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

FOR THE FISCAL YEAR ENDED JUNE 30, 2011

Commission File Number 1-5318

KENNAMETAL INC.

(Exact name of registrant as specified in its charter)

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

World Headquarters 1600 Technology Way P.O. Box 231 Latrobe, Pennsylvania		15650-0231
(Address 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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES þ NO o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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. þ

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.

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

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, 2010, 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 $2,977,300,000. 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, 2011, there were 81,256,614 shares of the Registrant’s Capital Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the 2011 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			7
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			23
9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure			57
9A. Controls and Procedures			57
9B. Other Information			57
PART III
10. Directors, Executive Officers and Corporate Governance			57
11. Executive Compensation			59
12. Security Ownership of Certain Beneficial Owners and Management and Related Shareowner Matters			59
13. Certain Relationships and Related Transactions, and Director Independence			59
14. Principal Accountant Fees and Services			59
PART IV
15. Exhibits, Financial Statement Schedules			59
SIGNATURES			64
EX-10.20
EX-10.22
EX-10.35
EX-21
EX-23
EX-31.1
EX-31.2
EX-32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

FORWARD-LOOKING INFORMATION

This Annual Report on Form 10-K contains “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are statements that do not relate strictly to historical or current facts. For example, statements about Kennametal’s outlook for earnings, sales volumes, and cash flow for its fiscal year 2012, its expectations regarding future growth and any statements regarding future operating or financial performance or events are forward-looking. We have also included forward looking statements in this Form 10-K concerning, among other things, our strategy, goals, plans and projections regarding our financial position, liquidity and capital resources, results of operations, market position, and product development. These statements are based on current estimates that involve inherent risks and uncertainties. Should one or more of these risks or uncertainties materialize, or should the assumptions underlying the forward-looking statements prove incorrect, our actual results could vary materially from our current expectations. There are a number of factors that could cause our actual results to differ from those indicated in the forward-looking statements. They include: economic recession; anticipated benefits resulting from our recently completed restructuring activities; availability and cost of the raw materials we use to manufacture our products; our foreign operations and international markets, such as currency exchange rates, different regulatory environments, trade barriers, exchange controls, and social and political instability; changes in the regulatory environment in which we operate, including environmental, health and safety regulations; our ability to protect and defend our intellectual property; competition; our ability to retain our management and employees; demands on management resources; potential claims relating to our products; integrating acquisitions and achieving the expected savings and synergies; business divestitures; global or regional catastrophic events; energy costs; commodity prices; labor relations; demand for and market acceptance of new and existing products; and implementation of environmental remediation matters. 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 development.

PART I

ITEM 1		— BUSINESS

OVERVIEW Kennametal Inc. was incorporated in Pennsylvania in 1943. We deliver productivity to customers seeking peak performance in demanding environments by providing innovative custom and standard wear-resistant solutions, enabled through our advanced materials sciences, application knowledge and commitment to a sustainable environment. We believe that our reputation for manufacturing excellence, as well as our technological expertise and innovation in our principal products, has helped us to achieve a leading market presence in our primary markets. End users of our products include metalworking manufacturers and suppliers across a diverse array of industries, including the aerospace, defense, transportation, machine tool, light machinery and heavy machinery industries, as well as manufacturers, producers and suppliers in a number of other industries including coal mining, highway construction, quarrying, and oil and gas exploration and production industries. Our end users’ products include items ranging from airframes to coal mining, engines to oil wells and turbochargers to construction.

Our product offering includes a wide array of standard and custom solution products in metalworking, such as metal cutting tools and tooling systems, and advanced materials, such as cemented tungsten carbide products, to address customer demands. These products are offered through a variety of channels via an enterprise approach. We are a leading global supplier of tooling, engineered components and advanced materials consumed in production processes. We believe we are one of the largest global providers of consumable metal cutting tools and tooling supplies.

We specialize in developing and manufacturing metalworking tools and wear-resistant parts and coatings using a specialized type of powder metallurgy. Our metalworking tools are made of cemented tungsten carbides, ceramics, cermets 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 also manufacture products made from tungsten carbide or other hard materials that are 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 In order to take additional advantage of growth opportunities, as well as to provide a better platform for continually improving the efficiency and effectiveness of operations, we implemented a new operating structure at the start of 2011. Our operations are now organized into two reportable operating segments; Industrial and Infrastructure. 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). Additional segment data is provided in Note 20 of our consolidated financial statements set forth in Item 8 of this annual report.

INDUSTRIAL The Industrial segment is focused on customers within the transportation, aerospace, defense and general engineering market sectors, as well as the machine tool industry. The customers in these end markets manufacture engines, airframes, automobiles, trucks, ships and various industrial goods. The technology needs and level of customization vary by customer and industry served. We deliver value to our Industrial segment customers through our application expertise and diverse product offering.

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

INTERNATIONAL OPERATIONS During 2011, we generated 56.7 percent of our sales in markets outside of the U.S. Our principal international operations are conducted in Western Europe, Asia Pacific, India, Latin America and Canada. 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 20 of our consolidated financial statements set forth in Item 8 of this annual report on Form 10-K (Item 8). 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.

GENERAL DEVELOPMENT OF BUSINESS We continue to engage in balancing our geographic footprint between North America, Western Europe, and the rest of the world markets. This strategy, together with steps to enhance the balance of our sales among our served end markets and business units, has helped to create a more diverse business base and thereby provide additional sales opportunities, as well as limit reliance on and exposure to any specific region or market sector.

In fiscal 2011, we experienced sequential sales growth in every quarter, as well as year-over-year quarterly sales growth. Our sales for the year ended June 30, 2011 were $2.4 billion, comprised of 46 percent in North America, 28 percent in Western Europe and 26 percent in the rest of the world. We completed our restructuring programs which are expected to reduce our cost structure by approximately $170 million annually, yielding higher benefits on costs that were lower than anticipated.

