets you down to like about $1.73 before you get to, what I'll call is additional price raw, which again should exist in that first half, right?

And then whatever the volume assumption is that you guys make at this point in time, obviously, we'll give some clarity about that in August.

The second thing I would say about that in terms of now taking that cadence and thinking about the year, yes, I think the right way to think about this, again, this is assuming a relatively stable tungsten environment would be first half, we're going to see the benefits of price raw. Back half of that year, we'll get back to what I would call it is a normal level of profitability, right, absent the price raw tailwinds.

The next question is a follow-up from Julian Mitchell with Barclays.

This will be a quick one. Maybe just flesh out a bit more the cadence of kind of volume demand. You had that very interesting chart on cumulative volumes going back several years. So that was interesting. And you've clearly seen a pickup, as you said a couple of times. There's some prebuy, I suppose, in that. So maybe give us any color you can on sort of how base volumes are performing, if you can really get to that level of detail from your channel partners and so forth?

And have you seen an improvement in base demand in the last couple of months? Or it's difficult to disentangle that from prebuy movement?

So I'll take that first, and then Sanjay will hit most of it. But just to clarify that chart to make sure we're all talking about the same way, right? That chart is based on a 12 trailing months basis. Julian. So based on that, you can think about it as an annualized chart, it's going to kind of flatten out any sort of short-term prebuying issues, right?

Because again, we're talking about an annual type number. And with that, I'll turn it over to Sanjay.

Yes, Julian, with regards to rest of the drivers at this point, Q4, we are confident in what we are saying that we do see impact from improving market condition, which is again moderate. And then on top of that, our share gain opportunities that we have, those will definitely play out. I think with respect to fiscal '27, we'll come back and talk about that in August, but the initial signs are -- seems like things are definitely stabilizing.

And this concludes today's question-and-answer session. At this time, I would like to turn the conference back over to Sanjay Chowbey for any closing remarks.

Thank you, operator, and thank you, everyone, for joining the call today. As always, we appreciate your interest and support. Please don't hesitate to reach out to Mike if you have any questions. Have a great day.

Thank you. And as a reminder, a replay of this event will be available approximately one hour after its conclusion. [Operator Instructions] And today's conference has now concluded. Thank you for attending today's presentation, and you may now disconnect your lines.

Good morning. I would like to welcome everyone to Kennametal's Second Quarter and Fiscal 2026 Earnings Conference Call.

[Operator Instructions]

Please note, this event is being recorded. I would now like to turn the conference over to Michael Pici, Vice President of Investor Relations.

Thank you, operator. Welcome, everyone, and thank you for joining us to review Kennametal's Second Quarter Fiscal 2026 results. This morning, we issued our earnings press release and posted our presentation slides on our website. We will be referring to that slide deck throughout today's call. I'm Michael Pici, Vice President of Investor Relations. Joining me on the call today are Sanjay Chowbey, President and Chief Executive Officer; and Pat Watson, Vice President and Chief Financial Officer.

After Sanjay and Pat's prepared remarks, we will open the line for questions. At this time, I'd like to direct your attention to our forward-looking disclosure statement. Today's discussion contains comments that constitute forward-looking statements and as such, involve a number of assumptions, risks and uncertainties that could cause the company's actual results, performance or achievements to differ materially from those expressed in or implied by such statements. These risk factors and uncertainties are detailed in Kennametal's SEC filings. In addition, we will be discussing non-GAAP financial measures on the call today. Reconciliation to GAAP financial measures that we believe are most directly comparable can be found at the back of the slide deck and on our Form 8-K on our website. And with that, I'll turn the call over to Sanjay.

Thank you, Mike. Good morning, and thank you for joining us. I will begin the call today with an overview of the quarter, including end market commentary, followed by a spotlight on one of our growth focus areas, Power Generation. From there, Pat will cover the quarterly financial results as well as the fiscal year '26 outlook. Finally, I'll make some summary comments and open the line for questions.

Turning to Slide 3. Let me begin by addressing some of the highlights from our strong second quarter. Our global commercial teams continue to advance our strategic growth initiatives. In the quarter, the Infrastructure team secured significant mining orders in Earthworks from key distributors in Asia Pacific and EMEA. Both wins were a direct result of our team's efforts with those customers to deliver high-quality technical support and superior product performance.

In Metal Cutting, we won projects that continue to advance our growth focus on Aerospace and Defense. We also secured engine and transmission wins in Transportation. In General Engineering, we increased our share with a pump manufacturer by providing them an innovative solution for machining valve seats. As you know, we have and will continue to prioritize above-market growth.

In the quarter, we also implemented pricing actions in response to rising tungsten costs, which are at historically high levels. We remain confident in our ability to price for the rising tungsten costs and in our ability to offset the impact. On the cost improvement front, we realized $8 million in restructuring savings this quarter and continue to execute our plan to lower structural costs and consolidate manufacturing operations. Some of these plans will extend beyond this fiscal year into fiscal '27. And as a result, we have updated the impact in fiscal '26, which Pat will address when he provides our updated outlook.

Now let's move to our quarterly results, which again exceeded the sales and EPS outlook we provided last quarter. Compared to the outlook, sales were better than expected on higher sales volume, which included the stronger-than-anticipated effect of customers buying ahead of price increases and modest improvement in certain end markets. EPS benefited from the volume and a lower-than-anticipated tax rate. Year-over-year, sales increased 10% organically.

That's our second consecutive quarter of organic growth and reflects price realization, buy ahead and continued modest relief from the broad market weakness. Excluding the effects of the buy ahead, sales volumes were modestly positive in the quarter, reflecting a continuation of gradual volume improvement we have seen since the fourth quarter of fiscal '25.

In terms of profitability, adjusted EBITDA margin was 17.1% compared to 13.9% in the prior year quarter. And adjusted EPS increased to $0.47 compared to $0.25 in the prior year quarter. The improvement in our profitability reflects the benefits from our strategic growth and restructuring initiatives as well as price/raw timing effects from the unprecedented increase in tungsten prices.

As a result, today, we are raising [Audio Gap] outlook shortly. In summary, we are pleased with this quarter's results and we continue to focus on delivering our commitments throughout fiscal '26.

Turning to Slide 4 in our end market update. The top half of this slide shows our outlook at the midpoint and includes impact of price growth initiatives and market factors.

I will focus on the bottom half of the slide and address the 3 markets that have changed since our last call: Transportation, Aerospace and Defense and General Engineering. First, IHS estimates for Transportation slightly improved from the previous estimate of down low single digits to flat. Production volumes in Asia Pacific improved; in EMEA, the current forecast is a bit better, but still down; and the Americas declined slightly.

Secondly, for Aerospace and Defense. The aerospace industry continues to show growth and OEM build rates continue to improve.

Finally, in General Engineering, the IPI forecast in the Americas improved slightly while other regions remain essentially unchanged. Also the most recent GBI and ISM PMI surveys indicate expansion in the U.S. for the first time in almost a year. For our other end markets, conditions remain mostly unchanged from our previous forecast.

Turning now to Slide 5. I want to take some time to expand upon an opportunity we introduced last quarter: the rising global demand for electricity and what it means for Kennametal. Across the growing energy value chain, Kennametal has a broad range of products that help our customers run faster and longer from resource extraction through energy transmission, generation and use. Electricity demand is projected to grow at about 3% annually through 2030 fueled by the rapid expansion of AI data centers, electric vehicle adoption and continued grid build-out. Data centers alone could represent 17% of U.S. power demand by 2030 along with EVs and hybrids, growing at a strong double-digit CAGRs in the Americas from 2023 to 2027.

And as demand rises, the energy mix is diversifying. By 2030, incremental energy supply is expected to come from 45% natural gas, 35% solar and 20% wind plus coal is expected to remain a meaningful source as overall demand for electricity persists. The grid is also scaling quickly with U.S. high-power transmission lines forecasted to grow at a 20% CAGR through 2030. This source to generation opportunity represented approximately 17% of our fiscal '25 sales. We anticipate this market to grow low single digits through 2030. Some areas like gas and combustion turbines are anticipated to experience relatively higher growth over this time frame.

