UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

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 of Principal Executive Offices)				(Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Name of each exchange on which registered
Capital Stock, par value $1.25 per share		New York Stock Exchange
Preferred Stock Purchase Rights		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

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 þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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 þ		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller Reporting Company o

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o No þ

As of December 31, 2007, the aggregate market value of the registrant’s Capital Stock held by non-affiliates of the registrant, estimated solely for the purposes of this Form 10-K, was approximately $2,590,200,000. For purposes of the foregoing calculation only, all directors and executive officers of the registrant and each person who may be deemed to own beneficially more than 5% of the registrant’s Capital Stock have been deemed affiliates.

As of July 31, 2008, there were 76,587,263 shares of the Registrant’s Capital Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the 2008 Annual Meeting of Shareowners are incorporated by reference into Part III.

 

 

Table of Contents

Item No.		Page
PART I
1. Business			1
1A. Risk Factors			4
1B. Unresolved Staff Comments			6
2. Properties			6
3. Legal Proceedings			8
4. Submission of Matters to a Vote of Security Holders			8
PART II
5. Market for the Registrant’s Common Equity, Related Shareowner Matters and Issuer Purchases of Equity Securities			8
6. Selected Financial Data			10
7. Management’s Discussion and Analysis of Financial Condition and Results of Operation			11
7A. Quantitative and Qualitative Disclosures About Market Risk			22
8. Financial Statements and Supplementary Data			24
9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure			56
9A. Controls and Procedures			56
9B. Other Information			56
PART III
10. Directors, Executive Officers and Corporate Governance			57
11. Executive Compensation			58
12. Security Ownership of Certain Beneficial Owners and Management and Related Shareowner Matters			58
13. Certain Relationships and Related Transactions, and Director Independence			58
14. Principal Accountant Fees and Services			59
PART IV
15. Exhibits, Financial Statement Schedules			59
SIGNATURES			62
EX-10.17
EX-10.19
EX-10.23
EX-21
EX-23.
EX-31.1
EX-31.2
EX-32.1

FORWARD-LOOKING INFORMATION

This Annual Report on Form 10-K contains “forward-looking” statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. 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. These statements are likely to relate to, among other things, our strategy, goals, plans and projections regarding our financial position, results of operations, market position, and product development, all of which are based on current expectations that involve inherent risks and uncertainties, including factors that could delay, divert or change any of them in future periods. It is not possible to predict or identify all factors; however, they may include the following: global and regional economic conditions; risks associated with the availability and costs of the raw materials we use to manufacture our products; risks associated with our foreign operations and international markets, such as currency exchange rates, different regulatory environments, trade barriers, exchange controls, and social and political instability; risks associated with integrating recent acquisitions, as well as any future acquisitions, and achieving the expected savings and synergies; risks relating to business divestitures; risks relating to our ability to protect our intellectual property in foreign jurisdictions; our ability to attract and retain highly skilled members of management and employees; demands on management resources; energy costs; commodity prices; competition; future terrorist attacks or acts of war; demand for and market acceptance of new and existing products; and risks associated with the implementation of restructuring plans and environmental remediation matters. We provide additional information about many of the specific risks we face in the “Risk Factors” Section of this Annual Report on Form 10-K. We can give no assurance that any goal or plan set forth in forward-looking statements can be achieved and readers are cautioned not to place undue reliance on such statements, which speak only as of the date made. We undertake no obligation to release publicly any revisions to forward-looking statements as a result of future events or developments.

PART I

ITEM 1 — BUSINESS

OVERVIEW Kennametal Inc. was incorporated in Pennsylvania in 1943. We are a leading global 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 achieve a leading market presence in our primary markets. We believe that we are the second largest global provider of metalcutting tools and tooling systems. End users of our products include metalworking manufacturers and suppliers in the aerospace, automotive, machine tool, light machinery and heavy machinery industries, as well as manufacturers and suppliers in the highway construction, coal mining, quarrying and oil and gas exploration and production industries. Our end users’ products include items ranging from airframes to coal, medical implants to oil wells and turbochargers to motorcycle parts.

We specialize in developing and manufacturing metalworking tools and wear-resistant parts using a specialized type of powder metallurgy. Our metalworking tools are made of cemented tungsten carbides, ceramics, cermets, high-speed steel and other hard materials. We also manufacture and market a complete line of toolholders, toolholding systems and rotary cutting tools by machining and fabricating steel bars and other metal alloys. We are one of the largest suppliers of metalworking consumables and related products in the United States (U.S.) and Europe. We also manufacture tungsten carbide products used in engineered applications, mining and highway construction and other similar applications, including compacts and metallurgical powders. Additionally, we manufacture and market engineered components with a proprietary metal cladding technology and provide our customers with engineered component process technology and materials that focus on component deburring, polishing and producing controlled radii.

Unless otherwise specified, any reference to a “year” is to a fiscal year ended June 30.

BUSINESS SEGMENT REVIEW We previously operated three global business units consisting of Metalworking Solutions & Services Group (MSSG), Advanced Materials Solutions Group (AMSG) and J&L Industrial Supply (J&L). During 2006, we divested our J&L segment. See Note 4 in our consolidated financial statements set forth in Item 8 of this annual report on Form 10-K (Item 8). 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. Sales and operating income by segment are presented in Management’s Discussion and Analysis set forth in Item 7 of this annual report on Form 10-K (MD&A) and Note 21 in our consolidated financial statements set forth in Item 8 (Note 21).

METALWORKING SOLUTIONS & SERVICES GROUP In the MSSG segment, we provide consumable metalcutting tools and tooling systems to manufacturing companies in a wide range of industries throughout the world. Metalcutting operations include turning, boring, threading, grooving, milling and drilling. Our tooling systems consist of a steel toolholder and cutting tool such as an indexable insert or drill made from cemented tungsten carbides, ceramics, cermets, high-speed steel or other hard materials. We also provide solutions to our customers’ metalcutting needs through engineering services aimed at improving their competitiveness. Engineering services include field sales engineers identifying products and engineering product designs to meet customer needs, which are recognized as selling expenses.

During a metalworking operation, the toolholder is positioned in a machine that provides turning power. While the workpiece or toolholder is rapidly rotating, the cutting tool insert or drill contacts the workpiece and cuts or shapes the workpiece. The cutting tool insert or drill is consumed during use and must be replaced periodically.

We serve a wide variety of industries that cut and shape metal parts, including manufacturers of automobiles, trucks, aerospace components, farm equipment, oil and gas drilling and processing equipment, railroad, marine and power generation equipment, light and heavy machinery, appliances, factory equipment and metal components, as well as job shops and maintenance operations. We deliver our products to customers through a direct field sales force, distribution, integrated supply programs and e-business. With a global marketing organization and operations worldwide, we believe we are the second largest global provider of consumable metalcutting tools and supplies.

ADVANCED MATERIALS SOLUTIONS GROUP In the AMSG segment, the principal business lines include the production and sale of cemented tungsten carbide products used in mining, highway construction and engineered applications requiring wear and corrosion resistance, including compacts and other similar applications. These products have technical commonality to our metalworking products. Additionally, we manufacture and market engineered components with a proprietary metal cladding technology as well as other hard materials. These products include radial bearings used for directional drilling for oil and gas, extruder barrels used by plastics manufacturers and food processors and numerous other engineered components to service a wide variety of industrial markets. We also sell metallurgical powders to manufacturers of cemented tungsten carbide products, intermetallic composite ceramic powders and parts used in the metalized film industry, and we provide application-specific component design services and on-site application support services. Lastly, we provide our customers with engineered component process technology and materials, which focus on component deburring, polishing and producing controlled radii.

Our mining and construction tools are fabricated from steel parts and tipped with cemented carbide. Mining tools, used primarily in the coal industry, include longwall shearer and continuous miner drums, blocks, conical bits, drills, pinning rods, augers and a wide range of mining tool accessories. Highway construction cutting tools include carbide-tipped bits for ditching, trenching and road planing, grader blades for site preparation and routine roadbed control and snowplow blades and shoes for winter road plowing. We produce these products for mine operators and suppliers, highway construction companies, municipal governments and manufacturers of mining equipment. We believe we are the worldwide market leader in mining and highway construction tooling.

Our customers use engineered products in manufacturing or other operations where extremes of abrasion, corrosion or impact require combinations of hardness or other toughness afforded by cemented tungsten carbides, ceramics or other hard materials. We believe we are the largest independent supplier of oil field compacts in the world. Compacts are the cutting edge of oil well drilling bits, which are commonly referred to as “rock bits.” We sell these products through a direct field sales force, distribution and e-business.

J&L INDUSTRIAL SUPPLY During 2006, we divested J&L. In this segment, we provided metalworking consumables, related products and related technical and supply chain-related productivity services to small- and medium-sized manufacturers in the U.S. and the United Kingdom (U.K.). J&L marketed products and services through annual mail-order catalogs, monthly sales flyers, telemarketing, the Internet and field sales. J&L distributed a broad range of metalcutting tools, abrasives, drills, machine tool accessories, precision measuring tools, gages, hand tools and other supplies used in metalcutting operations. The majority of industrial supplies distributed by J&L were purchased from other manufacturers, although the product offering did include Kennametal-manufactured items.

INTERNATIONAL OPERATIONS During 2008, 56.6 percent of our sales were generated in markets outside of the U.S. Our principal international operations are conducted in Western Europe, Asia Pacific, Canada and Latin America. In addition, we have manufacturing and distribution operations in Israel and South Africa, as well as sales companies, sales agents and distributors in Eastern Europe and other areas of the world. The diversification of our overall operations tends to minimize the impact of changes in demand in any one particular geographic area on total sales and earnings. Our international operations are subject to the risks of doing business in those countries, including foreign currency exchange rate fluctuations and changes in social, political and economic environments.

Our international assets and sales are presented in Note 21. Information pertaining to the effects of foreign currency exchange rate risk is presented in Quantitative and Qualitative Disclosures About Market Risk as set forth in Item 7A of this annual report on Form 10-K.

BUSINESS DEVELOPMENTS During 2008, we did not complete any material business acquisitions or divestitures. However, we did make two small acquisitions and two small divestitures in 2008, all within our MSSG segment, as we continued to enhance and shape our business portfolio. Also in 2008, we sold minor investments in two affiliated companies.

We continue to evaluate new opportunities that allow for the expansion of existing product lines into new market areas where appropriate. We also continue to evaluate opportunities that allow for the introduction of new and/or complementary product offerings into new and/or existing market areas where appropriate. In 2009, we expect to evaluate potential acquisition candidates that offer strategic technologies in an effort to continue to grow our AMSG business and further enhance our MSSG market position.

MARKETING AND DISTRIBUTION We sell our products through the following distinct sales channels: (i) a direct sales force; (ii) a network of independent distributors and sales agents in North America, Europe, Latin America, Asia Pacific and other markets around the world; (iii) integrated supply and (iv) the Internet. Service engineers and technicians directly assist customers with product design, selection and application.

We market our products under various trademarks and trade names, such as Kennametal, the letter K combined with other identifying letters and/or numbers, Block Style K, Kendex, Kenloc, Kenna-LOK, KM Micro, Kentip, Widia, Heinlein, Top Notch, ToolBoss, Kyon, KM, Drill-Fix, Fix-Perfect, Mill1, Chicago-Latrobe, Greenfield, RTW, Circle, Cleveland, Conforma Clad, Extrude Hone and Surftran. Kennametal Inc. or a subsidiary of Kennametal Inc. owns these trademarks and trade names. We also sell products to customers who resell such products under the customers’ names or private labels.

RAW MATERIALS AND SUPPLIES Major metallurgical raw materials consist of ore concentrates, compounds and secondary materials containing tungsten, tantalum, titanium, niobium and cobalt. Although an adequate supply of these raw materials currently exists, our major sources for raw materials are located abroad and prices fluctuate at times. We have entered into extended raw material supply agreements and will implement product price increases as deemed necessary to mitigate rising costs. For these reasons, we exercise great care in selecting, purchasing and managing availability of raw materials. We also purchase steel bars and forgings for making toolholders, high-speed steel and other tool parts, as well as for producing rotary cutting tools and accessories. We obtain products purchased for use in manufacturing processes and for resale from thousands of suppliers located in the U.S. and abroad.

RESEARCH AND DEVELOPMENT Our product development efforts focus on providing solutions to our customers’ manufacturing problems and productivity requirements. Our product development program provides discipline and focus for the product development process by establishing “gateways,” or sequential tests, during the development process to remove inefficiencies and accelerate improvements. This program speeds and streamlines development into a series of actions and decision points, combining efforts and resources to produce new and enhanced products faster. This program is designed to assure a strong link between customer needs and corporate strategy and to enable us to gain full benefit from our investment in new product development.

Research and development expenses included in operating expense totaled $32.6 million, $28.8 million and $26.1 million in 2008, 2007 and 2006, respectively. We hold a number of patents, which, in the aggregate, are material to the operation of our businesses.

SEASONALITY Our business is not materially affected by seasonal variations. However, to varying degrees, traditional summer vacation shutdowns of metalworking customers’ plants and holiday shutdowns often affect our sales levels during the first and second quarters of our fiscal year.

BACKLOG Our backlog of orders generally is not significant to our operations.

COMPETITION We are one of the world’s leading producers of cemented carbide products and high-speed steel tools, and we maintain a strong competitive position in all major markets worldwide. We actively compete in the sale of all our products with approximately 40 companies engaged in the cemented tungsten carbide business in the U.S. and many more outside the U.S. Several of our competitors are divisions of larger corporations. In addition, several hundred fabricators and toolmakers, many of which operate out of relatively small shops, produce tools similar to ours and buy the cemented tungsten carbide components for such tools from cemented tungsten carbide producers, including us. Major competition exists from both U.S. — and internationally-based concerns. In addition, we compete with thousands of industrial supply distributors.

The principal elements of competition in our businesses are service, product innovation and performance, quality, availability and price. We believe that our competitive strength derives from our customer service capabilities, including multiple distribution channels, our global presence, state-of-the-art manufacturing capabilities, ability to develop solutions to address customer needs through new and improved tools and the consistent high quality of our products. Based upon our strengths, we are able to sell products based on the value added to the customer rather than strictly on competitive prices.

REGULATION We are not currently a party to any material legal proceedings; however, we are periodically subject to legal proceedings and claims that arise in the ordinary course of our business. While management currently believes the amount of ultimate liability, if any, with respect to these actions will not materially affect our financial position, results of operations or liquidity, the ultimate outcome of any litigation is uncertain. Were an unfavorable outcome to occur, or if protracted litigation were to ensue, the impact could be material to us.

Compliance with government laws and regulations pertaining to the discharge of materials or pollutants into the environment or otherwise relating to the protection of the environment did not have a material effect on our capital expenditures or competitive position for the years covered by this report, nor is such compliance expected to have a material effect in the future.

We are involved as a potentially responsible party (PRP) at various sites designated by the United States Environmental Protection Agency (USEPA) as Superfund sites. With respect to the Li Tungsten Superfund site in Glen Cove, New York, we remitted $0.9 million in 2008 to the Department of Justice (DOJ) as payment in full settlement for its claim against us for costs related to that site.

During 2006, we were notified by the USEPA that we have been named as a PRP at the Alternate Energy Resources Inc. site located in Augusta, Georgia. The proceedings in this matter have not yet progressed to a stage 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.

Reserves for other potential environmental issues at June 30, 2008 and 2007 were $6.2 million and $6.1 million, respectively. The reserves that 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 take into consideration our prior experience in remediation and that of other companies, as well as public information released by the 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 liabilities 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 (EH&S) Department, as well as an EH&S Steering Committee, to ensure compliance with environmental regulations and to monitor and oversee remediation activities. In addition, we have established an EH&S administrator at each of our global manufacturing facilities. Our financial management team periodically meets with members of the Corporate EH&S 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 such reserves when appropriate.

EMPLOYEES We employed approximately 13,700 persons at June 30, 2008, of which approximately 6,400 were located in the U.S. and 7,300 in other parts of the world, principally Europe, India and Asia. At June 30, 2008, approximately 3,400 of the above employees were represented by labor unions. We consider our labor relations to be generally good.