While the global economy continues to improve, we remain confident in our ability to respond quickly to changes in global markets while continuing to serve our customers and preserve our competitive strengths. At the same time, we continue to focus on and maximize cash flow and liquidity. Further discussion and analysis of the developments in our business is set forth in MD&A.

ACQUISITIONS AND DIVESTITURES 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 complementary product offerings into new and/or existing market areas where appropriate. Going forward, we expect to evaluate potential acquisitions to continue to grow our business and further enhance our 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. Application engineers and technicians directly assist customers with product design, selection, application and support.

We market our products through two basic brand names; Kennametal and Widia. These master brands also include sub-brands under various trademarks and trade names, such as Kennametal with other identifying sub-brands: Kennametal Conforma Clad, Kennametal Tricon, Kennametal Extrude Hone, Kennametal Sintec, Kennametal International Specialty Alloys, Kennametal Camco, and similarly with Widia and other identifying sub-brands: Widia GTD, Widia Rubig, Widia Circle, Widia Manchester, Widia Hanita, Widia Clappdico, as well as various product names such as ToolBoss, Kyon, Fix-Perfect and Mill1™. 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 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 for their manufacturing challenges 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 requirements and corporate strategy, and to enable us to gain full benefit from our investment in new product development. We hold a number of patents which, in the aggregate, are material to the operation of our businesses.

Research and development expenses included in operating expense totaled $33.3 million, $28.0 million and $27.6 million in 2011, 2010 and 2009, respectively.

SEASONALITY Our business is not materially affected by seasonal variations. However, to varying degrees, traditional summer vacation shutdowns of 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 we maintain a strong competitive position in all major markets worldwide. We actively compete in the sale of all our products with approximately 30 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.-based 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, price and productivity delivered to our customers. We believe that our competitive strength derives from our global presence, our ability to develop solutions to address customer needs through new and improved tools, consistent high quality of our products, our customer service capabilities, our state-of-the-art manufacturing capabilities and multiple sales channels. With these strengths, we are able to sell products based on the value added productivity to the customer rather than strictly on competitive prices.

REGULATION From time to time, we are a party to legal claims and proceedings that arise in the ordinary course of business, which may relate to our operations or assets, including real, tangible, or intellectual property. While we currently believe that 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. For certain of these sites, we have evaluated the claims and potential liabilities and have determined that neither are material, individually or in the aggregate. For certain other sites, proceedings are in the very early stages and have not yet progressed to a point where it is possible to estimate the ultimate cost of remediation, the timing and extent of remedial action that may be required by governmental authorities or the amount of our liability alone or in relation to that of any other PRPs.

Reserves for other potential environmental issues at June 30, 2011 and 2010 were $5.4 million and $5.2 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 U.S. government on these matters.

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

EMPLOYEES We employed approximately 11,600 persons at June 30, 2011, of which approximately 4,800 were located in the U.S. and 6,800 in other parts of the world, principally Europe, India and Asia Pacific. At June 30, 2011, approximately 3,000 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 the SEC Filings page of our Web Site, which is accessible under the Investor Relations tab, 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 annual proxy statement, 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, as amended (Exchange Act). Our Sec Filings Web page also includes Forms 3, 4 and 5 filed pursuant to Section 16(a) of the Exchange Act. All filings posted on our SEC Filings Web page are available to be viewed on this page free of charge. On the Corporate Governance page of our Web site, which is under the Investor Relations tab, 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.

ITEM 1A		— RISK FACTORS

Kennametal’s business, financial condition or results of operations may be materially affected by a number of factors. Our management regularly monitors the risks inherent in our business, with input and assistance from our Enterprise Risk Management department. In addition to real time monitoring, we conduct a formal, annual, enterprise-wide risk assessment to identify factors and circumstances that might present significant risk to the company. Many of these factors are discussed throughout this report. In addition, the following list details some of the important factors and uncertainties that we believe could cause Kennametal’s actual results to differ materially from those projected in any forward-looking statements:

Downturns in the business cycle could adversely affect our sales and profitability. Our business has historically been cyclical and subject to significant impact from economic downturns. The recent global economic downturn that occurred in 2008 and 2009, coupled with the global financial and credit market disruptions had a negative impact on our sales and profitability. These events contributed to weak end markets, a sharp drop in demand and higher costs of borrowing and/or diminished credit availability. While the economy has recovered from the crisis of the economic downturn and we believe that the long-term prospects for our business remain positive, we are unable to predict the future course of industry variables or the strength, pace or sustainability of the economic recovery and the effects of government intervention. We implemented restructuring and other actions to reduce our manufacturing costs and operating expenses over the past several years. However, there is no assurance that these actions, or any others that we have taken or may take, will be sufficient to counter any future economic or industry disruptions.

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, 2011, 56.7 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.

Changes in the regulatory environment, including environmental, health and safety regulations, could subject us to increased compliance and manufacturing costs, which could have a material adverse effect on our business.

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 several regions throughout the world, including the U.S., Europe and Japan. Future studies on the health effects of hard metals may result in our products being classified as hazardous to human health, which could lead to new regulations in countries in which we operate that may restrict or prohibit the use of, and/or 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 workplace. 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 or utility 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 affected by a wide array of regulations in the jurisdictions where they operate, such as applicable environmental laws and 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.

