UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED ~~SEPTEMBER 30, 2011~~MARCH 31, 2012

Commission file number 1-5318

KENNAMETAL INC.

(Exact name of registrant as specified in its charter)


Pennsylvania		25-0900168
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

World Headquarters 1600 Technology Way P.O. Box 231 Latrobe, Pennsylvania		15650-0231
~~(Address~~ (Address of principal executive offices)		(Zip Code)

Website:www.kennametal.com

Registrant’s telephone number, including area code:(724) 539-5000

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES [X] NO [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES [X ] NO [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer [X]		Accelerated filer [ ]
Non-accelerated filer [ ] (Do not check if a smaller reporting company)		Smaller reporting company [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X]

Indicate the number of shares outstanding of each of the issuer’s classes of capital stock, as of the latest practicable date.


Title of Each Class				Outstanding at ~~October 31, 2011~~ April 30, 2012
Capital Stock, par value $1.25 per share				~~79,457,880~~80,045,908

KENNAMETAL INC.

FORM 10-Q

FOR THE THREE AND NINE MONTHS ENDED ~~SEPTEMBER 30, 2011~~MARCH 31, 2012

TABLE OF CONTENTS

~~TABLE OF CONTENTS~~


Item No.	Item No.		Page No.	Item No.		Page No.

		PART I - FINANCIAL INFORMATION
PART I - FINANCIAL INFORMATION				PART I - FINANCIAL INFORMATION

1.		Financial Statements.			Financial Statements.

		Condensed Consolidated Statements of Income (Unaudited) Three months ended September 30, 2011 and 2010	4		Condensed Consolidated Statements of Income (Unaudited) Three and nine months ended March 31, 2012 and 2011	4

		Condensed Consolidated Balance Sheets (Unaudited) September 30, 2011 and June 30, 2011	5		Condensed Consolidated Balance Sheets (Unaudited) March 31, 2012 and June 30, 2011	5

		Condensed Consolidated Statements of Cash Flow (Unaudited) Three months ended September 30, 2011 and 2010	6		Condensed Consolidated Statements of Cash Flow (Unaudited) Nine months ended March 31, 2012 and 2011	6

		Notes to Condensed Consolidated Financial Statements (Unaudited)	7		Notes to Condensed Consolidated Financial Statements (Unaudited)	7

2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	19		Management’s Discussion and Analysis of Financial Condition and Results of Operations.	23

3.		Quantitative and Qualitative Disclosures About Market Risk	23		Quantitative and Qualitative Disclosures About Market Risk	30

4.		Controls and Procedures	24		Controls and Procedures	30

		PART II - OTHER INFORMATION
PART II - OTHER INFORMATION				PART II - OTHER INFORMATION

2.		Unregistered Sales of Equity Securities and Use of Proceeds	24		Unregistered Sales of Equity Securities and Use of Proceeds	30

6.		Exhibits	25		Exhibits	31

Signatures	Signatures		26	Signatures		32

FORWARD-LOOKING INFORMATION

This Form 10-Q contains “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are statements that do not relate strictly to historical or current facts. You can identify forward-looking statements by the fact they use words such as “should,” “anticipate,” “estimate,” “approximate,” “expect,” “may,” “will,” “project,” “intend,” “plan,” “believe” and other words of similar meaning and expression in connection with any discussion of future operating or financial performance or events. Forward-looking statements in this Form 10-Q may concern, among other things, Kennametal’s expectations regarding our strategy, goals, plans and projections regarding our financial position, liquidity and capital resources, results of operations, market position, and product development, all of which are based on current estimates that involve inherent risks and uncertainties. Among the factors that could cause the actual results to differ materially from those indicated in the forward-looking statements are risks and uncertainties related to: economic recession; anticipated benefits resulting from our recently completed restructuring activities; availability and cost of the raw materials we use to manufacture our products; our foreign operations and international markets, such as currency exchange rates, different regulatory environments, trade barriers, exchange controls, and social and political instability; changes in the regulatory environment in which we operate, including environmental, health and safety regulations; our ability to protect and defend our intellectual property; competition; our ability to retain our management and employees; demands on management resources; potential claims relating to our products; integrating acquisitions and achieving the expected savings and synergies; business divestitures; global or regional catastrophic events; energy costs; commodity prices; labor relations; demand for and market acceptance of new and existing products; and implementation of environmental remediation matters. Should one or more of these risks or uncertainties materialize, or should the assumptions underlying the forward-looking statements prove incorrect, actual outcomes could vary materially from those indicated. These and other risks are more fully described in the “Risk Factors” Section of our Annual Report on Form 10-K and in our other periodic filings with the Securities and Exchange Commission. We undertake no obligation to release publicly any revisions to forward-looking statements as a result of future events or developments.

PART ~~I –~~I– FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

KENNAMETAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

							0000000000			0000000000		0000000000			0000000000
						Three Months Ended					Nine Months Ended
						March 31,					March 31,
	Three Months Ended September 30,
(in thousands, except per share amounts)	2011		2010			2012			2011		2012			2011

Sales	$	658,877	$	529,158		$	696,411		$	614,830	$	1,997,030		$	1,709,756
Cost of goods sold		407,817		340,418			449,965			384,849		1,267,638			1,091,010
Gross profit		251,060		188,740			246,446			229,981		729,392			618,746
Operating expense		145,989		125,020			138,904			138,322		419,459			395,447
Restructuring charges (Note 7)		-		3,260
Restructuring charges (Note 8)							-			1,046		-			7,697
Amortization of intangibles		3,461		2,948			4,250			2,836		10,982			8,696
Operating income		101,610		57,512			103,292			87,777		298,951			206,906
Interest expense		5,487		5,963			8,003			5,767		18,746			17,294
Other expense, net		574		1,911
Income from continuing operations before income taxes		95,549		49,638
Other (income) expense, net							(486	)		1,413		(1,169	)		3,071
Income before income taxes							95,775			80,597		281,374			186,541
Provision for income taxes		21,976		13,682			19,538			15,394		57,093			41,092
Net income		73,573		35,956			76,237			65,203		224,281			145,449
Less: Net income attributable to noncontrolling interests		1,587		1,035			738			520		3,099			2,376
Net income attributable to Kennametal	$	71,986	$	34,921		$	75,499		$	64,683	$	221,182		$	143,073


PER SHARE DATA ATTRIBUTABLE TO KENNAMETAL SHAREOWNERS					PER SHARE DATA ATTRIBUTABLE TO KENNAMETAL SHAREOWNERS

Basic earnings per share	$	0.89	$	0.43		$	0.94		$	0.79	$	2.76		$	1.74

Diluted earnings per share:	$	0.88	$	0.42

Diluted earnings per share						$	0.93		$	0.77	$	2.72		$	1.72


Dividends per share	$	0.12	$	0.12		$	0.14		$	0.12	$	0.40		$	0.36


Basic weighted average shares outstanding		80,659		82,105			80,110			82,138		80,179			82,144


Diluted weighted average shares outstanding		81,808		82,689			81,535			83,495		81,434			83,164

The accompanying notes are an integral part of these condensed consolidated financial statements.

KENNAMETAL INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands, except per share data)    September 30,
2011
June 30,
2011

ASSETS

Current assets:

Cash and cash equivalents
   $ 102,547       $ 204,565
Accounts receivable, less allowance for doubtful accounts of $18,926 and $20,958
   420,704       447,835
Inventories (Note 10)
   559,525       519,973
Deferred income taxes
   59,268       60,257
Other current assets
   48,591       54,955
Total current assets
   1,190,635       1,287,585
Property, plant and equipment:

Land and buildings
   364,483       373,971
Machinery and equipment
   1,357,492       1,396,306
Less accumulated depreciation
       (1,053,572)           (1,073,215)
Property, plant and equipment, net
   668,403       697,062
Other assets:

Investments in affiliated companies
   753       829
Goodwill (Note 17)
   500,323       511,328
Other intangible assets, less accumulated amortization of $80,015 and $78,712 (Note 17)
   145,366       152,279
Deferred income taxes
   28,012       29,876
Other
   78,026       75,510
Total other assets
   752,480       769,822
Total assets
   $ 2,611,518       $ 2,754,469

LIABILITIES

Current liabilities:

Current maturities of long-term debt and capital leases (Note 11)
   $ 305,499       $ 307,304
Notes payable to banks
   5,488       3,659
Accounts payable
   186,805       222,678
Accrued income taxes
   37,018       38,098
Accrued expenses
   87,132       102,576
Other current liabilities (Note 7)
   138,955       167,206
Total current liabilities
   760,897       841,521
Long-term debt and capital leases, less current maturities (Note 11)
   1,734       1,919
Deferred income taxes
   79,093       83,310
Accrued pension and postretirement benefits
   128,056       134,919
Accrued income taxes
   3,046       3,094
Other liabilities
   49,947       31,065
Total liabilities
   1,022,773       1,095,828
Commitments and contingencies

EQUITY (Note 15)

Kennametal Shareowners’ Equity:

Preferred stock, no par value; 5,000 shares authorized; none issued
   -       -
Capital stock, $1.25 par value; 120,000 shares authorized; 79,390 and 81,129 shares issued
   99,237       101,411
Additional paid-in capital
   417,490       470,758
Retained earnings
   1,045,511       983,374
Accumulated other comprehensive income
   6,052       82,529
Total Kennametal Shareowners’ Equity
   1,568,290       1,638,072
Noncontrolling interests
   20,455       20,569
Total equity
   1,588,745       1,658,641
Total liabilities and equity
   $ 2,611,518       $ 2,754,469

		000000000000			000000000000
	March 31,			June 30,
(in thousands, except per share data)	2012			2011
ASSETS
Current assets:
Cash and cash equivalents	$	125,549		$	204,565
Accounts receivable, less allowance for doubtful accounts of $18,709 and $20,958		481,821			447,835
Inventories (Note 11)		630,870			519,973
Deferred income taxes		57,380			60,257
Other current assets		51,823			54,955
Total current assets		1,347,443			1,287,585
Property, plant and equipment:
Land and buildings		383,199			373,971
Machinery and equipment		1,408,431			1,396,306
Less accumulated depreciation		(1,051,971	)		(1,073,215	)
Property, plant and equipment, net		739,659			697,062
Other assets:
Investments in affiliated companies		752			829
Goodwill (Note 18)		731,348			511,328
Other intangible assets, less accumulated amortization of $85,700 and $78,712 (Note 18)		254,924			152,279
Deferred income taxes		33,683			29,876
Other		90,765			75,510
Total other assets		1,111,472			769,822
Total assets	$	3,198,574		$	2,754,469

LIABILITIES
Current liabilities:
Current maturities of long-term debt and capital leases (Note 12)	$	333,745		$	307,304
Notes payable to banks		667			3,659
Accounts payable		223,656			222,678
Accrued income taxes		47,677			38,098
Accrued expenses		94,143			102,576
Other current liabilities (Note 8)		154,321			167,206
Total current liabilities		854,209			841,521
Long-term debt and capital leases, less current maturities (Note 12)		306,459			1,919
Deferred income taxes		124,573			83,310
Accrued pension and postretirement benefits		128,536			134,919
Accrued income taxes		3,093			3,094
Other liabilities		36,005			31,065
Total liabilities		1,452,875			1,095,828
Commitments and contingencies
EQUITY (Note 16)
Kennametal Shareowners’ Equity:
Preferred stock, no par value; 5,000 shares authorized; none issued		-			-
Capital stock, $1.25 par value; 120,000 shares authorized; 80,027 and 81,129 shares issued		100,035			101,411
Additional paid-in capital		441,638			470,758
Retained earnings		1,172,222			983,374
Accumulated other comprehensive income		5,341			82,529
Total Kennametal Shareowners’ Equity		1,719,236			1,638,072
Noncontrolling interests		26,463			20,569
Total equity		1,745,699			1,658,641
Total liabilities and equity	$	3,198,574		$	2,754,469

The accompanying notes are an integral part of these condensed consolidated financial statements.

KENNAMETAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)

Three months ended September 30 (in thousands)    2011    2010
OPERATING ACTIVITIES

Net income
   $ 73,573       $ 35,956
Adjustments for non-cash items:

Depreciation
   20,699       19,825
Amortization
   3,461       2,948
Stock-based compensation expense
   8,092       7,305
Deferred income tax provision (benefit)
   4,344       (10)
Other
   (3,294)       2,694
Changes in certain assets and liabilities:

Accounts receivable
   12,303       787
Inventories
   (62,680)       (34,045)
Accounts payable and accrued liabilities
   (64,685)       (9,579)
Accrued income taxes
   1,978       6,318
Other
   (1,029)       (5,771)

Net cash flow (used for ) provided by operating activities
   (7,238)       26,428

INVESTING ACTIVITIES

Purchases of property, plant and equipment
   (11,607)       (10,062)
Disposals of property, plant and equipment
   545       90
Other
   107       1,251

Net cash flow used for investing activities
   (10,955)       (8,721)

FINANCING ACTIVITIES

Net increase (decrease) in notes payable
   2,152       (15,729)
Term debt borrowings
   90,027       155,028
Term debt repayments
   (90,092)       (156,475)
Purchase of capital stock
   (66,650)       (73)
Dividend reinvestment and the effect of employee benefit and stock plans
   5,666       1,574
Cash dividends paid to shareowners
   (9,849)       (9,964)
Other
   (3,841)       (669)

Net cash flow used for financing activities
   (72,587)       (26,308)

Effect of exchange rate changes on cash and cash equivalents
   (11,238)       14,721

CASH AND CASH EQUIVALENTS

Net (decrease) increase in cash and cash equivalents
   (102,018)       6,120
Cash and cash equivalents, beginning of period
   204,565       118,129

Cash and cash equivalents, end of period
   $         102,547       $         124,249

		0000000000			0000000000
Nine months ended March 31 (in thousands)	2012			2011
OPERATING ACTIVITIES
Net income	$	224,281		$	145,449
Adjustments for non-cash items:
Depreciation		63,163			60,165
Amortization		10,982			8,696
Stock-based compensation expense		17,108			15,727
Restructuring charges		-			2,609
Deferred income tax provision (benefit)		3,827			(2,878	)
Other		(11,311	)		4,637
Changes in certain assets and liabilities:
Accounts receivable		(1,478	)		(71,692	)
Inventories		(85,276	)		(74,706	)
Accounts payable and accrued liabilities		(56,969	)		37,250
Accrued income taxes		2,307			4,378
Other		(2,398	)		(4,610	)
Net cash flow provided by operating activities		164,236			125,025
INVESTING ACTIVITIES
Purchases of property, plant and equipment		(60,657	)		(33,348	)
Disposals of property, plant and equipment		4,397			8,063
Business acquisition, net of cash acquired (Note 5)		(382,562	)		-
Purchase of technology license		(10,000	)		-
Other		400			2,349
Net cash flow used for investing activities		(448,422	)		(22,936	)
FINANCING ACTIVITIES
Net decrease in notes payable		(2,708	)		(13,844	)
Net increase in short-term revolving and other lines of credit		29,200			-
Term debt borrowings		980,926			365,082
Term debt repayments		(683,573	)		(366,653	)
Purchase of capital stock		(66,786	)		(26,457	)
Settlement of interest rate swap agreement (Note 7)		(22,406	)		-
Dividend reinvestment and the effect of employee benefit and stock plans		23,072			15,081
Cash dividends paid to shareowners		(32,334	)		(29,873	)
Other		(8,909	)		(1,045	)
Net cash flow provided by (used for) financing activities		216,482			(57,709	)
Effect of exchange rate changes on cash and cash equivalents		(11,312	)		21,683
CASH AND CASH EQUIVALENTS
Net (decrease) increase in cash and cash equivalents		(79,016	)		66,063
Cash and cash equivalents, beginning of period		204,565			118,129
Cash and cash equivalents, end of period	$	125,549		$	184,192

The accompanying notes are an integral part of these condensed consolidated financial statements.

KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

ORGANIZATION

Kennametal Inc. was incorporated in Pennsylvania in 1943. Kennametal Inc. and its subsidiaries (collectively, Kennametal or the Company) are a leading global manufacturer and supplier of tooling, engineered components and advanced materials consumed in production processes. We believe that our reputation for manufacturing excellence, as well as our technological expertise and innovation in our principle products, has helped us to achieve a leading market presence in our primary markets. End users of our products include metalworking manufacturers and suppliers across a diverse array of industries, including the aerospace, defense, transportation, machine tool, light machinery and heavy machinery industries, as well as manufacturers, producers and suppliers in a number of other industries including coal mining, highway construction, quarrying, and oil and gas exploration and production industries. Our end users’ products include items ranging from airframes to coal mining, engines to oil wells and turbochargers to construction. We operate two global business segments consisting of Industrial and Infrastructure.

2.	BASIS OF PRESENTATION

The condensed consolidated financial statements, which include our accounts and those of our majority-owned subsidiaries, should be read in conjunction with our 2011 Annual Report on Form 10-K. The condensed consolidated balance sheet as of June 30, 2011 was derived from the audited balance sheet included in our 2011 Annual Report on Form 10-K. These interim statements are unaudited; however, we believe that all adjustments necessary for a fair statement of the results of the interim periods were made and all adjustments are normal ~~recurring~~ adjustments. The results for the ~~three~~nine months ended ~~September 30,~~March 31, 2012 and 2011 ~~and 2010~~ are not necessarily indicative of the results to be expected for a full fiscal year. Unless otherwise specified, any reference to a “year” is to a fiscal year ended June 30. For example, a reference to 2012 is to the fiscal year ending June 30, 2012. When used in this Form 10-Q, unless the context requires otherwise, the terms “we,” “our” and “us” refer to Kennametal Inc. and its consolidated subsidiaries.

3.	NEW ACCOUNTING STANDARDS

Adopted

As of January 1, 2012, Kennametal adopted changes to fair value measurements and disclosure. Many of the amendments in this guidance represent clarifications to existing guidance or changes in the measurement guidance for determining fair value. The most significant change in disclosures is an expansion of the information required for Level 3 measurements. Disclosures will be required about the use of a nonfinancial asset measured or disclosed at fair value if its use differs from its highest and best use. In addition, entities must report the level in the fair value hierarchy of assets and liabilities not recorded at fair value but where fair value is disclosed. The adoption of this guidance did not have an impact on our condensed consolidated financial statements.

Issued

In ~~September~~December 2011, the Financial Accounting Standards Board (FASB) ~~issued new~~deferred the requirement to present reclassifications of other comprehensive income on the face of the income statement. Companies would still be required to adopt the other requirements contained in the accounting guidance on ~~testing goodwill for impairment. The new guidance permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value~~presentation of ~~a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test.~~other comprehensive income. This guidance is effective for Kennametal beginning July 1, 2012.

In June 2011, the FASB issued ~~new~~ guidance on presentation of comprehensive income. This ~~new~~ guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. An entity can elect to present items of net income and other comprehensive income in one continuous statement or in two separate consecutive statements. Each component of net income and other comprehensive income, together with totals for comprehensive income and its two parts, net income and other comprehensive income, would need to be displayed under either alternative. This guidance is effective for Kennametal beginning July 1, 2012.

In ~~May~~September 2011, the FASB issued ~~new~~additional guidance on ~~fair value measurements and disclosure.~~testing goodwill for impairment. The ~~objective of the new~~ guidance permits an entity to first assess qualitative factors to determine whether it is a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and international financial reporting standards (IFRS). Many of the amendments in this new guidance represent clarifications to existing guidance or changes in the measurement guidance for determining fair value. The most significant change in disclosures is an expansion of the information required for Level 3 measurements. New disclosures are required about the use of a nonfinancial asset measured or disclosed at fair value if its use differs from its highest and best use. In addition, entities must report the level inmore likely than not that the fair value ~~hierarchy~~ of ~~assets and liabilities not recorded at fair value but where fair value~~a reporting unit is ~~disclosed.~~less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. This guidance is effective for Kennametal beginning ~~January~~July 1, 2012.

KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4.	SUPPLEMENTAL CASH FLOW DISCLOSURES

						0000000000		0000000000
Three months ended September 30 (in thousands)	2011		2010
Nine months ended March 31 (in thousands)					2012		2011
Cash paid during the period for:
Interest	$	1,072	$	1,293	$	14,603	$	14,684
Income taxes		11,213		7,432		44,715		40,741

Supplemental disclosure of non-cash information:
Contribution of capital stock to employees’ defined contribution benefit plans		-		948		-		948

5.	ACQUISITION

On March 1, 2012, the Company acquired all of the shares of Deloro Stellite Holdings 1 Limited (Stellite) pursuant to the terms of the Share Sale and Purchase Agreement dated January 13, 2012. The U.K.-based Stellite is a global manufacturer and provider of alloy-based critical wear solutions for extreme environments involving high temperature, corrosion and abrasion. Stellite employs approximately 1,300 people across seven primary operating facilities globally, including locations in the U.S., Canada, Germany, Italy, India and China. Stellite’s proprietary metal alloys, materials expertise, engineering design and fabrication capabilities complement Kennametal’s current business in the oil and gas, power generation, transportation and aerospace end markets. This acquisition is in alignment with Kennametal’s growth strategy and positions us to further achieve geographic and end market balance.

Kennametal acquired Stellite for a purchase price of approximately $383 million; net of cash acquired, and funded the acquisition through existing credit facilities and operating cash flows. As part of the acquisition of Stellite, Kennametal incurred for both the three and nine months ended March 31, 2012, $5.7 million of acquisition related costs, which are included in operating expense.

Purchase Price Allocation

This acquisition was accounted for under the acquisition method of accounting and accordingly, the purchase price has been allocated to the assets acquired and liabilities assumed based on estimated fair values at the date of the acquisition. The Condensed Consolidated Balance Sheet as of March 31, 2012 reflects the preliminary allocation of the purchase price and is subject to revision when appraisals are finalized, which is expected to occur in the June quarter of 2012.

KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The preliminary allocation of the total purchase price to the fair values of the assets acquired and liabilities assumed is as follows:

		00000000000
(in thousands)	Total
ASSETS
Current assets:
Accounts receivable	$	45,484
Inventories		49,618
Other current assets		4,007
Total current assets		99,109
Property and equipment		72,794
Goodwill		235,883
Other intangible assets		102,721
Deferred income taxes		2,478
Other		70
Total assets	$	513,055

LIABILITIES
Current liabilities:
Short term debt and current maturities of long-term debt	$	4,685
Accounts payable		43,534
Accrued income taxes		9,530
Other current liabilities		16,045
Total current liabilities		73,794
Long-term debt and capital leases		5,379
Deferred income taxes		46,109
Total liabilities		125,282
Noncontrolling interest		5,211
Net assets acquired	$	382,562

In connection with this acquisition, we identified and valued certain intangible assets, including existing customer relationships, technologies and trademarks, as further discussed in Note 18. The goodwill recorded of $235.9 million is not deductible for tax purposes and is attributable to the operating synergies we expect to gain from the acquisition. These intangible assets are part of the Infrastructure segment.

Stellite realized net sales of $22.5 million and a net loss of $4.7 million during the month ended March 31, 2012 to the Company, including $5.7 million of acquisition related pre-tax costs.

Unaudited Pro Forma Financial Information

The following unaudited pro forma summary of operating results presents the consolidated results of operations as if the Stellite acquisition had occurred on July 1, 2010. These amounts were calculated after the conversion to U.S. GAAP, applying our accounting policies and adjusting Stellite’s results to reflect increased depreciation and amortization expense resulting from recording fixed assets and intangible assets at fair value and decreasing interest expense to reflect Kennametal’s more favorable borrowing rate, together with the related tax effects. The pro forma results for the three months ended March 31, 2012 excluded $5.7 million of acquisition related pre-tax costs. The pro forma results for the three and nine months ended March 31, 2011 includes $2.0 million and $8.9 million, respectively, of acquisition related expenses. The pro forma results have been presented for comparative purposes only and are not indicative of future results of operations or what would have occurred had the acquisition been made on July 1, 2010.

KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Unaudited pro forma summary of operating results of the Company, assuming the acquisition had occurred as of July 1, 2010 are as follows:

		000000000000		000000000000		000000000000		000000000000
	Three Months Ended				Nine Months Ended
	March 31,				March 31,
(in thousands)	2012		2011		2012		2011
Pro forma (unaudited):
Net Sales	$	733,518	$	687,121	$	2,170,532	$	1,901,888
Net income attributable to Kennametal	$	83,955	$	68,819	$	237,144	$	145,028

Per share data attributable to Kennametal :
Basic earnings per share	$	1.05	$	0.84	$	2.96	$	1.77
Diluted earnings per share	$	1.03	$	0.82	$	2.91	$	1.74

6.	FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy consists of three levels to prioritize the inputs used in valuations, as defined below:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3: Inputs that are unobservable.

As of ~~September 30, 2011,~~March 31, 2012, the fair values of the Company’s financial assets and financial liabilities measured at fair value on a recurring basis are categorized as follows:

										000000000		000000000		000000000		000000000
(in thousands)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Derivatives⁽¹⁾	$	-	$	1,064	$	-	$	1,064	$	-	$	487	$	-	$	487
Total assets at fair value	$	-	$	1,064	$	-	$	1,064	$	-	$	487	$	-	$	487


Liabilities:
Derivatives⁽¹⁾	$	-	$	20,721	$	-	$	20,721	$	-	$	58	$	-	$	58
Total liabilities at fair value	$	-	$	20,721	$	-	$	20,721	$	-	$	58	$	-	$	58

KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

As of June 30, 2011, the fair value of the Company’s financial assets and financial liabilities measured at fair value on a recurring basis are categorized as follows:

										september300		september300		september300		september300
(in thousands)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Derivatives⁽¹⁾	$	-	$	896	$	-	$	896	$	-	$	896	$	-	$	896
Total assets at fair value	$	-	$	896	$	-	$	896	$	-	$	896	$	-	$	896


Liabilities:
Derivatives⁽¹⁾	$	-	$	3,330	$	-	$	3,330	$	-	$	3,330	$	-	$	3,330
Total liabilities at fair value	$	-	$	3,330	$	-	$	3,330	$	-	$	3,330	$	-	$	3,330

⁽¹⁾⁽¹⁾

Foreign currency derivative and interest rate swap contracts are valued based on observable market spot and forward rates and are classified within Level 2 of the fair value hierarchy.

~~KENNAMETAL INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

6.7.	DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

As part of our financial risk management program, we use certain derivative financial instruments. We do not enter into derivative transactions for speculative purposes and therefore hold no derivative instruments for trading purposes. We use derivative financial instruments to provide predictability to the effects of changes in foreign currency exchange rates on our consolidated results and to achieve our targeted mix of fixed and floating interest rates on outstanding debt. We account for derivative instruments as a hedge of the related asset, liability, firm commitment or anticipated transaction, when the derivative is specifically designated as a hedge of such items. Our objective in managing foreign exchange exposures with derivative instruments is to reduce volatility in cash flow, allowing us to focus more of our attention on business operations. With respect to interest rate management, these derivative instruments allow us to achieve our targeted fixed-to-floating interest rate mix as a separate decision from funding arrangements in the bank and public debt markets. We measure hedge effectiveness by assessing the changes in the fair value or expected future cash flows of the hedged item. The ineffective portions are recorded in other (income) expense, ~~(income),~~ net.