AVAILABLE INFORMATION Our Internet address is www.kennametal.com. On our Investor Relations page on our Web site, we post the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission (SEC): our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. Our Investor Relations Web page also includes Forms 3, 4 and 5 filed pursuant to Section 16(a) of the Securities Exchange Act of 1934. All filings posted on our Investor Relations Web page are available to be viewed on this page free of charge. On the Corporate Governance page on our Web site, we post the following charters and guidelines: Audit Committee Charter, Compensation Committee Charter, Nominating/Corporate Governance Committee Charter, Kennametal Inc. Corporate Governance Guidelines, Code of Business Ethics and Conduct and Stock Ownership Guidelines. All charters and guidelines posted on our Corporate Governance Web page are available to be viewed on this page free of charge. Information contained on our Web site is not part of this annual report on Form 10-K or our other filings with the SEC. We assume no obligation to update or revise any forward-looking statements in this annual report on Form 10-K, whether as a result of new information, future events or otherwise. Copies of this annual report on Form 10-K and those items disclosed on our Corporate Governance Web page are available without charge upon written request to: Investor Relations, Quynh McGuire, Kennametal Inc., 1600 Technology Way, P.O. Box 231, Latrobe, Pennsylvania, 15650-0231.

ITEM 1A — RISK FACTORS

The cyclical nature of our business could cause fluctuations in operating results. Our business is cyclical in nature. As a result of this cyclicality, we have experienced, and in the future we can be expected to experience, significant fluctuation in our sales and operating income, which may negatively affect our financial position and results of our operations and could impair our ability to pay dividends.

Our future operating results may be affected by fluctuations in the prices and availability of raw materials. The raw materials we use for our products consist of ore concentrates, compounds and secondary materials containing tungsten, tantalum, titanium, niobium and cobalt. A significant portion of our raw materials are supplied by sources outside the U.S. The raw materials industry as a whole is highly cyclical, and at times pricing and supply can be volatile due to a number of factors beyond our control, including natural disasters, general economic and political conditions, labor costs, competition, import duties, tariffs and currency exchange rates. This volatility can significantly affect our raw material costs. In an environment of increasing raw material prices, competitive conditions can affect how much of the price increases in raw materials that we can recover in the form of higher sales prices for our products. To the extent we are unable to pass on any raw material price increases to our customers, our profitability could be adversely affected. Furthermore, restrictions in the supply of tungsten, cobalt and other raw materials could adversely affect our operating results. If the prices for our raw materials increase, our profitability could be impaired.

We may not be able to manage and integrate acquisitions successfully. In the recent past, we have acquired companies and we continue to evaluate acquisition opportunities that have the potential to support and strengthen our business. We can give no assurances, however, that any acquisition opportunities will arise or if they do, that they will be consummated, or that additional financing, if needed, will be available on satisfactory terms. In addition, acquisitions involve inherent risks that the businesses acquired will not perform in accordance with our expectations. We may not be able to achieve the synergies and other benefits we expect from the integration of acquisitions as successfully or rapidly as projected, if at all. Our failure to effectively integrate newly acquired operations could prevent us from realizing our expected rate of return on an acquired business and could have a material and adverse effect on our results of operations and financial condition.

Health and Safety Regulations. Certain of our products contain hard metals, including tungsten and cobalt. Hard metal dust is being studied for potential adverse health effects by organizations in both the U.S. and in Europe. Future studies on the health effects of hard metals may result in new regulations in the U.S. and Europe that may restrict or prohibit the use of, and exposure to, hard metal dust. New regulation of hard metals could require us to change our operations, and these changes could affect the quality of our products and materially increase our costs.

Environmental Regulations. We are subject to various environmental laws, and any violation of, or our liabilities under, these laws could adversely affect us. Our operations necessitate the use and handling of hazardous materials and, as a result, we are subject to various federal, state, local and foreign laws, regulations and ordinances relating to the protection of the environment, including those governing discharges to air and water, handling and disposal practices for solid and hazardous wastes, the cleanup of contaminated sites and the maintenance of a safe work place. These laws impose penalties, fines and other sanctions for noncompliance and liability for response costs, property damages and personal injury resulting from past and current spills, disposals or other releases of, or exposure to, hazardous materials. We could incur substantial costs as a result of noncompliance with or liability for cleanup or other costs or damages under these laws. We may be subject to more stringent environmental laws in the future. If more stringent environmental laws are enacted in the future, these laws could have a material adverse effect on our business, financial condition and results of operations.

Regulations affecting the mining and drilling industries or utilities industry. Some of our principal customers are mining and drilling companies. Many of these customers supply coal, oil, gas or other fuels as a source for the production of utilities in the U.S. and other industrialized regions. The operations of these mining and drilling companies are geographically diverse and are subject to or impacted by a wide array of regulations in the jurisdictions where they operate, such as applicable environmental laws and an array of regulations governing the operations of utilities. As a result of changes in regulations and laws relating to such industries, our customers’ operations could be disrupted or curtailed by governmental authorities. The high cost of compliance with mining, drilling and environmental regulations may also induce customers to discontinue or limit their operations, and may discourage companies from developing new opportunities. As a result of these factors, demand for our mining- and drilling-related products could be substantially affected by regulations adversely impacting the mining and drilling industries or altering the consumption patterns of utilities.

Natural disasters or other global or regional catastrophic events could disrupt our operations and adversely affect results. Despite our concerted effort to minimize risk to our production capabilities and corporate information systems and to reduce the effect of unforeseen interruptions to us through business continuity planning, we still may be exposed to interruptions due to catastrophe, natural disaster, terrorism or acts of war, which are beyond our control. Disruptions to our facilities or systems, or to those of our key suppliers, could also interrupt operational processes and adversely impact our ability to manufacture our products and provide services and support to our customers. As a result, our business, our results of our operations, financial position, cash flows and stock price could be adversely affected

Our continued success depends on our ability to protect our intellectual property. Our future success depends in part upon our ability to protect our intellectual property. We rely principally on nondisclosure agreements and other contractual arrangements and trade secret law and, to a lesser extent, trademark and patent law, to protect our intellectual property. However, these measures may be inadequate to protect our intellectual property from infringement by others or prevent misappropriation of our proprietary rights. In addition, the laws of some foreign countries do not protect proprietary rights to the same extent as do U.S. laws. Our inability to protect our proprietary information and enforce our intellectual property rights through infringement proceedings could have a material adverse effect on our business, financial condition and results of operations.

Our international operations pose certain risks that may adversely impact sales and earnings. We have manufacturing operations and assets located outside of the U.S., including Brazil, Canada, China, Europe, India, Israel and South Africa. We also sell our products to customers and distributors located outside of the U.S. During the year ended June 30, 2008, 57 percent of our consolidated sales were derived from non-U.S. markets. A key part of our long-term strategy is to increase our manufacturing, distribution and sales presence in international markets. These international operations are subject to a number of special risks, in addition to the risks of our domestic business, including currency exchange rate fluctuations, differing protections of intellectual property, trade barriers, exchange controls, regional economic uncertainty, differing (and possibly more stringent) labor regulation, labor unrest, risk of governmental expropriation, domestic and foreign customs and tariffs, current and changing regulatory environments (including, but not limited to, the risks associated with the importation and exportation of products and raw materials), risk of failure of our foreign employees to comply with both U.S. and foreign laws, including antitrust laws, trade regulations and the Foreign Corrupt Practices Act, difficulty in obtaining distribution support, difficulty in staffing and managing widespread operations, differences in the availability and terms of financing, political instability and unrest and risks of increases in taxes. Also, in some foreign jurisdictions, we may be subject to laws limiting the right and ability of entities organized or operating therein to pay dividends or remit earnings to affiliated companies unless specified conditions are met. To the extent we are unable to effectively manage our international operations and these risks, our international sales may be adversely affected, we may be subject to additional and unanticipated costs, and we may be subject to litigation or regulatory action. As a consequence, our business, financial condition and results of operations could be seriously harmed.

We operate in a highly competitive environment. Our domestic and foreign operations are subject to significant competitive pressures. We compete directly and indirectly with other manufacturers and suppliers of metalworking tools, engineered components and advanced materials. At least one of our competitors is larger, and some of our competitors may have greater access to financial resources and may be less leveraged than us. In addition, the metalworking supply industry is a large, fragmented industry that is highly competitive.

If we are unable to retain qualified employees, our growth may be hindered. Our ability to provide high quality products and services depends in part on our ability to retain our skilled personnel in the areas of management, product engineering, servicing and sales. Competition for such personnel is intense and our competitors can be expected to attempt to hire our skilled employees from time to time. Our results of operations could be materially and adversely affected if we are unable to retain the customer relationships and technical expertise provided by our management team and our professional personnel.

Product liability claims could have a material adverse effect on our business. The sale of metalworking, mining, highway construction and other tools and related products as well as engineered components and advanced materials entails an inherent risk of product liability claims. We cannot give assurance that the coverage limits of our insurance policies will be adequate or that our policies will cover any particular loss. Insurance can be expensive, and we may not always be able to purchase insurance on commercially acceptable terms, if at all. Claims brought against us that are not covered by insurance or that result in recoveries in excess of insurance coverage could have a material adverse affect on our business, financial condition and results of operations.

ITEM 1B — UNRESOLVED STAFF COMMENTS

None.

ITEM 2 — PROPERTIES

Our principal executive offices are located at 1600 Technology Way, P.O. Box 231, Latrobe, Pennsylvania, 15650. A summary of our principal manufacturing facilities and other materially important properties is as follows:

Location		Owned/Leased		Principal Products		Segment
United States:
Bentonville, Arkansas		Owned		Carbide Round Tools		MSSG/AMSG
Rogers, Arkansas		Owned		Carbide Products		AMSG
Rogers, Arkansas		Leased		Distribution		AMSG
Placentia, California		Leased		Wear Parts		AMSG
Evans, Georgia		Owned		High-Speed Steel Drills		MSSG
Rockford, Illinois		Owned		Indexable Tooling		MSSG
New Albany, Indiana		Leased		High Wear Coating for Steel Parts		AMSG
Greenfield, Massachusetts		Owned		High-Speed Steel Taps		MSSG
Shelby Township, Michigan		Leased		Thermal Deburring and High Energy Finishing		AMSG
Traverse City, Michigan		Owned		Wear Parts		AMSG

Location		Owned/Leased		Principal Products		Segment
United States (continued):
Walker, Michigan		Leased		Thermal Energy Machining		AMSG
Fallon, Nevada		Owned		Metallurgical Powders		MSSG/AMSG
Asheboro, North Carolina		Owned		High-Speed Steel and Carbide Round Tools		MSSG
Henderson, North Carolina		Owned		Metallurgical Powders		MSSG
Roanoke Rapids, North Carolina		Owned		Metalworking Inserts		MSSG
Cleveland, Ohio		Leased		Distribution		MSSG
Orwell, Ohio		Owned		Metalworking Inserts		MSSG
Solon, Ohio		Owned		Metalworking Toolholders		MSSG
Whitehouse, Ohio		Owned		Metalworking Inserts and Round Tools		MSSG
Bedford, Pennsylvania		Owned		Mining and Construction Tools and Wear Parts		AMSG
Bedford, Pennsylvania		Leased		Distribution		AMSG
Irwin, Pennsylvania		Owned		Carbide Wear Parts		AMSG
Irwin, Pennsylvania		Leased		Abrasive Flow Machining		AMSG
Latrobe, Pennsylvania		Owned		Metallurgical Powders, Wear Parts and Carbide Drills		MSSG/AMSG
Neshannock, Pennsylvania		Leased		Specialty Metals and Alloys		AMSG
Union, Pennsylvania		Owned		Specialty Metals and Alloys		AMSG
Clemson, South Carolina		Owned		High-Speed Steel Drills		MSSG
Johnson City, Tennessee		Owned		Metalworking Inserts		MSSG
Lyndonville, Vermont		Owned		High-Speed Steel Taps		MSSG
Chilhowie, Virginia		Owned		Mining and Construction Tools and Wear Parts		AMSG
New Market, Virginia		Owned		Metalworking Toolholders		MSSG
International:
Sao Paulo, Brazil		Leased		Metalworking Carbide Drills and Metalworking Toolholders		MSSG
Mississauga, Canada		Leased		Saw Blades and Special Tools		MSSG
Victoria, Canada		Owned		Wear Parts		AMSG
Fengpu, China		Owned		Intermetallic Composite Ceramic Powders and Parts		AMSG
Pudong, China		Owned		Metalworking Inserts		MSSG
Tianjin, China		Owned		Metalworking Inserts and Carbide Round Tools		MSSG
Xuzhou, China		Owned		Mining Tools		AMSG
Kingswinford, England		Leased		Metalworking Toolholders		MSSG
Bordeaux, France		Leased		Metalworking Cutting Tools		MSSG
Boutheon Cedex, France		Owned		Metalworking Inserts		MSSG
Ebermannstadt, Germany		Owned		Metalworking Inserts		MSSG
Essen, Germany		Owned		Metallurgical Powders and Wear Parts		MSSG
Konigsee, Germany		Leased		Metalworking Carbide Drills		MSSG
Lichtenau, Germany		Owned		Metalworking Toolholders		MSSG
Mistelgau, Germany		Owned		Metallurgical Powders, Metalworking Inserts and Wear Parts		MSSG/AMSG
Nabburg, Germany		Owned		Metalworking Toolholders		MSSG
Nabburg, Germany		Owned		Metalworking Round Tools, Drills and Mills		MSSG
Nuenkirchen, Germany		Owned		Distribution		MSSG
Vohenstrauss, Germany		Owned		Metalworking Carbide Drills		MSSG
Bangalore, India		Owned		Metalworking Inserts and Toolholders and Wear Parts		MSSG/AMSG
Shlomi, Israel		Owned		High-Speed Steel and Carbide Round Tools		MSSG
Milan, Italy		Owned		Metalworking Cutting Tools		MSSG
Arnhem, Netherlands		Owned		Wear Products		AMSG
Hardenberg, Netherlands		Owned		Wear Products		AMSG
Zory, Poland		Leased		Mining and Construction Conicals		AMSG
Barcelona, Spain		Leased		Metalworking Cutting Tools		MSSG
Vitoria, Spain		Leased		Metalworking Carbide Round Tools		MSSG
Newport, United Kingdom		Owned		Intermetallic Composite Powders		AMSG

We also have a network of warehouses and customer service centers located throughout North America, Europe, India, Asia Pacific and Latin America, a significant portion of which are leased. The majority of our research and development efforts are conducted in a corporate technology center located adjacent to our world headquarters in Latrobe, Pennsylvania, in addition to our facilities in Rogers, Arkansas; Fuerth, Germany and Essen, Germany.

We use all significant properties in the businesses of powder metallurgy, tools, tooling systems, engineered components and advanced materials. Our production capacity is adequate for our present needs. We believe that our properties have been adequately maintained, are generally in good condition and are suitable for our business as presently conducted.

ITEM 3 — LEGAL PROCEEDINGS

The information set forth in Part I herein under the caption “Regulation” is incorporated into this Item 3. There are no material pending legal proceedings to which Kennametal or any of our subsidiaries is a party or of which any of our property is the subject. We are, however, periodically subject to legal proceedings and claims that arise in the ordinary course of our business.

ITEM 4 — SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

During the fourth quarter of 2008, there were no matters submitted to a vote of security holders through the solicitation of proxies or otherwise.

EXECUTIVE OFFICERS OF THE REGISTRANT — Incorporated by reference into this Part I is the information set forth in Part III, Item 10 under the caption “Executive Officers of the Registrant.”

PART II

ITEM 5 — MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED SHAREOWNER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our capital stock is traded on the New York Stock Exchange (symbol KMT). The number of shareowners of record as of July 31, 2008 was 2,455. Stock price ranges and dividends declared and paid have been restated to reflect the Company’s 2-for-1 stock split completed in December 2007 and were as follows:

Quarter Ended		September 30				December 31				March 31				June 30
2008
High		$	44.93			$	45.61			$	38.03			$	38.75
Low			34.90				36.01				26.00				29.44
Dividends			0.105				0.12				0.12				0.12
2007
High		$	31.25			$	31.89			$	34.08			$	41.48
Low			24.85				28.08				28.28				33.41
Dividends			0.095				0.105				0.105				0.105

See Note 2 in our consolidated financial statements set forth in Item 8 (Note 2) for information concerning our 2008 capital stock split.

The information incorporated by reference in Item 12 of this annual report on Form 10-K from our 2008 Proxy Statement under the heading “Equity Compensation Plans – Equity Compensation Plan Information” is hereby incorporated by reference into this Item 5.