Our continued success depends on our ability to protect and defend our intellectual property. Our future success depends in part upon our ability to protect and defend 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. If one of our patents is infringed upon by a third party, we may need to devote significant time and financial resources to attempt to halt the infringement. We may not be successful in defending the patents involved in such a dispute. Similarly, while we do not knowingly infringe on patents, copyrights or other intellectual property rights owned by other parties, we may be required to spend a significant amount of time and financial resources to resolve any infringement claims against us. We may not be successful in defending our position or negotiating an alternative remedy. Our inability to protect our proprietary information and enforce or defend our intellectual property rights in proceedings initiated by or against us could have a material adverse effect on our business, financial condition and results of operations.

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. Some of our competitors are larger than we are and may have greater access to financial resources or be less leveraged than us. In addition, the industry in which our products are used is a large, fragmented industry that is highly competitive.

If we are unable to retain our qualified management and employees, our business may be negatively affected. 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 management and skilled employees from time to time. In addition, our restructuring activities and strategies for growth have placed, and are expected to continue to place, increased demands on our management’s skills and resources. If we are unable to retain our management team and professional personnel, our customer relationships and level of technical expertise could be negatively affected, which may materially and adversely affect our business.

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 include ore concentrates, compounds and secondary materials containing tungsten, tantalum, titanium, niobium and cobalt. A significant portion of our raw materials is 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 or we are unable to secure adequate supplies of raw materials on favorable terms, our profitability could be impaired.

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.

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, pandemic, 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 operations, financial position, cash flows and stock price could be adversely affected.

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:
Irondale, Alabama		Owned		Custom Fabricated Wear Plate Solutions and Pins		Infrastructure
Rogers, Arkansas		Owned/Leased		Carbide Products and Pelletizing Die Plates		Infrastructure
University Park, Illinois		Owned		Custom Fabricated Wear Plate Solutions		Infrastructure
Rockford, Illinois		Owned		Indexable Tooling		Industrial
New Albany, Indiana		Leased		High Wear Coating for Steel Parts		Infrastructure
Greenfield, Massachusetts		Owned		High-Speed Steel Taps		Industrial
Shelby Township, Michigan		Leased		Thermal Deburring and High Energy Finishing		Industrial
Traverse City, Michigan		Owned		Wear Parts		Industrial
Walker, Michigan		Leased		Thermal Energy Machining		Industrial
Elko, Nevada		Owned		Custom Fabricated Wear Plate Solutions		Infrastructure
Fallon, Nevada		Owned		Metallurgical Powders		Infrastructure
Asheboro, North Carolina		Owned		High-Speed Steel and Carbide Round Tools		Industrial
Henderson, North Carolina		Owned		Metallurgical Powders		Infrastructure
Roanoke Rapids, North Carolina		Owned		Metalworking Inserts		Industrial
Cleveland, Ohio		Leased		Distribution		Industrial
Orwell, Ohio		Owned		Metalworking Inserts		Industrial
Solon, Ohio		Owned		Metalworking Toolholders		Industrial
Whitehouse, Ohio		Owned		Metalworking Inserts and Round Tools		Industrial

Location		Owned/Leased		Principal Products		Segment
Bedford, Pennsylvania		Owned/Leased		Mining and Construction Tools and Wear Parts and Distribution		Infrastructure
Irwin, Pennsylvania		Owned		Carbide Wear Parts		Industrial
Irwin, Pennsylvania		Leased		Abrasive Flow Machining		Industrial
Latrobe, Pennsylvania		Owned		Metallurgical Powders		Infrastructure
Nenshannock, Pennsylvania		Leased		Specialty Metals and Alloys		Industrial
Union, Pennsylvania		Owned		Specialty Metals and Alloys		Industrial
Johnson City, Tennessee		Owned		Metalworking Inserts		Industrial
Lyndonville, Vermont		Owned		High-Speed Steel Taps		Industrial
Chilhowie, Virginia		Owned		Mining and Construction Tools and Wear Parts		Infrastructure
New Market, Virginia		Owned		Metalworking Toolholders		Industrial
International:
Indaiatuba, Brazil		Leased		Metalworking Carbide Drills and Toolholders		Industrial
Victoria, Canada		Owned		Wear Parts		Industrial
Fengpu, China		Owned		Intermetallic Composite Ceramic Powders and Parts		Infrastructure
Tianjin, China		Owned		Metalworking Inserts and Carbide Round Tools		Industrial
Xuzhou, China		Leased		Mining Tools		Infrastructure
Kingswinford, England		Leased		Distribution		Industrial
Ebermannstadt, Germany		Owned		Metalworking Inserts		Industrial
Essen, Germany		Owned		Metallurgical Powders and Wear Parts		Industrial
Koenigsee, Germany		Leased		Metalworking Carbide Drills		Industrial
Lichtenau, Germany		Owned		Metalworking Toolholders		Industrial
Mistelgau, Germany		Owned		Metallurgical Powders, Metalworking Inserts and Wear Parts		Infrastructure
Nabburg, Germany		Owned		Metalworking Toolholders		Industrial
Nabburg, Germany		Owned		Metalworking Round Tools, Drills and Mills		Industrial
Nuenkirchen, Germany		Owned		Distribution		Industrial
Vohenstrauss, Germany		Owned		Metalworking Carbide Drills		Industrial
Bangalore, India		Owned		Metalworking Inserts and Toolholders and Wear Parts		Industrial
Shlomi, Israel		Owned		High-Speed Steel and Carbide Round Tools		Industrial
Milan, Italy		Owned		Metalworking Cutting Tools		Industrial
Zory, Poland		Leased		Mining and Construction Conicals		Infrastructure
Barcelona, Spain		Leased		Metalworking Cutting Tools		Industrial
Newport, United Kingdom		Owned		Intermetallic Composite Powders		Infrastructure

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 is conducted in a corporate technology center located adjacent to our world headquarters in Latrobe, Pennsylvania, U.S., as well as in our facilities in Rogers, Arkansas, U.S.; 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, Item 1, of this annual report on Form 10-K under the caption “Regulation” is incorporated into this Item 3. From time to time, we are party to legal claims and proceedings that arise in the ordinary course of business, which may relate to our operations or assets, including real, tangible, or intellectual property. Although certain of these actions are currently pending, we do not believe that any individual proceeding is material or that our pending legal proceedings in the aggregate are material to Kennametal.

