FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004

Commission file number 1-5318

KENNAMETAL INC.

World Headquarters
1600 Technology Way
P.O. Box 231
Latrobe, Pennsylvania 15650-0231
(Address of registrant’s principal executive offices)

Website: www.kennametal.com

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [  ]

Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act). YES [X] NO [  ]

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

KENNAMETAL INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2004

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

KENNAMETAL INC.

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

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KENNAMETAL INC.

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

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KENNAMETAL INC.

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

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KENNAMETAL INC.

1.		ORGANIZATION
		Kennametal Inc. was incorporated in Pennsylvania in 1943 and maintains its world headquarters in Latrobe, Pennsylvania. Kennametal Inc. and its subsidiaries (collectively, “Kennametal” or the “Company”) is a leading global manufacturer, marketer and distributor of a broad range of cutting tools, tooling systems, supplies and technical services, as well as wear-resistant parts. We believe that our reputation for manufacturing excellence and technological expertise and innovation in our principal products has helped us achieve a leading market presence in our primary markets. We believe 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 and farm machinery industries, as well as manufacturers and suppliers in the highway construction, coal mining, quarrying and oil and gas exploration industries. We operate four global business units consisting of Metalworking Solutions & Services Group (“MSSG”), Advanced Materials Solutions Group (“AMSG”), J&L Industrial Supply (“J&L”) and Full Service Supply (“FSS”), as well as our corporate functional shared services.
2.		BASIS OF PRESENTATION
		The condensed consolidated financial statements, which include our accounts and those of our majority-owned subsidiaries, should be read in conjunction with the 2003 Annual Report on Form 10-K. The condensed consolidated balance sheet as of June 30, 2003 was derived from the audited balance sheet included in our 2003 Annual Report on Form 10-K. These interim statements are unaudited; however, we believe that all adjustments necessary for a fair statement of the results of the interim periods were made and all adjustments are normal, recurring adjustments. The results for the nine months ended March 31, 2004 and 2003 are not necessarily indicative of the results to be expected for a full fiscal year. Unless otherwise specified, any reference to a “year” is to a fiscal year ended June 30. For example, a reference to 2004 is to the fiscal year ending June 30, 2004. When used in this Form 10-Q, unless the context requires otherwise, the terms “we,” “our” and “us” refer to Kennametal Inc. and its subsidiaries.
		Certain amounts have been reclassified to conform to current year presentation.
3.		STOCK-BASED COMPENSATION
		Stock options generally are granted to eligible employees with a stock price equal to fair market value at the date of grant. Options are exercisable under specific conditions for up to 10 years from the date of grant. As permitted under the Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”) we have elected to measure compensation expense related to stock options in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations which uses the intrinsic value method. In addition to stock option grants, the Amended and Restated Kennametal Inc. Stock and Incentive Plan of 2002 permits the award of restricted stock to directors, officers and key employees. Expense associated with restricted stock grants is amortized over the vesting period. If compensation expense was determined based on the estimated fair value of options granted, consistent with the methodology in SFAS No. 123 and SFAS No. 148 “Accounting for Stock-Based Compensation – Transition and Disclosure (“SFAS No. 148”), our 2004 and 2003 net income and earnings per share for the quarter and nine months would be reduced to the pro forma amounts indicated below (in thousands, except per share data):

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KENNAMETAL INC.

4.		ACQUISITIONS
		Widia
		On August 30, 2002, we purchased the Widia Group (“Widia”) in Europe and India from Milacron Inc. for EUR188 million ($185.3 million) subject to a purchase price adjustment. On February 12, 2003, Milacron Inc. and Kennametal signed a settlement agreement with respect to the calculation of the post-closing purchase price adjustment for the Widia acquisition pursuant to which Milacron paid Kennametal EUR 18.8 million ($20.1 million) in cash. The net cash purchase price of $167.1 million includes the actual purchase price of $185.3 million less the settlement of $20.1 million plus $6.2 million of direct acquisition costs ($1.1 million paid in 2002 and $5.1 million paid in 2003) less $4.3 million of acquired cash. We financed the acquisition with funds borrowed under the 2002 Credit Agreement. The acquisition of Widia improves our global competitiveness, strengthens our European position and represents a strong platform for increased penetration in Asia. Widia’s operating results have been included in our consolidated results since August 30, 2002. The fair market value of the Widia tangible and intangible assets were determined by an independent appraiser.
		In accordance with SFAS No. 141, “Business Combinations” (SFAS No. 141), we accounted for the acquisition using the purchase method of accounting. As a result of the acquisition, we have recorded approximately $58.4 million of goodwill and $27.2 million of other intangibles. Of the $27.2 million of identifiable intangible assets approximately $6.4 million have a definite life and therefore will be amortized over its remaining useful life.

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KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

		In conjunction with the Widia acquisition, we reviewed the estimated lives currently being used for existing Kennametal assets, and have determined that the current useful lives should be extended to more appropriately match the life of the asset. Starting July 1, 2003, we have changed our accounting policy regarding machinery and equipment and have extended our useful lives from a maximum life of 10 years to 15 years.
		The unaudited pro forma consolidated financial data presented below gives effect to the Widia acquisition as if it had occurred as of July 1, 2002. The pro forma adjustments are based upon available information and certain assumptions that we believe are reasonable, including additional interest expense that resulted from the transaction, net of any applicable income tax effects. The unaudited pro forma consolidated financial data is not necessarily indicative of the operating results that would have occurred had the acquisition been consummated on the date indicated, nor are they indicative of future operating results. The unaudited pro forma consolidated financial data should be read in conjunction with the historical consolidated financial statements and accompanying notes.