PERFORMANCE GRAPH

The following graph compares cumulative total shareowner return on our Capital Stock with the cumulative total shareowner return on the common equity of the companies in the Standard & Poor’s Mid-Cap 400 Market Index (S&P Mid-Cap 400), the Standard & Poor’s Composite 1500 Market Index (S&P Composite), and a peer group of companies determined by us (Peer Group) for the period from July 1, 2003 to June 30, 2008.

We created the Peer Group to benchmark our sales and earnings growth, return on invested capital, profitability and asset management. The Peer Group consists of the following companies: Allegheny Technologies Incorporated; Carpenter Technology Corporation; Crane Co.; Danaher Corporation; Eaton Corporation; Flowserve Corp.; Harsco Corporation; Illinois Tool Works, Inc.; Joy Global Inc.; Lincoln Electric Holdings, Inc.; MSC Industrial Direct Co. Inc.; Parker-Hannifin Corporation; Pentair, Inc.; Precision Castparts Corp.; Sauer-Danfoss, Inc.; Teleflex, Incorporated; and The Timken Co.

Comparison of 5-Year Cumulative Total Return

Assumes $100 Invested on July 1, 2003 and All Dividends Reinvested

		2003				2004				2005				2006				2007				2008
Kennametal Inc.		$	100.00			$	137.66			$	139.86			$	192.55			$	257.14			$	206.66
Peer Group Index			100.00				153.87				153.66				208.29				262.78				251.42
S&P Mid-Cap 400			100.00				127.98				145.94				164.88				195.40				181.06
S&P Composite			100.00				119.11				126.64				137.57				165.90				144.13

ISSUER PURCHASES OF EQUITY SECURITIES

Total Number of

Maximum Number of

Shares Purchased as

Shares that May

Total Number

Part of Publicly

Yet Be Purchased

of Shares

Average Price

Announced Plans

Under the Plans or

Period

Purchased (1)

Paid per Share

or Programs (2)

Programs (2)

April 1 through April 30, 2008

1,187

$

33.73

—

4.0 million

May 1 through May 31, 2008

5,037

37.46

—

4.0 million

June 1 through June 30, 2008

—

N/A

—

4.0 million

Total:

6,224

$

36.75

—

1)		During the period, employees delivered 1,496 shares of restricted stock to Kennametal, upon vesting, to satisfy tax-withholding requirements. During the period, 4,728 shares were purchased on the open market on behalf of Kennametal to fund the Company’s dividend reinvestment program.
2)		On October 24, 2006, Kennametal’s Board of Directors authorized a share repurchase program, under which Kennametal is authorized to repurchase up to 6.6 million shares of its capital stock. This repurchase program does not have a specified expiration date. See Note 2 for information concerning our 2008 capital stock split.

ITEM 6 — SELECTED FINANCIAL DATA

						2008				2007				2006				2005				2004
OPERATING RESULTS (in thousands)
Sales			(1	)		$	2,705,129			$	2,385,493			$	2,329,628			$	2,202,832			$	1,866,953
Cost of goods sold							1,781,889				1,543,931				1,497,462				1,431,716				1,237,610
Operating expense							605,004				554,634				579,907				559,293				497,308
Restructuring and asset impairment charges			(2	)			39,891				5,970				—				4,707				3,683
Interest expense							31,728				29,141				31,019				27,277				25,884
Income taxes							64,057				70,469				172,902				60,967				32,551
Income from continuing operations			(3	)			167,775				176,842				272,251				113,919				67,247
Net income			(4	)			167,775				174,243				256,283				119,291				73,578
FINANCIAL POSITION (in thousands)
Working capital						$	630,675			$	529,265			$	624,658			$	402,404			$	310,418
Total assets							2,784,349				2,606,227				2,435,272				2,092,337				1,938,663
Long-term debt, including capital leases, excluding current maturities							313,052				361,399				409,508				386,485				313,400
Total debt, including capital leases and notes payable							346,652				366,829				411,722				437,374				440,207
Total shareowners’ equity							1,647,907				1,484,467				1,295,365				972,862				887,152
PER SHARE DATA (7)
Basic earnings from continuing operations						$	2.18			$	2.30			$	3.54			$	1.55			$	0.94
Basic earnings			(5	)			2.18				2.27				3.33				1.62				1.03
Diluted earnings from continuing operations							2.15				2.25				3.44				1.50				0.93
Diluted earnings			(6	)			2.15				2.22				3.24				1.57				1.01
Dividends							0.47				0.41				0.38				0.34				0.34
Book value (at June 30)							21.44				19.04				16.78				12.76				12.11
Market price (at June 30)							32.55				40.50				30.32				22.03				21.68
OTHER DATA (in thousands except number of employees)
Capital expenditures						$	163,489			$	92,001			$	79,593			$	88,552			$	56,962
Number of employees (at June 30)							13,673				13,947				13,282				13,970				13,700
Basic weighted average shares outstanding			(7	)			76,811				76,788				76,864				73,848				71,408
Diluted weighted average shares outstanding			(7	)			78,201				78,545				79,101				76,112				72,946
KEY RATIOS
Sales growth							13.4	%			2.4	%			5.8	%			18.0	%			12.3	%
Gross profit margin							34.1				35.3				35.7				35.0				33.7
Operating profit margin							9.8				11.3				20.5				9.2				6.8

1)		We divested J&L effective June 1, 2006. J&L sales were $0.3 billion, $0.3 billion and $0.2 billion for 2006, 2005 and 2004, respectively.
2)		In 2008, the charges related to an AMSG goodwill impairment of $35.0 million, MSSG restructuring of $3.2 million and AMSG restructuring of $1.7 million. In 2007, the charge related to an impairment of the MSSG Widia trademark. In 2005, the charge related to an impairment of goodwill in our divested Full Service Supply segment. In 2004, the charges related primarily to two restructuring programs.
3)		In 2006, income from continuing operations includes net gain on divestitures of $122.5 million.
4)		Net income includes (loss) income from discontinued operations of ($2.6) million, ($16.0) million, $5.4 million and $6.3 million for 2007, 2006, 2005 and 2004, respectively.
5)		Basic earnings per share includes basic (loss) earnings from discontinued operations per share of ($0.03), ($0.21), $0.07 and $0.09 for 2007, 2006, 2005 and 2004, respectively.
6)		Diluted earnings per share includes diluted (loss) earnings from discontinued operations per share of ($0.03), ($0.20), $0.07 and $0.09 for 2007, 2006, 2005 and 2004, respectively.
7)		Share and per share amounts have been restated to reflect the Company’s 2-for-1 stock split completed in December 31, 2007. See Note 2 for information concerning our 2008 capital stock split.

ITEM 7 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

The following discussion should be read in connection with the consolidated financial statements of Kennametal Inc. and the related footnotes. Unless otherwise specified, any reference to a “year” is to a fiscal year ended June 30. Additionally, when used in this annual report on
Form 10-K, unless the context requires otherwise, the terms “we,” “our” and “us” refer to Kennametal Inc. and its subsidiaries.

OVERVIEW Kennametal Inc. is a leading global 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 enabled us to achieve a leading market presence in our primary markets. We believe that we are the second largest global provider of metalcutting tools and tooling systems.

Kennametal delivered record sales of $2.7 billion and earnings per diluted share of $2.15 in 2008 despite operating in a challenging environment. Rising raw material costs, higher transportation costs, record fuel prices and a soft economy in North America provided considerable headwinds for both Kennametal and certain of our served end markets. Our strategies to further diversify our portfolio as well as the geographies and end markets we serve contributed to this success. In 2008, we took advantage of a slower growth sales environment to accelerate planned restructuring activities to reduce operating costs and enhance efficiencies. All of this has and will provide Kennametal with additional flexibility to further capitalize on business opportunities and market strengths around the world while enabling us to weather more demanding business conditions that transpire in certain geographic regions and market sectors.

We continued to diversify our geographic footprint with the long-term goal to establish an evenly balanced presence across all three of our regions; North America, Western Europe and rest of world markets. In 2008, our sales by geographic region were as follows: 46.6 percent from North America, 35.3 percent from Western Europe and 18.1 percent from rest of world markets. This strategy proved its merit when growth in global markets helped to offset softer conditions in North America. We also increased the balance between MSSG and AMSG, moving closer toward our long-range goal of having each business segment represent approximately half of total sales. In 2008, MSSG and AMSG comprised 66.2 percent and 33.8 percent of sales, respectively. Additionally, we achieved a greater balance in our served end markets, bolstered particularly in aerospace and defense, durable goods, machine tools, underground coal mining and general engineering sectors.

In 2008, we continued to manage our portfolio to maximize earnings growth and shareowner returns. In our MSSG segment, we divested two non-core businesses and completed two small acquisitions. We remained disciplined in evaluating acquisition opportunities and continued to invest in our business with capital expenditures of $163.5 million for enhanced manufacturing capabilities and geographic expansion. In addition, during 2008 we repurchased 1.7 million shares of our capital stock for a total cost of $65.4 million. We also continued to implement our Lean initiatives which drive higher performance and ongoing improvements throughout our global organization. As one example of the benefits of these initiatives, we reduced operating expense as a percent of sales for the third consecutive year.

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 totaled $32.6 million for 2008, an increase of $3.8 million from 2007. In 2008, we generated approximately 47 percent of our sales from new products.

RESTRUCTURING ACTIONS During 2008, we announced our intent to implement restructuring actions to further our ability to achieve our long-term goals for margin expansion and earnings growth as well as to reduce costs and improve efficiency in our operations. Consistent with this announcement, we initiated actions in 2008 related to facility rationalizations and employment reductions as well as the conversion of an international defined benefit pension plan to a defined contribution plan. We recorded restructuring and related charges of $8.2 million in 2008 as follows: cost of goods sold $1.4 million, operating expense $1.9 million and restructuring and asset impairment $4.9 million. MSSG, AMSG and Corporate charges were $4.9 million, $3.0 million and $0.3 million, respectively. See Note 14 in our consolidated financial statements set forth in Item 8.

These and other restructuring actions are expected to be completed over the next nine to fifteen months. Total related charges are expected to be in the range of $40 million to $50 million of which approximately 90 percent are expected to be cash expenditures. Annual ongoing benefits from these actions, once fully implemented, are expected to be in the range of $20 million to $25 million.

ACQUISITIONS AND DIVESTITURES During 2008, we did not complete any material acquisitions or divestitures. However, we made two small acquisitions in Europe, within our MSSG segment, for a combined net purchase price of $4.0 million. Also during 2008, we divested two small, non-core businesses from our MSSG segment, one in the U.S. and one in Europe. Combined cash proceeds received were $20.2 million and we recognized a combined loss on divestiture of $0.6 million.

During 2007, we completed five business acquisitions. We completed three acquisitions in our AMSG segment for a combined net purchase price of $165.7 million, which generated AMSG goodwill of $55.1 million of which $22.5 million is deductible for income tax purposes. We completed two acquisitions in our MSSG segment for a net purchase price of $95.4 million including an additional payment of euro 12.0 million, which will be paid in 2011. The MSSG acquisitions generated goodwill of $54.2 million of which $26.6 million is deductible for income tax purposes.

Effective June 12, 2006, we divested our U.K.-based high-speed steel business (Presto) for proceeds of $1.5 million as a part of our strategy to exit non-core businesses. This divestiture resulted in a pre-tax loss of $9.4 million in 2006. Included in the loss was a $7.3 million inventory charge reported in cost of goods sold. This business was a part of the MSSG segment. Cash flows of this component that were retained were deemed significant in relation to prior cash flows of the disposed component. The sale agreement included a three-year supply agreement that management deemed to be both quantitatively and qualitatively material to the overall operations of the disposed component and constituted significant continuing involvement. As such, the results of operations of Presto prior to the divestiture were reported in continuing operations.

Effective June 1, 2006, we divested J&L for proceeds of $359.2 million, of which $9.7 million and $349.5 million was received in 2007 and 2006, respectively, as a part of our strategy to exit non-core businesses. During 2006, we recognized a pre-tax gain of $233.9 million. The inventory-related portion of this gain amounting to $1.9 million was recorded in cost of goods sold. During 2006, we also recognized $6.4 million of divestiture-related charges in our Corporate segment that were included in operating expense. Cash flows of this component that were retained were deemed significant in relation to prior cash flows of the disposed component. The sale agreement included a five-year supply agreement and a two-year private label agreement. Management deemed these agreements to be both quantitatively and qualitatively material to the overall operations of the disposed component and constituted significant continuing involvement. As such, J&L results prior to the divestiture were reported in continuing operations. During 2007, we also recognized a pre-tax loss of $1.6 million related to a post-closing adjustment.

We continue to evaluate new opportunities for the expansion of existing product lines into new market areas, where appropriate. We also continue to evaluate opportunities for the introduction of new and/or complimentary product offerings into new and/or existing market areas, where appropriate. In 2009, we expect to evaluate potential acquisition candidates that offer strategic technologies in an effort to continue to grow our AMSG business and further enhance our MSSG market position.

DISCONTINUED OPERATIONS During 2006, our Board of Directors and management approved plans to divest our Kemmer Praezision Electronics business (Electronics) and our consumer retail product line, including industrial saw blades (CPG) as a part of our strategy to exit non-core businesses. These divestitures were accounted for as discontinued operations.

The divestiture of Electronics, which was part of the AMSG segment, was completed in two separate transactions. The first transaction closed during 2006. The second transaction closed during 2007. During 2006, we recognized a pre-tax loss of $22.0 million, including an $8.8 million inventory-related charge. During 2007, we recognized a pre-tax gain on divestiture of $0.1 million to adjust the related net assets to fair value. Also during 2007, management completed its assessment of the future use of a building owned and previously used by Electronics, but not divested. We concluded that we had no future economic use for the facility. As a result, we wrote the building down to fair value and recognized a pre-tax impairment charge of $3.0 million during 2007.

The divestiture of CPG, which was part of the MSSG segment, closed during 2007 for net consideration of $31.0 million. We have received the full net proceeds of which $3.0 million, $26.5 million and $1.5 million were received during 2008, 2007 and 2006, respectively. During 2006, we recorded a pre-tax goodwill impairment charge of $5.0 million related to CPG based primarily on a discounted cash flow analysis. During 2006, we also recorded an additional pre-tax goodwill impairment charge of $10.7 million based on the expected proceeds from the sale of the business and a pre-tax loss on divestiture of $0.5 million. These charges were not deductible for income tax purposes. Also included in discontinued operations was a $13.7 million tax benefit recorded during 2006 reflecting a deferred tax asset related to tax deductions that were realized as a result of the divestiture. During 2007, we recognized an additional pre-tax loss on divesture of $1.0 million related to post-closing adjustments.

The following represents the results of discontinued operations for the years ended June 30:

(in thousands)		2007				2006
Sales		$	15,034			$	89,987
Loss from discontinued operations before income taxes		$	(2,464	)		$	(35,711	)
Income tax (benefit) expense			135				(19,743	)
Loss from discontinued operations		$	(2,599	)		$	(15,968	)

RESULTS OF CONTINUING OPERATIONS

SALES Sales of $2,705.1 million in 2008 increased 13.4 percent versus $2,385.5 million in 2007. The increase in sales was primarily attributed to organic sales growth of $92.9 million, the impact of acquisitions of $86.8 million and favorable foreign currency effects of $140.0 million. Regionally, organic sales growth was mostly driven by growth in European and Asia Pacific markets offset somewhat by weakness in the North American market. Organic sales growth by sector was led by year-over-year expansion in the aerospace, machine tools, general engineering, mining and highway construction markets.

Sales of $2,385.5 million in 2007 increased 2.4 percent versus $2,329.6 million in 2006. The increase in sales was primarily attributed to organic sales growth of $128.5 million and favorable foreign currency effects of $58.1 million. The organic sales growth was mostly driven by growth in European and developing economies, growth in the distribution and general engineering markets and favorable conditions in certain other markets, particularly in the energy and mining markets. These increases in sales were partially offset by a reduction from the net impact of acquisitions and divestitures of $130.7 million, primarily the divestiture of J&L.

GROSS PROFIT Gross profit increased $81.6 million to $923.2 million in 2008 from $841.6 million in 2007. The 9.7 percent increase was primarily due to organic sales growth, the effect of acquisitions, the effects of price increases and the impact of favorable foreign currency effects of $53.9 million. These benefits were partially offset by higher raw material costs, particularly products containing steel and cobalt, as well as a less favorable sales mix primarily due to a lower proportion of sales of energy-related products and lower performance in our surface finishing machines and services business. Gross profit for 2008 included restructuring charges of $1.2 million related to inventory write-offs and $0.2 million of other restructuring-related charges.