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” of this annual report on Form 10-K.

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, 2011 was 2,199. Stock price ranges and dividends declared and paid were as follows:

Quarter ended		September 30				December 31				March 31				June 30
2011
High		$	31.80			$	39.81			$	44.11			$	43.48
Low			24.08				30.35				36.57				37.38
Dividends			0.12				0.12				0.12				0.12
2010
High		$	25.17			$	28.29			$	30.64			$	34.89
Low			15.29				21.66				23.45				25.31
Dividends			0.12				0.12				0.12				0.12

The information incorporated by reference in Part III, Item 12 of this annual report on Form 10-K from our 2011 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 the peer group of companies determined by us for the period from July 1, 2005 to June 30, 2011.

The Peer Group consists of the following companies: Allegheny Technologies Incorporated; Ametek Inc.; Barnes Group Inc.; Carpenter Technology Corporation; Crane Co.; Donaldson Company, Inc.; Dresser-Rand Group Inc.; Flowserve Corp.; Greif Inc.; Harsco Corporation; Joy Global Inc.; Lincoln Electric Holdings, Inc.; Pall Corporation.; Parker-Hannifin Corporation; Pentair Inc.; Sauer-Danfoss, Inc.; Teleflex, Incorporated; and The Timken Co.

Comparison of 5-Year Cumulative Total Return

Assumes $100 Invested on July 1, 2005 and All Dividends Reinvested

		2006				2007				2008				2009				2010				2011
Kennametal		$	100.00			$	133.55			$	107.35			$	64.69			$	87.47			$	147.21
Peer Group Index			100.00				131.21				132.76				79.60				102.50				163.59
S&P Mid-Cap 400			100.00				118.51				109.81				79.04				98.74				137.63
S&P 1500 Composite			100.00				120.22				104.92				77.29				89.32				117.58

ISSUER PURCHASES OF EQUITY SECURITIES

										Total Number of				Maximum Number of
										Shares Purchased as				Shares that May Yet
		Total Number of								Part of Publicly				Be Purchased Under
		Shares				Average Price				Announced Plans or				the Plans or
Period		Purchased (1)				Paid per Share				Programs				Programs (2)
April 1 through April 30, 2011			17,129			$	38.95				17,000				7,284,600
May 1 through May 31, 2011			255,550				40.27				250,000				7,034,600
June 1 through June 30, 2011			540,998				38.99				529,500				6,505,100
Total			813,677			$	39.39				796,500

ITEM 6- SELECTED FINANCIAL DATA

		2011				2010				2009				2008				2007
OPERATING RESULTS (in thousands)
Sales		$	2,403,493			$	1,884,067			$	1,999,859			$	2,589,786			$	2,265,336
Cost of goods sold			1,519,102				1,256,339				1,423,320				1,682,715				1,438,137
Operating expense			538,530				477,487				489,567				594,187				543,952
Restructuring and asset impairment charges	(1)		12,586				43,923				173,656				39,891				5,970
Interest expense			22,760				25,203				27,244				31,586				28,999
Provision (benefit) for income taxes			63,856				26,977				(11,205	)			62,754				68,251
Income (loss) from continuing operations attributable to Kennametal			229,727				47,842				(102,402	)			163,666				174,717
Net income (loss) attributable to Kennametal	(2)		229,727				46,419				(119,742	)			167,775				174,243
FINANCIAL POSITION (in thousands)
Working capital		$	446,064			$	522,926			$	496,935			$	630,675			$	529,265
Total assets			2,754,469				2,267,823				2,346,974				2,784,349				2,606,227
Long-term debt, including capital leases, excluding current maturities			1,919				314,675				436,592				313,052				361,399
Total debt, including capital leases and notes payable			312,882				337,668				485,957				346,652				366,829
Total Kennametal shareowners’ equity			1,638,072				1,315,500				1,247,443				1,647,907				1,484,467
PER SHARE DATA ATTRIBUTABLE TO KENNAMETAL
Basic earnings (loss) from continuing operations		$	2.80			$	0.59			$	(1.40	)		$	2.13			$	2.28
Basic earnings (loss)	(3)		2.80				0.57				(1.64	)			2.18				2.27
Diluted earnings (loss) from continuing operations			2.76				0.59				(1.40	)			2.10				2.22
Diluted earnings (loss)	(4)		2.76				0.57				(1.64	)			2.15				2.22
Dividends			0.48				0.48				0.48				0.47				0.41
Book value (at June 30)			20.19				16.06				17.03				21.44				19.04
Market Price (at June 30)			42.21				25.43				19.18				32.55				40.50
OTHER DATA (in thousands, except number of employees)
Capital expenditures		$	83,442			$	56,679			$	104,842			$	163,489			$	92,001
Number of employees (at June 30)			11,612				11,047				11,584				13,673				13,947
Basic weighted average shares outstanding			82,063				80,966				73,122				76,811				76,788
Diluted weighted average shares outstanding			83,173				81,690				73,122				78,201				78,545
KEY RATIOS
Sales growth			27.6	%			(5.8	%)			(22.8	%)			14.3	%			2.4	%
Gross profit margin			36.8				33.3				28.8				35.0				36.5
Operating profit (loss) margin			13.4				4.9				(5.0	)			10.0				11.7

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 financial statement notes. 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. delivers productivity to customers seeking peak performance in demanding environments by providing innovative custom and standard wear-resistant solutions, enabled through our advanced materials sciences, application knowledge and commitment to a sustainable environment. We believe that our reputation for manufacturing excellence, as well as our technological expertise and innovation in our principal products, has helped us to achieve a leading market presence in our primary markets. We believe that we are one of the largest global providers of consumable metalcutting tools and tooling supplies.