In our Infrastructure segment, our wear resistant solutions are used in oil and gas extraction as well as trenching and foundation digging for wind turbines and transmission lines.

In Metal Cutting, we supply products and solutions used in gas turbines and combustion engines supporting both utility and AI data center power generation. Gas turbines are projected to grow at 15% CAGR and combustion engines for backup generators at 10% CAGR. We are well positioned to capitalize on these trends with the right products already in our portfolio and access to the right customers. And among those customers, we are well known for quality, reliability and innovation and we offer a global footprint that supports them [ wherever ] who will review the second quarter financial performance and the outlook.

Thank you, Sanjay, and good morning, everyone. I will begin on Slide 6 with a review of the second quarter operating results. Sales were up 10% year-over-year, with an organic increase of 10% and a favorable foreign currency exchange of 1%. The divestiture we concluded last year also had a negative 1% effect. At the segment level, Infrastructure increased 11% organically and Metal Cutting increased 9%. On a constant currency basis, Americas sales increased 16%, Asia Pacific sales increased 9% and EMEA was up 2%.

As Sanjay mentioned, our sales performance this quarter exceeded our expectations. Relative to those expectations, higher sales volumes, including the effect of customers buying ahead of tungsten related price increases with a catalyst for the outperformance. By the end market, on a constant currency basis, Aerospace and Defense grew 23%, Earthworks grew 18%. General engineering grew 8%; Energy increased 4% and Transportation increased 3%. I'll provide more color when reviewing the segment performance in a moment.

Adjusted EBITDA and operating margins were 17.1% and 10.5%, respectively, versus 13.9% and 6.9% in the prior year quarter. The margin increase was driven by favorable price/raw effect of $17 million within the Infrastructure segment, higher pricing and tariff surcharges in Metal Cutting, increased sales and production volumes in Metal Cutting, and year-over-year restructuring savings of $8 million.

These were partially offset by higher compensation costs, tariffs and general inflation and a prior year benefit from insurance proceeds of approximately $3 million that did not repeat in the current year. Adjusted earnings per share were $0.47 in the quarter versus $0.25 in the prior year period. The main drivers of our EPS performance are highlighted on the bridge on Slide 7.

The year-over-year effect of operations this quarter was $0.22. This reflects [Audio Gap] approximately $0.15 of favorability from price/raw material cost timing, price and tariff surcharges and higher sales and production volume in Metal Cutting and incremental restructuring benefits. These were partially offset by higher compensation costs, tariffs and general inflation. There was a headwind of $0.02 related to the net insurance proceeds received in the prior year due to the tornado that damaged our Rogers facility. You can also see $0.02 of transaction gains related to preferential Bolivia exchange rates. Currency and pension impacts offset each other.

Slides 8 and 9 detail the performance of our segments this quarter. Reported Metal Cutting sales were up 11% compared to the prior year quarter, with 9% organic growth and favorable foreign exchange of 2%. Regionally, excluding currency exchange, the Americas increased 15%, Asia Pacific increased 9% and EMEA increased 3%.

Looking at sales by end market. Aerospace and Defense increased 19% year-over-year due to the absence of the Boeing strike that occurred in the prior year, improved build rates in the Americas and easing supply chain pressures in EMEA, combined with our global strategic focus. Energy grew 11% this quarter due to data center power generation wins. General Engineering increased 9% year-over-year due to indirect channel buy ahead and price; and lastly, Transportation increased 3% year-over-year due to internal combustion engine and transmission wins in the Americas and price.

Across all end markets, there was approximately $10 million of sales in the quarter as a result of customers buying ahead of price increases. Regionally, approximately half of the buy ahead was in the Americas with 1/3 in Asia Pacific and the balance in EMEA. Metal Cutting adjusted operating margin of 9.6% increased 360 basis points year-over-year, primarily due to price and tariff surcharges, higher sales and production volumes and incremental year-over-year restructuring savings of approximately $6 million. These factors were partially offset by higher compensation, tariffs and general inflation.

Turning to Slide 9 for Infrastructure. Reported Infrastructure sales increased 8% year-over-year with an organic growth of 11% and favorable foreign currency exchange of 1%, partially offset by a divestiture impact of 4%. Regionally, on a constant currency basis, Americas sales increased 17%, Asia Pacific increased 8% and EMEA sales decreased by 1%.

Looking at sales by end market on a constant currency basis, Aerospace and Defense increased 33% due to defense orders driven by continued focus on growth initiatives in the Americas. Earthworks increased 18% due to mining share gain and higher global construction volumes due to buy ahead and share gain. General Engineering increased 5% due to price and higher powder demand in the Americas and Asia Pacific partially offset by lower demand in EMEA. And lastly, Energy was flat as higher prices offset weaker market conditions.

Within Infrastructure, we saw approximately $3 million of sales as a result of customers buying ahead of higher prices. Adjusted operating margin increased 370 basis points year-over-year to 12.3% primarily due to a few factors. The increase in operating income was primarily due to the $17 million effect from a favorable timing of pricing compared to raw material costs and year-over-year restructuring savings of $2 million partially offset by higher compensation costs, prior year net insurance proceeds of $3 million and general inflation.

Now turning to Slide 10 to review our free operating cash flow and balance sheet. Our second quarter year-to-date net cash flow from operating activities was $73 million compared to $101 million in the prior year period. Our second quarter year-to-date free operating cash flow decreased to $38 million from $57 million in the prior year due primarily to working capital changes, including the increase in inventory from higher tungsten prices partially offset by lower capital expenditures.

On a dollar basis, year-over-year, primary working capital increased $97 million from an $85 million increase in inventory to $690 million. On a percentage of sales basis, primary working capital increased to 31.9%. Net capital expenditures decreased to $34 million compared to $44 million in the prior year. We returned $15 million to our shareholders through dividends. Due to the unprecedented increase in level of tungsten prices and the corresponding increase in our working capital, we did not repurchase shares in the second quarter.

Inception to date, we have repurchased $70 million or 3 million shares under our $200 million authorization. And as we've had every quarter since becoming a public company over 50 years ago, we paid a dividend to our shareholders. We remain committed to returning cash to shareholders while executing our strategy to drive growth and margin improvement. We continue to maintain a healthy balance sheet and debt maturity profile with no near-term refunding requirements. During the quarter, we amended and extended our revolving credit agreement, which has capacity of $650 million and matures in November 2030. At quarter end, we had combined cash and revolver availability of approximately $779 million, and we're well within our financial covenants. The full balance sheet can be found on Slide 17 in the appendix.

Now on Slide 11 regarding the full year outlook. We now expect FY '26 sales to be between $2.19 billion and $2.25 billion, with volume ranging from flat to positive 3%. Net price and tariff surcharge combined of approximately 11% and we anticipate an approximate 2% tailwind from foreign exchange. The increased outlook reflects additional pricing actions related to the increase in cost of tungsten since we provided our prior outlook.

Despite the record level of tungsten, we remain confident in our ability to achieve the price. From a cost perspective, as Sanjay noted earlier, some of our EMEA restructuring actions will take a bit longer to execute. And as a result, our updated range includes $30 million of savings. Depreciation and amortization, foreign exchange and pension assumptions are unchanged and noted on the slide. We now expect adjusted EPS in the range of $2.05 to $2.45. This outlook includes approximately a $0.95 year-over-year benefit related to the timing of price and raw material costs.

On the cash side, the full year outlook for capital expenditures is unchanged and free operating cash flow is expected to be approximately 60% of adjusted net income. This revision reflects the additional working capital required by the rising cost of tungsten as discussed earlier.