The gross profit margin for 2008 decreased 120 basis points to 34.1 percent from 35.3 percent in 2007. The decrease was primarily due to higher raw material costs as well as a less favorable sales mix and lower performance in our surface finishing machines and services business.

Gross profit increased $9.4 million to $841.6 million in 2007 from $832.2 million in 2006. The increase was primarily due to organic sales growth, favorable foreign currency effects of $23.0 million and a reduction of pension and other postretirement benefit expense of $6.9 million. These benefits were partially offset by the unfavorable net impact of acquisitions and divestitures of $42.2 million, higher raw material costs and costs related to a plant closure of $3.5 million.

The gross profit margin for 2007 decreased 40 basis points to 35.3 percent from 35.7 percent in 2006. The decrease was primarily attributed to higher raw material costs and an unfavorable impact due to the above-mentioned plant closure costs partially offset by the net impact of acquisitions and divestitures and a reduction in pension expense, which favorably impacted the margin by 80 basis points and 30 basis points, respectively.

OPERATING EXPENSE Operating expense in 2008 was $605.0 million, an increase of $50.4 million, or 9.1 percent, compared to $554.6 million in 2007. The increase in operating expense was primarily due to unfavorable foreign currency effects of $32.0 million, the impact of acquisitions of $16.5 million, a $5.9 million increase in employment costs and a $5.7 million increase in professional fees, partially offset by a decrease in other expenses. Operating expense for 2008 included restructuring-related charges of $1.9 million.

Operating expense in 2007 was $554.6 million, a decrease of $25.3 million, or 4.4 percent, compared to $579.9 million in 2006. The decrease in operating expense was primarily attributed to the net beneficial impact of acquisitions and divestitures of $38.4 million as well as reductions in professional fees of $6.2 million and pension and other postretirement benefit expense of $4.6 million. These benefits were partially offset by unfavorable foreign currency effects of $13.7 million, increased travel expenses of $3.4 million and the effect of a prior year environmental reserve adjustment of $2.6 million.

RESTRUCTURING AND ASSET IMPAIRMENT CHARGES During 2008, we initiated certain restructuring actions and recognized $4.9 million of restructuring charges. See the discussion under the heading “Restructuring Actions” within this MD&A for additional information.

The operating performance of our surface finishing machines and services business was lower than expected in 2008. The earnings forecast for the next five years was revised as a result of this decline in operating performance and a further weakness in markets served by this business, specifically in North America and the automotive sector. As a result, the tangible and intangible assets of this business were tested for impairment during 2008 and we recorded a related $35.0 million AMSG goodwill impairment charge. As of June 30, 2008, the remaining carrying value of goodwill related to this business was $39.4 million. The fair value of this business was estimated using a combination of a present value technique and a valuation technique based on multiples of earnings and revenue.

During 2007, we completed our strategic analysis and plan for our Widia brand. As a key element of our channel and brand strategy, we decided to leverage the strength of this brand to accelerate growth in the distribution market. Since demand in the distribution market is mostly for standard products and to further our relationship with our Widia distributors, we furthermore decided to migrate direct sales of Widia custom solutions products to the Kennametal brand. As a result, we recorded a pre-tax impairment charge of $6.0 million related to our MSSG Widia trademark during 2007.

In 2006, we did not incur any restructuring or impairment charges with respect to our continuing operations.

LOSS (GAIN) ON DIVESTITURES During 2008, we completed the divestitures of two non-core MSSG businesses for proceeds of $20.2 million and recognized a net loss on divestitures of $0.6 million. The results of operations for these businesses were not material and have not been presented as discontinued operations.

During 2007, we recorded a loss on divestiture of $1.6 million as a result of a post-closing adjustment related to our divestiture of J&L.

During 2006, we completed the divestitures of J&L and Presto for a gain of $233.9 million and a loss of $9.4 million, respectively. The inventory-related portion of the J&L gain and Presto loss amounting to $1.9 million and $7.3 million, respectively, were included in cost of goods sold in 2006. See the discussion under the heading “Acquisitions and Divestitures” within this MD&A for additional information related to these divestitures.

AMORTIZATION OF INTANGIBLES Amortization expense was $13.9 million in 2008, an increase of $4.0 million from $9.9 million in 2007. The increase was due to the impact of acquisitions.

Amortization expense increased $4.3 million to $9.9 million in 2007 from $5.6 million in 2006. The increase was due to the impact of acquisitions.

INTEREST EXPENSE Interest expense increased $2.6 million to $31.7 million in 2008, compared with $29.1 million in 2007. This increase was primarily due to an increase in average domestic borrowings of $110.2 million, offset in part by the effect of lower average interest rates on domestic borrowings of 6.2 percent, compared to 7.0 percent in 2007. The portion of our debt subject to variable rates of interest was approximately 68 percent and 53 percent at June 30, 2008 and 2007, respectively.

Interest expense decreased $1.9 million to $29.1 million in 2007 compared with $31.0 million in 2006. This decrease was due primarily to a $140.0 million decrease in average domestic borrowings partially offset by the impact of higher average borrowing rates. The weighted average domestic borrowing rate increased from 5.5 percent in 2006 to 7.0 percent in 2007 due primarily to repayments of lower cost floating rate debt during 2007.

OTHER INCOME, NET In 2008, other income, net decreased by $6.6 million to $2.6 million compared to $9.2 million in 2007. The decrease was due to unfavorable foreign currency transaction results of $4.4 million, lower other income of $1.6 million and lower interest income of $0.6 million.

In 2007, other income, net increased by $7.0 million to $9.2 million compared to $2.2 million in 2006. The increase was primarily due to a reduction in accounts receivable securitization fees of $4.7 million, an information technology service agreement resulting in $1.3 million of income and an increase in interest income of $0.8 million, partially offset by the effect of a prior year gain on the sale of a non-core product line of $1.1 million.

INCOME TAXES The effective tax rate from continuing operations for 2008 was 27.3 percent compared to 28.2 percent for 2007. The decrease in the effective rate from 2007 to 2008 was primarily driven by a further increase in earnings under our pan-European business strategy, the combined effects of other international operations, and a tax benefit associated with a dividend reinvestment plan in China. The effects of these items were partially offset by the effect of the goodwill impairment charge related to our surface finishing machines and services businesses for which there was no tax benefit, and a non-cash income tax charge related to a German tax reform bill that was enacted in the first quarter of 2008.

During 2008, we made a change in our determination with respect to cumulative undistributed earnings of international subsidiaries and affiliates whereby we now consider unremitted previously taxed income of our international subsidiaries to not be permanently reinvested. As a result of this change, we accrued an income tax liability of $3.0 million. Of this amount, $2.1 million decreased accumulated other comprehensive income and $0.9 million increased tax expense. As of June 30, 2008, the unremitted earnings of our non-U.S. subsidiaries and affiliates that have not been previously taxed in the U.S. are determined to be permanently reinvested, and accordingly, no deferred tax liability has been recorded in connection therewith. It is not practical to estimate the income tax effect that might be incurred if earnings not previously taxed in the U.S. were remitted to the United States.

Effective July 1, 2007, we adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109” (FIN 48). The adoption of FIN 48 had the following impacts on our consolidated balance sheet: a $0.3 million increase in current deferred tax assets, a $0.6 million increase in non-current deferred tax assets, a $14.1 million decrease in current accrued income taxes, a $1.7 million decrease in non-current deferred tax liabilities, a $20.0 million increase in non-current accrued income taxes and a $3.1 million decrease in retained earnings. As of the adoption date, we had $20.3 million of unrecognized tax benefits.

The effective tax rate from continuing operations for 2007 was 28.2 percent compared to 38.6 percent for 2006. The decrease in the effective rate from 2006 to 2007 was primarily driven by higher earnings from our pan-European business strategy, a favorable valuation allowance adjustment related to net operating loss carryforwards for state income tax purposes, unfavorable permanent differences in 2006 related to the J&L divestiture and income tax expense in 2006 associated with cash repatriated under the American Jobs Creation Act of 2004 (AJCA). The impact of these items was partially offset by a tax charge recognized in 2007 for tax contingencies in Europe, as well as the favorable resolution of tax contingencies in 2006 that were primarily related to a research and development credit claim.

INCOME FROM CONTINUING OPERATIONS Income from continuing operations was $167.8 million, or $2.15 per diluted share, in 2008 compared to $176.8 million, or $2.25 per diluted share, in 2007. The decrease in income from continuing operations was a result of the factors previously discussed.

Income from continuing operations was $176.8 million, or $2.25 per diluted share, in 2007 compared to $272.3 million, or $3.44 per diluted share, in 2006. The decrease in income from continuing operations was a result of the factors previously discussed.

BUSINESS SEGMENT REVIEW Prior to the divestiture of J&L in 2006, our operations were organized into three global business units consisting of MSSG, AMSG and J&L, and Corporate. In 2006, J&L outside sales, intersegment sales and operating income were $251.3 million, $0.8 million and $260.9 million, respectively. The presentation of segment information reflects the manner in which we organize segments for making operating decisions and assessing performance.

METALWORKING SOLUTIONS & SERVICES GROUP

(in thousands)		2008				2007				2006
External sales		$	1,789,859			$	1,577,234			$	1,401,777
Intersegment sales			174,004				135,502				186,024
Operating income			260,744				221,387				197,525

External sales increased by $212.6 million, or 13.5 percent, from 2007. The increase in sales was attributed to organic sales growth of 3.8 percent, favorable foreign currency effects of 6.8 percent and the effects of acquisitions of 2.9 percent. The organic sales growth was driven by increases in Europe of 7.6 percent, Asia Pacific of 15.3 percent, India of 8.0 percent and Latin America of 8.5 percent partially offset by an organic sales decline in North America of 3.0 percent. Industrial activity remained positive in most industry sectors on a global basis, most notably aerospace, machine tools and general engineering. Favorable foreign currency effects were $108.0 million for 2008.

Operating income increased by $39.4 million, or 17.8 percent, from 2007. Operating margin on total sales was 13.3 percent in 2008 compared to 12.9 percent in 2007. These results benefited from sales growth as discussed above, favorable foreign currency effects, continued cost containment and the impact of acquisitions. MSSG operating income included restructuring and related charges of $3.2 million and $1.7 million, respectively, for 2008.

External sales increased by $175.5 million, or 12.5 percent, from 2006. This increase was driven primarily by growth in European sales of 15.0 percent and North American sales of 9.4 percent, both aided somewhat by the effects of acquisitions, and growth in Asia Pacific sales of 21.4 percent and India sales of 14.5 percent. MSSG experienced growth in the distribution channel, general engineering, aerospace and machine tool markets. Favorable foreign currency effects were $49.4 million for 2007.

Operating income increased by $23.9 million, or 12.1 percent, from 2006. Operating margin on total sales was 12.9 percent in 2007 compared to 12.4 percent in 2006. These results benefited from sales growth as discussed above and continued cost containment, partially offset by an asset impairment charge of $6.0 million and $3.5 million of plant closure costs. The prior year results included divestiture-related charges of $9.4 million.

ADVANCED MATERIALS SOLUTIONS GROUP

(in thousands)		2008				2007				2006
External sales		$	915,270			$	808,259			$	676,556
Intersegment sales			39,131				42,881				38,509
Operating income			83,925				131,323				121,058

In 2008, AMSG external sales increased by $107.0 million, or 13.2 percent, from 2007. The increase in sales was attributed to organic sales growth of 4.2 percent and the effects of acquisitions of 5.0 percent and favorable foreign currency effects of 3.8 percent. The increase in organic sales was driven by stronger mining and construction product sales, which were up 9.8 percent, and energy and related product sales, which were up 3.3 percent. Engineered product sales were flat in 2008. Favorable foreign currency effects were $32.0 million for 2008.

Operating income decreased $47.4 million, or 36.1 percent, from 2007. Operating margin on total sales was 8.8 percent in 2008 compared to 15.4 percent in 2007. The decrease in margin was driven by a $35.0 million goodwill impairment charge and higher raw material costs as well as lower performance related to our surface finishing machines and services business and a less favorable sales mix. AMSG operating income included restructuring charges of $3.0 million for 2008.

In 2007, AMSG external sales increased by $131.7 million, or 19.5 percent, from 2006. The increase in sales was primarily attributed to the impact of favorable conditions in the energy market, increased market share in several markets, particularly the mining and construction market, and the effects of acquisitions. The increase in sales was achieved primarily in energy product sales, which were up 23.7 percent, engineered products sales, which were up 20.8 percent, and mining and construction products, which were up 6.4 percent. Favorable foreign currency effects were $11.2 million for the year.

Operating income increased $10.3 million, or 8.5 percent, from 2006. The increase was primarily attributed to the benefits of higher sales volumes, the effects of acquisitions and new product introductions, partially offset by higher raw material costs. Operating margin on total sales was 15.4 percent in 2007 compared to 16.9 percent in 2006. Margins decreased primarily due to the impact of higher raw material costs, the unfavorable impact in 2006 of recent acquisitions, the effects of certain restructuring actions taken within our surface finishing machines and services business and a softness in demand for certain markets served by that business, particularly related to diesel fuel systems.

CORPORATE Corporate represents corporate shared service costs, certain employee benefit costs, certain employment costs, such as performance-based bonuses and stock-based compensation expense, and eliminations of operating results between segments.

(in thousands)		2008				2007				2006
Operating loss		$	(80,770	)		$	(83,290	)		$	(102,958	)

In 2008, operating loss decreased $2.5 million, or 3.0 percent, from 2007. The decrease was primarily due to lower shared services expense of $6.6 million and reduced pension and other postretirement benefit expenses of $3.5 million, partially offset by lower other income of $5.6 million and higher employment costs of $2.6 million. Corporate operating loss included $0.3 million of restructuring-related costs for 2008.

In 2007, operating loss decreased $19.7 million, or 19.1 percent, from 2006. The decrease was primarily attributed to reductions in employment costs of $8.2 million, pension and other postretirement benefit expenses of $7.2 million and professional fees of $6.1 million as well as a $3.7 million decrease in J&L divestiture-related costs partially offset by a $2.5 million increase in research and development activities.

LIQUIDITY AND CAPITAL RESOURCES Our cash flow from operations is the primary source of financing for capital expenditures and organic growth. The most significant risk associated with our ability to generate sufficient cash flow from operations is the overall level of demand for our products. However, we believe we can adequately control costs and manage our working capital to meet our cash flow needs throughout changes in the economic cycle.

In March 2006, we entered into a five-year, multi-currency, revolving credit facility with a group of financial institutions (2006 Credit Agreement). The 2006 Credit Agreement permits revolving credit loans of up to $500.0 million for working capital, capital expenditures and general corporate purposes. The 2006 Credit Agreement allows for borrowings in U.S. dollars, Euro, Canadian dollars, pound sterling and Japanese yen. Interest payable under the 2006 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 0.5 percent or (3) fixed as negotiated by us.

The 2006 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). As of June 30, 2008, we had no outstanding borrowings under the agreement. We had the ability to borrow under the agreement, or otherwise incur additional debt of up to $1.2 billion as of June 30, 2008 and remain in compliance with the maximum leverage ratio financial covenant. At June 30, 2008, we were in compliance with all debt covenants.

Borrowings under the 2006 Credit Agreement are guaranteed by our significant domestic subsidiaries.

Additionally, we obtain local financing through credit lines with commercial banks in the various countries in which we operate. At June 30, 2008, these borrowings amounted to $32.8 million of notes payable and $5.8 million of term debt and capital leases. We believe that cash flow from operations and the availability under our credit lines will be sufficient to meet our cash requirements over the next 12 months.

Based upon our debt structure at June 30, 2008 and 2007, approximately 68 percent and 53 percent of our debt, respectively, was exposed to variable rates of interest, which is consistent with our target range for variable versus fixed interest rate debt. We periodically review the target range and the strategies designed to maintain the mix of variable to fixed interest rate debt within that range. In the future, we may decide to adjust the target range or the strategies to achieve it.