In 2011, the Company achieved sequential sales growth each quarter, with an organic sales increase of 28 percent for the year. The Company had strong earnings per diluted share (EPS) of $2.76 as a result of sales growth and solid operating margins. We completed our restructuring programs which are expected to reduce our cost structure by approximately $170 million annually, yielding higher benefits on costs that were lower than anticipated.

For 2011, sales were $2.4 billion, an increase of 27.6 percent compared to prior year sales of $1.9 billion. Operating income was $321.7 million, an increase of $228.4 million compared to operating income of $93.2 million in 2010. The increase in operating income was primarily due to sales volume and price realization, improved capacity utilization and incremental restructuring benefits of approximately $28 million, partially offset by higher raw material costs.

We generated cash flow from operating activities of $230.8 million in the current year. Capital expenditures were $83.4 million during the 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 included in operating expense totaled $33.3 million for 2011. In 2011, we generated approximately 40 percent of our sales from new products.

NEW OPERATING STRUCTURE In order to take additional advantage of growth opportunities as well as to provide a better platform for continually improving the efficiency and effectiveness of operations, we implemented a new operating structure as of July 1, 2010. We restated the segment financial information for the years ended June 30, 2010 and 2009, respectively, to reflect the change in reportable operating segments.

The new structure provides for an enhanced market sector approach coupled with a more customer-centric focus for the sales organization and other key market-facing functions such as customer service, marketing, product management, engineering and product development. The new structure also involves the formation of a single, global integrated supply chain and logistics organization that unleashes additional opportunities to achieve higher customer satisfaction and realize lower costs to serve. Furthermore, the new structure provides for more uniform management of administrative functions on a global basis to further improve the consistency, effectiveness and efficiency of the services provided by these functions.

A key attribute of the new structure is the establishment of two new operating segments by market sector which replace the previous two operating segments that were based on a product focus. The two new reportable operating segments are named Industrial and Infrastructure. The Industrial business is primarily focused on customers within the transportation, aerospace, defense and general engineering market sectors. The Infrastructure business is primarily focused on customers within the energy and earthworks industries. The formation of the two new reportable operating segments is consistent with the new management approach and internal financial reporting established under the new structure.

Under the new structure, more corporate expenses will be allocated to the new segments than were allocated to the previous segments. The remaining corporate expenses that are determined to be non-allocable will continue to be reported as Corporate.

RESTRUCTURING ACTIONS During 2011, we completed our restructuring programs to reduce costs and improve operating efficiencies. These programs related to the rationalization of certain manufacturing and service facilities, as well as other employment and cost reduction programs. Restructuring and related charges recorded in 2011 amounted to $21.5 million. This included $13.7 million of restructuring charges of which $1.1 million were related to inventory disposals and recorded as cost of goods sold. Restructuring related charges of $4.4 million were recorded in cost of goods sold and $3.4 million in operating expense during 2011. We realized pre-tax benefits from these restructuring programs of approximately $165 million during 2011.

The Company’s restructuring programs are expected to deliver annual ongoing pre-tax savings of approximately $170 million now that all programs are fully implemented. Total pre-tax charges recorded from inception to June 30, 2011 was approximately $150 million.

ACQUISITIONS AND DIVESTITURES In 2011 and 2010, we had no acquisitions or divestitures.

In 2009, we acquired Tricon Metals and Services Inc. (Tricon) in our Infrastructure segment for a net purchase price of $64.1 million. Tricon is a leading supplier of custom wear solutions specializing in consumable proprietary steels for the surface and underground mining markets, including hard rock and coal. During 2009, we also made an acquisition within our Industrial segment. We also had one divestiture in 2009 that was accounted for as discounted operations and described below.

DISCONTINUED OPERATIONS On June 30, 2009, we divested our high speed steel business (HSS) from our Industrial segment as part of our continuing focus to shape our business portfolio and rationalize our manufacturing footprint. This divestiture was accounted for as discontinued operations. Cash proceeds from this divestiture amounted to $28.5 million. We incurred pre-tax charges related to the divestiture of $2.3 million and $25.9 million during 2010 and 2009, respectively. The pre-tax charges as well as the related tax effects were recorded in discontinued operations. We do not expect to incur any additional pre-tax charges related to this divestiture.

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

(in thousands)		2010				2009
Sales		$	–			$	80,630
Loss from discontinued operations before income taxes		$	(2,269	)		$	(25,923	)
Income tax expense (benefit)			(846	)			(8,583	)
Loss from discontinued operations		$	(1,423	)		$	(17,340	)

RESULTS OF CONTINUING OPERATIONS

SALES Sales of $2,403.5 million in 2011 increased 27.6 percent from $1,884.1 million in 2010 as a result of strong organic growth. Organic sales increased in both segments and across all regions. Organic sales growth drivers were general engineering of 40 percent, transportation of 30 percent and energy markets of 26 percent.

Sales of $1,884.1 million in 2010 decreased 5.8 percent from $1,999.9 million in 2009. Sales declined organically by 8 percent as a result of the global economy, partially offset by a 1 percent increase from favorable foreign currency effects and a 1 percent increase from an acquisition. Organic sales declined in Europe and the Americas, partially offset by an organic sales increase in Asia. Organic sales decreased in both segments primarily due to lower sales in general engineering of 14 percent and reduced demand in energy markets of 13 percent, partially offset by an increase in the transportation and earthworks market sectors of 8 percent and 3 percent, respectively.