Turning to Slide 12 regarding our third quarter outlook. We expect third quarter sales to be between $545 million and $565 million, which reflects the effects of the buy ahead that occurred in the second quarter. We expect volumes to range from negative 4% to flat. If you were to adjust for the buy ahead that occurred in the second quarter, volume at the midpoint would be positive 1% and would be the third consecutive quarter of improving volume trends. The outlook also includes price and tariff surcharge realization of approximately 13% and 5% positive impact from foreign exchange. We expect adjusted EPS in the range of $0.50 to $0.60. This includes approximately $0.30 year-over-year benefit related to price/raw timing.

It's worth noting that the prior year's third quarter results included a $0.13 benefit from the advanced manufacturing tax credit. The other key assumptions for the quarter are noted on the slide. And with that, I'll turn it back over to Sanjay.

Thank you, Pat. Turning to Slide 13. Let me take a few minutes to summarize. We delivered a solid first half of fiscal '26 driven by price, modest improvements in a couple of end markets, project wins on the commercial side and cost improvement actions. We continue to make steady progress on our strategic growth initiatives, lean transformation and structural cost improvement while also exploring ways to strengthen our portfolio over time. We remain confident in our plan for long-term value creation for our shareholders. And with that, operator, please open the line for questions.

[Operator Instructions]

Our first question comes from Stephen Volkmann with Jefferies.

I guess, no surprise, maybe I'll talk about tungsten a little bit here. So a couple of things. You talked about some pull forward here into the last quarter, is there some big price increase that's about to hit that people wanted to get in front of?

Yes, Steve, we had a modest price increase in January 1 relative to what we have done in past, I think it's in mid-single digits.

I'd add to that, Steve, I think, even in places where we're not on a list price business, and we've got a lot more material content. We've got customers who are informed about the direction of what the tungsten price is.

Okay. And since the price of Tungsten is up, I think, since you started this conference call, that's only a slight joke. It is up 33% year-to-date, right? So how do you -- like how fast can you kind of keep up with this?

Yes. So Steve, there are parts of our business where the prices get effective very quickly. Those are like -- the spot buy. And also we have parts of the business which are indexed to the prices. And of course, in Metal Cutting, pretty much everything is on the list price basis. So that takes a little bit more time. But based on the order pattern and the lead time, that also works out just fine for us. As you asked the first question, I made the comment modest because prices of tungsten has gone up a lot more than almost 2 to 3x. But by the time you look at how it affects overall in the price of our product, and I mentioned, yes, mid-single digit is relatively higher price. But our customers also see these dynamics, and they have been also kind of monitoring it very closely. And there were some buy ahead, as Pat mentioned in his prepared remarks. If you even adjust for that, we still think that the overall market improved sequentially, and then we're still expecting slight improvement in market from that perspective.

Okay. All right. Great. And then just the final piece here. How should we think about the supply side? I'm curious, like, are you worried about access to tungsten. Is there any chance that the market gets tight and you kind of can't get what you need. And maybe as you answer that, Sanjay, just remind us about sort of your kind of internal versus external sourcing of tungsten and I'll pass it on.

Yes, sure. I will also have Pat chime in here, but let me start by saying that we have multiple different sources, and we have things in pipeline in terms of how we work with our vendors and suppliers. We have -- in many cases, we have long-term agreements. So we feel confident in our ability to get what we need for the outlook that we're giving you at this point. Pat?

Yes, I'd say obviously, in terms of sources, we use a diversified mix of recycled materials. We've got our facility in Bolivia that pulls out material from that market. And in terms of what we're using, I'll say, outside of China, we do not have a dependence on Chinese material to satisfy those operations. Obviously, with the ramp-up of tungsten, and as we've commented before, this is really a supply-driven price increase at the moment across the industry. We are seeing additional activity, I would say, in terms of what's happening at mines and projects also in terms of government involvement in some of those things to facilitate that. And so I think if we took a longer-term view of this as well, there's ample supply that's out there that should come online.

Yes. Steve, I'll add one more thing. Along with the supply side of the question, we, as a company based on material science and technology, we also look for ways that how we use tungsten in the most efficient way in our product. There are places where over the years, we have taken parts of our product mixed with the steel and then having the parts of the tool made by tungsten. So we are also looking for as there are some pricing concerns and also the supply side concerns, how do we make our product more efficient in that result.

Our next question comes from Julian Mitchell with Barclays.

I just wanted to start off with clarifying your -- the volume trends just kind of through the year. So I guess you have the third quarter guidance of slight volumes down year-on-year at the midpoint. The full year is slight growth. So maybe help us understand or remind us kind of Q1, Q2, how are volumes moving then and trying to understand kind of that interplay of maybe some pull forward of volume versus what you're seeing in the end market final demand volume-wise.

Sure, Julian. First, let me back up a little bit from your question of the full year, and then I'll come to Q2 and Q3 in a second. If you go back to the August outlook, at midpoint, we have said volume was going to be minus 2.5%. Last quarter, we said at midpoint, volume was going to be for the full year again at plus 1%. This time, we are saying volume is 1.5%. So it gives you at least confidence that volume is moving in the right direction as the year has progressed.

Of course, we have -- like that's the 400 basis point change in 6 months in our volume projection for the full year. In parallel, of course, we have 700 basis point change in the price, which is a bigger driver of top line. But coming back to Q2 and Q3 dynamics. In Q2, we had a buy ahead, as Pat alluded to that earlier, about $13 million by the time you add both segments. Now if you adjust for that, Q2 will be flat. And then if you adjust for that also Q3, rather than showing as negative, it will be plus 1. So we are showing you also Q1 was minus 1. Q2 was plus in a flat and then Q3 getting plus 1. So volume overall is moving forward in the right direction for us.

That's really helpful. And maybe just my follow-up. If we focus on, I suppose, 2 markets in particular that are very relevant for you, General Engineering and then Transportation. So Transportation, I suppose, has been pretty soggy updates on auto production ex China, General Engineering, I think, understandably people getting excited because of the manufacturing PMI move a couple of days ago. Just give us sort of your perspective on those 2 markets. And again, the volume demand picture, please. I know you've guided the sales assumptions on Slide 11.

Yes, sure. So let me start with Transportation first, then I'll come to General Engineering. In Transportation, as we had in our prepared remarks that EMEA improved slightly, still in negative territory in low single-digit territory. Asia Pacific improved, this is again data coming out of the IHS. That has had quite a bit of improvement, almost 200 basis points. Americas is essentially flat, slightly negative, but essentially flat in terms of Transportation. So overall, what we said was that Transportation was minus 1 last time, now it's about flat. For us, again, this is just the market. For us, of course, we are winning projects, and we have also seen some comp issues with projects that we had in EV a couple of years ago, in last 24 months, where we've got good stocking orders and all that.

That has some other dynamics going on. As you know, some of the programs have not taken off as much. So overall, we expect Transportation to help us with this slight improvement in the trend.

Now coming to General Engineering. As said in the prepared remarks, Americas is where we have seen tangible difference. Other areas like EMEA and also in APAC, essentially flattish or similar outlook that we had before. In the recent outlook, I think the PMI -- ISM PMI report that came out earlier this week, we saw that it was above 50 for the first time in 12 months. So that's a good sign, but there's just 1 month.

We got to see that translate into -- that sentiment translate into real orders. And hopefully, that happens. So that can give us a little bit of upside. But in our view, right now, we have assumed slight improvement in Americas and essentially flattish for other 2 regions.

Our next question comes from Steven Fisher with UBS.

So just to talk about the cadence a little bit more. Thanks for giving that adjusted progression on the volumes adjusting for the pull forward. I guess just looking at what's implied in Q4, it seems like a lot of the year's upside is really falling into Q4. Can you just talk a little bit about what is driving such a big uplift in Q4 and then, I guess, related to that, how should we think about carryover into the second half of this calendar year, both from a kind of a price and volume and price cost perspective?