Following is a summary of our contractual obligations and other commercial commitments as of June 30, 2008 (in thousands):

Contractual Obligations						Total				2009				2010-2011				2012-2013				Thereafter
Long-term debt			(1	)		$	385,867			$	19,484			$	38,837			$	327,538			$	8
Notes payable			(2	)			33,551				33,551				—				—				—
Pension benefit payments								(3)			34,526				75,450				83,832					(3)
Postretirement benefit payments								(3)			2,910				5,998				5,695					(3)
Capital leases			(4	)			5,875				871				3,293				751				960
Operating leases							79,303				22,441				23,919				6,663				26,280
Purchase obligations			(5	)			644,373				206,127				270,898				145,525				21,823
Unrecognized tax benefits			(6	)			27,921				10,709				—				—				17,212
Total										$	330,619			$	418,395			$	570,004

1)		Long-term debt includes interest obligations of $77.3 million. Interest obligations were determined assuming interest rates as of June 30, 2008 remain constant.
2)		Notes payable includes interest obligations of $0.8 million. Interest obligations were determined assuming interest rates as of June 30, 2008 remain constant.
3)		Annual payments are expected to continue into the foreseeable future at the amounts noted in the table.
4)		Capital leases include interest obligations of $0.6 million.
5)		Purchase obligations consist of purchase commitments for materials, supplies and machinery and equipment as part of the ordinary conduct of business. Purchase obligations with variable price provisions were determined assuming current market prices as of June 30, 2008 remain constant.
6)		Unrecognized tax benefits are positions taken or expected to be taken on an income tax return that may result in additional payments to tax authorities. These amounts include interest of $3.7 million accrued related to such positions as of June 30, 2008. The amount included for 2009 is expected to be paid within the next twelve months. The remaining amount of unrecognized tax benefits is included in the ‘Thereafter’ column as we are not able to reasonably estimate the timing of potential future payments. If a tax authority agrees with the tax position taken or expected to be taken or the applicable statute of limitations expires, then additional payments will not be necessary.

Other Commercial Commitments		Total				2009				2010-2011				2012-2013				Thereafter
Standby letters of credit		$	6,346			$	1,512			$	4,834			$	—			$	—
Guarantees			22,044				19,794				67				—				2,183
Total		$	28,390			$	21,306			$	4,901			$	—			$	2,183

The standby letters of credit relate to insurance and other activities.

Cash flows from discontinued operations are not deemed material and have been combined with cash flows from continuing operations within each cash flow statement category. The absence of cash flows from discontinued operations is not expected to have a material impact on our future liquidity and capital resources.

During 2008, we generated $279.8 million in cash flow from operations, an increase of $80.8 million, compared to 2007. Cash flow provided by operating activities for 2008 consists of net income and non-cash items totaling $346.4 million, including $39.9 million of restructuring and asset impairment charges, offset somewhat by net changes in certain assets and liabilities of $66.6 million. Contributing to these changes were an increase in inventory of $34.0 million due primarily to higher raw material prices and initiatives to increase service levels, an increase in accounts receivable of $14.3 million and a decrease in accrued income taxes of $9.7 million.

During 2007, we generated $199.0 million in cash flow from operations, an increase of $180.0 million, compared to 2006. Cash flow provided by operating activities for 2007 consists of net income and non-cash items totaling $270.1 million offset somewhat by net changes in certain assets and liabilities of $71.1 million. Contributing to these net changes were a $31.1 million increase in accounts receivable due to higher sales volumes, a $26.1 million increase in inventory due to higher sales volume and increased raw material inventory, an increase in accounts payable and accrued liabilities of $39.3 million and a decrease in accrued income taxes of $63.5 million primarily due to first quarter tax payments of $86.2 million that mostly related to the gain on divestiture of J&L and cash repatriated during 2006 under the AJCA.

During 2006, cash flow provided by operating activities consisted of net income and non-cash items totaling $173.7 million offset mostly by net changes in certain assets and liabilities of $154.7 million. Contributing to such net changes were $109.8 million of remittances in excess of proceeds under our accounts receivable securitization program, a decrease in accounts payable and accrued liabilities of $85.4 million, which includes $73.0 million for funding a portion of our U.K. and U.S. defined benefit pension plans, and an increase in accrued income taxes of $73.1 million due primarily to divestiture activities.

Cash Flow Used for / Provided by Investing Activities

In 2008, net cash used for investing activities of $131.2 million included $163.5 million used for purchases of property, plant and equipment, which consisted primarily of equipment upgrades and geographical expansion, partially offset by proceeds from divestitures of $23.2 million and proceeds from the sale of investments in affiliated companies of $5.9 million.

We have projected our capital expenditures for 2009 to be approximately $155 million, which will be used primarily to invest in capacity, manufacturing capabilities and geographic expansion. We believe this level of capital spending is sufficient to maintain competitiveness and improve productivity.

In 2007, net cash used for investing activities of $302.5 million included $246.5 million used for the acquisition of business assets and $92.0 million used for purchases of property, plant and equipment, which consisted primarily of equipment upgrades, partially offset by proceeds from divestitures of $36.2 million.

During 2006, net cash provided by investing activities of $239.3 million included proceeds from divestitures of $352.4 million offset by purchases of property, plant and equipment of $79.6 million, which consisted primarily of equipment upgrades, and $31.4 million used for the acquisition of business assets.

Cash Flow Used for Financing Activities

In 2008, net cash used for financing activities was $125.7 million. This consisted primarily of $65.4 million for the repurchase of capital stock, a net decrease in borrowings of $38.1 million and $36.0 million of cash dividends paid to shareowners, partially offset by $14.8 million of dividend reinvestment and the effects of employee benefit and stock plans.

Net cash used for financing activities was $82.7 million in 2007. This consisted primarily of a net decrease in borrowings of $53.3 million, $41.4 million for the repurchase of capital stock and $31.8 million of cash dividends paid to shareowners, partially offset by $50.9 million of dividend reinvestment and the effects of employee benefit and stock plans.

During 2006, net cash used for financing activities of $66.0 million included $93.0 million for the repurchase of capital stock, $29.7 million of cash dividends paid to shareowners and a net decrease in borrowings of $16.5 million, partially offset by dividend reinvestment and the effect of employee benefit and stock plans of $75.8 million.

OFF-BALANCE SHEET ARRANGEMENTS We previously had an agreement with a financial institution whereby we were permitted to securitize, on a continuous basis, an undivided interest in a specific pool of our domestic trade accounts receivable. Pursuant to this agreement, we, and certain of our domestic subsidiaries, sold our domestic accounts receivable to Kennametal Receivables Corporation, a wholly-owned, bankruptcy-remote subsidiary. This agreement was discontinued in 2008.

The financial institutions charged us fees based on the level of accounts receivable securitized under this agreement and the commercial paper market rates plus the financial institutions’ cost to administer the program. The costs incurred under this program in 2008 and 2007 were immaterial. The costs incurred under this program in 2006 were $4.8 million and were accounted for as a component of other income, net.

At June 30, 2008 and 2007, there were no accounts receivable securitized under this program. In June 2006, total remittances of accounts receivable securitized reduced these amounts to zero. No additional accounts receivable were securitized after this reduction.

FINANCIAL CONDITION At June 30, 2008, total assets were $2,784.3 million having increased $178.1 million from $2,606.2 million at June 30, 2007. Total liabilities increased $10.8 million from $1,104.1 million at June 30, 2007 to $1,114.9 million at June 30, 2008.

Working capital was $630.7 million at June 30, 2008, an increase of $101.4 million or 19.2 percent from $529.3 million at June 30, 2007. The increase in working capital was primarily driven by an increase in inventory of $57.2 million and an increase in accounts receivable of $46.1 million. Foreign currency effects accounted for $34.3 million and $33.9 million of the increases in inventory and accounts receivable, respectively.

Property, plant and equipment, net increased $135.8 million from $614.0 million at June 30, 2007 to $749.8 million at June 30, 2008, primarily due to capital expenditures of $163.5 million related to machinery and equipment upgrades and geographic expansion, foreign currency effects of $38.8 million and the net impact of acquisitions and divestitures, partially offset by depreciation expense of $80.9 million.

At June 30, 2008, other assets were $882.6 million, a decrease of $93.1 million from $975.7 million at June 30, 2007. The decrease in other assets was primarily attributed to a decrease in other of $51.1 million due mostly to a reduction in pension assets and a reduction in goodwill of $22.8 million caused by a goodwill impairment charge.

Non-current liabilities decreased $23.3 million to $593.6 million at June 30, 2008 from $616.9 million at June 30, 2007 primarily due to a decrease in long-term debt and capital leases of $48.3 million offset somewhat by an increase in accrued income taxes of $17.2 million for uncertain tax positions related to the adoption of FIN 48 in 2008 and a $6.3 million increase in deferred income taxes.

Shareowners’ equity was $1,647.9 million at June 30, 2008, an increase of $163.4 million from $1,484.5 million in the prior year. The increase was primarily attributed to net income of $167.8 million, the effect of employee stock and benefit plan activity of $19.0 million and other comprehensive income of $80.4 million partially offset by repurchases of capital stock totaling $65.4 million and cash dividends of $36.0 million.

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 PRP at various sites designated by the USEPA as Superfund sites. With respect to the Li Tungsten Superfund site in Glen Cove, New York, we remitted $0.9 million in 2008 to the DOJ as payment in full settlement for its claim against us for costs related to that site and reversed the remaining accrual of $0.1 million to operating expense. At June 30, 2007, we had an accrual of $1.0 million relative to this environmental issue.

We have been named as a PRP at the Alternate Energy Resources Inc. site located in Augusta, Georgia. The proceedings in this matter have not yet progressed to a stage 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 Issues Additionally, we also maintain reserves for other potential environmental issues. At June 30, 2008 and 2007, the total of these accruals was $6.2 million and $6.1 million, respectively, and represents anticipated costs associated with the remediation of these issues. Cash payments of $1.0 million and $0.1 million were made against these reserves during 2008 and 2007, respectively. We recorded unfavorable foreign currency translation adjustments of $0.8 and $0.2 million during 2008 and 2007, respectively, related to these reserves. We also recorded additional reserves of $0.3 million during 2008. During 2006, we completed the remediation activities related to a site in India and reversed the remaining accrual of $1.0 million to operating expense.

We maintain a Corporate EH&S Department, as well as an EH&S Steering Committee, to ensure compliance with environmental regulations and to monitor and oversee remediation activities. In addition, we have established an EH&S administrator at each of our global manufacturing facilities. Our financial management team periodically meets with members of the Corporate EH&S 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 such reserves when appropriate.

EFFECTS OF INFLATION Despite modest inflation in recent years, rising costs, in particular the cost of certain raw materials, continue to affect our operations throughout the world. We strive to minimize the effects of inflation through cost containment, productivity improvements and price increases under competitive conditions.

DISCUSSION OF CRITICAL ACCOUNTING POLICIES In preparing our financial statements in conformity with accounting principles generally accepted in the United States of America, we make judgments and estimates about the amounts reflected in our financial statements. As part of our financial reporting process, our management collaborates to determine the necessary information on which to base our judgments and develops estimates used to prepare the financial statements. We use historical experience and available information to make these judgments and estimates. However, different amounts could be reported using different assumptions and in light of different facts and circumstances. Therefore, actual amounts could differ from the estimates reflected in our financial statements. Our significant accounting policies are described in Note 2. We believe that the following discussion addresses our critical accounting policies.

Revenue Recognition We recognize revenue upon shipment of our products and assembled machines. Our general conditions of sale explicitly state that the delivery of our products and assembled machines is F.O.B. shipping point and that title and all risks of loss and damages pass to the buyer upon delivery of the sold products or assembled machines to the common carrier.

Our general conditions of sale explicitly state that acceptance of the conditions of shipment is considered to have occurred unless written notice of objection is received by Kennametal within 10 calendar days of the date specified on the invoice. We do not ship products or assembled machines unless we have documentation authorizing shipment to our customers. Our products are consumed by our customers in the manufacture of their products. Historically, we have experienced very low levels of returned products and assembled machines and do not consider the effect of returned products and assembled machines to be material. We have recorded an estimated returned goods allowance to provide for any potential returns.

We warrant that products and services sold are free from defects in material and workmanship under normal use and service when correctly installed, used and maintained. This warranty terminates 30 days after delivery of the product to the customer, and does not apply to products that have been subjected to misuse, abuse, neglect or improper storage, handling or maintenance. Products may be returned to Kennametal only after inspection and approval by Kennametal and upon receipt by the customer of shipping instructions from Kennametal. We have included an estimated allowance for warranty returns in our returned goods allowance discussed above.

We recognize revenue related to the sale of specialized assembled machines upon customer acceptance and installation, as installation is deemed essential to the functionality of a specialized assembled machine. Sales of specialized assembled machines were immaterial for 2008, 2007 and 2006.

Stock-based Compensation We recognize stock-based compensation expense for all stock options, restricted stock awards and restricted stock units over the period from the date of grant to the date when the award is no longer contingent on the employee providing additional service (substantive vesting period). We continue to follow the nominal vesting period approach for unvested awards granted prior to the adoption of Statement of Financial Accounting Standard (SFAS) No. 123(R), “Share-Based Payment (revised 2004)” on July 1, 2005. We utilize the Black-Scholes valuation method to establish the fair value of all awards.

Accounting for Contingencies We accrue for contingencies when it is probable that a liability or loss has been incurred and the amount can be reasonably estimated. Contingencies by their nature relate to uncertainties that require the exercise of judgment in both assessing whether or not a liability or loss has been incurred and estimating the amount of probable loss. The significant contingencies affecting our financial statements include environmental, health and safety matters and litigation.

Long-Lived Assets We evaluate the recoverability of property, plant and equipment and intangible assets that are amortized whenever events or changes in circumstances indicate the carrying amount of any such assets may not be fully recoverable. Changes in circumstances include technological advances, changes in our business model, capital structure, economic conditions or operating performance. Our evaluation is based upon, among other things, our assumptions about the estimated future undiscounted cash flows these assets are expected to generate. When the sum of the undiscounted cash flows is less than the carrying value, we will recognize an impairment loss to the extent that carrying value exceeds fair value. We apply our best judgment when performing these evaluations to determine if a triggering event has occurred, the undiscounted cash flows used to assess recoverability and the fair value of the asset.

Goodwill and Indefinite-Lived Intangible Assets We evaluate the recoverability of goodwill of each of our reporting units by comparing the fair value of each reporting unit with its carrying value. The fair values of our reporting units are determined using a combination of a discounted cash flow analysis and market multiples based upon historical and projected financial information. We apply our best judgment when assessing the reasonableness of the financial projections used to determine the fair value of each reporting unit. We evaluate the recoverability of indefinite-lived intangible assets using a discounted cash flow analysis based on projected financial information. This evaluation is sensitive to changes in market interest rates.

Pension and Other Postretirement and Postemployment Benefits We sponsor these types of benefit plans for a majority of our employees and retirees. Accounting for the cost of these plans requires the estimation of the cost of the benefits to be provided well into the future and attributing that cost over the expected work life of employees participating in these plans. This estimation requires our judgment about the discount rate used to determine these obligations, expected return on plan assets, rate of future compensation increases, rate of future health care costs, withdrawal and mortality rates and participant retirement age. Differences between our estimates and actual results may significantly affect the cost of our obligations under these plans.

In the valuation of our pension and other postretirement and postemployment benefit liabilities, management utilizes various assumptions. We determine our discount rate based on an investment grade bond yield curve with a duration that approximates the benefit payment timing of each plan. This rate can fluctuate based on changes in investment grade bond yields. At June 30, 2008, a hypothetical 25 basis point increase or decrease in our discount rates would increase or decrease, respectively, our pre-tax income by approximately $1.0 million.

The long-term rate of return on plan assets is estimated based on an evaluation of historical returns for each asset category held by the plans, coupled with the current and short-term mix of the investment portfolio. The historical returns are adjusted for expected future market and economic changes. This return will fluctuate based on actual market returns and other economic factors.

The rate of future health care cost increases is based on historical claims and enrollment information projected over the next fiscal year and adjusted for administrative charges. This rate is expected to decrease until 2014. At June 30, 2008, a hypothetical 1 percent increase or decrease in our health care cost trend rates would decrease or increase our pre-tax income by $0.2 million.

Future compensation rates, withdrawal rates and participant retirement age are determined based on historical information. These assumptions are not expected to significantly change. Mortality rates are determined based on a review of published mortality tables.

We expect to contribute $7.2 million and $2.6 million to our pension and other postretirement benefit plans, respectively, in 2009.