The fair value of derivatives designated in the condensed consolidated balance sheet are as follows:

						september30			september30
					March 31,			June 30,
(in thousands)	September 30, 2011		June 30, 2011		2012			2011
Derivatives designated as hedging instruments
Other current assets - range forward contracts	$	982	$	87	$	435		$	87
Other current liabilities - range forward contracts		(11)		(159)		(4	)		(159	)
Other assets - forward starting interest rate swap contracts		-		772		-			772
Other liabilities - forward starting interest rate swap contracts		(20,578)		(3,169)		-			(3,169	)
Total derivatives designated as hedging instruments		(19,607)		(2,469)		431			(2,469	)
Derivatives not designated as hedging instruments
Other current assets - currency forward contracts		82		37		52			37
Other current liabilities - currency forward contracts		(132)		(2)		(54	)		(2	)
Total derivatives not designated as hedging instruments		(50)		35		(2	)		35
Total derivatives	$	(19,657)	$	(2,434)	$	429		$	(2,434	)

Certain currency forward contracts ~~hedging~~that hedge significant cross-border intercompany loans are considered as other derivatives and therefore do not qualify for hedge accounting. These contracts are recorded at fair value in the balance sheet, with the offset to other (income) expense, ~~(income),~~ net. ~~Losses (gains)~~(Gains) losses related to derivatives not designated as hedging instruments have been recognized as follows:

Three months ended September 30 (in thousands) 2011 2010
Other expense (income), net - currency forward contracts
$ 49 $ (2,647)

		september3			september3		september3		september3
	Three Months Ended					Nine Months Ended
	March 31,					March 31,
(in thousands)	2012			2011		2012		2011
Other (income) expense, net - currency forward contracts	$	(747	)	$	56	$	33	$	(1,963	)

KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FAIR VALUE HEDGES

In February 2009, we terminated interest rate swap contracts to convert $200.0 million of our fixed rate debt to floating rate debt. These contracts were originally set to mature in June 2012. Upon termination, we received a cash payment of $13.2 million. This gain is being amortized as a component of interest expense over the remaining term of the related debt using the effective interest rate method. During the three and nine months ended ~~September 30, 2011 and 2010,~~March 31, 2012, $1.5 million ~~was~~and $4.4 million, respectively, were recognized as a reduction in interest ~~expense~~expense. During the three and nine months ended March 31, 2011, $1.5 million and $4.4 million, respectively, were recognized as a reduction in ~~each of the periods.~~interest expense.

CASH FLOW HEDGES

Currency forward contracts and range forward contracts (a transaction where both a put option is purchased and a call option is sold), designated as cash flow hedges, hedge anticipated cash flows from cross-border intercompany sales of products and services. Gains and losses realized on these contracts at maturity are recorded in accumulated other comprehensive ~~loss,~~income, net of tax, and are recognized as a component of other (income) expense, ~~(income),~~ net when the underlying sale of products or services is recognized into earnings. The notional amount of the contracts translated into U.S. dollars at ~~September~~March 31, 2012 and June 30, 2011, ~~and 2010,~~ was ~~$34.8~~$43.1 million and ~~$48.5~~$37.6 million, respectively. The time value component of the fair value of range ~~forwards~~forward contracts is excluded from the assessment of hedge effectiveness. Assuming the market rates remain constant with the rates at ~~September 30, 2011,~~March 31, 2012, we expect to recognize a gain of ~~$0.6~~$0.3 million in the next 12 months on outstanding derivatives.

~~KENNAMETAL INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

We enter into floating-to-fixed interest rate swap contracts, designated as cash flow hedges, from time to time to hedge our exposure to interest rate changes on a portion of our floating rate debt. These interest rate swap contracts convert a portion of our floating rate debt to fixed rate debt. We record the fair value of these contracts as an asset or a liability, as applicable, in the balance sheet, with the offset to accumulated other comprehensive ~~loss,~~income, net of tax. ~~At both September 30, 2011 and June 30, 2011,~~

In February 2012, we ~~had~~settled forward starting interest rate swap contracts ~~outstanding for forecasted transactions that effectively converted a cumulative notional amount~~to convert $150.0 million of ~~$150 million from~~our floating rate debt to fixed rate debt. Upon settlement, we made a cash payment of $22.4 million. The loss is being amortized as a component of interest ~~rates.~~expense over the term of the related debt using the effective interest rate method. During the three and nine months ended March 31, 2012, $0.3 million was recognized as interest expense. As of ~~September 30, 2011 and~~ June 30, 2011, we recorded a liability of ~~$20.6 million and~~ $2.4 million ~~respectively~~ on these contracts which was recorded as ~~an offset in~~a decrease to other comprehensive income, net of tax. Over the next 12 months, assuming the market rates remain constant with the rates at September 30, 2011, we do not expect to recognize into earnings any significant gains or losses on outstanding derivatives.

Amounts related to cash flow hedges have been recognized as follows:

Three months ended September 30 (in thousands)    2011    2010

Losses recognized in other comprehensive income
   $         10,683       $         3,642

Losses reclassified from accumulated other comprehensive income into other expense, net
   $ 241       $ 110

		september		september			september		september
	Three Months Ended					Nine Months Ended
	March 31,					March 31,
(in thousands)	2012		2011			2012		2011
Gains (losses) recognized in other comprehensive income, net	$	155	$	(57	)	$	11,742	$	(2,286	)

Losses reclassified from accumulated other comprehensive income into other (income) expense, net	$	11	$	182		$	177	$	374

No portion of the gains or losses recognized in earnings was due to ineffectiveness and no amounts were excluded from our effectiveness testing for the three and nine months ended ~~September 30, 2011~~March 31, 2012 and ~~2010.~~2011.

7.8.	RESTRUCTURING AND RELATED CHARGES

Restructuring and related charges recorded during the ~~three~~nine months ended ~~September 30, 2010~~March 31, 2011 amounted to ~~$4.3~~$14.9 million, including ~~$3.3~~$8.7 million of restructuring ~~charges.~~charges of which $1.0 million were related to inventory disposals and recorded in cost of goods sold. Restructuring-related charges of ~~$1.0~~$3.0 million and $3.2 million were recorded in cost of goods sold and operating expense, respectively, during the ~~three months ended September 30, 2010.~~same period.

KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The restructuring accrual is recorded in other current liabilities in our condensed consolidated balance sheet and the amount attributable to each segment is as follows:

(in thousands)    June 30, 2011    Expense    Asset
Write-down    Cash
Expenditures    Translation    September 30, 2011
Industrial

  Severance
   $         7,811         $           -             $             -             $        (3,002)       $ (189)       $                       4,620
  Facilities
   525                 -                         -             (217)       (36)       272
  Other
   1,604                 -                         -             (390)       (92)       1,122

  Total Industrial
   9,940                 -                         -             (3,609)       (317)       6,014

Infrastructure

  Severance
   1,650                 -                         -             (1,286)       (81)       283
  Facilities
   269                 -                         -             (93)       (15)       161
  Other
   852                 -                         -             (167)       (39)       646

  Total Infrastructure
   2,771                 -                         -             (1,546)       (135)       1,090

Total
   $ 12,711         $           -             $             -             $ (5,155)       $          (452)       $                   7,104

~~KENNAMETAL INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

														september3		september3		september3			september3			september3			september3
(in thousands)	June 30, 2010		Expense		Asset Write-down		Cash Expenditures		Translation		June 30, 2011		June 30, 2011		Expense		Asset Write-down			Cash Expenditures			Translation			March 31, 2012
Industrial
Severance	$	18,327	$	4,363	$	-	$	(16,510)	$	1,631	$	7,811	$	7,811	$	-	$	-		$	(6,136	)	$	(179	)	$	1,496
Facilities		508		2,318		(1,857)		(444)		-		525		525		-		-			(500	)		(25	)		-
Other		403		2,031		-		(931)		101		1,604		1,604		-		-			(790	)		(102	)		712

Total Industrial		19,238		8,712		(1,857)		(17,885)		1,732		9,940		9,940		-		-			(7,426	)		(306	)		2,208

Infrastructure
Severance		7,637		2,484		-		(9,399)		928		1,650		1,650		-		-			(1,573	)		(77	)		-
Facilities		211		1,319		(1,057)		(204)		-		269		269		-		-			(226	)		(10	)		33
Other		168		1,156		-		(530)		58		852		852		-		-			(339	)		(44	)		469

Total Infrastructure		8,016		4,959		(1,057)		(10,133)		986		2,771		2,771		-		-			(2,138	)		(131	)		502

Total	$	27,254	$	13,671	$	(2,914)	$	(28,018)	$	2,718	$	12,711	$	12,711	$	-	$	-		$	(9,564	)	$	(437	)	$	2,710


(in thousands)													June 30, 2010		Expense		Asset Write-down			Cash Expenditures			Translation			June 30, 2011
Industrial
Severance													$	18,327	$	4,363	$	-		$	(16,510	)	$	1,631		$	7,811
Facilities														508		2,318		(1,857	)		(444	)		-			525
Other														403		2,031		-			(931	)		101			1,604
Total Industrial														19,238		8,712		(1,857	)		(17,885	)		1,732			9,940
Infrastructure
Severance														7,637		2,484		-			(9,399	)		928			1,650
Facilities														211		1,319		(1,057	)		(204	)		-			269
Other														168		1,156		-			(530	)		58			852
Total Infrastructure														8,016		4,959		(1,057	)		(10,133	)		986			2,771
Total													$	27,254	$	13,671	$	(2,914	)	$	(28,018	)	$	2,718		$	12,711

8.9.	STOCK-BASED COMPENSATION

On October 26, 2010, the Company’s shareowners approved the Kennametal Inc., Stock and Incentive Plan of 2010 (the 2010 Plan). The 2010 Plan authorizes the issuance of up to 3,500,000 shares of the Company’s common stock plus the remaining shares from the Kennametal Inc., Stock Incentive Plan of 2002, as amended (the 2002 Plan). Shares can be issued in the form of incentive stock options, non-statutory stock options, stock appreciation rights, performance share awards, performance unit awards, restricted stock awards, restricted unit awards and share awards.

Stock Options

The assumptions used in our Black-Scholes valuation related to grants made during the ~~three~~nine months ended ~~September 30,~~March 31, 2012 and 2011 ~~and 2010~~ were as follows:


	2011		2010		2012		2011
Risk-free interest rate		1.2%		1.4%		1.2%		1.4%
Expected life (years)⁽²⁾		4.5		4.5		4.5		4.5
Expected volatility⁽³⁾		47.5%		47.0%		47.5%		47.0%
Expected dividend yield		1.5%		2.0%		1.5%		2.0%

⁽²⁾ Expected life is derived from historical experience.

⁽³⁾

~~Expected life is derived from historical experience.~~

⁽³⁾

Expected volatility is based on the historical volatility of our common stock.

~~Changes in our stock options for the three months ended September 30, 2011 were as follows:~~

      Options     Weighted
Average
Exercise Price    Weighted
Average
Remaining
Life (years)
Aggregate
Intrinsic value
(in thousands)

Options outstanding, June 30, 2011
   3,388,003    $             26.50
Granted
   354,618    38.95
Exercised
   (129,475 ) 27.70
Lapsed and forfeited
   (16,833 ) 30.42

Options outstanding, September 30, 2011
   3,596,313    $ 27.67         6.3       $         22,776

Options vested and expected to vest, September 30, 2011
   3,489,292    $ 27.61         6.2       $ 22,235

Options exercisable, September 30, 2011
   2,353,830    $         26.89         5.1       $ 16,021

During the three months ended September 30, 2011 and 2010, compensation expense related to stock options was $2.4 million and $2.0 million, respectively. As of September 30, 2011, the total unrecognized compensation cost related to options outstanding was $6.5 million and is expected to be recognized over a weighted average period of 2.4 years.

Weighted average fair value of options granted during the three months ended September 30, 2011 and 2010 was $13.84 and $9.18, respectively. Fair value of options vested during the three months ended September 30, 2011 and 2010 was $4.3 million and $4.1 million, respectively.

KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Changes in our stock options for the nine months ended March 31, 2012 were as follows:


						Weighted
				Weighted		Average		Aggregate
				Average		Remaining		Intrinsic value
	Options			Exercise Price		Life (years)		(in thousands)
Options outstanding, June 30, 2011		3,388,003		$	26.50
Granted		354,618			38.95
Exercised		(730,000	)		24.89
Lapsed and forfeited		(50,675	)		30.22
Options outstanding, March 31, 2012		2,961,946		$	28.32		6.0	$	48,000

Options vested and expected to vest, March 31, 2012		2,895,598		$	28.28		5.9	$	47,056

Options exercisable, March 31, 2012		1,775,085		$	27.76		4.8	$	29,774

During the nine months ended March 31, 2012 and 2011, compensation expense related to stock options was $4.6 million and $4.2 million, respectively. As of March 31, 2012, the total unrecognized compensation cost related to options outstanding was $4.5 million and is expected to be recognized over a weighted average period of 2.0 years.

Weighted average fair value of options granted during the nine months ended March 31, 2012 and 2011 was $13.84 and $9.22, respectively. Fair value of options vested during the nine months ended March 31, 2012 and 2011 was $4.6 million and $4.4 million, respectively.

Tax benefits, relating to excess stock-based compensation deductions, are presented in the statement of cash flow as financing cash inflows. Tax benefits resulting from stock-based compensation deductions exceeded amounts reported for financial reporting purposes by ~~$1.3~~$3.9 million and ~~were immaterial~~$2.4 million for the ~~three~~nine months ended ~~September 30,~~March 31, 2012 and 2011, ~~and 2010,~~ respectively.

The amount of cash received from the exercise of capital stock options during the ~~three~~nine months ended ~~September 30,~~March 31, 2012 and 2011 ~~and 2010~~ was ~~$3.6~~$17.9 million and ~~$0.5~~$11.3 million, respectively. The related tax benefit for the ~~three~~nine months ended ~~September 30,~~March 31, 2012 and 2011 ~~and 2010~~ was ~~$0.5~~$4.0 million and ~~$0.1~~$2.6 million, respectively. The total intrinsic value of options exercised during the ~~three~~nine months ended ~~September 30,~~March 31, 2012 and 2011 ~~and 2010~~ was ~~$1.9~~$13.2 million and ~~$0.3~~$8.0 million, respectively.