GROSS PROFIT Gross profit increased $256.7 million to $884.4 million in 2011 from $627.7 million in 2010. The increase was primarily due to increased organic sales of $523.9 million, price realization, improved absorption of manufacturing costs due to higher production levels, cost reduction benefits, favorable business mix and favorable foreign currency effects of $3.5 million. The impact of these items was partially offset by higher raw material costs and one-time benefits in the prior year from certain labor negotiations in Europe that did not occur in the current period. The gross profit margin for 2011 increased to 36.8 percent from 33.3 percent in 2010.

Gross profit increased $51.2 million to $627.7 million in 2010 from $576.5 million in 2009. The increase was primarily due to restructuring and other cost reduction benefits, lower raw material costs which more than offset unfavorable price realization, one-time benefits from certain labor negotiations in Europe, favorable foreign currency effects of $7.5 million, a decrease in restructuring and related charges of $7.0 million, as well as improved absorption of manufacturing costs due to higher production levels. The impact of these items was partially offset by lower organic sales of $151.2, unfavorable business mix and the restoration of salaries and other employment costs that had been temporarily reduced. The gross profit margin for 2010 increased to 33.3 percent from 28.8 percent in 2009.

OPERATING EXPENSE Operating expense in 2011 was $538.5 million, an increase of $61.0 million, or 12.8 percent, compared to $477.5 million in 2010. The increase is primarily driven by higher employment costs of $31.9 million due to the reinstatement of salaries and other temporary employment cost reductions and a higher provision for incentive compensation of $18.7 million, as a result of better operating performance. Foreign currency unfavorably impacted operating expense by $2.1 million

Operating expense in 2010 was $477.5 million, a decrease of $12.1 million, or 2.5 percent, compared to $489.6 million in 2009. The decrease is primarily attributable to a $40.2 million decrease in employment expenses driven by restructuring and cost management activities and a $5.4 million decrease in the provision for bad debts. These decreases were partially offset by higher provisions for incentive compensation programs of $20.5 million, increased spending on strategic projects of $8.2 million and the unfavorable impact of foreign currency of $4.3 million.

RESTRUCTURING AND ASSET IMPAIRMENT CHARGES During 2011, we completed our restructuring programs and recognized $21.5 million of restructuring charges of which $13.7 million were recorded as restructuring charges including $1.1 million related to inventory disposals and recorded in cost of goods sold. No asset impairment occurred in 2011. See the discussion under the heading “Restructuring Actions” within this MD&A for additional information.

During 2010, we continued to implement restructuring actions and recognized $48.9 million of restructuring charges of which $44.3 million were recorded as restructuring charges including $0.4 million related to inventory disposals and recorded in cost of goods sold. No asset impairment occurred in 2010.

During 2009, restructuring and related charges amounted to $73.3 million, including $64.7 million of restructuring charges of which $2.1 million were related to inventory disposals and recorded in cost of goods sold. During 2009, we recorded a goodwill impairment charge of $100.2 million. Of this amount, $37.3 million related to our surface finishing machines and services business and $62.9 million related to our engineered products business. No goodwill remains on the books for our surface finishing machines and services business and $39.6 million of goodwill remains on the engineered products business. We also recorded a $10.8 million impairment charge for the indefinite-lived trademark for our surface finishing machines and services business.

AMORTIZATION OF INTANGIBLES Amortization expense was $11.6 million, $13.1 million and $13.1 million in 2011, 2010 and 2009, respectively.

INTEREST EXPENSE Interest expense decreased $2.4 million to $22.8 million in 2011, compared with $25.2 million in 2010. This decrease was due to a decrease in the average interest rates on domestic borrowings to 4.8 percent, compared to 5.0 percent in 2010, partially offset by higher borrowings. The portion of our debt subject to variable rates of interest was approximately 2 percent and 6 percent at June 30, 2011 and 2010, respectively.

Interest expense decreased $2.0 million to $25.2 million in 2010, compared with $27.2 million in 2009. This decrease was due to lower borrowings, partially offset by an increase in the average interest rates on domestic borrowings to 5.0 percent compared to 3.9 percent in 2009. The portion of our debt subject to variable rates of interest was approximately 6 percent and 34 percent at June 30, 2010 and 2009, respectively, due to lower borrowings outstanding against our revolving credit facility.

OTHER EXPENSE (INCOME), NET In 2011, other expense, net decreased by $11.4 million to $2.8 million expense, net compared to $8.6 million income, net in 2010. The decrease was primarily due to a $10.2 million unfavorable change in foreign currency transaction results, primarily driven by the euro.

In 2010, other income, net decreased by $6.0 million to $8.6 million compared to $14.6 million in 2009. The decrease was primarily due to an unfavorable change in foreign currency transaction results of $3.2 million, primarily due to the euro and a $3.1 million decrease in interest income due to a decrease in interest rates.

INCOME TAXES The effective tax rate from continuing operations for 2011 was 21.6 percent compared to 35.2 percent for 2010. The change in the effective rate from 2010 to 2011 was primarily driven by increased income in international locations where the tax rate is lower than the U.S. as well as restructuring charges in the prior year in jurisdictions where no tax benefit could be recognized.

The 2011 effective rate was favorably impacted by a $21.5 million release of a valuation allowance in the United Kingdom, but that impact was offset by the tax cost of approximately $22.0 million, predominately U.S., associated with dividends of current year net income from some of our international subsidiaries. The 2010 effective rate was unfavorably impacted by the expiration of the research, development and experimental tax credit as well as the impact of restructuring charges in jurisdictions where no tax benefit could be recognized.