Allowance for Doubtful Accounts We record allowances for estimated losses resulting from the inability of our customers to make required payments. We assess the creditworthiness of our customers based on multiple sources of information and analyze additional factors such as our historical bad debt experience, industry and geographic concentrations of credit risk, current economic trends and changes in customer payment terms. This assessment requires significant judgment. If the financial condition of our customers was to deteriorate, additional allowances may be required, resulting in future operating losses that are not included in the allowance for doubtful accounts at June 30, 2008.

Inventories Inventories are stated at the lower of cost or market. We use the last-in, first-out method for determining the cost of a significant portion of our U.S. inventories. The cost of the remainder of our inventories is determined under the first-in, first-out or average cost methods. When market conditions indicate an excess of carrying costs over market value, a lower-of-cost-or-market provision is recorded. Excess and obsolete inventory reserves are established based upon our evaluation of the quantity of inventory on hand relative to demand.

Income Taxes Realization of our deferred tax assets is primarily dependent on future taxable income, the timing and amount of which are uncertain in part due to the expected profitability of certain foreign subsidiaries. A valuation allowance is recognized if it is “more likely than not” that some or all of a deferred tax asset will not be realized. As of June 30, 2008, the deferred tax assets net of valuation allowances relate primarily to net operating loss carryforwards, accrued employee benefits and inventory reserves. In the event that we were to determine that we would not be able to realize our deferred tax assets in the future, an increase in the valuation allowance would be required.

NEW ACCOUNTING STANDARDS In March 2008, the Financial Accounting Standards Board (FASB) issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133” (SFAS 161). SFAS 161 expands the current disclosure requirements in SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS 161 is effective for Kennametal beginning January 1, 2009. We are in the process of evaluating the provisions of SFAS 161 to determine the impact of adoption on our consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (SFAS 141(R)). SFAS 141(R) establishes principles and requirements for how an acquirer accounts for business combinations and includes guidance for the recognition, measurement and disclosure of the identifiable assets acquired, the liabilities assumed and any noncontrolling or minority interest in the acquiree. It also provides guidance for the measurement of goodwill, the recognition of contingent consideration and the accounting for pre-acquisition gain and loss contingencies, as well as acquisition-related transaction costs and the recognition of changes in the acquirer’s income tax valuation allowance. SFAS 141(R) is to be applied prospectively and is effective for Kennametal beginning July 1, 2009. We are in the process of evaluating the provisions of SFAS 141(R) to determine the impact of adoption on our consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB No. 51” (SFAS 160). SFAS 160 amends Accounting Research Bulletin No. 51, “Consolidated Financial Statements” to establish accounting and reporting standards for any noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 clarifies that a noncontrolling interest in a subsidiary should be reported as a component of equity in the consolidated financial statements and requires disclosure on the face of the consolidated statement of income of the amounts of consolidated net income attributable to the parent and to the noncontrolled interest. SFAS 160 is to be applied prospectively and is effective for Kennametal as of July 1, 2009, except for the presentation and disclosure requirements, which, upon adoption, will be applied retrospectively for all periods presented. We are in the process of evaluating the provisions of SFAS 160 to determine the impact of adoption on our consolidated financial statements.

In June 2007, the FASB ratified Emerging Issues Task Force (EITF) Issue No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards” (EITF 06-11). EITF 06-11 requires that tax benefits generated by dividends paid during the vesting period on certain equity-classified share-based compensation awards be classified as additional paid-in capital and included in a pool of excess tax benefits available to absorb tax deficiencies from share-based payment awards. EITF 06-11 was effective for Kennametal on July 1, 2008 and is to be applied on a prospective basis. The adoption of this EITF will not have a material impact on our consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115” (SFAS 159). SFAS 159 permits entities to measure many financial instruments at fair value with the changes in fair value recognized in earnings at each subsequent reporting date. SFAS 159 was effective for Kennametal as of July 1, 2008. We are in the process of evaluating the provisions of SFAS 159 to determine the impact of adoption on our consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures related to fair value measurements. The provisions of this standard apply to other accounting pronouncements that require or permit fair value measurements. SFAS 157 was effective for Kennametal as of July 1, 2008 for financial assets and liabilities and as of July 1, 2009 for non-financial assets and liabilities. Upon adoption, the provisions of SFAS 157 are to be applied prospectively with limited exceptions. We are in the process of evaluating the impact of the provisions of SFAS 157 on our consolidated financial statements.

ITEM 7A — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISK We are exposed to certain market risks arising from transactions that are entered into in the normal course of business. As part of our financial risk management program, we use certain derivative financial instruments to manage these risks. 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 dampen the effects of changes in foreign exchange rates on our consolidated results and to achieve our targeted mix of fixed and floating interest rates on outstanding debt. Our objective in managing foreign exchange exposures with derivative instruments is to reduce volatility for both earnings and 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, net in the current period. See Notes 2 and 15 in our consolidated financial statements set forth in Item 8.

We are exposed to counterparty credit risk for nonperformance of derivative contracts and, in the event of nonperformance, to market risk for changes in interest and currency rates, as well as settlement risk. We manage exposure to counterparty credit risk through credit standards, diversification of counterparties and procedures to monitor concentrations of credit risk. We do not anticipate nonperformance by any of the counterparties.

The following provides additional information on our use of derivative instruments. Included below is a sensitivity analysis that is based upon a hypothetical 10 percent weakening or strengthening in the U.S. dollar compared to the June 30, 2008 foreign currency rates and the effective interest rates under our current borrowing arrangements. We compared the contractual derivative and borrowing arrangements in effect at June 30, 2008 to the hypothetical foreign exchange or interest rates in the sensitivity analysis to determine the effect on interest expense, pre-tax income or accumulated other comprehensive income. Our analysis takes into consideration the different types of derivative instruments and the applicability of hedge accounting.

CASH FLOW HEDGES Currency A portion of our operations consists of investments in foreign subsidiaries. Our exposure to market risk for changes in foreign exchange rates arises from these investments, intercompany loans utilized to finance these subsidiaries, trade receivables and payables and firm commitments arising from international transactions. We manage our foreign exchange transaction risk to reduce the volatility of cash flows caused by currency fluctuations through natural offsets where appropriate and through foreign exchange contracts. These contracts are designated as hedges of transactions that will settle in future periods and otherwise would expose us to foreign currency risk.

Our foreign exchange hedging program minimizes our exposure to foreign exchange rate movements. This exposure arises largely from anticipated cash flows from cross-border intercompany sales of products and services. This program utilizes range forwards and forward contracts primarily to sell foreign currency. The notional amounts of the contracts translated into U.S. dollars at June 30, 2008 and 2007 rates were $126.5 million and $135.4 million, respectively. We would have paid $0.3 million and $1.4 million at June 30, 2008 and 2007, respectively, to settle these contracts, which represent the fair value of these agreements. At June 30, 2008, a hypothetical 10 percent strengthening or weakening of the U.S. dollar would change accumulated other comprehensive income (loss), net of tax, by $4.8 million.

In addition, we may enter into forward contracts to hedge transaction exposures or significant cross-border intercompany loans by either purchasing or selling specified amounts of foreign currency at a specified date. At June 30, 2008 and 2007, we had several outstanding forward contracts to purchase and sell foreign currency, with notional amounts, translated into U.S. dollars at June 30, 2008 and 2007 rates, of $111.4 million and $63.7 million, respectively. At June 30, 2008, a hypothetical 10 percent change in the year-end exchange rates would result in an increase or decrease in pre-tax income of $8.8 million related to these positions.

Interest Rate Our exposure to market risk for changes in interest rates relates primarily to our long-term debt obligations. We seek to manage our interest rate risk in order to balance our exposure between fixed and floating rates while attempting to minimize our borrowing costs. To achieve these objectives, we primarily use interest rate swap agreements to manage exposure to interest rate changes related to these borrowings. We had no such agreements in place at June 30, 2008. At June 30, 2007, we had interest rate swap agreements outstanding that effectively converted notional amounts $58.6 million of debt from floating to fixed interest rates. These agreements matured in 2008. We would have received $0.7 million at June 30, 2007 to settle these interest rate swap agreements, which represented the fair value of these agreements.

FAIR VALUE HEDGES Interest Rate As discussed above, our exposure to market risk for changes in interest rates relates primarily to our long-term debt obligations. We seek to manage this risk through the use of interest rate swap agreements. At June 30, 2008 and 2007, we had interest rate swap agreements outstanding that effectively convert a notional amount of $200.0 million of the Senior Unsecured Notes from fixed to variable interest rates. These agreements mature in June 2012.

DEBT AND NOTES PAYABLE At June 30, 2008 and 2007, we had $346.7 million and $366.8 million, respectively, of debt, including capital leases and notes payable outstanding. Effective interest rates as of June 30, 2008 and 2007 were 6.2 percent and 7.2 percent, respectively, including the effect of interest rate swaps. A hypothetical change of 10 percent in interest rates from June 30, 2008 levels would increase or decrease annual interest expense by approximately $1.0 million.

FOREIGN CURRENCY EXCHANGE RATE FLUCTUATIONS Foreign currency exchange rate fluctuations have materially increased earnings in 2008 and 2007 and materially reduced earnings in 2006 as compared to the prior year periods. Foreign currency exchange rate fluctuations may have a material impact on future earnings in the short term and long term.

ITEM 8 — FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management is responsible for establishing and maintaining adequate internal control over financial reporting. Management has conducted an assessment of the Company’s internal controls over financial reporting as of June 30, 2008 using the criteria in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Based on its assessment, management has concluded that the Company maintained effective internal control over financial reporting as of June 30, 2008, based on criteria in Internal Control – Integrated Framework issued by the COSO. The effectiveness of the Company’s internal control over financial reporting as of June 30, 2008 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.

MANAGEMENT’S CERTIFICATIONS

The certifications of the Company’s Chief Executive Officer and Chief Financial Officer required under Section 302 of the Sarbanes-Oxley Act have been filed as Exhibits 31.1 and 31.2 to this report. Additionally, in October 2007, the Company’s Chief Executive Officer filed with the New York Stock Exchange (NYSE) the annual certification required to be furnished to the NYSE pursuant to Section 303A.12 of the NYSE Listed Company Manual. The certification confirmed that the Company’s Chief Executive Officer was not aware of any violation by the Company of the NYSE’s corporate governance listing standards.

Report of Independent Registered Public Accounting Firm

To the Shareowners of Kennametal Inc.:

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Kennametal Inc. and its subsidiaries (the Company) at June 30, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2008 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 8. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As discussed in Note 11 to the consolidated financial statements, the Company changed its method of accounting for uncertainty in income taxes in 2008. As discussed in Note 12 to the consolidated financial statements, the Company changed its method of accounting for defined benefit pension and other postretirement plans in 2007.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
August 13, 2008

CONSOLIDATED STATEMENTS OF INCOME

Year ended June 30 (in thousands, except per share data)		2008				2007				2006
Sales		$	2,705,129			$	2,385,493			$	2,329,628
Cost of goods sold			1,781,889				1,543,931				1,497,462
Gross profit			923,240				841,562				832,166
Operating expense			605,004				554,634				579,907
Restructuring and asset impairment charges (Notes 2 and 14)			39,891				5,970				—
Loss (gain) on divestitures (Notes 2 and 4)			582				1,686				(229,886	)
Amortization of intangibles			13,864				9,852				5,626
Operating income			263,899				269,420				476,519
Interest expense			31,728				29,141				31,019
Other income, net			(2,641	)			(9,217	)			(2,219	)
Income from continuing operations before income taxes and minority interest expense			234,812				249,496				447,719
Provision for income taxes (Note 11)			64,057				70,469				172,902
Minority interest expense			2,980				2,185				2,566
Income from continuing operations			167,775				176,842				272,251
Loss from discontinued operations (Note 5)			—				(2,599	)			(15,968	)
Net income		$	167,775			$	174,243			$	256,283
PER SHARE DATA (Note 2)
Basic earnings (loss)
Continuing operations		$	2.18			$	2.30			$	3.54
Discontinued operations			—				(0.03	)			(0.21	)
		$	2.18			$	2.27			$	3.33
Diluted earnings (loss)
Continuing operations		$	2.15			$	2.25			$	3.44
Discontinued operations			—				(0.03	)			(0.20	)
		$	2.15			$	2.22			$	3.24
Dividends per share		$	0.47			$	0.41			$	0.38
Basic weighted average shares outstanding			76,811				76,788				76,864
Diluted weighted average shares outstanding			78,201				78,545				79,101

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

CONSOLIDATED BALANCE SHEETS

As of June 30 (in thousands, except per share data)		2008				2007
ASSETS
Current assets:
Cash and cash equivalents		$	86,478			$	50,433
Accounts receivable, less allowance for doubtful accounts of $18,473 and $17,031			512,794				466,690
Inventories (Note 7)			460,800				403,613
Deferred income taxes (Note 11)			53,330				51,837
Other current assets			38,584				43,929
Total current assets			1,151,986				1,016,502
Property, plant and equipment:
Land and buildings			375,128				334,899
Machinery and equipment			1,382,028				1,159,462
Less accumulated depreciation			(1,007,401	)			(880,342	)
Property, plant and equipment, net			749,755				614,019
Other assets:
Investments in affiliated companies			2,325				3,924
Goodwill (Note 2)			608,519				631,363
Intangible assets, less accumulated amortization of $42,010 and $26,332 (Note 2)			194,203				202,927
Deferred income taxes (Note 11)			25,021				33,880
Other			52,540				103,612
Total other assets			882,608				975,706
Total assets		$	2,784,349			$	2,606,227
LIABILITIES
Current liabilities:
Current maturities of long-term debt and capital leases (Note 9)		$	813			$	2,120
Notes payable to banks (Note 10)			32,787				3,310
Accounts payable			189,050				189,301
Accrued income taxes (Note 11)			28,102				49,542
Accrued vacation pay			40,255				36,537
Accrued payroll			81,384				67,957
Other current liabilities (Note 8)			148,920				138,470
Total current liabilities			521,311				487,237
Long-term debt and capital leases, less current maturities (Note 9)			313,052				361,399
Deferred income taxes (Note 11)			76,980				70,669
Accrued postretirement benefits (Note 12)			23,599				26,546
Accrued pension benefits (Note 12)			105,580				105,214
Accrued income taxes (Note 11)			17,213				—
Other liabilities			57,180				53,071
Total liabilities			1,114,915				1,104,136
Commitments and contingencies (Note 18)
Minority interest in consolidated subsidiaries			21,527				17,624
SHAREOWNERS’ EQUITY (Notes 2 and 20)
Preferred stock, no par value; 5,000 shares authorized; none issued			—				—
Capital stock, $1.25 par value; 120,000 shares authorized; 76,858 and 82,974 shares issued			96,076				103,722
Additional paid-in capital			468,169				655,086
Retained earnings			941,553				812,917
Treasury shares, at cost; 0 and 5,002 shares held			—				(148,932	)
Accumulated other comprehensive income			142,109				61,674
Total shareowners’ equity			1,647,907				1,484,467
Total liabilities and shareowners’ equity		$	2,784,349			$	2,606,227