Yes. A couple of things, just to kind of walk you through there, Steve. The way I look at the progression here in terms of the second half, and if I strip away a couple of elements here and that is we obviously had some [ track ] between Q2 and Q3 on some buy ahead. And then if we think about the incremental price that's going into the business here in the back half, you pull that out at the midpoint look pretty normal from a sequential volume perspective.

As you think about that change then, which is pretty significant Q3 to Q4, what's driving that pretty significant step up in terms of where pricing is. And that's just a dynamic that's associated with the timing of when we've seen tungsten prices rise here. In the month of January alone, tungsten was up nearly $340, right? And so much of that will hit us then in fourth quarter. And then as you think about in your question in terms of what's the first half of our fiscal '27 kind of look like, yes, where we're kind of sitting now, you would anticipate right, some bleed over into early part of FY '27 in terms of favorability of price/raw.

Obviously, as we talked about in the scripted remarks, there's a headwind out there as well at some point in time once tungsten stabilizes, this will have the absence of some of this benefit, but when that happens, obviously uncertain at the moment.

The other two things I would think about in terms of that early part of '27 and beyond that price/raw dynamic coming into play. Just keep in mind that there's additional restructuring that will be coming in place that ultimately will get us to a run rate of about $125 million at the end of next fiscal year. That's a 35 -- excuse me, a $30 million lift, and then additionally, here, as we think about FY '26, there's a little bit more than your average performance-based compensation in play. And that -- when you think about '27, that's probably a $0.10 to $0.15 tailwind then at this point in time going into '27.

That's really helpful. And then, I guess, nice to see that you continue to have some of these wins from your customers. Can you just talk about the competitive dynamics on that? How actively or how broad is the competitor set on these? Or is the pie just getting bigger and these are areas that you're not facing a lot of competition?

Yes. Of course, we are facing competition in all areas, but I will just tell you that we are using our core competencies as we have spoken before, with material science, our products and solutions, and also adding that with application engineering support, which is, again, a lot of talent we have in the field, in the front line and our engineering team. And then our global footprint that helps us meeting customer demands anywhere in the world, I think we are using our core competencies and a very structured approach on our growth initiatives to drive very close intimacy with customers and solving their problems and winning these projects.

I can tell you a few things that we have spoken and past, but you look through the different end markets we play. In Aerospace and Defense, we have been definitely winning bigger share of wallet with our major customers. And also, we have expanded our new customer list in that in the last few years.

Similarly, in Earthworks, we talked about mining project wins and all that. We definitely have had some new products coming out there and also supporting our customers with good operational performance and quality and delivery. Now I have to say that Earthworks, some of the wins we have has been price sensitive as we have noted in the past.

So we know that, that pressure will be there on us even going forward. With respect to Energy, we have talked about oil and gas customers are definitely valuing our products as they are going more -- not necessarily increasing rig counts, but going more distance in the horizontal ways. We have very good products there. Along with that, in Energy, we have had very good success with supporting our customers on the power generation for AI data centers. We highlighted that last quarter or so.

Today, we talked about the broader electricity and energy play and how we are well positioned to capture that at least to outperform the market. Transportation, we are very well prepared regardless of whichever way our end customers go with respect to drive trend. We had very proven products in combustion engines. Then we launched a lot of really good products on battery and hybrid. Of course, there's quite a bit of dynamics in the mix right now, but we are well positioned to support our customers in that.

And finally, coming to General Engineering. We have very strong channel partners. We work very closely with them. Along with that, in parallel, we have launched many initiatives in General Engineering to help our smaller customers, small- to medium-sized customers. In parallel, we have also launched new initiatives on digital machining solutions. We have put in public domain, our partnerships with key technology players out there. So we're taking a very comprehensive approach as it applies to our overall market.

Our next question comes from Steve Barger with KeyBanc.

This is actually Christian Zyla on for Steve Barger. First question, if you guys get both volume and price for several quarters, how should we think about incremental margins relative to history? Is there a range that you guys are targeting?

Yes. On the volume, as we have said before, Metal Cutting is going to have a little bit higher incremental leverage than Infrastructure. But net-net, we have said mid-40s as average. Pat, do you want to add something to that?

No, I just only say that's a through-the-cycle type number as well. And so individual quarters depending on where a variety of factors that could move around a little bit.

Yes. With respect to price, obviously, we have said it, our first intent there is to make sure that we are offsetting the cost. So the mid-40s number is on volume.

Got it. Understood. And then I guess second question, just your full year guide assumes tungsten prices remain stable from the current level. How fast your list prices adjust in Metal Cutting if tungsten keeps rising? And I guess, conversely, if tungsten prices fall at some point, would you have to give back the surcharges and reduce your list price? And how fast does that happen?

Yes. So we generally have about 3 months or so lag in Metal Cutting in terms of list price change. With respect to if the prices come down, our goal is to stay competitive in the market. So we'll see when that happens and what the extent of that is.

Our next question comes from Angel Castillo with Morgan Stanley.

Just maybe a near-term one first. I wanted to clarify, I don't know if -- apologies if I missed this, but did you say, I guess, how much orders are kind of rising in January, just what you're seeing kind of thus far in the last month and whether that kind of aligns with what you're talking about in terms of the organic growth or maybe even at or just kind of compare to that?

Sorry. We have not talked about January specifically in the prepared remarks, Angel, but I can just tell you that we have a good start, and we are confident about the outlook we gave you.

Understood. And then, Sanjay, just a little bit of a bigger picture question. Back in, I think, fiscal 4Q, you had talked about some additional self-help initiatives, plant closures and other kind of changes you are making given how challenging the backdrop was and just the overall demand picture. But ever since that, I feel like things have been steadily improving, more tailwinds with Power Generation, just general kind of market share wins.

Can you talk at a higher level? Is this -- do these changes impact how you're thinking about repositioning the business, the plant closures, what you need to target or what the business needs to focus on versus perhaps even areas of investing, so you can kind of take more advantage of those kind of higher, faster growth power gen type of markets, just bigger picture just how it impacts your strategy?

Yes, absolutely. Angel, first of all, let me recap what we have done, and then I'll talk about where we're going next. So in last 12 months, we have closed 2 manufacturing plants successfully. We divested 1 business. And now looking forward, we are working on projects as we've spoken after the Q4 of last year. We are going to, of course, keep an eye on where the market is and specifically to different product lines, the demands. And if we have to adjust our plan, we will, our overall goal here is to do what is best for our shareholders, our customers and our team. But at this point, the plans that we have put together still makes sense, and we are making good progress on that.

Our next question comes from Tami Zakaria with JPMorgan.

Very nice results. A question on India. Could you remind us whether you have sourcing exposure from there? And how that might benefit should tariff rates on India come down in the coming months?

Yes, Tami, about 6 months ago or so when this question came up when the tariff had gone up, we have said that we don't really bring a lot of products from India to U.S. So for all practical purposes, the impact was minimum. And then whatever we had over the last few quarters globally, not just the India impact, but as overall we have taken appropriate actions, including relocating several thousand stock SKUs to different places of the world to offset that. So for all practical purposes, this change, tariff coming down will not have that impact. But I do believe that it should help India market, where we are a big player also in our -- so domestically, it should help us, but from a tariff perspective, it's not material for us.

Understood. Very helpful. And along the same lines, should some more trade deals come through, how should we think about pricing? Would tariff surcharges get automatically rolled back? Or you took permanent price increases, which might stick even if tariffs go down in the coming months, how should we think about that?

We have kept the tariffs as is right now. We have not converted that to a permanent price change, but we're keeping that option open. If there are some parts of the trade agreements that feel like more permanent, we'll do that. That is good for everybody, including our customers. But as of right now, we're keeping tariffs as tariff. And if the tariffs do come down, we will immediately adjust it down.

This concludes our question-and-answer session. I would like to turn the conference back to Sanjay Chowbey for closing remarks.

Thank you, operator, and thank you, everyone, for joining the call today. As always, we appreciate your interest and support. Please don't hesitate to reach out to Mike if you have any questions. Have a great day. Thank you.