During 2011, we generated taxable income in other jurisdictions where we have valuation allowances recorded against our net deferred tax assets. The corresponding impact on the 2011 effective tax rate was immaterial. In conjunction with our annual planning process during the fourth quarter of 2011, we determined that sustainability of future income in the United Kingdom is likely, and as a result, we believe that it is more likely than not that we will be able to realize the net deferred tax assets in this jurisdiction. Accordingly, we recorded a valuation allowance adjustment of $21.5 million that reduced tax expense. With respect to the other jurisdictions, we believe sustainability of future income remains uncertain. We therefore have not adjusted the valuation allowance in these jurisdictions. We will continue to monitor our ability to realize the net deferred tax assets in these jurisdictions, and if appropriate, will adjust the valuation allowance. Such an adjustment would likely result in a material reduction to tax expense in the period the adjustment occurs.

The effective tax rate from continuing operations for 2010 was 35.2 percent (provision on income) compared to 10.0 percent (benefit on a loss) for 2009. The change in the effective rate from 2009 to 2010 was primarily driven by asset impairment charges in the prior period. In addition, the 2010 effective rate was unfavorably impacted by the expiration of the research, development and experimental tax credit as well as the impact of restructuring charges in jurisdictions where no tax benefit could be recognized. The 2009 effective rate benefited from a valuation allowance adjustment in Europe.

INCOME (LOSS) FROM CONTINUING OPERATIONS ATTRIBUTABLE TO KENNAMETAL SHAREOWNERS Income from continuing operations attributable to Kennametal Shareowners was $229.7 million, or $2.76 per diluted share, in 2011 compared to $47.8 million, or $0.59 per diluted share, in 2010. The increase in income from continuing operations was a result of the factors previously discussed.

Income from continuing operations attributable to Kennametal Shareowners was $47.8 million, or $0.59 per diluted share, in 2010 compared to loss of ($102.4) million, or ($1.40) per diluted share, in 2009. The increase in income from continuing operations was a result of the factors previously discussed.

BUSINESS SEGMENT REVIEW We operate two reportable operating segments consisting of Industrial and Infrastructure. Corporate expenses that do not have a meaningful base for allocation are reported in Corporate. Segment determination is based upon internal organizational structure, the manner in which we organize segments for making operating decisions and assessing performance, the availability of separate financial results and materiality considerations.

INDUSTRIAL

		2011				2010				2009
External sales		$	1,528,672			$	1,166,793			$	1,277,981
Operating income (loss)			209,663				31,210				(115,083	)

External sales of $1,528.7 million in 2011 increased by $361.9 million, or 31.0 percent, from 2010. The increase in sales was attributed to an organic sales increase of 32 percent and favorable foreign currency effects of 1 percent, offset by the impact of fewer business days. On an organic basis, sales increased in all served market sectors led by strong growth in general engineering and transportation sales of 40 percent and 30 percent, respectively. On a regional basis, organic sales increased by approximately 40 percent in Asia, 29 percent in Europe and 28 percent in the Americas.

Operating income for 2011 was $209.7 million and reflects an increase in operating performance of $178.5 million from 2010. The primary drivers of the increase in operating income were higher organic sales of $369.7 million, price realization, improved capacity utilization and incremental restructuring benefits. These benefits were partially offset by higher raw material costs. Industrial operating income included restructuring and related charges of $12.9 million and $35.5 million in 2011 and 2010, respectively. Industrial operating margin increased to 13.7 percent from 2.7 percent in the prior year.

External sales of $1,166.8 million in 2010 decreased by $111.2 million, or 8.7 percent, from 2009. The decrease in sales was attributed to organic sales decline of 10 percent offset by favorable foreign currency effects of 2 percent. On an organic basis, sales decreased in both aerospace and defense and general engineering, by 28 percent and 14 percent, respectively, partially offset by an increase in transportation sales of 8 percent. On a regional basis, organic sales decreased by approximately 15 percent in Europe and 12 percent in the Americas, partially offset by a 13 percent increase in Asia.

Operating income for 2010 was $31.2 million and reflects an increase in operating performance of $146.3 million from the operating loss generated in 2009. The primary drivers of the increase in operating performance were cost savings from restructuring programs, continued cost containment actions and favorable price realization, partially offset by lower organic sales of $133.5 million. Industrial operating income (loss) included restructuring and related charges of $35.5 million and $24.5 million in 2010 and 2009, respectively and $111.0 million of asset impairment charges in 2009.

INFRASTRUCTURE

		2011				2010				2009
External sales		$	874,821			$	717,274			$	721,878
Operating income			121,733				79,899				19,768

External sales of $874.8 million in 2011 increased by $157.5 million, or 22.0 percent, from 2010. The increase in sales was attributed to organic sales increase of 21 percent and favorable foreign currency effects of 1 percent. The organic increase was driven by higher sales in the energy and earthworks markets of 26 percent and 18 percent, respectively. On a regional basis, organic sales increased by approximately 27 percent in Asia, 22 percent in the Americas and 13 percent in Europe.

Operating income for 2011 was $121.7 million and reflects an increase of $41.8 million from 2010. Operating income improved primarily due to higher organic sales of $153.1 million, price realization, increased capacity utilization and incremental restructuring benefits, partially offset by higher raw material costs. Infrastructure operating income included restructuring and related charges of $6.2 million and $13.4 million in 2011 and 2010, respectively. Infrastructure operating margin increased from the prior year quarter to 13.9 percent from 11.1 percent.

External sales of $717.3 million in 2010 decreased by $4.6 million, or 0.6 percent, from 2009. The decrease in sales was attributed to organic sales decline of 4 percent offset by the positive effects of acquisitions of 2 percent and favorable foreign currency effects of 1 percent. The decrease in organic sales was driven by lower sales in the energy market of 13 percent, partially offset by an increase in the earthworks market of 3 percent. On a regional basis, organic sales decreased by approximately 8 percent in Europe and 6 percent in the Americas, partially offset by a 14 percent increase in Asia.