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

CONSOLIDATED STATEMENTS OF CASH FLOW

Year ended June 30 (in thousands)		2008				2007a				2006a
OPERATING ACTIVITIES
Net income		$	167,775			$	174,243			$	256,283
Adjustments for non-cash items:
Depreciation			80,869				68,811				65,518
Amortization			13,864				9,852				5,626
Stock-based compensation expense			9,512				16,276				23,544
Restructuring and asset impairment charges (Notes 2, 5 and 14)			39,891				8,970				15,674
Loss (gain) on divestitures (Notes 4 and 5)			582				2,531				(202,052	)
Deferred income tax provision			31,967				(8,938	)			8,839
Other			1,945				(1,598	)			303
Changes in certain assets and liabilities, excluding effects of acquisitions and divestitures:
Accounts receivable			(14,297	)			(31,062	)			(26,953	)
Change in accounts receivable securitization			—				—				(109,786	)
Inventories			(34,034	)			(26,117	)			(7,711	)
Accounts payable and accrued liabilities			(4,792	)			39,343				(85,354	)
Accrued income taxes			(9,734	)			(63,516	)			73,062
Other			(3,762	)			10,211				2,060
Net cash flow provided by operating activities			279,786				199,006				19,053
INVESTING ACTIVITIES
Purchases of property, plant and equipment			(163,489	)			(92,001	)			(79,593	)
Disposals of property, plant and equipment			2,839				3,455				2,961
Acquisitions of business assets, net of cash acquired			(2,968	)			(246,496	)			(31,373	)
Proceeds from divestitures (Notes 4 and 5)			23,229				36,172				352,364
Purchase of subsidiary stock			—				—				(7,261	)
Proceeds from sale of investments in affiliated companies			5,915				—				—
Other			3,233				(3,668	)			2,230
Net cash flow (used for) provided by investing activities			(131,241	)			(302,538	)			239,328
FINANCING ACTIVITIES
Net increase (decrease) in notes payable			28,196				2,741				(43,207	)
Net increase in short-term revolving and other lines of credit			—				—				(3,500	)
Term debt borrowings			338,646				43,541				569,293
Term debt repayments			(404,904	)			(99,576	)			(539,042	)
Purchase of capital stock			(65,429	)			(41,401	)			(93,015	)
Dividend reinvestment and employee benefit and stock plans			14,811				50,914				75,774
Cash dividends paid to shareowners			(35,994	)			(31,759	)			(29,719	)
Other			(1,031	)			(7,181	)			(2,614	)
Net cash flow used for financing activities			(125,705	)			(82,721	)			(66,030	)
Effect of exchange rate changes on cash and cash equivalents			13,205				2,710				1,595
CASH AND CASH EQUIVALENTS
Net increase (decrease) in cash and cash equivalents			36,045				(183,543	)			190,756
Cash and cash equivalents, beginning of year			50,433				233,976				43,220
Cash and cash equivalents, end of year		$	86,478			$	50,433			$	233,976

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

CONSOLIDATED STATEMENTS OF SHAREOWNERS’ EQUITY

		2008								2007								2006
Year ended June 30 (in thousands)		Shares				Amount				Shares				Amount				Shares				Amount
CAPITAL STOCK (Note 2)
Balance at beginning of year			82,974			$	103,722				80,712			$	100,896				76,484			$	95,610
Dividend reinvestment			13				16				—				—				168				210
Capital stock issued under employee benefit and stock plans			649				806				2,262				2,826				4,060				5,076
Treasury share restoration (Note 20)			(6,456	)			(8,066	)			—				—				—				—
Purchase of capital stock			(322	)			(402	)			—				—				—				—
Balance at end of year			76,858				96,076				82,974				103,722				80,712				100,896
ADDITIONAL PAID-IN CAPITAL (Note 2)
Balance at beginning of year							655,086								587,951								502,559
SFAS 123 (R) reclassification adjustment							—								—								(12,687	)
Dividend reinvestment							456								1,643								4,079
Capital stock issued under employee benefit and stock plans							24,362								65,492								94,000
Treasury share restoration (Note 20)							(202,484	)							—								—
Purchase of capital stock							(9,251	)							—								—
Balance at end of year							468,169								655,086								587,951
RETAINED EARNINGS
Balance at beginning of year							812,917								670,433								443,869
Net income							167,775								174,243								256,283
Cash dividends paid to shareowners							(35,994	)							(31,759	)							(29,719	)
Impact of adoption of FIN48 (Note 11)							(3,145	)							—								—
Balance at end of year							941,553								812,917								670,433
TREASURY SHARES, AT COST (Note 2)
Balance at beginning of year			(5,002	)			(148,932	)			(3,498	)			(101,781	)			(230	)			(5,367	)
Dividend reinvestment			10				315				266				6,050				—				—
Purchase of capital stock			(1,410	)			(55,776	)			(1,376	)			(41,401	)			(3,172	)			(93,015	)
Capital stock issued under employee benefit and stock plans			(54	)			(6,157	)			(394	)			(11,800	)			(96	)			(3,399	)
Treasury share restoration (Note 20)			6,456				210,550				—				—				—				—
Balance at end of year			—				—				(5,002	)			(148,932	)			(3,498	)			(101,781	)
UNEARNED COMPENSATION
Balance at beginning of year							—								—								(12,687	)
SFAS 123 (R) reclassification adjustment							—								—								12,687
Balance at end of year							—								—								—
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance at beginning of year							61,674								37,866								(51,122	)
Reclassification of unrealized loss on investments, net of tax							—								—								450
Unrealized gain (loss) on derivatives designated and qualified as cash flow hedges, net of tax							2,412								1,035								(104	)
Reclassification of unrealized gain on expired derivatives, net of tax							(2,452	)							(1,682	)							(38	)
Net unrecognized pension and other postretirement benefit losses, net of tax							(21,393	)							—								—
Reclassification of net unrecognized pension and other postemployment benefit losses, net of tax							3,249								—								—
Minimum pension liability adjustment, net of tax							—								8,348								67,720
Foreign currency translation adjustments, net of tax							98,619								46,739								20,960
Other comprehensive income, net of tax							80,435								54,440								88,988
Impact of adoption of SFAS 158, net of tax							—								(30,632	)							—
Balance at end of year							142,109								61,674								37,866
Total shareowners’ equity, June 30						$	1,647,907							$	1,484,467							$	1,295,365

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — NATURE OF OPERATIONS

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 achieve a leading market presence in our primary markets. We believe that we are the second largest global provider of metalcutting tools and tooling systems. End users of our products include metalworking manufacturers and suppliers in the aerospace, automotive, machine tool, light machinery and heavy machinery industries, as well as manufacturers and suppliers in the highway construction, coal mining, quarrying and oil and gas exploration and production industries. Our end users’ products include items ranging from airframes to coal, medical implants to oil wells and turbochargers to motorcycle parts.

Unless otherwise specified, any reference to a “year” is to a fiscal year ended June 30. When used in this annual report on Form 10-K, unless the context requires otherwise, the terms “we,” “our” and “us” refer to Kennametal Inc. and its subsidiaries.

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The summary of our significant accounting policies is presented below to assist in evaluating our consolidated financial statements.

PRINCIPLES OF CONSOLIDATION The consolidated financial statements include our accounts and those of our majority-owned subsidiaries. All significant intercompany balances and transactions are eliminated. Investments in entities of less than 50 percent of the voting stock over which we have significant influence are accounted for on an equity basis. The factors used to determine significant influence include, but are not limited to, our management involvement in the investee, such as hiring and setting compensation for management of the investee, the ability to make operating and capital decisions of the investee, representation on the investee’s board of directors and purchase and supply agreements with the investee. Investments in entities of less than 50 percent of the voting stock in which we do not have significant influence are accounted for on the cost basis.

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS In preparing our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, we make judgments and estimates about the amounts reflected in our financial statements. As part of our financial reporting process, our management collaborates to determine the necessary information on which to base our judgments and develop estimates used to prepare the financial statements. We use historical experience and available information to make these judgments and estimates. However, different amounts could be reported using different assumptions and in light of different facts and circumstances. Therefore, actual amounts could differ from the estimates reflected in our financial statements.

CAPITAL STOCK SPLIT On October 23, 2007, the Board of Directors approved a two-for-one capital stock split in the form of a capital stock dividend, which was distributed after the close of trading on December 18, 2007 to all shareowners of record as of the close of business on December 4, 2007. The stated par value of each share was not changed from $1.25. The related issuance of 41.7 million additional shares resulted in a $52.1 million transfer from additional paid-in-capital to capital stock. All share and per share amounts as well as the balance sheet accounts for capital stock and additional paid-in capital in these consolidated financial statements retroactively reflect the effect of this capital stock split.

CASH AND CASH EQUIVALENTS Cash investments having original maturities of three months or less are considered cash equivalents. Cash equivalents principally consist of investments in money market funds at June 30, 2008.

ACCOUNTS RECEIVABLE Accounts receivable from affiliates were immaterial at June 30, 2008 and 2007. We market our products to a diverse customer base throughout the world. Trade credit is extended based upon periodically updated evaluations of each customer’s ability to satisfy its obligations. We make judgments as to our ability to collect outstanding receivables and provide allowances for the portion of receivables when collection becomes doubtful. Accounts receivable reserves are determined based upon an aging of accounts and a review of specific accounts.

INVENTORIES Inventories are stated at the lower of cost or market. We use the last-in, first-out (LIFO) method for determining the cost of a significant portion of our United States (U.S.) inventories. The cost of the remainder of our inventories is determined under the first-in, first-out or average cost methods. When market conditions indicate an excess of carrying costs over market value, a lower-of-cost-or-market provision is recorded. Excess and obsolete inventory reserves are established based upon our evaluation of the quantity of inventory on hand relative to demand. The excess and obsolete inventory reserve at June 30, 2008 and 2007 was $61.5 million and $59.7 million, respectively.

PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are carried at cost. Major improvements are capitalized, while maintenance and repairs are expensed as incurred. Retirements and disposals are removed from cost and accumulated depreciation accounts, with the gain or loss reflected in operating income. Interest related to the construction of major facilities is capitalized as part of the construction costs and is amortized over the facilities estimated useful life.

Depreciation for financial reporting purposes is computed using the straight-line method over the following estimated useful lives: building and improvements over 15-40 years; machinery and equipment over 4-15 years; furniture and fixtures over 5-10 years and computer hardware and software over 3-5 years.

Leased property and equipment under capital leases are amortized using the straight-line method over the terms of the related leases.

LONG-LIVED ASSETS We evaluate the recoverability of property, plant and equipment and intangible assets that are amortized whenever events or changes in circumstances indicate the carrying amount of any such assets may not be fully recoverable. Changes in circumstances include technological advances, changes in our business model, capital structure, economic conditions or operating performance. Our evaluation is based upon, among other things, our assumptions about the estimated future undiscounted cash flows these assets are expected to generate. When the sum of the undiscounted cash flows is less than the carrying value, we will recognize an impairment loss to the extent that carrying value exceeds fair value. We apply our best judgment when performing these evaluations to determine if a triggering event has occurred, the undiscounted cash flows used to assess recoverability and the fair value of the asset.

GOODWILL AND INTANGIBLE ASSETS Goodwill represents the excess of cost over the fair value of acquired companies. Goodwill and 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 planning process unless there are impairment indicators that warrant a test prior to that.

The carrying amount of goodwill attributable to each segment at June 30 is as follows:

						Acquisitions/
(in thousands)		2007				Divestitures				Impairment				Adjustments				Translation				2008
MSSG		$	282,670			$	(4,394	)		$	—			$	(12,058	)		$	15,969			$	282,187
AMSG			348,693				—				(35,000	)			6,196				6,443				326,332
Total		$	631,363			$	(4,394	)		$	(35,000	)		$	(5,862	)		$	22,412			$	608,519

(in thousands)		2006				Acquisitions				Impairment				Adjustments				Translation				2007
MSSG		$	201,258			$	63,815			$	—			$	10,542			$	7,055			$	282,670
AMSG			298,744				48,989				—				—				960				348,693
Total		$	500,002			$	112,804			$	—			$	10,542			$	8,015			$	631,363

During 2008, we completed purchase price allocations for two 2008 acquisitions resulting in additional Metalworking Solutions & Services Group (MSSG) goodwill of $1.1 million. We also completed the divestitures of two MSSG non-core businesses that resulted in a reduction in MSSG goodwill of $5.5 million.

The operating performance of our surface finishing machines and services business was lower than expected in 2008. The earnings forecast for the next five years was revised as a result of this decline in operating performance and a further weakness in markets served by this business, specifically in North America and the automotive sector. As a result, the tangible and intangible assets of this business were tested for impairment during 2008 and we recorded a related $35.0 million Advanced Materials Solutions Group (AMSG) goodwill impairment charge. As of June 30, 2008, the remaining carrying value of goodwill related to this business was $39.4 million. The fair value of this business was estimated using a combination of a present value technique and a valuation technique based on multiples of earnings and revenue.

During 2008, we completed purchase price allocations for three 2007 acquisitions resulting in a $9.6 million reduction in MSSG goodwill and a $6.2 million increase in AMSG goodwill. In 2008, we released a deferred tax valuation allowance of $2.5 million, which was established as a result of the acquisition of the Widia Group in 2003, and recognized a corresponding reduction in MSSG goodwill.

During 2007, we completed five business acquisitions (2007 Business Acquisitions). We completed three acquisitions in our AMSG segment for a combined net purchase price of $165.7 million, which generated AMSG goodwill of $55.1 million of which $22.5 million is deductible for income tax purposes. We completed two acquisitions in our MSSG segment for a net purchase price of $95.4 million, including an additional payment of euro 12.0 million, which will be paid in 2011. The MSSG acquisitions generated goodwill of $54.2 million of which $26.6 million is deductible for income tax purposes. In connection with the MSSG acquisitions, we expect to pay approximately euro 4 million and $13 million in 2011 as contingent consideration associated with continued employment. This contingent consideration is being recognized as compensation expense over the periods earned.

Also during 2007, we recorded a $10.5 million adjustment to goodwill to correct deferred tax liabilities related to our acquisition of the Widia Group in 2003.

The components of our intangible assets were as follows as of June 30:

		Estimated				2008								2007
		Useful Life				Gross Carrying				Accumulated				Gross Carrying				Accumulated
(in thousands)		(in years)				Amount				Amortization				Amount				Amortization
Contract-based			4 to 15			$	6,237			$	(4,469	)		$	6,498			$	(4,008	)
Technology-based and other			4 to 15				41,461				(16,850	)			49,305				(10,541	)
Customer-related			5 to 20				109,387				(16,233	)			97,810				(9,567	)
Unpatented technology			30				19,725				(2,955	)			19,381				(1,956	)
Trademarks			5 to 10				5,788				(1,503	)			6,511				(260	)
Trademarks		Indefinite					53,615				—				49,754				—
Total						$	236,213			$	(42,010	)		$	229,259			$	(26,332	)

In 2008, we completed purchase price allocations for three 2007 acquisitions and two 2008 acquisitions. As a result, Technology-based and other decreased $10.6 million, Customer-related increased $9.2 million, Contract-based decreased $1.2 million and Trademarks decreased $1.1 million. The 2008 divestiture of two non-core businesses resulted in a $1.5 million reduction in Customer-related intangible assets. Also during 2008, foreign currency effects contributed to an increase of $10.1 million in net intangible assets and we recorded $13.9 million in amortization expense.

As a result of the 2007 Business Acquisitions, we recorded $98.3 million of identifiable intangible assets based on the applicable purchase price allocations as follows: Customer-related of $54.8 million, Technology-based and other of $34.7 million, Trademarks of $6.3 million and Contract-based of $2.4 million.

We continue to review our marketing strategies related to all of our brands. During 2007, we completed our strategic analysis and plan for our Widia brand. As a key element of our channel and brand strategy, we decided to leverage the strength of this brand to accelerate growth in the distribution market. Since demand in the distribution market is mostly for standard products and to further our relationship with our Widia distributors, we furthermore decided to migrate direct sales of Widia custom solutions products to the Kennametal brand. As a result and in accordance with Statement of Financial Accounting Standard (SFAS) No. 142, “Goodwill and Other Intangible Assets,” we recorded a $6.0 million asset impairment charge related to our MSSG Widia trademark. The remaining balance of this trademark was $21.9 million as of June 30, 2007 and has an indefinite life.

Amortization expense for intangible assets was $13.9 million, $9.9 million and $5.6 million for 2008, 2007 and 2006, respectively. Estimated amortization expense for 2009 through 2013 is $12.9 million, $12.2 million, $11.2 million, $10.6 million and $10.1 million, respectively.

PENSION AND OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS We sponsor these types of benefit plans for a majority of our employees and retirees. Accounting for the cost of these plans requires the estimation of the cost of the benefits to be provided well into the future and attributing that cost over the expected work life of employees participating in these plans. This estimation requires our judgment about the discount rate used to determine these obligations, expected return on plan assets, rate of future compensation increases, rate of future health care costs, withdrawal and mortality rates and participant retirement age. Differences between our estimates and actual results may significantly affect the cost of our obligations under these plans.

In the valuation of our pension and other postretirement and postemployment benefit liabilities, management utilizes various assumptions. We determine our discount rate based on an investment grade bond yield curve with a duration that approximates the benefit payment timing of each plan. This rate can fluctuate based on changes in investment grade bond yields.

The long-term rate of return on plan assets is estimated based on an evaluation of historical returns for each asset category held by the plans, coupled with the current and short-term mix of the investment portfolio. The historical returns are adjusted for expected future market and economic changes. This return will fluctuate based on actual market returns and other economic factors.