Under the provisions of the 2010 Plan participants may deliver stock, owned by the holder for at least six months, in payment of the option price and receive credit for the fair market value of the shares on the date of delivery. The fair market value of shares delivered during the ~~three~~nine months ended ~~September 30,~~March 31, 2012 and 2011 was $0.4 million and ~~2010 was immaterial.~~$0.6 million, respectively.

Restricted Stock Awards

Changes in our restricted stock awards for the ~~three~~nine months ended ~~September 30, 2011~~March 31, 2012 were as follows:


								Weighted
								Average Fair
	Shares		Weighted Average Fair Value		Shares			Value
Unvested restricted stock awards, June 30, 2011		89,315	$	32.90		89,315		$	32.90
Vested		(45,596)		33.79		(64,412	)		34.46
Forfeited		(291)		29.60		(582	)		29.60
Unvested restricted stock awards, March 31, 2012						24,321		$	28.85

Unvested restricted stock awards, September 30, 2011		43,428	$	31.99

During the ~~three~~nine months ended ~~September 30,~~March 31, 2012 and 2011, ~~and 2010,~~ compensation expense related to restricted stock awards was ~~$0.3~~$0.8 million and ~~$0.6~~$1.6 million, respectively. As of ~~September 30, 2011,~~March 31, 2012, the total unrecognized compensation cost related to unvested restricted stock awards was ~~$0.6~~$0.2 million and is expected to be recognized over a weighted average period of ~~0.8~~0.4 years.

KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Restricted Stock Units – Time Vesting and Performance Vesting

Performance vesting restricted stock units (performance units) were granted to certain individuals. These performance units are earned pro rata each year if certain performance goals are met over a 3-year period, and are also subject to a service condition that requires the individual to be employed by the Company at the payment date after the 3-year performance ~~period.~~period, with the exception of retirement eligible grantees, who upon retirement are entitled to receive payment for any units that have been earned, including a prorated portion in the partially completed fiscal year in which the retirement occurs.

Changes in our time vesting and performance vesting restricted stock units for the ~~three~~nine months ended ~~September 30, 2011~~March 31, 2012 were as follows:

										september30		september30		september30			september30
											Performance
									Performance		Vesting					Time Vesting
									Vesting		Weighted					Weighted
									Stock		Average Fair		Time Vesting			Average Fair
	Performance Vesting Stock Units		Performance Vesting Weighted Average Fair Value		Time Vesting Stock Units		Time Vesting Weighted Average Fair Value		Units		Value		Stock Units			Value
Unvested performance vesting and time vesting restricted stock units, June 30, 2011		116,368	$	26.89		906,082	$	25.81		116,368	$	26.89		906,082		$	25.81
Granted		129,977		38.95		333,595		38.95		129,977		38.95		335,327			38.95
Vested		-		-		(197,315)		25.60		-		-		(239,824	)		25.89
Forfeited		-		-		(4,493)		31.27		-		-		(38,511	)		31.12
Unvested performance vesting and time vesting restricted stock units, March 31, 2012										246,345	$	31.27		963,074		$	30.16

Unvested performance vesting and time vesting restricted stock units, September 30, 2011		246,345	$	31.27		1,037,869	$	30.05

During the ~~three~~nine months ended ~~September 30,~~March 31, 2012 and 2011, ~~and 2010,~~ compensation expense related to time vesting and performance vesting restricted stock units was ~~$5.2~~$11.6 million and ~~$3.6~~$8.6 million, respectively. As of ~~September 30, 2011,~~March 31, 2012, the total unrecognized compensation cost related to unvested time vesting and performance vesting restricted stock units was ~~$23.3~~$17.7 million and is expected to be recognized over a weighted average period of ~~2.7~~2.3 years.

~~KENNAMETAL INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

Restricted Stock Units – STEP

On November 26, 2007, the Company adopted a one-time, long-term equity program, the Kennametal Inc. 2008 Strategic Transformational Equity Program, under the 2002 Plan (STEP). The STEP was designed to compensate participating executives for achievement of certain performance conditions during the period which began on October 1, 2007 and ended on September 30, 2011. Each participant was awarded a maximum number of restricted stock units, each representing a contingent right to receive one share of capital stock of the Company to the extent the unit was earned during the performance period and would have become payable under the STEP. The performance conditions were based on the Company’s total shareholder return (TSR) which governed 35 percent of the awarded restricted stock units, and cumulative adjusted earnings per share (EPS), which governed 65 percent of the awarded restricted stock units. The performance period for the STEP ended on September 30, 2011 and the minimum threshold levels of performance were not achieved. Therefore, all outstanding restricted stock units were forfeited by participating executives. As of ~~September 30, 2011,~~March 31, 2012, no restricted stock units had been earned or paid under the STEP. There were no voting rights or dividends associated with restricted stock units under the STEP.

Changes to the EPS performance-based portion of the STEP restricted stock units for the ~~three~~nine months ended ~~September 30, 2011~~March 31, 2012 were as follows:


							Weighted
					Stock		Average Fair
	Stock Units		Weighted Average Fair Value		Units		Value
Unvested EPS performance-based restricted stock units, June 30, 2011		431,789	$	35.23		431,789	$	35.23
Forfeited		(431,789)		35.23		(431,789)		35.23
Unvested EPS performance-based restricted stock units, March 31, 2012						-	$	-

Unvested EPS performance-based restricted stock units, September 30, 2011		-	$	-

KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Changes to the TSR performance-based portion of the STEP restricted stock units for the ~~three~~nine months ended ~~September 30, 2011~~March 31, 2012 were as follows:

						septmeber			septmeber
								Weighted
					Stock			Average Fair
	Stock Units		Weighted Average Fair Value		Units			Value
Unvested TSR performance-based restricted stock units, June 30, 2011		232,497	$	8.21		232,497		$	8.21
Forfeited		(232,497)		8.21		(232,497	)		8.21
Unvested TSR performance-based restricted stock units, March 31, 2012						-		$	-

Unvested TSR performance-based restricted stock units, September 30, 2011		-	$	-

During the ~~three~~nine months ended ~~September 30,~~March 31, 2012 and 2011, ~~and 2010,~~ compensation expense related to STEP restricted stock units was $0.2 million ~~in both periods.~~and $0.3 million, respectively.

9.10.

BENEFIT PLANS

We sponsor several defined benefit pension plans. Additionally, we provide varying levels of postretirement health care and life insurance benefits to some U.S. employees.

The table below summarizes the components of net periodic pension cost:

Three months ended September 30 (in thousands)    2011 2010
Service cost
   $         1,728    $ 1,912
Interest cost
   10,380    10,250
Expected return on plan assets
   (12,709 ) (12,046)
Amortization of transition obligation
   16    13
Amortization of prior service credit
   (46 ) (70)
Settlement loss
   256    263
Recognition of actuarial losses
   2,063    3,069

Net periodic pension cost
   $ 1,688    $         3,391

~~KENNAMETAL INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

~~The table below summarizes the components of the net periodic other postretirement benefit cost:~~

							september			september			september			september
Three months ended September 30 (in thousands)	2011		2010
						Three Months Ended						Nine Months Ended
						March 31,						March 31,
(in thousands)						2012			2011			2012			2011
Service cost						$	1,728		$	1,927		$	5,178		$	5,748
Interest cost							10,402			10,319			31,113			30,776
Expected return on plan assets							(12,752	)		(12,074	)		(38,168	)		(36,146	)
Amortization of transition obligation							16			13			48			39
Amortization of prior service credit							(46	)		(70	)		(139	)		(211	)
Settlement loss							268			277			787			810
Recognition of actuarial losses							2,066			3,076			6,190			9,208
Net periodic pension cost						$	1,682		$	3,468		$	5,009		$	10,224


The table below summarizes the components of the net periodic other postretirement benefit cost:					The table below summarizes the components of the net periodic other postretirement benefit cost:

						Three Months Ended						Nine Months Ended
						March 31,						March 31,
(in thousands)						2012			2011			2012			2011
Service cost	$	19	$	19		$	19		$	19		$	56		$	57
Interest cost		257		259			257			259			772			777
Amortization of prior service cost		(22)		-			(22	)		-			(67	)		-
Recognition of actuarial gains		(14)		(47)			(14	)		(47	)		(42	)		(142	)

Net periodic other postretirement benefit cost	$	240	$	231		$	240		$	231		$	719		$	692

~~10.~~11.

INVENTORIES

We used the last-in, first-out (LIFO) method of valuing inventories for approximately 49 percent and 50 percent of total inventories at ~~both September 30, 2011~~March 31, 2012 and June 30, ~~2011.~~2011, respectively. Because inventory valuations under the LIFO method are based on an annual determination of quantities and costs as of June 30 of each year, the interim LIFO valuations are based on our projections of expected year-end inventory levels and costs. Therefore, the interim financial results are subject to any final year-end LIFO inventory adjustments.

KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Inventories consisted of the following:

						0000000000			0000000000
(in thousands)	September 30, 2011		June 30, 2011		March 31, 2012			June 30, 2011
Finished goods	$	327,038	$	303,716	$	349,671		$	303,716
Work in process and powder blends		240,543		202,940		256,215			202,940
Raw materials and supplies		114,980		109,683

Raw materials						147,590			109,683
Inventories at current cost		682,561		616,339		753,476			616,339
Less: LIFO valuation		(123,036)		(96,366)		(122,606	)		(96,366	)

Total inventories	$	559,525	$	519,973	$	630,870		$	519,973

~~11.~~12.

LONG-TERM DEBT AND CAPITAL LEASES

~~Long-term debt~~On February 14, 2012, we issued $300 million of 3.875 percent Senior Unsecured Notes due in 2022. Interest will be paid semi-annually on February 15 and ~~capital lease obligations consist primarily~~August 15 of each year. We settled forward starting interest rate swap contracts related to the bond issuance as further discussed in Note 7. We intend to apply the net proceeds from this notes offering to the repayment of our outstanding 7.20 percent Senior Unsecured Notes at their June 15, 2012 maturity. Pending such use, proceeds will be utilized to repay outstanding indebtedness under our credit facility and for general corporate purposes.

The 7.20 percent 10 year Senior Unsecured Notes issued in June 2002 ~~having~~with an aggregate face amount of ~~$300.0~~$300 million ~~maturing in~~were reclassified to current maturities of long-term debt as of June ~~2012,~~30, 2011.

On October 21, 2011, we entered into an amendment to our 2010 Credit Agreement, which is used to augment cash from operations and as ~~well as borrowings under a~~an additional source of funds. The five-year, multi-currency, revolving credit facility ~~(2010~~(2011 Credit Agreement) ~~which~~ permits revolving credit loans of up to ~~$500.0~~$600.0 million for working capital, capital expenditures and general corporate purposes. The ~~2010~~2011 Credit Agreement allows for borrowings in U.S. dollars, euro, Canadian dollars, pound sterling and Japanese yen. Interest payable under the ~~2010~~2011 Credit Agreement is based upon the type of borrowing under the facility and may be (1) LIBOR plus an applicable margin, (2) the greater of the prime rate or the Federal Funds effective rate plus an applicable margin, or (3) fixed as negotiated by us.

The ~~2010~~2011 Credit Agreement requires us to comply with various restrictive and affirmative covenants, including two financial covenants: a maximum leverage ratio and a minimum consolidated interest coverage ratio (as those terms are defined in the agreement). We were in compliance with these financial covenants as of ~~September 30, 2011.~~March 31, 2012. We had $29.2 million of borrowings outstanding under the 2011 Credit Agreement as of March 31, 2012. We had no borrowings outstanding under the 2010 Credit Agreement as of ~~September 30, 2011 and~~ June 30, 2011.

Borrowings under the ~~2010~~2011 Credit Agreement are guaranteed by our significant domestic subsidiaries.

Fixed rate debt had a fair market value of ~~$311.5~~$604.6 million and $315.8 million at ~~September 30, 2011~~March 31, 2012 and June 30, 2011, respectively. The fair value is determined based on the quoted market price of this debt as of ~~September 30, 2011~~March 31, 2012 and June 30, 2011, respectively.

On October 21, 2011, we entered into an amendment to our 2010 Credit Agreement. The amendment provides additional liquidity by increasing the size of the facility from $500 million to $600 million and extending the term to October 2016. The financial covenants and other key provisions remain unchanged.

~~KENNAMETAL INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

~~12.~~13.

ENVIRONMENTAL MATTERS

The operation of our business has exposed us to certain liabilities and compliance costs related to environmental matters. We are involved in various environmental cleanup and remediation activities at certain of our locations.

Superfund Sites We are involved as a Potentially Responsible Party (PRP) at various sites designated by the U.S. Environmental Protection Agency ~~(US EPA)~~(USEPA) as Superfund sites. For certain of these sites, we have evaluated the claims and potential liabilities and have determined that neither are material, individually or in the aggregate. For certain other sites, proceedings are in the very early stages and have not yet progressed to a point where it is possible to estimate the ultimate cost of remediation, the timing and extent of remedial action that may be required by governmental authorities or the amount of our liability alone or in relation to that of any other PRPs.

Other Environmental Matters We establish and maintain reserves for other potential environmental costs, which amounted to ~~$4.8~~$4.3 million and $5.4 million as of ~~September 30, 2011~~March 31, 2012 and June 30, 2011, respectively. This accrual represents anticipated costs associated with the remediation of these issues. WeFor the nine months ended March 31, 2012 we recorded favorable foreign currency translation adjustments of ~~$0.5~~$0.4 million, an adjustment of $0.4 million and cash payments of ~~$0.1~~$0.3 million against the ~~reserve for the three months ended September 30, 2011.~~reserve.

KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The reserves we have established for environmental liabilities represent our best current estimate of the costs of addressing all identified environmental situations, based on our review of currently available evidence, and taking into consideration our prior experience in remediation and that of other companies, as well as public information released by the ~~US EPA,~~USEPA, other governmental agencies, and by the PRP groups in which we are participating. Although the reserves currently appear to be sufficient to cover these environmental liabilities, there are uncertainties associated with environmental liabilities, and we can give no assurance that our estimate of any environmental liability will not increase or decrease in the future. The reserved and unreserved exposures for all environmental concerns could change substantially due to factors such as the nature and extent of contamination, changes in remedial requirements, technological changes, discovery of new information, the financial strength of other PRPs, the identification of new PRPs and the involvement of and direction taken by the government on these matters.

We maintain a Corporate Environmental, Health and Safety (EHS) Department, as well as an EHS Steering Committee, to monitor compliance with environmental regulations and to oversee remediation activities. In addition, we have designated EHS coordinators who are responsible for each of our global manufacturing facilities. Our financial management team periodically meets with members of the Corporate EHS Department and the Corporate Legal Department to review and evaluate the status of environmental projects and contingencies. On a quarterly basis, we review financial provisions and reserves for environmental contingencies and adjust these reserves when appropriate.

~~13.~~14.

INCOME TAXES

The effective income tax rate for the three months ended ~~September 30,~~March 31, 2012 and 2011 ~~and 2010~~ was ~~23.0~~20.4 percent and ~~27.6~~19.1 percent, respectively. The current year rate ~~reflects~~was unfavorably impacted by non-deductible acquisition related costs. These drivers were partially offset by favorable adjustments to certain tax reserves and the impact of stronger earnings in our pan European business model.

The effective income tax rate for the nine months ended March 31, 2012 and 2011 was 20.3 percent and 22.0 percent, respectively. The current year rate was favorably impacted by a $5.6 million reduction of a valuation allowance in the Netherlands, as well as the favorable impact of stronger operating results under our pan-European business strategy.

~~14.~~15.

EARNINGS PER SHARE

Basic earnings per share are computed using the weighted average number of shares outstanding during the period, while diluted earnings per share are calculated to reflect the potential dilution that may occur related to the issuance of capital stock through grants of capital stock options, restricted stock awards and restricted stock units. The difference between basic and diluted earnings per share relates solely to the effect of capital stock options, restricted stock awards and restricted stock units.

For purposes of determining the number of diluted shares outstanding, weighted average shares outstanding for basic earnings per share calculations were increased due solely to the dilutive effect of unexercised capital stock options, unvested restricted stock awards and unvested restricted stock units by ~~1.1~~1.4 million shares for both the three months ended March 31, 2012 and 2011, respectively, and 1.3 million shares and ~~0.6~~1.0 million shares for the ~~three~~nine months ended ~~September 30,~~March 31, 2012 and 2011, ~~and 2010,~~ respectively. Unexercised capital stock options, restricted stock units and restricted stock awards of 0.2 million shares for the three months ended ~~September 30,~~March 31, 2012 and for the nine months ended March 31, 2012 and 2011 ~~and 2010~~ of ~~0.8~~0.4 million and ~~1.5~~0.7 million shares, respectively, were not included in the computation of diluted earnings per share because the inclusion would have been anti-dilutive. For the three months ended March 31, 2011 anti-dilutive shares were immaterial.

KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~15.~~16.

EQUITY

A summary of the changes in the carrying amounts of total equity, Kennametal shareowners’ equity and equity attributable to noncontrolling interests as of ~~September 30,~~March 31, 2012 and 2011 ~~and 2010~~ is as follows:

   Kennametal Shareowners’ Equity
(in thousands)    Capital
stock Additional
paid-in
capital    Retained
earnings Accumulated
other
comprehensive
income (loss)    Non-
controlling
interests Total equity
Balance as of June 30, 2011
   $   101,411    $ 470,758         $ 983,374    $         82,529         $    20,569    $   1,658,641
Net income
   -        -             71,986    -             1,587    73,573
Other comprehensive loss
   -        -             -        (76,477)       (1,701 ) (78,178)
Dividend reinvestment
   3    64         -        -             -        67
Capital stock issued under employee benefit and stock plans
   326    10,815         -        -             -        11,141
Purchase of capital stock
   (2,503 ) (64,147)       -        -             -        (66,650)
Cash dividends paid
   -        -             (9,849 ) -             -        (9,849)

Total equity, September 30, 2011
   $     99,237    $ 417,490         $       1,045,511    $           6,052         $    20,455    $   1,588,745


															Kennametal Shareowners’ Equity
(in thousands)															Capital stock			Additional paid-in capital			Retained earnings			Accumulated other comprehensive income			Non- controlling interests			Total equity
Balance as of June 30, 2011															$	101,411		$	470,758		$	983,374		$	82,529		$	20,569		$	1,658,641
Net income																-			-			221,182			-			3,099			224,281
Other comprehensive loss																-			-			-			(77,188	)		(2,249	)		(79,437	)
Dividend reinvestment																8			195			-			-			-			203
Capital stock issued under employee benefit and stock plans																1,124			34,963			-			-			-			36,087
Purchase of capital stock																(2,508	)		(64,278	)		-			-			-			(66,786	)
Cash dividends paid																-			-			(32,334	)		-			(167	)		(32,501	)
Noncontrolling interest acquisition																-			-			-			-			5,211			5,211
Total equity, March 31, 2012															$	100,035		$	441,638		$	1,172,222		$	5,341		$	26,463		$	1,745,699

	Kennametal Shareowners’ Equity														Kennametal Shareowners’ Equity
(in thousands)	Capital stock			Additional paid-in capital		Retained earnings			Accumulated other comprehensive (loss) income		Non- controlling interests		Total equity		Capital stock			Additional paid-in capital			Retained earnings			Accumulated other comprehensive (loss) income			Non- controlling interests			Total equity
Balance as of June 30, 2010	$	102,379			$ 492,454	$	793,448			$ (72,781)		$ 17,943		$ 1,333,443	$	102,379		$	492,454		$	793,448		$	(72,781	)	$	17,943		$	1,333,443
Net income		-			-		34,921			-		1,035		35,956		-			-			143,073			-			2,376			145,449
Other comprehensive income		-			-		-			68,870		1,509		70,379		-			-			-			108,896			2,030			110,926
Dividend reinvestment		4			69		-			-		-		73		9			225			-			-			-			234
Capital stock issued under employee benefit and stock plans		97			7,705		-			-		-		7,802		762			28,035			-			-			-			28,797
Purchase of capital stock		(4	)		(69)		-			-		-		(73)		(883	)		(25,574	)		-			-			-			(26,457	)
Cash dividends paid		-			-		(9,964	)		-		-		(9,964)		-			-			(29,873	)		-			(132	)		(30,005	)
Total equity, March 31, 2011															$	102,267		$	495,140		$	906,648		$	36,115		$	22,217		$	1,562,387

Total equity, September 30, 2010	$	102,476			$ 500,159	$	818,405			$ (3,911)		$ 20,487		$ 1,437,616

The amounts of comprehensive ~~(loss)~~ income attributable to Kennametal shareowners and noncontrolling interests are disclosed in Note ~~16.~~17.

KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~16.~~17.

COMPREHENSIVE ~~(LOSS)~~ INCOME

Comprehensive ~~(loss)~~ income is as follows:

Three months ended September 30 (in thousands)    2011    2010
Net income
   $               73,573       $ 35,956
Unrealized loss on derivatives designated and qualified as cash flow hedges, net of income tax benefit of $6.6 million and $2.2 million, respectively
   (10,745)       (3,593)
Reclassification of unrealized loss on expired derivatives designated and qualified as cash flow hedges, net of income tax benefit of $0.2 million and $0.0 million, respectively
   309       46
Unrecognized net pension and other postretirement benefit gain (loss), net of income tax expense (benefit) of $0.3 million and ($0.6) million, respectively
   848       (2,186)
Reclassification of net pension and other postretirement benefit loss, net of income tax benefit of $0.7 million and $1.0 million, respectively
   1,287       1,861
Foreign currency translation adjustments, net of income tax (benefit) expense of ($13.0) million and $51.9 million, respectively
   (69,877)       74,251

Total comprehensive (loss) income
   (4,605)       106,335
Comprehensive (loss) income attributable to noncontrolling interests
   (114)       2,544

Comprehensive (loss) income attributable to Kennametal Shareowners
   $ (4,491)       $           103,791


	Three Months Ended March 31,						Nine Months Ended March 31,
(in thousands)	2012			2011			2012			2011
Net income	$	76,237		$	65,203		$	224,281		$	145,449
Unrealized (loss) gain on derivatives designated and qualified as cash flow hedges, net of income tax (benefit) expense of ($0.0) million, $0.1 million, ($7.3) million and $1.4 million, respectively		(57	)		98			(11,591	)		2,285
Reclassification of unrealized (gain) loss on expired derivatives designated and qualified as cash flow hedges, net of income tax expense (benefit) of $0.1 million, ($0.1) million, ($0.0) million and ($0.2) million, respectively		(88	)		142			35			365
Unrecognized net pension and other postretirement benefit (loss) gain, net of income tax (benefit) expense of ($0.2) million, ($0.3) million, $0.2 million and ($0.8) million, respectively		(672	)		(1,294	)		393			(2,916	)
Reclassification of net pension and other postretirement benefit loss, net of income tax benefit of $0.7 million, $1.0 million, $2.2 million and $2.9 million, respectively		1,291			1,868			3,864			5,588
Foreign currency translation adjustments, net of income tax expense (benefit) of $17.2 million, $29.0 million, ($42.8) million and $ 11.3 million, respectively		28,603			38,646			(72,138	)		105,604
Total comprehensive income		105,314			104,663			144,844			256,375
Comprehensive income attributable to noncontrolling interests		1,323			1,258			850			4,406
Comprehensive income attributable to Kennametal Shareowners	$	103,991		$	103,405		$	143,994		$	251,969

~~17.~~18.

GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill represents the excess of cost over the fair value of the net assets of acquired companies. Goodwill and other intangible assets with indefinite lives are tested at least annually for impairment. We perform our annual impairment tests during the June quarter in connection with our annual planning process, unless there are impairment indicators that warrant a test prior to that. We have noted no impairment indicators warranting additional testing.

A summary of the carrying amount of goodwill attributable to each segment, as well as the changes in such, is as follows:


(in thousands)	Industrial		Infrastructure		Total		Industrial			Infrastructure			Total
Goodwill	$	411,945	$	250,225	$	662,170	$	411,945		$	250,225		$	662,170
Accumulated impairment losses		(150,842)		-		(150,842)		(150,842	)		-			(150,842	)

Balance as of June 30, 2011	$	261,103	$	250,225	$	511,328	$	261,103		$	250,225		$	511,328

Adjustments	$	76	$	-	$	76
Acquisition							$	-		$	235,883		$	235,883
Translation		(9,362)		(1,719)		(11,081)		(10,679	)		(5,184	)		(15,863	)

Change in goodwill		(9,286)		(1,719)		(11,005)		(10,679	)		230,699			220,020

Goodwill		402,659		248,506		651,165		401,266			480,924			882,190
Accumulated impairment losses		(150,842)		-		(150,842)		(150,842	)		-			(150,842	)
Balance as of March 31, 2012							$	250,424		$	480,924		$	731,348

Balance as of September 30, 2011	$	251,817	$	248,506	$	500,323

KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The components of our other intangible assets were as follows:


	Estimated		September 30, 2011				June 30, 2011				Estimated		March 31, 2012					June 30, 2011
(in thousands)	Useful Life (in years)		Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization		Useful Life (in years)		Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
Contract-based		4 to 15	$	6,318	$	(5,403)	$	6,349	$	(5,380)		4 to 15	$	21,089	$	(5,659	)	$	6,349	$	(5,380	)
Technology-based and other		4 to 15		38,537		(24,664)		39,743		(25,442)		4 to 15		38,405		(24,693	)		39,743		(25,442	)
Customer-related		10 to 20		111,541		(39,191)		113,977		(38,275)		10 to 20		182,527		(41,867	)		113,977		(38,275	)
Unpatented technology		30		19,393		(5,720)		19,540		(4,740)		15 to 30		47,529		(6,319	)		19,540		(4,740	)
Trademarks		5 to 20		10,759		(5,037)		10,902		(4,875)		5 to 20		14,236		(7,162	)		10,902		(4,875	)
Trademarks		Indefinite		38,833		-		40,480		-		Indefinite		36,838		-			40,480		-

Total			$	225,381	$	(80,015)	$	230,991	$	(78,712)			$	340,624	$	(85,700	)	$	230,991	$	(78,712	)

As of March 1, 2012 we acquired Stellite in our Infrastructure segment. As a result we increased goodwill by $235.9 million and other intangible assets by $102.7 million based on preliminary purchase price allocations. These allocations are subject to revision based upon the finalization of the valuation of net assets expected to be completed in the fourth quarter of 2012. We recorded customer-related intangible assets of $72.7 million with an estimated useful life of 20 years, technology-based intangible assets of $28.3 million with an estimated useful life of 15 - 17 years and trademarks of $1.7 million with an estimated useful life of 5 years. These intangible assets will be amortized using the straight-line method over their respective estimated useful lives.

During the ~~three~~nine months ended ~~September 30, 2011,~~March 31, 2012, we entered into a technology license agreement in our Infrastructure segment. This resulted in a $15.0 million increase of contract-based intangible assets. The technology license agreement will be amortized using the straight-line method over an estimated useful life of 10 years.

During the nine months ended March 31, 2012, we recorded amortization expense of ~~$3.5~~$11.0 million related to our other intangible assets and unfavorable foreign currency translation adjustments of ~~$3.5~~$4.1 million.

~~18.~~19.

SEGMENT DATA

Kennametal delivers productivity to customers seeking peak performance in demanding environments by providing innovative custom and standard wear-resistant solutions, enabled through our advanced materials sciences, application knowledge and commitment to a sustainable environment. Our product offering includes a wide array of standard and custom solution products in metalworking, such as metalcutting tools and tooling systems, and advanced materials, such as cemented tungsten carbide products, to address customer demands. These products are offered through a variety of channels via an enterprise approach to customers in both of our operating segments.