A replay of this event will be available approximately 1 hour after its conclusion. To access the replay, you may dial toll-free within the United States (877) 344-7529. Outside of the United States, you may dial (412) 317-0088. You will be prompted to enter the conference ID 945699, then the pound or hash symbol. You will be asked to record your name and company.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

Good morning. I would like to welcome everyone to Kennametal's First Quarter and Fiscal 2026 Earnings Conference Call. [Operator Instructions] Please note that this event is being recorded.

I would now like to turn the conference over to Michael Pici, Vice President of Investor Relations. Please go ahead.

Thank you, operator. Welcome, everyone, and thank you for joining us to review Kennametal's First Quarter Fiscal 2026 results. This morning, we issued our earnings press release and posted our presentation slides on our website. We will be referring to that slide deck throughout today's call.

I'm Michael Pici, Vice President of Investor Relations. Joining me on the call today are: Sanjay Chowbey, President and Chief Executive Officer; and Pat Watson, Vice President and Chief Financial Officer. After Sanjay and Pat's prepared remarks, we will open the line for questions.

At this time, I would like to direct your attention to our forward-looking disclosure statement. Today's discussion contains comments that constitute forward-looking statements and as such, involve a number of assumptions, risks and uncertainties that could cause the company's actual results, performance or achievements to differ materially from those expressed in or implied by such statements. These risk factors and uncertainties are detailed in Kennametal's SEC filings.

In addition, we will be discussing non-GAAP financial measures on the call today. Reconciliations to GAAP financial measures that we believe are most directly comparable can be found at the back of the slide deck and on our Form 8-K on our website.

And with that, I'll turn the call over to Sanjay.

Thank you, Mike. Good morning, and thank you for joining us. I'll begin the call today with a brief overview of the quarter, including some end market commentary, followed by a spotlight on one of our growth focus areas, Power Generation. From there, Pat will cover the quarterly financial results as well as the fiscal year '26 outlook. Finally, I'll make some summary comments, and then we will open the line for questions.

Turning to Slide 3. Let me begin by addressing some of the highlights from our strong first quarter. Our global commercial teams continue to advance our strategic growth initiatives. In the quarter, infrastructure secured 2 large project wins within our Earthworks end market. Both wins were a direct result of our team's efforts with those customers to deliver high-quality technical support and superior product performance. That combination has and will continue to be a winning formula for us.

In Metal Cutting, we won projects in Energy, Aerospace and Defense and Transportation. For example, we increased our share of wallet with an aerospace customer to provide high precision tooling solutions for machining military components. As you know, we continue to prioritize above-market growth, and these wins position us well in markets that are benefiting from long-term secular growth trends.

We also continue to respond to the evolving tariff landscape, and we remain committed to fully offsetting the impact of tariffs through various actions, including product moves, supply chain optimization and surcharges as appropriate. Separately, we have implemented pricing actions in response to the continuing rise in tungsten costs, which have increased since August and are at historically high levels. We remain confident in our ability to price to offset the rising tungsten costs.

On the cost improvement front, we realized $8 million in restructuring savings this quarter, and we continue to execute our plans to lower structural cost by reducing employment costs and consolidating manufacturing operations.

Now let's move to our quarterly results, which exceeded the sales and EPS outlook we provided last quarter. Compared to the outlook, sales were primarily driven by better-than-expected volume across all end markets. EPS benefited from the additional volume and a lower-than-anticipated tax rate. Year-over-year, sales increased 3% organically. That's our first quarter of organic growth in 2 years and reflects modest relief from the broad market weakness that has impacted our end markets for the past 8 quarters.

As you may recall, historically, down cycles tend to last 4 to 8 quarters. Adjusted EPS increased to $0.34 compared to $0.29 in the prior year quarter. In terms of profitability, adjusted EBITDA margin was 15.3% compared to 14.3% in the prior year quarter. Cash from operating activities year-to-date was $17 million compared to $46 million in the prior year period. Free operating cash flow year-to-date was negative $5 million compared to $21 million in the prior year. And finally, we returned $25 million to shareholders through share repurchases of $10 million and dividends of $15 million.

Today, we are raising our sales and EPS outlook for fiscal '26. This update reflects the modestly improved market conditions, additional price and tariff surcharges and our favorable performance in the first quarter. Pat will provide more details on our updated outlook shortly. In summary, we are pleased with this quarter's results, and we continue to focus on delivering our commitments throughout fiscal '26.

Turning to Slide 4 and our end market update. As a reminder, our full year outlook reflects forecasts of specific market drivers and general market conditions. I will focus on the bottom half of the slide and address the 2 markets that have changed since our last call.

First, IHS estimates for Transportation slightly improved from the previous estimate, while still being in the negative low single-digit range. Volumes in the Americas have improved from the prior estimate, partially offset by pressure that continues to impact EMEA.

And secondly, for Aerospace and Defense, expectations are improving as the aerospace industry has recovered from supply chain challenges and will benefit from the recent approval that will increase OEM production. Market factors remain mostly unchanged within the other end markets.

Turning to Slide 5. We are seeing emerging opportunities in Power Generation, driven by rising demand for both renewable and traditional energy sources to support the expansion of AI data centers. This is an expanding opportunity for Kennametal across both of our segments, and we are capitalizing on this trend.

As we shared last quarter, we secured a key win in Metal Cutting connected to the backup generators that are providing energy security to those data centers. And it's our deep expertise in application engineering and machining complex engine components that is positioning us particularly well to support customers as they manufacture backup power generation systems and utility scale gas turbines.

With respect to the gas turbines, these applications require the same capabilities that we have long applied in Aerospace and Defense. So this is also an area that we know very well. While this slide focused on Metal Cutting, the opportunity extends across both segments.

In Infrastructure, our wear-resistant solutions and a strong position in oil and gas extraction aligns with the growing need for natural gas as a reliable fuel source for uninterrupted power. So while our recent wins are in backup power systems, the opportunity is much broader, and we are well positioned to capitalize on that as the trend continues.

Now let me turn the call over to Pat, who will review the first quarter financial performance and the outlook.

Thank you, Sanjay, and good morning, everyone. I will begin on Slide 6 with a review of the first quarter operating results. Sales were up 3% year-over-year on both a reported and organic basis. At the segment level, Metal Cutting and Infrastructure both increased 3% organically and by end market. On a constant currency basis, Aerospace and Defense grew 20%; Earthworks grew 5%; Energy increased 1%; General Engineering was flat and Transportation declined 1%. Regionally, on a constant currency basis, sales in the Americas increased 7%, EMEA was flat and sales decreased 1% in Asia Pacific.

The sales performance this quarter exceeded the outlook we provided last quarter. Relative to those expectations, share gains in Earthworks, better-than-expected auto build rates and overall modest volume improvements were the catalysts for the outperformance. I will provide more color when reviewing the segment performance in a moment.

Adjusted EBITDA and operating margins were 15.3% and 8.2%, respectively, versus 14.3% and 7.6% in the prior year quarter. The improved margin was driven by price and tariff surcharges and incremental year-over-year restructuring savings of $8 million, partially offset by higher compensation costs, tariffs and general inflation and a prior year benefit from net insurance proceeds of $4 million that did not repeat in the current year. Adjusted EPS was $0.34 in the quarter versus $0.29 in the prior year period. The main drivers of our EPS performance are highlighted on the bridge on Slide 7.

The year-over-year effect of operations this quarter was positive $0.05. This reflects incremental restructuring benefits, favorable timing of price/raw material costs, tariff surcharges and the advanced manufacturing tax credit, partially offset by higher compensation costs, tariffs and general inflation. The headwind of $0.04 from the net insurance benefits received in the prior year due to the tornado that damaged our Rogers facility. You can also see $0.04 of transactional gains related to preferential Bolivia exchange rates.