The rate of future health care costs is based on historical claims and enrollment information projected over the next year and adjusted for administrative charges. This rate is expected to decrease until 2014.

Future compensation rates, withdrawal rates and participant retirement age are determined based on historical information. These assumptions are not expected to significantly change. Mortality rates are determined based on a review of published mortality tables.

DEFERRED FINANCING FEES Fees incurred in connection with new borrowings are capitalized and amortized to interest expense over the life of the related obligation.

EARNINGS PER SHARE Basic earnings per share is computed using the weighted average number of shares outstanding during the period, while diluted earnings per share is calculated to reflect the potential dilution that occurs related to issuance of capital stock under stock option grants and restricted stock awards. The difference between basic and diluted earnings per share relates solely to the effect of capital stock options and restricted stock awards.

For purposes of determining the number of dilutive 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 and restricted stock awards by 1.4 million, 1.8 million and 2.2 million shares in 2008, 2007 and 2006, respectively. Unexercised capital stock options of 0.5 million, 0.5 million and 1.0 million shares at June 30, 2008, 2007 and 2006, respectively, were not included in the computation of diluted earnings per share because the option exercise price was greater than the average market price, and therefore their inclusion would have been anti-dilutive. See disclosure of our 2008 capital stock split within this note.

REVENUE RECOGNITION We recognize revenue upon shipment of our products and assembled machines. Our general conditions of sale explicitly state that the delivery of our products and assembled machines is F.O.B. shipping point and that title and all risks of loss and damage pass to the buyer upon delivery of the sold products or assembled machines to the common carrier.

Our general conditions of sale explicitly state that acceptance of the conditions of shipment are considered to have occurred unless written notice of objection is received by Kennametal within 10 calendar days of the date specified on the invoice. We do not ship products or assembled machines unless we have documentation from our customers authorizing shipment. Our products are consumed by our customers in the manufacture of their products. Historically, we have experienced very low levels of returned products and assembled machines and do not consider the effect of returned products and assembled machines to be material. We have recorded an estimated returned goods allowance to provide for any potential returns.

We warrant that products and services sold are free from defects in material and workmanship under normal use and service when correctly installed, used and maintained. This warranty terminates 30 days after delivery of the product to the customer, and does not apply to products that have been subjected to misuse, abuse, neglect or improper storage, handling or maintenance. Products may be returned to Kennametal, only after inspection and approval by Kennametal and upon receipt by the customer of shipping instructions from Kennametal. We have included an estimated allowance for warranty returns in our returned goods allowance discussed above.

We recognize revenue related to the sale of specialized assembled machines upon customer acceptance and installation, as installation is deemed essential to the functionality of a specialized assembled machine. Sales of specialized assembled machines were immaterial for 2008, 2007 and 2006.

STOCK-BASED COMPENSATION We recognize stock-based compensation expense for all stock options, restricted stock awards and restricted stock units over the period from the date of grant to the date when the award is no longer contingent on the employee providing additional service (substantive vesting period). We continue to follow the nominal vesting period approach for unvested awards granted prior to the adoption of SFAS No. 123(R), “Share-Based Payment (revised 2004)” (SFAS 123(R)) on July 1, 2005. We utilize the Black-Scholes valuation method to establish the fair value of all awards.

Capital stock options are granted to eligible employees at fair market value at the date of grant. Capital stock options are exercisable under specified conditions for up to 10 years from the date of grant. The aggregate number of shares available for issuance under the Kennametal Inc. Stock and Incentive Plan of 2002, as amended (2002 Plan) is 7,500,000. See disclosure of our 2008 capital stock split within this note. Under the provisions of the 2002 Plan, participants may deliver our 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 value of shares delivered during 2008 was $1.0 million. In addition to stock option grants, the 2002 Plan permits the award of restricted stock to directors, officers and key employees.

RESEARCH AND DEVELOPMENT COSTS Research and development costs of $32.6 million, $28.8 million and $26.1 million in 2008, 2007 and 2006, respectively, were expensed as incurred. These costs are included in operating expense in the consolidated statements of income.

SHIPPING AND HANDLING FEES AND COSTS All fees billed to customers for shipping and handling are classified as a component of net sales. All costs associated with shipping and handling are classified as a component of cost of goods sold.

INCOME TAXES Deferred income taxes are recognized based on 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” that some or all of a deferred tax asset will not be realized. The valuation allowance was $46.7 million and $45.2 million at June 30, 2008 and 2007, respectively (see Note 11).

FINANCIAL INSTRUMENTS AND DERIVATIVES 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 dampen the effects of changes in foreign 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 for both earnings and 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 or expense in the current period. In addition, other forward contracts hedging significant cross-border intercompany loans are considered 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, net.

CASH FLOW HEDGES Currencies 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 income (loss), net of tax, and are recognized as a component of other income, net when the underlying sale of products or services are recognized into earnings. Expense recognized in 2008, 2007 and 2006 related to hedge ineffectiveness was immaterial. The time value component of the fair value of range forwards is excluded from the assessment of hedge effectiveness. Assuming market rates remain constant with the rates at June 30, 2008, we expect to recognize into earnings in the next 12 months losses on outstanding derivatives of $1.5 million.

Interest Rates Floating-to-fixed interest rate swap agreements, designated as cash flow hedges, are entered into from time to time to hedge our exposure to interest rate changes on a portion of our floating rate debt. These interest rate swap agreements 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 income (loss), net of tax. We had no such agreements at June 30, 2008. As of June 30, 2007, we had interest rate swap agreements to convert $58.6 million of our floating rate debt to fixed rate debt. As of June 30, 2007, we recorded a gain of $0.5 million on these contracts, which was recorded in other comprehensive income, net of tax. The contracts required periodic settlement; the difference between the amounts to be received and paid under interest rate swap agreements was recognized in interest expense.

FAIR VALUE HEDGES Interest Rates Fixed-to-floating interest rate swap agreements, designated as fair value hedges, hedge our exposure to fair value fluctuations on a portion of our fixed rate 10-year Senior Unsecured Notes due to changes in the overall interest rate environment. These interest rate swap agreements convert a portion of our fixed rate debt to floating rate debt. We have interest rate swap agreements, which mature in 2012, to convert $200.0 million of our fixed rate debt to floating rate debt. These contracts require periodic settlement; the difference between amounts to be received and paid under the interest rate swap agreements is recognized in interest expense. As of June 30, 2008 and 2007, we recorded a gain of $0.7 million and a loss of $10.8 million, respectively, related to these contracts. We record the gain or loss on these contracts as an asset or a liability, as applicable, in the balance sheet, with the offset to the carrying value of the Senior Unsecured Notes. Any gain or loss resulting from changes in the fair value of these contracts offset the corresponding gains or losses from changes in the fair values of the Senior Unsecured Notes. As a result, changes in the fair value of these contracts had no net impact on current year earnings.

FOREIGN CURRENCY TRANSLATION Assets and liabilities of international operations are translated into U.S. dollars using year-end exchange rates, while revenues and expenses are translated at average exchange rates throughout the year. The resulting net translation adjustments are recorded as a component of accumulated other comprehensive income (loss). The local currency is the functional currency of most of our locations. Losses from foreign currency transactions included in other income, net were $6.3 million, $1.9 million and $1.6 million for 2008, 2007 and 2006, respectively.

NEW ACCOUNTING STANDARDS In March 2008, the Financial Accounting Standards Board (FASB) issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133” (SFAS 161). SFAS 161 expands the current disclosure requirements in SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS 161 is effective for Kennametal beginning January 1, 2009. We are in the process of evaluating the provisions of SFAS 161 to determine the impact of adoption on our consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (SFAS 141(R)). SFAS 141(R) establishes principles and requirements for how an acquirer accounts for business combinations and includes guidance for the recognition, measurement and disclosure of the identifiable assets acquired, the liabilities assumed and any noncontrolling or minority interest in the acquiree. It also provides guidance for the measurement of goodwill, the recognition of contingent consideration and the accounting for pre-acquisition gain and loss contingencies, as well as acquisition-related transaction costs and the recognition of changes in the acquirer’s income tax valuation allowance. SFAS 141(R) is to be applied prospectively and is effective for Kennametal beginning July 1, 2009. We are in the process of evaluating the provisions of SFAS 141(R) to determine the impact of adoption on our consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB No. 51” (SFAS 160). SFAS 160 amends Accounting Research Bulletin No. 51, “Consolidated Financial Statements” to establish accounting and reporting standards for any noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 clarifies that a noncontrolling interest in a subsidiary should be reported as a component of equity in the consolidated financial statements and requires disclosure on the face of the consolidated statement of income of the amounts of consolidated net income attributable to the parent and to the noncontrolled interest. SFAS 160 is to be applied prospectively and is effective for Kennametal as of July 1, 2009, except for the presentation and disclosure requirements, which, upon adoption, will be applied retrospectively for all periods presented. We are in the process of evaluating the provisions of SFAS 160 to determine the impact of adoption on our consolidated financial statements.

In June 2007, the FASB ratified Emerging Issues Task Force (EITF) Issue No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards” (EITF 06-11). EITF 06-11 requires that tax benefits generated by dividends paid during the vesting period on certain equity-classified share-based compensation awards be classified as additional paid-in capital and included in a pool of excess tax benefits available to absorb tax deficiencies from share-based payment awards. EITF 06-11 was effective for Kennametal on July 1, 2008 and is to be applied on a prospective basis. The adoption of this EITF will not have a material impact on our consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115” (SFAS 159). SFAS 159 permits entities to measure many financial instruments at fair value with the changes in fair value recognized in earnings at each subsequent reporting date. SFAS 159 was effective for Kennametal as of July 1, 2008. We are in the process of evaluating the provisions of SFAS 159 to determine the impact of adoption on our consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures related to fair value measurements. The provisions of this standard apply to other accounting pronouncements that require or permit fair value measurements. SFAS 157 was effective for Kennametal as of July 1, 2008 for financial assets and liabilities and as of July 1, 2009 for non-financial assets and liabilities. Upon adoption, the provisions of SFAS 157 are to be applied prospectively with limited exceptions. We are in the process of evaluating the impact of the provisions of SFAS 157 on our consolidated financial statements.

NOTE 3 — SUPPLEMENTAL CASH FLOW INFORMATION

Year Ended June 30, (in thousands)		2008				2007				2006
Cash paid during the year for:
Interest		$	30,648			$	27,875			$	29,880
Income taxes			38,699				127,468				58,998
Supplemental disclosure of non-cash information:
Contribution of stock to employees’ defined contribution benefit plans			—				5,579				8,528
Change in fair value of interest rate swaps			(11,557	)			(3,348	)			14,380
Changes in accounts payable related to purchases of property, plant and equipment			(1,700	)			6,400				8,100

NOTE 4 — ACQUISITIONS AND DIVESTITURES

During 2008, we made two small acquisitions in Europe, within our MSSG segment, for a combined net purchase price of $4.0 million. Also during 2008, we divested two small, non-core businesses from our MSSG segment, one in the U.S. and one in Europe. Combined cash proceeds received were $20.2 million and we recognized a combined loss on divestiture of $0.6 million.

Effective June 12, 2006, we divested our United Kingdom (U.K.) — based high-speed steel business (Presto) for net proceeds of $1.5 million as a part of our strategy to exit non-core businesses. This divestiture resulted in a pre-tax loss of $9.4 million. Included in the loss was a $7.3 million inventory charge reported in cost of goods sold. This business was a part of the MSSG segment. Cash flows of this component that were retained were deemed significant in relation to prior cash flows of the disposed component. The sale agreement included a three-year supply agreement that management deemed to be both quantitatively and qualitatively material to the overall operations of the disposed component and constituted significant continuing involvement. As such, the results of operations of Presto prior to the divestiture were reported in continuing operations.

Effective June 1, 2006, we divested J&L Industrial Supply (J&L) for net proceeds of $359.2 million, of which $9.7 million and $349.5 million was received in 2007 and 2006, respectively, as a part of our strategy to exit non-core businesses. During 2006, we recognized a pre-tax gain of $233.9 million. The inventory-related portion of this gain amounting to $1.9 million was recorded in cost of goods sold. During 2006, we also recognized $6.4 million of divestiture-related charges in our Corporate segment that were included in operating expense. Cash flows of this component that were retained were deemed significant in relation to prior cash flows of the disposed component. The sale agreement included a five-year supply agreement and a two-year private label agreement. Management deemed these agreements to be both quantitatively and qualitatively material to the overall operations of the disposed component and constituted significant continuing involvement. As such, J&L results prior to the divestiture were reported in continuing operations. During 2007, we also recognized a pre-tax loss of $1.6 million related to a post-closing adjustment.

NOTE 5 — DISCONTINUED OPERATIONS

During 2006, our Board of Directors and management approved plans to divest our Kemmer Praezision Electronics business (Electronics) and our consumer retail product line, including industrial saw blades (CPG) as a part of our strategy to exit non-core businesses. These divestitures were accounted for as discontinued operations.

The divestiture of Electronics, which was part of the AMSG segment, was completed in two separate transactions. The first transaction closed during 2006. The second transaction closed during 2007. During 2006, we recognized a pre-tax loss of $22.0 million, including an $8.8 million inventory-related charge. During 2007, we recognized a pre-tax gain on divestiture of $0.1 million to adjust the related net assets to fair value. Also during 2007, management completed its assessment of the future use of a building owned and previously used by Electronics, but not divested. We concluded that we had no future economic use for the facility. As a result, we wrote the building down to fair value and recognized a pre-tax impairment charge of $3.0 million during 2007.

The divestiture of CPG, which was part of the MSSG segment, closed during 2007 for net consideration of $31.0 million. We have received the full net proceeds of which $3.0 million, $26.5 million and $1.5 million were received during 2008, 2007 and 2006, respectively. During 2006, we recognized a pre-tax goodwill impairment charge of $5.0 million related to CPG based primarily on a discounted cash flow analysis. During 2006, we also recognized an additional pre-tax goodwill impairment charge of $10.7 million based on the expected proceeds from the sale of the business and a pre-tax loss on divestiture of $0.5 million. These charges were not deductible for income tax purposes. Also included in discontinued operations was a $13.7 million tax benefit recorded during 2006 reflecting a deferred tax asset related to tax deductions that were realized as a result of the divestiture. During 2007, we recognized an additional pre-tax loss on divesture of $1.0 million related to post-closing adjustments.

The following represents the results of discontinued operations for the years ended June 30:

(in thousands)		2007				2006
Sales		$	15,034			$	89,987
Loss from discontinued operations before income taxes		$	(2,464	)		$	(35,711	)
Income tax (benefit) expense			135				(19,743	)
Loss from discontinued operations		$	(2,599	)		$	(15,968	)

NOTE 6 — ACCOUNTS RECEIVABLE SECURITIZATION PROGRAM

We previously had an agreement with a financial institution whereby we were permitted to securitize, on a continuous basis, an undivided interest in a specific pool of our domestic trade accounts receivable. Pursuant to this agreement, we, and certain of our domestic subsidiaries, sold our domestic accounts receivable to Kennametal Receivables Corporation, a wholly-owned, bankruptcy-remote subsidiary. This agreement was discontinued in 2008.

The financial institutions charged us fees based on the level of accounts receivable securitized under this agreement and the commercial paper market rates plus the financial institutions’ cost to administer the program. The costs incurred under this program in 2008 and 2007 were immaterial. The costs incurred under this program in 2006 were $4.8 million, and were accounted for as a component of other income, net.

At June 30, 2008 and 2007, there were no accounts receivable securitized under this program. In June 2006, total remittances of accounts receivable securitized reduced these amounts to zero. No additional accounts receivable were securitized after this reduction.

Cash flows related to our securitization program represented remittances of previously securitized receivables and proceeds from the securitization of new receivables. Collections and sales occurred on a daily basis. As a result, net cash flows varied based on the ending balance of receivables securitized. The net repayments of accounts receivable securitization for the year ended June 30, 2006 were $109.8 million.

NOTE 7 — INVENTORIES

Inventories consisted of the following at June 30:

(in thousands)		2008				2007
Finished goods		$	288,188			$	234,828
Work in process and powder blends			176,680				161,815
Raw materials and supplies			75,999				72,941
Inventories at current cost			540,867				469,584
Less: LIFO valuation			(80,067	)			(65,971	)
Total inventories		$	460,800			$	403,613