The Industrial segment serves customers that operate in industrial end markets such as aerospace, defense, transportation and general engineering. The customers in these end markets manufacture engines, airframes, automobiles, trucks, ships and various industrial goods. The technology needs and level of customization vary by customer and industry served. We deliver value to our Industrial segment customers through our application expertise and diverse product offering.

The Infrastructure segment, which includes the Stellite acquisition, serves customers that operate in the earthworks and energy end markets. These customers support primary industries such as oil and gas, power generation, underground mining, surface and hard rock mining, highway construction and road maintenance. Generally, our Infrastructure segment customers are served through a customer intimacy model that allows us to offer full system solutions by gaining an in-depth understanding of our customers’ engineering needs. Our product offering promotes value by bringing enhanced performance and productivity to our customers’ processes and systems.

Corporate expenses related to executive retirement plans, the Company’s Board of Directors and strategic initiatives, as well as certain other costs, are reported as Corporate.

KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Our external sales and operating income by segment are as follows:


Three months ended September 30 (in thousands)	2011			2010
							Three Months Ended March 31,						Nine Months Ended March 31,
(in thousands)							2012			2011			2012			2011
External sales:
Industrial	$	417,819		$	330,658		$	418,554		$	391,763		$	1,246,261		$	1,091,560
Infrastructure		241,058			198,500			277,857			223,067			750,769			618,196
Total external sales							$	696,411		$	614,830		$	1,997,030		$	1,709,756

Total external sales	$	658,877		$	529,158

Operating income:
Industrial	$	72,685		$	36,108		$	71,195		$	54,145		$	206,778		$	132,410
Infrastructure		32,554			26,503			34,060			35,639			99,927			83,708
Corporate		(3,629	)		(5,099	)		(1,963	)		(2,007	)		(7,754	)		(9,212	)

Total operating income	$	101,610		$	57,512		$	103,292		$	87,777		$	298,951		$	206,906


Interest expense	$	5,487		$	5,963		$	8,003		$	5,767		$	18,746		$	17,294
Other expense, net		574			1,911
Other (income) expense, net								(486	)		1,413			(1,169	)		3,071
Income before income taxes							$	95,775		$	80,597		$	281,374		$	186,541

Income from continuing operations before income taxes	$	95,549		$	49,638

ITEM 2. ~~ITEM 2.~~ MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

OVERVIEW

Kennametal Inc. is a leading global manufacturer and supplier of tooling, engineered components and advanced materials consumed in production processes. We believe that our reputation for manufacturing excellence, as well as our technological expertise and innovation in our principal products, has helped us to achieve a leading market presence in our primary markets. We believe we are one of the largest global providers of consumable metalcutting tools and tooling supplies. End users of our products include metalworking manufacturers and suppliers across a diverse array of industries, including the aerospace, defense, transportation, machine tool, light machinery and heavy machinery industries, as well as manufacturers, producers and suppliers in a number of other industries including coal mining, highway construction, quarrying, and oil and gas exploration and production industries. Our end users’ products include items ranging from airframes to coal mining, engines to oil wells and turbochargers to construction.

On March 1, 2012, we acquired all of the shares of Deloro Stellite Holdings 1 Limited (Stellite) pursuant to the terms of the Share Sale and Purchase Agreement dated January 13, 2012. The UK-based Stellite is a global manufacturer and provider of alloy-based critical wear solutions for extreme environments involving high temperature, corrosion and abrasion. Stellite employs approximately 1,300 people across seven primary operating facilities globally, including locations in the U.S., Canada, Germany, Italy, India and China. Stellite’s proprietary metal alloys, materials expertise, engineering design and fabrication capabilities complement Kennametal’s current business in the oil and gas, power generation, transportation and aerospace end markets. This acquisition is in alignment with our growth strategy and positions us to further achieve geographic and end market balance.

We acquired Stellite for a purchase price of approximately $383 million and funded the acquisition through existing credit facilities and operating cash flows, and remain committed to maintaining our investment grade ratings. The transaction is expected to be accretive to earnings in the fiscal year ending June 30, 2013.

We experienced strong growth for the ~~September~~March quarter across both business segments and all regions. Our sales of ~~$658.9~~$696.4 million for the quarter ended ~~September 30, 2011~~March 31, 2012 grew 2513 percent compared to sales for the ~~September~~March quarter one year ago. Sales growth was primarily due to organic growth which includes both volume and price and the impact of the Stellite acquisition.

We consumed higher cost raw materials in the quarter, while price levels remained unchanged. We had ~~record earnings per diluted share of $0.88 as a result of sales growth~~previously executed appropriate pricing actions and ~~record operating margins.~~have continued to maintain our cost discipline during the quarter. We continue to monitor changes in raw material costs to ensure appropriate pricing.

Operating income was ~~$101.6~~$103.3 million, an increase of ~~$44.1~~$15.5 million compared to operating income of ~~$57.5~~$87.8 million in the prior year quarter. The increase in operating income was driven by higher sales volume and price, ~~realization, continued focus on cost containment and incremental restructuring benefits,~~ partially offset by higher raw material ~~costs.~~costs and acquisition related charges.

We delivered a record March quarter earnings per diluted share of $0.93.

We had cash ~~outflow~~inflow from operating activities of ~~$7.2~~$164.2 million induring the ~~current year quarter due to higher inventory levels and higher payments related to incentive compensation.~~nine months ended March 31, 2012, driven by our operating performance. Capital expenditures were ~~$11.6~~$60.7 million during the ~~three~~nine months ended ~~September 30, 2011.~~

~~During the quarter we purchased 2 million shares of our capital stock under a previously announced share repurchase program for $66.7 million.~~March 31, 2012.

In addition, we invested further in technology and innovation to continue delivering a high level of new products to our customers. Research and development expenses included in operating expense totaled $9.1 million for the three months ended ~~September 30, 2011.~~March 31, 2012.

The following narrative provides further discussion and analysis of our results of operations, liquidity and capital resources, as well as other pertinent matters.

RESULTS OF CONTINUING OPERATIONS

SALES

Sales for the three months ended ~~September 30, 2011~~March 31, 2012 were ~~$658.9~~$696.4 million, an increase of ~~$129.7~~$81.6 million, or 2513 percent, from ~~$529.2~~$614.8 million in the prior year quarter. Sales increased due to organic growth of 178 percent ~~a 7~~and the impacts of acquisition of 4 percent ~~favorable~~and more business days of 3 percent, partially offset by an unfavorable impact from foreign ~~currency effects and a favorable impact from more business days.~~currency. The improvement in sales was driven by better performance in both business segments and across all regions. Organic sales growth drivers were aerospace and defense of 14 percent, earthworks market of 12 percent, energy markets of 12 percent, general engineering of 227 percent ~~demand in energy markets of 19 percent and growth of 14 percent in both~~while the transportation ~~and earthworks markets.~~

~~GROSS PROFIT~~

~~Gross profit for the three months ended September 30, 2011 was $251.1 million, an increase of $62.4 million from $188.7 million in~~end market sales remained at a relatively similar level as the prior year quarter. This increase was primarily due to increased organic sales of $87.0 million, favorable foreign currency effects of $15.3 million, partially offset by higher raw material costs. The gross profit margin for the three months ended September 30, 2011 was 38.1 percent, as compared to 35.7 percent generated in the prior year quarter.

~~OPERATING EXPENSE~~

Operating expense for the three months ended September 30, 2011 increased $21.0 million or 16.8 percent to $146.0 million compared to $125.0 million in the prior year quarter. The increase is primarily due to unfavorable impact of foreign currency results of $8.3 million, an increase in employment costs of $7.8 million, including higher sales compensation of $3.2 million due to better operating performance and an increase of $2.0 million related to strategic initiatives.year.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)

Sales for the nine months ended March 31, 2012 were $1,997.0 million, an increase of $287.2 million or 17 percent, from $1,709.8 million in the prior year quarter. Sales increased due to organic growth of 13 percent, the impact of more business days of 2 percent and a slightly favorable impact due to both acquisition and foreign currency effects. The improvement in sales was driven by better performance in both business segments and across all regions. Organic sales growth drivers were energy markets of 18 percent, earthworks market of 14 percent, general engineering of 13 percent, aerospace and defense of 13 percent and transportation of 7 percent.

GROSS PROFIT

Gross profit for the three months ended March 31, 2012 was $246.4 million, an increase of $16.4 million from $230.0 million in the prior year quarter. This increase was primarily due to an organic sales increase of $52 million, partially offset by higher raw material costs. The gross profit margin for the three months ended March 31, 2012 was 35.4 percent, as compared to 37.4 percent generated in the prior year quarter.

Gross profit for the nine months ended March 31, 2012 was $729.4 million, an increase of $110.7 million from $618.7 million in the prior year quarter. This increase was primarily due to an organic sales increase of $226.2 million, partially offset by higher raw material costs. The gross profit margin for the nine months ended March 31, 2012 was 36.5 percent, as compared to 36.2 percent generated in the prior year quarter.

OPERATING EXPENSE

Operating expense for the three months ended March 31, 2012 increased $0.6 million or less than 1 percent to $138.9 million compared to $138.3 million in the prior year quarter. The increase is primarily due to acquisition related costs of $5.7 million and Stellite operating expenditures of $2.5 million, partially offset by lower professional fees of $3.4 million, a decrease in restructuring and related charges of $2.5 million and favorable currency effects of $1.8 million.

Operating expense for the nine months ended March 31, 2012 increased $24.1 million or 6.1 percent to $419.5 million compared to $395.4 million in the prior year quarter. The increase is primarily due to an increase in employment costs of $13.5 million, including higher sales compensation of $8.1 million due to better operating performance, acquisition related costs of $5.7 million, Stellite operating expenditures of $2.5 million and an unfavorable impact of foreign currency effects of $6.9 million, partially offset by a decrease in restructuring and related charges of $3.2 million.

RESTRUCTURING CHARGES

During fiscal year 2011, we completed our restructuring plans to reduce costs and improve operating efficiencies. These actions related to the rationalization of certain manufacturing and service facilities as well as other employment cost reduction programs. As the restructuring programs were completed in fiscal 2011, there were no restructuring and related charges for the three and nine months ended ~~September 30, 2011.~~March 31, 2012. The Company’s restructuring programs are ~~expected to deliver~~delivering annual ongoing pre-tax savings of approximately $170 million now that all programs are fully implemented.

Restructuring and related charges recorded during the three months ended ~~September 30, 2010~~March 31, 2011 amounted to ~~$4.3~~$5.5 million, including ~~$3.3~~$1.6 million of restructuring ~~charges.~~charges, of which $0.6 million were related to inventory disposals and recorded in cost of goods sold. Restructuring related charges of ~~$1.0~~$1.5 million and $2.4 million were recorded in cost of goods sold and operating expense, respectively, during the three months ended ~~September 30, 2010.~~March 31, 2011.

Restructuring and related charges recorded during the nine months ended March 31, 2011 amounted to $14.9 million, including $8.7 million of restructuring charges, of which $1.0 million were related to inventory disposals and recorded in cost of goods sold. Restructuring related charges of $3.0 million and $3.2 million were recorded in cost of goods sold and operating expense, respectively, during the nine months ended March 31, 2011.

INTEREST EXPENSE

Interest expense ~~was $5.5 million and $6.0 million~~ for the three months ended ~~September 30, 2011 and 2010, respectively.~~March 31, 2012 of $8.0 million increased $2.2 million or 38.8 percent, from $5.8 million in the prior year quarter due to increased borrowings. Interest expense for the nine months ended March 31, 2012 of $18.7 million increased $1.4 million or 8.4 percent, from $17.3 million in the prior year quarter due to increased borrowings

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)

OTHER (INCOME) EXPENSE, NET

Other ~~expense,~~income, net for the three months ended ~~September 30, 2011~~March 31, 2012 was ~~$0.6~~$0.5 million compared to ~~$1.9~~other expense, net of $1.4 million for the prior year quarter. The ~~decrease~~increase was primarily driven by favorable foreign currency transaction results of ~~$0.8~~$1.5 million.

Other income, net for the nine months ended March 31, 2012 was $1.2 million compared to other expense, net of $3.1 million for the prior year quarter. The increase was primarily driven by favorable foreign currency transaction results of $3.9 million.

INCOME TAXES

The effective income tax rate for the nine months ended March 31, 2012 and 2011 was 20.3 percent and 22.0 percent, respectively. The current year rate was favorably impacted by a $5.6 million reduction of a valuation allowance in the Netherlands as well as the favorable impact of stronger operating results under our pan-European business strategy.

~~Deferred income taxes are recognized based on~~During the future income tax effects (using enacted tax laws and rates) of differences in the carrying amounts of assets and liabilities for financial reporting and tax purposes. A valuation allowance is recognized if it is “more likely than not”quarter, we implemented a strategy that ~~some or all of a deferred tax asset will not be realized. During 2012, we expect to generate~~would provide incremental taxable income in ~~jurisdictions where~~the Netherlands. Based on this assessment, we ~~have a valuation allowance recorded against our~~believe that it is more likely than not that we will be able to realize an additional portion of the net deferred tax ~~assets. The corresponding impact of~~assets in this jurisdiction. With respect to the ~~realization on the effective tax rate is expected to be immaterial. We believe the sustainability of future income in these~~other jurisdictions, ~~remains uncertain. Accordingly,~~ we ~~have not adjusted the valuation allowance against the remaining net deferred tax assets. We~~ will continue to monitor our ability to realize the net deferred tax assets in these jurisdictions, and if appropriate, will adjust the valuation allowance. Such an adjustment ~~would likely~~may result in a material reduction to tax expense in the period the adjustment occurs.

BUSINESS SEGMENT REVIEW

We operate two reportable segments consisting of Industrial and Infrastructure. Expenses that are not allocated are reported in Corporate. Segment determination is based upon internal organizational structure, the manner in which we organize segments for making operating decisions and assessing performance, the availability of separate financial results and materiality considerations.