Slides 8 and 9 detail the performance of our segments this quarter. Reported Metal Cutting sales were up 5% compared to the prior year quarter with 3% organic growth and favorable foreign currency exchange of 2%. Regionally, excluding the effects of currency, the Americas increased 6%, EMEA increased 1% and Asia Pacific declined 1%.

Looking at sales by end market, Aerospace and Defense increased 16% year-over-year from improved build rates in the Americas and easing supply chain pressures in EMEA. Energy grew 12% this quarter due to data center power generation wins. General Engineering was flat year-over-year from lower production activity, primarily in EMEA. And lastly, Transportation declined 1% year-over-year due to project timing in Asia Pacific and an overall slowdown in EMEA and the Americas.

Metal Cutting adjusted operating margin of 8% decreased 20 basis points year-over-year, primarily from higher compensation costs, tariffs and general inflation. These factors are partially offset by higher prices and surcharges and incremental year-over-year restructuring savings of approximately $6 million.

Turning to Slide 9 for Infrastructure. Infrastructure sales increased 3% organically with reported sales growth of 1%, which was negatively affected 3 points from the divestiture, which closed in June. Regionally, on a constant currency basis, Americas sales increased 7%, Asia Pacific was flat and EMEA sales decreased by 3%.

Looking at sales by end market on a constant currency basis, Aerospace and Defense increased 28% from defense orders driven by continued execution on our growth initiatives in both EMEA and the Americas. Earthworks increased 5% due to mining share gains in the Americas and higher global construction demand, partially offset by Asia Pacific mining market softness. General Engineering was flat due to higher powder demand in the Americas and higher demand in Asia, partially offset by lower industrial activity in EMEA. And lastly, Energy declined 5%, mainly in EMEA, driven by project timing and from a lower U.S. land rig count.

Adjusted operating margin increased 190 basis points year-over-year to 8.8%. Adjusted operating income of $17 million increased primarily due to the favorable timing of pricing compared to raw material costs, partially offset by prior year net insurance proceeds of $4 million and higher compensation costs and general inflation. Additionally, we recognized year-over-year restructuring savings of approximately $2 million.

Now turning to Slide 10 to review our free operating cash flow and balance sheet. Our first quarter net cash flow from operating activities was $17 million compared to $46 million in the prior year period. The change in net cash flow from operating activities was driven by working capital changes, including a higher investment in inventory, primarily from rising tungsten prices. Because sales volumes declined less than normal from the fourth quarter of FY '25 and pricing and tungsten value was up, working capital was a more challenging comparison this quarter.

Our first quarter free operating cash flow decreased to negative $5 million from positive $21 million in the prior year, primarily from the lower cash flow from operations. On a dollar basis, year-over-year, primary working capital increased to $660 million and on a percentage of sales basis, it increased to 32%. Net capital expenditures of $23 million declined modestly from $25 million in the prior year quarter. In total, we returned $25 million to shareholders through our share repurchase and dividend programs. We repurchased 475,000 shares or $10 million in Q1 under our $200 million authorization.

And as we have every quarter since becoming a public company over 50 years ago, we paid a dividend to our shareholders. We remain committed to returning cash to shareholders while executing our strategy to drive growth and margin improvement. We continue to maintain a healthy balance sheet and debt maturity profile with no near-term refunding requirements. At quarter end, we had combined cash and revolver availability of approximately $800 million, and we're well within our financial covenants. The full balance sheet can be found on Slide 17 in the appendix.

Now on Slide 11 regarding the full year outlook. We now expect FY '26 sales to be between $2.1 billion and $2.17 billion, with volume ranging from negative 1% to positive 3%, net price and tariff surcharge combined of approximately 7%, and we anticipate approximately 2% tailwind from foreign exchange. We now expect adjusted EPS to be in the range of $1.35 to $1.65. The increased outlook reflects additional pricing actions related to the rising cost of tungsten and additional surcharges in place to address the changes in policy since our August call.

The adjusted tax rate for the year is now 27%. And as a result of the additional cash that we need to invest in inventory due to higher tungsten costs, free operating cash flow as a percent of adjusted net income is now 100%. All of the other elements of our outlook remain unchanged.

Turning to Slide 12 regarding our second quarter outlook. We expect Q2 sales to be between $500 million and $520 million, with volume ranging from negative 4% to flat, price and tariff surcharge realization of approximately 7% and a 2% positive impact from foreign exchange. One comment regarding the adjusted effective tax rate this quarter. The rate of approximately 30% assumes a discrete item that is driving the rate higher in Q1 than our full year outlook. We expect adjusted EPS in the range of $0.30 to $0.40. The other key assumptions for the quarter are all noted on the slide.

And with that, I'll turn it back over to Sanjay.

Thank you, Pat. Turning to Slide 13. Let me take a few minutes to summarize. We delivered a solid first quarter, thanks to modest improvements in a couple of end markets, project wins on commercial side and cost improvement actions. We continue to make steady progress on our strategic growth initiatives, lean transformation and a structural cost improvement while also exploring ways to strengthen our portfolio over time.

In parallel, we are monitoring external drivers such as trade and monetary policies and raw material prices and taking timely and necessary actions. We remain confident in our plan for long-term value creation for our shareholders.

And with that, operator, please open the line for questions.

[Operator Instructions] Today's first question comes from Angel Castillo with Morgan Stanley.

Congrats on a strong quarter here. I just wanted to touch base a little bit more on the end market outlook. I think, you noted a little bit on the kind of prepared remarks about what you're seeing across end markets. But I think it kind of stood out to me that some of the changes on Slide 4 for each end market were quite notable in terms of going from down to up or materially kind of more into the double digits, all the while some of the kind of market factors that are listed below seemed a lot more muted to unchanged.

Can you just clarify, I guess, within each of these, what specifically is kind of driving the material kind of uplift? And in particular, maybe also from a regional standpoint, how should we think about the mix of which regions are driving kind of the improved outlook for each of these?

Yes. Thank you, Angel. Good question. So let me walk you through that slide, which is Slide 4. Just first of all, as a reminder, on that slide, the top half of the slide is basically reflecting our sales trend and the bottom half of the page reflects what is the external factor, which is the market. So in all of these end markets, there are 3 pieces: first one is, APT and surcharge -- APT-related price increase and surcharges; second is, market itself, whether the market improved or it stayed flat; and the third piece is, project wins and share gains.

So as we discussed in our prepared remarks, there were definitely some markets where we had bigger benefit of project wins, for example, in Aerospace and also in Energy, especially in the Power Generation side. Now let me walk you through the other factors. So like I said, APT and surcharge-related price affects all end markets. Specific to where we saw changes in end market in Transportation and Aerospace where we saw the biggest change -- changes. Let me walk you through that a little bit.

So for Transportation, we saw Americas coming out a little bit stronger in the Q1, and we have outlook at this point also for the full year and based on even IHS data that we expect while still being in the low single digit in a negative territory, the Transportation IHS forecast at this point is improved from the prior outlook we had 3 months ago.

In Aerospace, the customer build rate and also supply chain constraint easing up and also from a Defense perspective, definitely, we are seeing market to be stronger in that regard. Earthworks, when you see the arrow going up on the top of the page -- half of the page, that is mostly driven by share win.

Same thing in Energy. Energy is more or less staying flat with respect to oil and gas. If you look at the rig counts and all that, about the same as where we anticipated 3 months ago. But we have had good project wins when it comes to the Power Generation and that helped in the Energy.

And in General Engineering, we are seeing improvements. In Q1, we have seen some. But for you look at -- when you look at the full year, other than China, more or less, I think we're seeing slight improvement or flattish type situation in the Gen Eng when it comes to IPI. So that's really what we have at this point.

Again, in summary, APT and surcharge helping and share wins are also helping along with that and modest improvement in a couple of end markets.

That's very helpful. And maybe just as my follow-up, just to kind of double-click on some of these numbers. But maybe on the market share dynamic, could you just give us a little bit more color as to -- is that because the kind of cadence of wins here maybe it's seemingly accelerating in some of these end markets. Is there something about either the product that's really resonating with customers? Is it more related to being competitive advantages to being a domestic producer?