		Conforma Clad
		The Company acquired all of the outstanding common stock of Conforma Clad, Inc. for $64.6 million, effective March 1, 2004, subject to a purchase price adjustment based on acquired working capital. The Company acquired Conforma Clad to expand its product and solutions offerings in the area of extreme wear environments involving corrosion, erosion and abrasion. We financed the acquisition with borrowings under our 2002 Credit Agreement. We accounted for the acquisition in accordance with SFAS No. 141. Based on the preliminary fair values determined at the time of the acquisition, we have recorded $59.5 million in goodwill associated with the acquisition of Conforma Clad. The financial statements as of March 31, 2004 reflect preliminary estimates of the fair value of acquired property, plant and equipment and intangible assets. These estimates will be finalized based on an independent valuation of such assets to be obtained in our fiscal fourth quarter ending June 30, 2004. Conforma Clad’s operating results have been included in our consolidated results since March 1, 2004 and are included in the Advanced Materials Solutions Group (see Note 14). Pro forma comparative results of the Company, assuming the acquisition of Conforma Clad had been made at the beginning of fiscal 2003, would not have been materially different from the reported results.
5.		DIVESTITURE OF OPERATIONS HELD FOR SALE
		During our fiscal third quarter ended March 31, 2004, we completed the sale of the Mining and Construction business of Kennametal Widia India Limited, which was a part of the AMSG segment, for approximately $14.3 million, subject to a working capital adjustment. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS No. 144”), we recorded the assets of this business as held for sale in our fiscal second quarter ended December 31, 2003. As a result of our supply agreement with the buyer, this transaction did not qualify for discontinued operations treatment. This transaction did not have a material impact on our results of operations.

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KENNAMETAL INC.

		During the fiscal third quarter ended March 31, 2004, the Company received $12.3 million in net proceeds related to the sale of this business. The Company is required to satisfy certain conditions related to the property sold for it to receive the remaining $2.0 million due under the sale agreement. The Company expects to collect the remaining $2.0 million due under the sale agreement within the next twelve months. The $2.0 million due under the agreement is classified within other current assets in the consolidated balance sheet as of March 31, 2004.
		As we consummated this transaction during the current quarter, there are no amounts held for sale in the March 31, 2004 balance sheet. The major classes of assets and liabilities of operations held for sale in the consolidated balance sheet as of June 30, 2003 are as follows (in thousands):

6.		SALE OF MARKETABLE EQUITY SECURITIES
		During the nine months ended March 31, 2004, we sold our investment in Toshiba Tungaloy Co., Ltd. (Toshiba) resulting in cash proceeds of $17.4 million and a pre-tax gain of $4.4 million ($3.0 million after tax). The gain is recorded in other (income), net.

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KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7.		BENEFIT PLANS
		We sponsor several pension plans that cover substantially all employees. Additionally, we sponsor varying levels of postretirement health care and life insurance benefits to most US employees.
		On November 13, 2003, Kennametal announced modifications to certain employee benefits, including a plan amendment for selected participants in the Retirement Income Plan (the “RIP Plan”), new employer contributions to the defined contribution plan (“Thrift Plus Plan”) and changes to the retiree medical portion of the Other Postemployment Benefits Plan (“OPEB”). The RIP Plan currently covers the majority of the Company’s U.S. workforce. Effective January 1, 2004, no new non-union employees will become eligible to participate in the RIP Plan. Benefits under the RIP Plan continued to accrue after December 31, 2003 only for certain employees (“Grandfathered Participants”). Benefits for all other participants were frozen effective December 31, 2003. All eligible employees hired on or after January 1, 2004 and all non-Grandfathered Participants in the RIP Plan will be eligible to participate in the Thrift Plus Plan which will provide for an employer fixed contribution equal to three percent of the employee’s compensation and will allow for an additional variable contribution from zero percent up to three percent depending on the Company’s performance. The modification of the OPEB Plan will eliminate Kennametal’s obligation to provide a Company subsidy for employee medical costs for all employees who retire after January 1, 2009. The RIP Plan amendment resulted in a curtailment under SFAS No. 88 “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits” and resulted in a pre-tax charge of $1.3 million in the nine months ended March 31, 2004. In connection with the amendments above, the Company also amended its Supplemental Executive Retirement Plan, effective January 1, 2004. Such amendment did not have an impact on the Company’s financial statements.
		The table below summarizes the components of the net periodic cost of our pension and OPEB plans, as amended, during the quarter and nine months ended March 31, 2004 and 2003 (in thousands):
		Pension Plans

OPEB Plans

During the nine months ended March 31, 2004, the Company contributed $5 million to its various defined benefit pension plans. Contributions to such plans for fiscal 2004 are expected to total approximately $7 million in total.

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KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8.		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 U.S. inventories. The cost for the remainder of our inventories is determined under the first-in, first-out (“FIFO”) or average cost methods. We used the LIFO method of valuing inventories for approximately 40 percent of total inventories at both March 31, 2004 and June 30, 2003. Because inventory valuations under the LIFO method are based on an annual determination of quantities and costs as of June 30 of each year, the interim LIFO valuations are based on our projections of expected year-end inventory levels and costs. Therefore, the interim financial results are subject to any final year-end LIFO inventory adjustments.
		Inventories as of the balance sheet dates consisted of the following (in thousands):