INDUSTRIAL

		0000000000		0000000000
Three months ended September 30 (in thousands)	2011		2010
					Three Months Ended March 31,				Nine Months Ended March 31,
(in thousands)					2012		2011		2012		2011
External sales	$	417,819	$	330,658	$	418,554	$	391,763	$	1,246,261	$	1,091,560
Operating income		72,685		36,108		71,195		54,145		206,778		132,410

For the three months ended ~~September 30, 2011,~~March 31, 2012, Industrial external sales increased by 266.8 percent driven by organic sales growth of 175 percent ~~favorable~~and the impact of more business days of 4 percent, partially offset by unfavorable foreign currency ~~impact of 8 percent and a favorable impact from more business days.~~effects. On an organic basis, sales ~~increased in all served market sectors~~growth was led by ~~strong~~aerospace and defense growth inof 14 percent and general engineering growth of 7 percent, while transportation end market sales remained at a relatively similar level as the prior year. The aerospace and ~~transportation sales~~defense end markets’ growth is due to the significant increase in commercial aircraft production. Growth in the general engineering end markets is attributable to new orders for industrial machinery as manufacturers have increased their capital spending, as well as increased metalworking machinery production driven by a modest reacceleration of ~~22 percent and 14 percent, respectively.~~the global economy. On a regional basis, organic sales increased by approximately ~~24 percent in Europe, 19~~12 percent in the Americas, ~~and 7~~11 percent in ~~Asia.~~Europe and were relatively flat in Asia due to strong comparisons to the prior year. The increase in the Americas and Europe was driven by growth in the general engineering end markets. For comparison purposes, organic sales increased by approximately 32 percent in Asia, 29 percent in Europe and 23 percent in the Americas during the three months ended March 31, 2011.

For the three months ended ~~September 30, 2011,~~March 31, 2012, Industrial operating income increased ~~$36.6~~$17.1 million. The primary drivers of the increase in operating income were higher organic sales of ~~$55.9~~$21.3 million, ~~and price realization,~~ partially offset by an increase in raw material costs.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)

~~INFRASTRUCTURE~~

Three months ended September 30 (in thousands)    2011    2010
External sales
   $         241,058       $         198,500
Operating income
   32,554       26,503

For the ~~three~~nine months ended ~~September 30, 2011, Infrastructure~~March 31, 2012, Industrial external sales increased by 2114.2 percent, driven by organic sales growth of 1712 percent, ~~and~~ favorable foreign currency effects and the impact of 4more business days. On an organic basis, sales increased in all served market sectors led by strong growth in general engineering of 13 percent, aerospace and defense of 13 percent and transportation of 7 percent. Growth in the general engineering end markets is attributable to new orders for industrial machinery as manufacturers have increased their capital spending as well as increased metalworking machinery production driven by a reaccelerating economy. The aerospace and defense end markets’ growth is due to a significant increase in commercial aircraft production and the growth in the transportation end markets was due to an overall increase in global vehicles sales and production. On a regional basis, organic sales increased by approximately 15 percent in Europe, 15 percent in the Americas and 2 percent in Asia. The increase in the Americas and Europe was driven by growth in the general engineering end markets, and the growth in Asia was driven by the transportation end markets.

For the nine months ended March 31, 2012, Industrial operating income increased $74.4 million. The primary drivers of the increase in operating income were organic sales growth of $126.3 million, partially offset by higher raw material costs.

INFRASTRUCTURE


	Three Months Ended March 31,				Nine Months Ended March 31,
(in thousands)	2012		2011		2012		2011
External sales	$	277,857	$	223,067	$	750,769	$	618,196
Operating income		34,060		35,639		99,927		83,708

For the three months ended March 31, 2012, Infrastructure external sales increased by 24.6 percent, driven by organic sales growth of 13 percent, 10 percent growth from acquisition and business days also favorably impacted sales by 3 percent, partially offset by unfavorable foreign currency effects. The organic increase was driven by higher sales in the energy and earthworks markets of 1912 percent each. Energy related product sales increased due to increased drilling activity. Sales in the earthworks end markets increased due to an increase in construction machinery production. On a regional basis, organic sales increased by approximately 24 percent in Asia, 16 percent in Europe and 13 percent in the Americas. The increase in Asia and the Americas was driven by the performance in the earthworks markets, while the European increase was more evenly split between both the earthworks and energy markets. For comparison purposes, organic sales increased by approximately 20 percent in the Americas, 15 percent in Asia and 11 percent in Europe during the three months ended March 31, 2011.

For the three months ended March 31, 2012, Infrastructure operating income decreased $1.6 million. Operating income included $5.7 million of acquisition related costs. Operating income benefited from higher organic sales of $28.8 million, partially offset in part by an increase in raw material costs and $5.7 million of acquisition related costs.

For the nine months ended March 31, 2012, Infrastructure external sales increased by 21.4 percent, driven by organic sales growth of 16 percent, 4 percent growth from acquisition and favorable foreign currency effects. The organic increase was driven by higher sales in the energy and earthworks markets of 18 percent and 14 percent, respectively. Energy related product sales increased due to higher U.S. and international rig counts, as well as increased shale production and increased natural gas inventories. Sales in the earthworks end markets increased due to mining capacity expansion and the increase in construction machinery production. On a regional basis, organic sales increased by approximately 25 percent in Asia, 1615 percent in the Americas and 1413 percent in Europe. The increase in Asia and the Americas was driven by the performance in the earthworks markets, while the European increase was more evenly split between both the earthworks and energy markets.

For the ~~three~~nine months ended ~~September 30, 2011,~~March 31, 2012, Infrastructure operating income increased ~~$6.1~~$16.2 million. Operating income grew primarily due to higher organic sales of ~~$33.7~~$99.8 million, ~~and price realization, despite significantly higher~~partially offset by increase in raw material costs.

CORPORATE


Three months ended September 30 (in thousands)	2011			2010
							Three Months Ended March 31,				Nine Months Ended March 31,
(in thousands)							2012		2011		2012		2011
Corporate unallocated expense		$ (3,629	)		$ (5,099	)	$	(1,963)	$	(2,007)	$	(7,754)	$	(9,212)

For the three months ended ~~September 30, 2011,~~March 31, 2012, unallocated expense remained relatively flat.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)

For the nine months ended March 31, 2012, unallocated expense decreased $1.5 million to ~~$3.6~~$7.8 million. The decrease was primarily due to lower strategic project spending of ~~$2.1 million.~~$4.7 million, offset by an increase in professional fees of $1.0 million and the timing of certain other charges.

LIQUIDITY AND CAPITAL RESOURCES

Cash flow from operations is our primary source of funding for capital expenditures and internal growth.

ToOn October 21, 2011, we entered into an amendment to our five year, multi-currency, revolving credit facility (2010 Credit Agreement), which is used to augment cash flow from operations and as an additional source of ~~funds, we maintain a syndicated,~~funds. The five-year, multi-currency, revolving credit facility ~~(2010~~(2011 Credit Agreement) ~~that originally extended~~extends to ~~June 2015.~~October 2016. The ~~2010~~2011 Credit Agreement permits revolving credit loans of up to ~~$500.0~~$600.0 million for working capital, capital expenditures and general corporate purposes. The ~~2010~~2011 Credit Agreement allows for borrowings in U.S. dollars, euro, Canadian dollars, pound sterling and Japanese yen. Interest payable under the ~~2010~~2011 Credit Agreement is based upon the type of borrowing under the facility and may be (1) LIBOR plus an applicable margin, (2) the greater of the prime rate or the Federal Funds effective rate plus an applicable margin, or (3) fixed as negotiated by us.

The ~~2010~~2011 Credit Agreement requires us to comply with various restrictive and affirmative covenants, including two financial covenants: a maximum leverage ratio and a minimum consolidated interest coverage ratio (as those terms are defined in the agreement). We were in compliance with these financial covenants as of ~~September 30, 2011.~~March 31, 2012. We had no$29.2 million of borrowings outstanding under the 2011 Credit Agreement as of March 31, 2012. For the nine months ended March 31, 2012 average borrowings outstanding under the 2010 and 2011 Credit ~~Agreement as of September 30, 2011.~~Agreements were approximately $117.1 million.

Borrowings under the ~~2010~~2011 Credit Agreement are guaranteed by our significant domestic subsidiaries.

~~Our~~On February 14, 2012, we issued $300 million of 3.875 percent Senior Unsecured Notes due in 2022. Interest will be paid semi-annually on February 15 and August 15 of each year. We intend to apply the net proceeds from this notes offering to the repayment of our outstanding 7.20 percent Senior Unsecured Notes at their June 15, 2012 maturity. Pending such use, proceeds will be utilized to repay outstanding indebtedness under our credit facility and for general corporate purposes.

Our 7.20 percent 10 year Senior Unsecured Notes issued in June 2002 with an aggregate face amount of $300 million were reclassified to current maturities of long-term debt as of June 30, 2011. ~~The repayment~~

We consider the unremitted earnings of ~~this debt is expected~~our non-U.S. subsidiaries that have not previously been taxed in the U.S., to be ~~financed in due course through a new corporate bond issuance.~~

~~On October 21, 2011, we entered into an amendment~~permanently reinvested. As of March 31, 2012, cash and cash equivalents of $125 million and short term intercompany advances made by our foreign subsidiaries to our ~~2010 Credit Agreement. The amendment provides additional~~United States parent of $216 million would not be available for use in the United States on a long term basis, without incurring U.S. federal and state income tax consequences. These short term intercompany advances are in the form of intercompany loans made over quarter end to repay borrowings under our revolving credit agreement and have duration of not more than fourteen days. We have not, nor do we anticipate the need to, repatriate funds to the U.S. to satisfy domestic liquidity ~~by increasing~~needs arising in the ~~size~~ordinary course of the facility from $500 million to $600 million and extending the term to October 2016. The amendment also provides for improved pricing. The financial covenants and other key provisions remain unchanged.business, including liquidity needs associated with our domestic debt service requirements.

At ~~September 30, 2011,~~March 31, 2012, cash and cash equivalents were ~~$102.5~~$125.5 million, total debt, including notes payable and capital lease obligations, was ~~$312.7~~$640.9 million and total Kennametal shareowners’ equity was ~~$1,568.3~~$1,719.2 million. Our current senior credit ratings are at investment grade levels. We believe that our current financial position, liquidity and credit ratings provide access to the capital markets. We continue to closely monitor our liquidity position and the condition of the capital markets, as well as the counterparty risk of our credit providers.

On March 1, 2012 we acquired Stellite from Duke Street Capital for $382.6 million. We funded the acquisition through existing facilities and operating cash flow, and remain committed to maintaining our investment grade ratings.

There have been no other material changes in our contractual obligations and commitments since June 30, 2011.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)

Cash Flow ~~(Used for)~~ Provided by Operating Activities

During the ~~three~~nine months ended ~~September 30, 2011, cash flow used for operating activities was $7.2 million, compared to~~March 31, 2012, cash flow provided by operating activities ~~of $26.4~~was $164.2 million, compared to $125.0 million for the prior year period. Cash flow ~~used for~~provided by operating activities for the current year period consisted of net income and non-cash items amounting to an inflow of ~~$106.9~~$308.1 million, partially offset by changes in certain assets and liabilities netting to $114.1 million. Contributing to the changes in certain assets and liabilities was a decrease in accounts payable and accrued liabilities of $64.7 million driven by payment of $27.0 million of incentive compensation and an increase in inventory of $62.7 million driven by higher inventory levels to meet higher demand, partially offset by decrease in accounts receivable of $12.3 million.

During the three months ended September 30, 2010, cash flow provided by operating activities consisted of net income and non-cash items amounting to $68.7 million, partially offset by changes in certain assets and liabilities netting to $42.3$143.9 million. Contributing to the changes in certain assets and liabilities was an increase in inventory of ~~$34.0~~$85.3 million driven by ~~an increase in production~~higher inventory levels to meet ~~expected increases in~~higher demand, a decrease in accounts payable and accrued liabilities of ~~$9.6~~$57.0 million primarily driven by accounts payable payments of $35.1 million and payment of $27.0 million of incentive compensation, a decrease in other of ~~$5.8~~$2.4 million and an increase in accounts receivable of $1.5 million, offset by an increase in accrued income taxes of $2.3 million.

During the nine months ended March 31, 2011, cash flow provided by operating activities consisted of net income and non-cash items amounting to an inflow of $234.4 million, partially offset by changes in certain assets and liabilities netting to $109.4 million. Contributing to the changes in certain assets and liabilities was an increase in inventory of $74.7 million driven by an increase in production to meet higher demand and an increase in accounts receivable of $71.7 million due to higher sales volumes, partially offset by an increase in ~~domestic~~accounts payable and ~~foreign income taxes~~accrued liabilities of ~~$6.3~~$37.3 million.

Cash Flow Used for Investing Activities

Cash flow used for investing activities was ~~$11.0~~$448.4 million for the ~~three~~nine months ended ~~September 30, 2011,~~March 31, 2012, compared to ~~$8.7~~$22.9 million in the prior year period. During the current year period, cash flow used for investing activities included the acquisition of Stellite for $382.6 million and capital expenditures, net of ~~$11.1~~$56.3 million, which consisted primarily of equipment ~~upgrades.~~upgrades and $10.0 million for the purchase of a technology license intangible in our Infrastructure segment.

~~For~~During the ~~three~~nine months ended ~~September 30, 2010,~~March 31, 2011, cash flow used for investing activities included capital expenditures, net of ~~$10.0~~$25.3 million, which consisted primarily of ~~software~~an Enterprise Resource Planning system and equipment upgrades.