And then as it relates to this or maybe more to the price dynamic that's driving some of these improvements, any concerns here that as you look at tungsten prices or kind of you're passing through higher prices here, any concerns that people start to consider either trading to other non-tungsten equipment? Or I guess, anything that you would note as it pertains to kind of elasticity of the customer to be willing to continue to kind of take these higher prices?

Sure. So first of all, with respect to share gain, it is definitely driven by what we have discussed before, the 3 main drivers: first, innovative solutions; secondly, our commercial excellence, which includes our engagement with customers and application support; and third, operational excellence. Our overall operational performance at this point, including safety, by the way. Safety, quality, on-time delivery has been very good. We continue to make good progress on that. So I think all of those combinations are definitely helping us in share gain.

With respect to -- I think just to confirm, your second part of the question was, can you remind me?

Moving [ something ] away from.

Okay. Yes. Sorry, yes.

Yes, so specific to the customers for the price increases in tungsten?

Got it. Yes. Tungsten, yes. We have looked at that -- from our perspective, what we provide in terms of the innovative solutions, I believe that the value customers get through our solutions has -- is very strong in terms of like even with higher tungsten prices, it will make more sense for them to continue using that rather than changing it to stainless steel or some other type because the performance that they receive from our solution will more than offset even the increase that they're going to see from the tungsten prices.

So we don't see a big risk from that. But Angel, to your broader question, as you look at some of the end markets, they are still on the fence. Can things get worse? Yes. Like we know there is a monetary policies, trade policies and things like that. So things can get worse. But overall, we have taken a very balanced approach in terms of what we see from the market and also from price dynamics, and on top of that, overall our share gain initiatives.

And our next question today comes from Tami Zakaria with JPMorgan.

Very nice quarter. I wanted to ask you about the $250 million TAM from engines, large engines, which I thought was very interesting. How much of this $250 million is simply volume? Or does it also include pricing? And I may have missed it, but what share of that $250 million do you realistically expect to gain over the next 3 years?

Yes, Tami, good question. So first, let me explain that the $250 million that we have carved out to show as a TAM for Power Generation, some of this used to sit within either Energy or Transportation. Now we have carved it out to say, what is it so that we can really focus on that? And then how much is the growth initiative here. At this point, as we pointed out there, if you look at last 2, 3 years, that market has been growing in the high single-digit range, and we are still projecting it to grow at 10% rate for the next few years. So that's how we see it.

At this point, of course, the $250 million does include the latest price dynamics in that. But in the bigger picture, it does have -- like the historical trend is there from that perspective. And as far as we are concerned, market share-wise, we don't disclose at this point about that information. However, we are very confident that our solutions and our overall value proposition with application support and custom solutions that we are very well positioned to win in this.

Understood. That is very helpful. I wanted to ask you about the Energy end market outlook a bit. I think it improved to mid-single digits from flat, if I'm reading it correctly. What's really driving this improved outlook for Energy? Rig counts is still down. Is it well? So could you just elaborate on that a little bit?

Yes. As you look at that, again, Slide 4, in the bottom half of the page, we are clearly telling you that oil and gas stays about the same, right? It's not getting worse. That's good news. But overall sales, which is in the top half of the page, we are saying it's improving because we have definitely impact of APT-related price increase and also surcharges if applicable. And as you know, a lot of products that is used in oil and gas does have very heavy content or greater content of the raw material.

And just to tack on to that, Tami, keep in mind that across our Energy portfolio between both businesses, it's pretty diversified. So beyond having the exposure in oil and gas, which we think of primarily in Infrastructure, Metal Cutting has some exposure there as well. Obviously, we've been talking about the opportunities we have in reciprocating Power Gen and more traditional power gen sources. And as you followed us over the last couple of years, the great position we have in wind power as well.

And our next question today comes from Steven Fisher at UBS.

Congrats on the quarter. Just to come back to the share gain dynamics a little bit. I know this is something you obviously embedded in your multiyear outlook since 2023. So it's nice to see it coming through. I guess just now that we're starting to see this a little bit more visibly and you started to talk about it more, what visibility do you have to anything else in kind of lined up that could materialize in some program wins over the next couple of quarters?

Yes. Again, good question, Steven. Let me start by first addressing some of the higher growth end markets that we see right now from Aerospace and Defense, we have had success in that for the last 2, 3 years. Actually, we have talked about it all the way back in the Investor Day. And we have a good pipeline of projects that we continue to work on. Then when it comes to Power Generation, we already talked about a little bit. So that also has good pipeline.

When it comes to Transportation, we will position ourselves very well as the transportation industry was going through quite a bit of dynamic shift in terms of the powertrain. And we have solutions which will support whether a customer launches new internal combustion engine or hybrid or plug-in hybrid or battery-only electric vehicle, we have good solutions, and we have very good strong application support for that. So well positioned on that.

And in parallel, we continue to work on Earthworks, as you saw some of the project wins we reported in Q1. And finally, coming to General Engineering, our strong relationships with our channel partner and really working together to do what's best for our end customers have also bode well for us, and we'll continue to work on all of these 5 end markets.

That's really helpful. And then I guess just on the tungsten price, can you just talk about how much of that top line benefit and margin dynamic you saw in Q1 relative to what might still be ahead? What could you still see there in Q2? And then are you expecting to see things in balance between your -- what you're passing along and what you're experiencing by, say, Q3?

Yes. If we think about that, [ that's a modest ] -- we saw a modest amount of tailwind, I would say, Steve, in the first quarter, right? And then what you're going to see here as we go into Q2 -- and in Q2, we'll see a little bit of ramp-up there. Price will go up. We'll get a little bit of tailwind from that. We did see a -- we saw a little bit of advanced buying here in Q1, call that low single digits that might be flopped between Q1 and Q2 from a volume perspective. And that's part of what's animating, I'll say, our volume outlook for Q2.

But as you think about Q3, Q3, we should see a pretty significant step-up in price/raw. If tungsten prices were to stick around where they are currently, we probably have our strongest EPS quarter in Q3 as we get into Q4, get into basically price/raw neutrality at this point in time.

And as we've talked about on prior calls, we tend to -- what flows through the P&L tends to lag the market by about 2 quarters. If we were to see increases in tungsten prices throughout this quarter, that would tell us that, that period of favorable price/raw would continue more into the fourth quarter. Obviously, if we were to see some of that tungsten price roll off, we would start seeing some of that fall through in Q4 as well. But right now, our outlook assumes stable pricing for the balance of the year from a tungsten perspective.

And our next question today comes from Steve Barger at KeyBanc Capital Markets.

Going back to data center, you said some of that TAM used to sit in Energy or Transportation. So what is the incremental machining opportunity you see from data center? And can you frame up, does it add single-digit millions of revenue, double-digit millions? How are you thinking about that?

Yes, Steve, it's definitely built into that $250 million. At this point, over the last few years, we have seen that in the $100 million range, and then we're raising it to a 10% CAGR.

Got it. Okay. And then, Sanjay, going back to your comment on some higher expectations for General Engineering. I think everybody is looking for the turn there. So is your outlook based on expectations for improvement just due to how long this downturn has been? Or is it customers saying they want to restock? Or are they seeing actual demand pick up that they're either seeing it or they're planning for it? Can you just frame up that comment?

Yes, sure. Steve, when it comes to General Engineering, I think at this point, by region, I'll comment a little bit. In U.S. and Americas in general, we saw a slight improvement. And by the way, you'll hear the word slight quite a bit here just because we are on the fence. I can tell you that even if you look at our outlook, the way we have framed it, overall volume for the full year, we are saying at midpoint is 1%. So that gives you the idea that we're right on the fence, a slight bit of improvement in IPI will help us, and that's what we have built because that's what we have seen from external projection perspective.

In recent months, we have seen some improvement in Americas. EMEA, in Q1, we saw, but the projection for the rest of the year is more flattish. And in China, we have seen positive projection, slight bit of positive projection.