Cash Flow ~~Used for~~Provided by (Used for) Financing Activities

Cash flow provided by financing activities was $216.5 million for the nine months ended March 31, 2012 compared to cash flow used for financing activities ~~was $72.6 million for the three months ended September 30, 2011 compared to $26.3~~of $57.7 million in the prior year period. During the current year period, cash flow ~~used for~~provided by financing activities included ~~$66.7~~$323.8 million ~~used for~~net increase in borrowings, which included the ~~purchase~~issuance of ~~capital stock, $9.8~~$300 million of ~~cash dividends paid to shareowners~~3.875 percent Senior Unsecured Notes due in 2022 and ~~$3.8~~$29.2 million of ~~other, partially offset by $5.7~~borrowings outstanding on our revolving credit facility, and $23.1 million of dividend reinvestment and the effect of employee benefit and stock ~~plans~~plans. These cash flows were partially offset by $66.8 million used for the purchase of capital stock, $32.3 million of cash dividends paid to shareowners and ~~$2.1~~$22.4 million ~~net increase in borrowings.~~payment related to the settlement of forward starting interest rate swap contracts.

~~For~~During the ~~three~~nine months ended ~~September 30, 2010,~~March 31, 2011, cash flow used for financing activities included ~~a $17.2 million net decrease in borrowings and $10.0~~$29.9 million of cash dividends paid to ~~shareowners.~~shareowners, $26.5 million used for the purchase of capital stock and $15.4 million net decrease in borrowings, partially offset by $15.1 million of dividend reinvestment and the effect of employee benefit and stock plans.

FINANCIAL CONDITION

Working capital was ~~$429.7~~$493.2 million at ~~September 30, 2011, a decrease~~March 31, 2012, an increase of ~~$16.4~~$47.1 million from $446.1 million at June 30, 2011. The ~~decrease~~increase in working capital was driven primarily by an increase in inventories of $110.9 million due to higher business activity, an increase in accounts receivable of $34.0 million, a decrease in other current liabilities of $12.9 million driven primarily by the payout of incentive compensation and a decrease in accrued expenses of $8.4 million due to the timing of payments, partially offset by a decrease in cash and cash equivalents of ~~$102.0~~$79.0 million ~~due to~~driven primarily by the acquisition of Stellite and purchase of capital stock, ~~and dividend payment and a decrease in accounts receivable of $27.1 million,~~ partially offset by net increase in borrowings due to the issuance of $300 million of 3.875 percent Senior Unsecured Notes, an increase in ~~inventories~~current maturities of ~~$39.6~~long-term debt and capital leases of $26.4 million, ~~driven by higher inventory levels to meet higher demand, a decrease in accounts payable of $35.9 million~~primarily due to the ~~timing~~$29.2 million outstanding on the revolving credit facility, an increase in accrued income taxes of ~~payments,~~$9.6 million and a decrease in other current ~~liabilities~~assets of ~~$28.3 million and a decrease in accrued expenses of $15.4 million due to the payout of incentive compensation.~~$3.1 million. Foreign currency effects and the impact of the Stellite acquisition accounted for ~~$40.3~~$39.6 million and $45.8 million of the working capital ~~change.~~change, respectively.

Property, plant and equipment, net ~~decreased $28.7~~increased $42.6 million from $697.1 million at June 30, 2011 to ~~$668.4~~$739.7 million at ~~September 30, 2011,~~March 31, 2012, primarily due to the Stellite acquisition of $72.8 million and capital additions of $60.7 million, partially offset by depreciation expense of ~~$20.7~~$63.2 million, ~~and~~ unfavorable foreign currency impact of ~~$18.4 million, partially offset by capital additions of $11.6 million.~~

At September 30, 2011, other assets were $752.5 million, a decrease of $17.3 million from $769.8 million at June 30, 2011. The driver for the decrease was a decrease in goodwill and other intangible assets of $11.0$20.7 million and ~~$6.9 million, respectively. The change in goodwill was primarily due to foreign currency translation effects. The decrease in other intangible assets was due to amortization expense~~capital disposals of ~~$3.5 million and unfavorable foreign currency translation adjustments of $3.5~~$4.4 million.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)

At March 31, 2012, other assets were $1,111.5 million, an increase of $341.7 million from $769.8 million at June 30, 2011. The driver for the increase was an increase in goodwill of $220.0 million, an increase in other intangible assets of $102.6 million, an increase in other assets of $15.3 million and an increase in deferred income taxes of $3.8 million. The change in goodwill was primarily due to an increase of $235.9 million related to the acquisition of Stellite and unfavorable foreign currency effects of $15.9 million. The change in other intangible assets was due to an increase of $102.7 million related to the to the intangibles acquired as part of the of Stellite acquisition, technology license intangible asset acquisition in our Infrastructure segment for $15.0 million, offset by amortization expense of $11.0 million and unfavorable foreign currency translation adjustments of $4.1 million. The increase in other assets was primarily due to increase in pension assets due to higher return on plan assets, higher deferred financing fees related to the issuance of $300 million of 3.875 percent Senior Unsecured Notes due in 2022 and higher prepaid charges.

Kennametal shareowners’ equity was ~~$1,568.3~~$1,719.2 million at ~~September 30, 2011, a decrease~~March 31, 2012, an increase of ~~$69.8~~$81.1 million from $1,638.1 million at June 30, 2011. The ~~decrease~~increase was primarily due to ~~foreign currency translation adjustments of $69.9 million, purchase of capital stock of $66.7 million and cash dividends paid to shareowners of $9.8 million, partially offset by~~ net income attributable to Kennametal of ~~$72.0~~$221.2 million and capital stock issued under employee benefit and stock plans of ~~$11.1~~$36.1 million, partially offset by foreign currency translation adjustments of $72.1 million, purchase of capital stock of $66.8 million and cash dividends paid to shareowners of $32.3 million.

ENVIRONMENTAL MATTERS

Superfund Sites We are involved as a PRP at various sites designated by the ~~US EPA~~USEPA as Superfund sites. For certain of these sites, we have evaluated the claims and potential liabilities and have determined that neither are material, individually or in the aggregate. For certain other sites, proceedings are in the very early stages and have not yet progressed to a point where it is possible to estimate the ultimate cost of remediation, the timing and extent of remedial action that may be required by governmental authorities or the amount of our liability alone or in relation to that of any other PRPs.

Other Environmental MattersWe establish and maintain reserves for other potential environmental costs, which amounted to ~~$4.8~~$4.3 million and $5.4 million as of ~~September 30, 2011~~March 31, 2012 and June 30, 2011, respectively. This accrual represents anticipated costs associated with the remediation of these issues. WeFor the nine months ended March 31, 2012 we recorded favorable foreign currency translation adjustments of ~~$0.5~~$0.4 million, an adjustment of $0.4 million and cash payments of ~~$0.1~~$0.3 million against the ~~reserve for the three months ended September 30, 2011.~~reserve.

We maintain a Corporate EHS Department, as well as an EHS Steering Committee, to monitor compliance with environmental regulations and to oversee remediation activities. In addition, we have designated EHS coordinators who are responsible for each of our global manufacturing facilities. Our financial management team periodically meets with members of the Corporate EHS Department and the Corporate Legal Department to review and evaluate the status of environmental projects and contingencies. On a quarterly basis, we review financial provisions and reserves for environmental contingencies and adjust these reserves when appropriate.

DISCUSSION OF CRITICAL ACCOUNTING POLICIES

There have been no changes to our critical accounting policies since June 30, 2011.

NEW ACCOUNTING STANDARDS

See Note 3 to our condensed consolidated financial statements set forth in Part I Item 1 of this Form 10-Q for a description of new accounting standards.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes to our market risk exposure since June 30, 2011.

ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this quarterly report on Form 10-Q, the Company’s management evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). The Company’s disclosure controls were designed to provide a reasonable assurance that information required to be disclosed in reports that we file or submit under the Securities Exchange Act of 1934, as amended (Exchange Act), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. However, the controls have been designed to provide reasonable assurance of achieving the controls’ stated goals. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of ~~September 30, 2011.~~March 31, 2012.

There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

The SEC’s general guidance permits the exclusion of an assessment of the effectiveness of a registrant’s disclosure controls and procedures as they relate to its internal controls over financial reporting for an acquired business during the first year following such acquisition, if among other circumstances and factors there is not adequate time between the acquisition date and the date of assessment. As previously noted in this Form 10-Q, the Company completed the acquisition of Stellite on March 1, 2012. Stellite represents approximately 16 percent of the Company’s total assets as of March 31, 2012. Management’s assessment and conclusion on the effectiveness of the Company’s disclosure controls and procedures as of March 31, 2012 excluded an assessment of the internal control over financial reporting of Stellite.

PART II. OTHER INFORMATION

~~ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS~~

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

ISSUER PURCHASES OF EQUITY SECURITIES

Period Total Number of
Shares
Purchased⁽¹⁾ Average Price
Paid per Share   Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans or
Programs⁽²⁾
July 1 through July 31, 2011
12,180            $ 43.78    -         6,505,100
August 1 through August 31, 2011
1,880,886    33.37    1,830,296    4,674,804
September 1 through September 30, 2011
178,170    34.07    169,704    4,505,100
Total
2,071,236            $ 33.49    2,000,000


Period	Total Number of Shares Purchased⁽¹⁾		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs⁽²⁾
January 1 through January 31, 2012		18,798	$	39.14		-		4,505,100
February 1 through February 29, 2012		1,410		47.36		-		4,505,100
March 1 through March 31, 2012		607		46.86		-		4,505,100
Total		20,815	$	39.93		-

⁽¹⁾

During the current period, ~~employees delivered 63,273 shares of restricted stock to Kennametal, upon vesting, to satisfy tax withholding requirements and 7,963~~1,410 shares were purchased on the open market on behalf of Kennametal to fund the Company’s ~~401(k) basic~~dividend reinvestment program. Also, during the current period employees delivered 11,995 shares of restricted stock to Kennametal, upon vesting, to satisfy tax withholding requirements and ~~matching contribution.~~7,410 shares of Kennametal stock as payment for the exercise price of stock options.

⁽²⁾	On October 26, 2010, the Company publicly announced a repurchase program for up to 8 million shares of its outstanding common stock.

ITEM 6. EXHIBITS



~~(10)~~(2)	~~Material Contracts~~Plan of acquisition, reorganization, arrangement,liquidation or succession
~~(10.1)~~ (2.1)	~~Amendment No.~~Tax Deed Covenant relating to Deloro Stellite Holdings 1 Limited dated as of October 21, 2011, to the Third Amended and Restated Credit Agreement by and among Kennametal Inc., Kennametal Europe GmbH, Bank of America, N.A., Bank of America N.A., London Branch, PNC Bank, National Association, JPMorgan Chase Bank, N.A., The Bank of Tokyo-Mitsubishi UFJ, Ltd., Citizens Bank of Pennsylvania, Mizuho Corporate Bank, Ltd., HSBC Bank USA, N.A., U.S. Bank National Association, Comerica Bank, Commerzbank AG, New York and Grand Cayman Branches, The Huntington National Bank, First Commonwealth Bank and Intesa Sanpaolo S.P.A.	~~Exhibit 10.1 of the Form 8-K filed on October 27, 2011 is incorporated herein by reference~~

~~(10.2)~~	~~Form of Kennametal Inc. Performance Unit Award (granted under the Kennametal Inc. Stock and Incentive Plan of 2010) (effective August 2011)~~March 1, 2012	Filed herewith.

(4)	Instruments defining the rights of security holders, including indentures
(4.1)	Indenture, dated as of February 14, 2012, by and between Kennametal Inc., as Issuer, and U.S. Bank National Association, as Trustee	Exhibit 4.1 of the Form 8-K filed February 14, 2012 is incorporated herein by reference.
(4.2)	First Supplemental Indenture, dated as of February 14, 2012, by and between Kennametal Inc., as Issuer, and U.S. Bank National Association, as Trustee	Exhibit 4.2 of the Form 8-K filed February 14, 2012 is incorporated herein by reference.

(31)	Rule 13a-14(a)/15d-14(a) Certifications
(31.1)	Certification executed by Carlos M. Cardoso, Chairman, President and Chief Executive Officer of Kennametal Inc.	Filed herewith.

(31.2)	Certification executed by Frank P. Simpkins, Vice President and Chief Financial Officer of Kennametal Inc.	Filed herewith.

(32)	Section 1350 Certifications
(32.1)	Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by Carlos M. Cardoso, Chairman, President and Chief Executive Officer of Kennametal Inc., and Frank P. Simpkins, Vice President and Chief Financial Officer of Kennametal Inc.	Filed herewith.

(101)	XBRL
(101.INS)**	XBRL Instance Document	Filed herewith.
(101.SCH)**	XBRL Taxonomy Extension Schema Document	Filed herewith.
(101.CAL) (101.DEF)	XBRL Taxonomy Extension Calculation Linkbase Document	~~Filed herewith.~~
(101.DEF)**	XBRL Taxonomy Definition Linkbase	Filed herewith. Filed herewith.
(101.LAB)**	XBRL Taxonomy Extension Label Linkbase Document	Filed herewith.
(101.PRE)**	XBRL Taxonomy Extension Presentation Linkbase Document	Filed herewith.

The XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed “filed” or part of a registration statement or prospects for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, and is not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of these sections.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		KENNAMETAL INC.

Date: ~~November 8, 2011~~May 9, 2012	By:	/s/ Martha A. Bailey
		Martha A. Bailey
		Vice President Finance and Corporate Controller

2632


	Options			Weighted Average Exercise Price		Weighted Average Remaining Life (years)		Aggregate Intrinsic value (in thousands)
Options outstanding, June 30, 2011		3,388,003		$	26.50
Granted		354,618			38.95
Exercised		(129,475	)		27.70
Lapsed and forfeited		(16,833	)		30.42

Options outstanding, September 30, 2011		3,596,313		$	27.67		6.3	$	22,776

Options vested and expected to vest, September 30, 2011		3,489,292		$	27.61		6.2	$	22,235

Options exercisable, September 30, 2011		2,353,830		$	26.89		5.1	$	16,021