And our next question today comes from Chris Dankert at Loop.

I guess just to circle back to the earlier question, can you kind of help frame for us what the assumed price/cost impact actually is in the guide? Are we assuming dollar neutrality for the year? Is it dollar positive margin? Can you just kind of walk us through what's actually assumed in your guide from a price/cost perspective here?

Yes. So I would say for the full year, there will be positive price/raw, right? And you just kind of have to look through where the volume is because, again, volume at this point in time on a full year basis, as Sanjay just talked about, it's up 1%, right, at the midpoint of the guide, right? In addition to that, I would just point out to you that think about some of the comments we had last quarter in terms of some of the tailwinds we had in the prior year that are just not repeating here this year.

So when we just think about that overall profitability and EPS walk, yes, we're going to have a very modest amount of positive volume, not quite frankly, enough to write [ home about ] from a leverage perspective. We will have some benefits, obviously, from the restructuring coming through.

We're going to have significant amounts of cost inflation here coming through in the business, whether that relates to tungsten tariff costs as well as, I would say, the normal salary inflation that comes about in addition to some of the headwinds that we've got in, in terms of $15 million that we talked about in the prior quarter in terms of net tornado benefits that occurred in the prior year and some additional tax credits that came through from a tungsten perspective as well as about a $5 million pension headwind.

So we'll see that positive price raw here really in Q3. And as we just talked about previously, when we get out to Q4, we'll really get to a more neutral basis.

Okay. Okay. That's helpful. And then as we're thinking about those restructuring savings, any additional color either in terms of the ratability there or maybe just even how to think about what the key programs are inside that restructuring savings?

Yes, I'd say it's pretty ratable throughout the year, maybe with a little bit of a trail off in Q4 as we start lapping some stuff.

In terms of what's in that program, we've done some shifting of resources that what's been able to unlock some cost as well as in the last year, talked about the closure of 2 facilities, one here in the U.S. and the consolidation of 2 locations in Spain that are driving that.

Yes, we are on track for the $35 million that we have projected for the year.

And our next question today comes from Julian Mitchell of Barclays.

I just wanted to try and dial in again a little bit on the sort of EPS guide change and the moving parts there. So I think the guide midpoint went up by sort of $0.40 or so. And maybe $0.05 of that is the lower tax rate. So are we right in thinking that sort of the price/cost part of that $0.40 is kind of more than half of it? So maybe, I don't know, $0.20, $0.30 tailwind from price/cost versus the prior guide?

And then it sounds like a lot of that comes in the third fiscal quarter. And as we look ahead, simplistically, if the tungsten price stays where it is today, is it sort of neutral after this year? Or does it sort of flip to a kind of headwind as your COGS catch up? Just trying to understand that dynamic, please.

Yes. Good questions, Julian. I would say the best way to think about the change in the outlook is you got outlook to outlook, there's really 2 primary changes. One is volume and the second one is price, right? And so there is some incremental volume in there in terms of the change, and you can probably call that in EPS terms, $0.20-ish, $0.30 -- $0.25, $0.30, right? I think that tax number is probably a little bit hot. So it's probably closer to about $0.03 of tax, ETR to ETR, when you do the math, Julian.

And then so you'll have some remainder in that. And included in that is price/raw favorability that's in the year, but you've also got some muting of that is some higher variable comp, okay? That's also nestled in there. So as you think about Q4, and I'm going to switch now to talking about this sequentially because I think on a year-over-year basis becomes a little more difficult. Q4, effectively, what's in the outlook is neutrality. And unless there's a change in tungsten, right, we would expect to be price/raw neutral on that piece going forward from that as you think about the following fiscal year, right?

As we think about that from a headwind perspective, yes, there is some favorability this year that we will have on price/raw that won't repeat next year, right? And when you do that from a year-over-year perspective, I appreciate that would be seen as a headwind. But if you think of it sequentially, we'll be on the same basis.

That's helpful. So you've got sort of that -- as you said, it's sort of $0.20 to $0.30 price/cost tailwind this year. Is that right?

Yes. I go back to the math I just kind of gave you there, Julian, so.

Yes. I think, Julian, keep that in mind, as Pat said, that volume, which, again, if you look at prior outlook versus this outlook, has improved by 350 basis points. Price improved by 300 basis points. Average was 4%, now it's 7%. So it gives you an idea that volume is playing a role in EPS. And within the volume, you've got project wins, you've got some improvement in market. And then also, I think those are the 2 main components of that.

That's helpful. And then just my sort of second question would be around just the sort of Power Gen exposure, and you have that helpful kind of Slide 5 that you've touched on a couple of times already. Just wanted to understand what is your revenue sort of exposure as pertains to that Slide 5 material? What was your dollar revenue in the last 12 months or fiscal '25? Or just trying to understand what your sort of jumping off point is today in revenue as we look ahead to that TAM expansion.

Yes. Julian, we are not disclosing that deeper detail. But let me just tell you the information you have, if you look at the Metal Cutting slide, you will see that Metal Cutting Energy had improved by 12%, whereas Infrastructure Energy had a decline. This is Q1 by 5%. That will tell you, you can do some math in that, and you can see that some of the increase in Metal Cutting Energy revenue is driven by some of those projects.

And our next question today comes from Joe Ritchie at Goldman Sachs.

Yes. Nice to see the strong start to the year. Just a couple of quick ones. I know we've talked a lot about tungsten. It's interesting to me the -- look, tungsten prices were up materially this past quarter. And Pat, you kind of talked through the dynamics. It typically takes a couple of quarters. I was just wondering, has anything changed from a timing standpoint in your ability to pass through price earlier than you have historically? Just seems like the dynamics have gotten perhaps a little bit better on the margin there. Just any thoughts around that would be helpful.

Yes. I think 2 things to think about there as it relates to pricing. We've got 2 semi-unique circumstances going on simultaneously here. One is where tungsten is sitting at today is a historical high, right? And then secondly, I would say we've got the tariff surcharges that are in place, which are a unique event for us and many other companies in terms of how they've had to deal with some of the tariff costs. So I think the situation is pretty unique that we're in at the moment.

I do credit the commercial teams. They have gotten out there and been aggressive where they can be and been smart about where we can make sure we're raising prices to cover the costs. And that's never an easy conversation with the client. No client ever really wants to have their price raised. But as Sanjay talked about previously, we remain very confident in our ability to go out there and get the cost and make sure we're covering for it.

We've had a track record of doing so. And I think some of the commercial capabilities that as an organization that we've developed over the last couple of years, not only do they help us in terms of going out and winning market share, but they also help us in terms of making sure we're accurately pricing for the product that we have and the value we're creating for the customer.

Got it. That's helpful. And I guess just maybe following up on that tariff discussion. To the extent that you're putting surcharges through, how are you guys thinking about a situation in which tariffs are potentially rolled back? What does that ultimately mean for kind of like the price/cost equation that you have baked into the guide for the year?

Yes, sure. Joe, I think, first of all, tariff situation, as you guys know, has been very dynamic. And we have taken a very broad sets of actions, starting with like production move, supply chain optimization and where necessary, we did implement surcharges. And as things have changed, those surcharges also have been very dynamic from our side.

For example, when the tariff for products going from U.S. to Canada, that was taken down, we took the surcharges out. So we are very quickly adopting and doing what we need to do to recoup the cost that we need to, but at the same time, being very, very competitive in the market. So we'll continue to do that.

And in the long term, let's say, some of the tariffs that we get to a point where they become permanent, then we will make those changes in the permanent prices. So that's the way we are looking at it.

Thank you. This concludes the question-and-answer session. I'd like to turn the conference back over to Sanjay Chowbey for closing remarks.

Thank you, operator, and thank you, everyone, for joining the call today. As always, we appreciate your interest and support. Please don't hesitate to reach out to Mike if you have any questions. Have a great day. Thank you.

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