Operating income for 2010 was $79.9 million and reflects an increase of $60.1 million from 2009. The increase was driven by cost savings from restructuring programs and continued cost containment actions, partially offset due to lower organic sales of $27.0 million and unfavorable price realization. For 2010, operating loss included $13.4 million of restructuring and related charges, compared to $47.9 million of restructuring and related charges in 2009.

CORPORATE

		2011				2010				2009
Corporate unallocated expense		$	(9,723	)		$	(17,881	)		$	(4,503	)

In 2011, unallocated expense decreased $8.2 million, or 45.6 percent from 2010. The decrease was driven by $4.2 million of lower strategic project spending, $4.1 million higher allocation of Corporate expense to the segments than in the prior year, $1.2 million higher foreign government subsidy income for certain research projects and a $1.1 million reversal of an international environmental liability, partially offset by charge of $2.4 million recorded to write-off our pre-existing ERP system.

In 2010, unallocated expense increased $13.4 million from 2009. The increase was primarily due to $9.0 million of higher strategic project spending and $1.7 million higher foreign government subsidy income for certain research projects.

LIQUIDITY AND CAPITAL RESOURCES Cash flow from operations is our primary source of funding for capital expenditures. During the year ended June 30, 2011, cash flow provided by operating activities was $230.8 million, driven by our operating performance.

To augment cash from operations and as an additional source of funds, we maintain a syndicated revolving credit-facility. On June 25, 2010 we entered into a five-year, multi-currency, revolving credit facility (2010 Credit Agreement) that extends to June 2015. This agreement replaces the prior credit facility that was scheduled to mature in March 2011. The 2010 Credit Agreement permits revolving credit loans of up to $500.0 million for working capital, capital expenditures and general corporate purposes. The 2010 Credit Agreement allows for borrowings in U.S. dollars, euro, Canadian dollars, pound sterling and Japanese yen. Interest payable under the 2010 Credit Agreement is based upon the type of borrowing under the facility and may be (1) LIBOR plus an applicable margin, (2) the greater of the prime rate or the Federal Funds effective rate plus an applicable margin, or (3) fixed as negotiated by us.

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

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

Our $300 million Senior Unsecured Notes due in June 2012 have been reclassified to current maturities of long-term debt as of June 30, 2011. The repayment of this debt is expected to be financed in due course through a new corporate bond issuance.

Additionally, we obtain local financing through credit lines with commercial banks in the various countries in which we operate. At June 30, 2011, these borrowings amounted to $3.7 million of notes payable and $3.3 million of term debt, capital leases and other debt. 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, 2011 and 2010, approximately 2 percent and 6 percent of our debt, respectively, was exposed to variable rates of interest. The decrease in the portion of our debt subject to variable rates was due to a reduction in notes payable and term debt subject to variable interest rates.

At June 30, 2011, we had cash and cash equivalents of $204.6 million. Total Kennametal shareowners’ equity was $1,658.1 million and total debt was $312.9 million. Our current senior credit ratings are at investment grade levels. We believe that our current financial position, liquidity and credit ratings provide us access to the capital markets. We continue to closely monitor our liquidity position and the condition of the capital markets, as well as the counterparty risk of our credit providers.

Following is a summary of our contractual obligations and other commercial commitments as of June 30, 2011 (in thousands):

Contractual Obligations						Total				2012				2013-2014				2015-2016				Thereafter
Long-term debt			(1	)		$	327,718			$	327,651			$	67			$	-			$	-
Notes payable			(2	)			3,821				3,821				-				-				-
Pension benefit payments							(3)				41,230				83,988				91,304				(3)
Postretirement benefit payments							(3)				2,416				4,586				4,203				(3)
Capital leases			(4	)			3,505				1,392				1,385				728				-
Operating leases							64,893				16,962				17,516				6,714				23,701
Purchase obligations			(5	)			830,285				616,984				90,493				57,792				65,016
Unrecognized tax benefits			(6	)			21,462				16,096				-				-				5,366
Total										$	1,026,552			$	198,035			$	160,741

Other Commercial Commitments		Total				2012				2013-2014				2015-2016				Thereafter
Standby letters of credit		$	5,234			$	5,234			$	-			$	-			$	-
Guarantees			32,241				25,725				454				9				6,053
Total		$	37,475			$	30,959			$	454			$	9			$	6,053

The standby letters of credit relate to insurance and other activities. The guarantees are non-debt guarantees in foreign locations with financial institutions required primarily for security deposits, product performance guarantees and advances.

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.

Cash Flow Provided by Operating Activities

During 2011, cash flow provided by operating activities was $230.8 million, compared to $164.8 million in 2010. Cash flow provided by operating activities for the current year consisted of net income and non-cash items amounting to $329.8 million, offset by changes in certain assets and liabilities netting to $99.0 million. These changes were primarily driven by an increase in inventory of $124.1 million, due to increased demand and higher raw material costs, and an increase in accounts receivable of $89.2 million driven by higher sales volumes, partially offset by an increase in accounts payable and accrued liabilities of $100.3 million, driven by higher accounts payable balances related to increased production and an increase in accrued income taxes of $22.2 million.

During 2010, cash flow provided by operating activities was $164.8 million, compared to $192.3 million in 2009. Cash flow provided by operating activities for 2010 consisted of net income and non-cash items amounting to $158.4 million and changes in certain assets and liabilities netting to $6.5 million. These changes were driven by an increase in accounts receivable of $58.2 million, driven by higher sales volumes in the latter part of the year, partially offset by an increase in accounts payable and accrued liabilities of $41.0 million, driven by increased accounts payable related to increased production and an increase in accrued income taxes of $19.2 million.

During 2009, cash flow provided by operating activities was $192.3 million. Cash flow provided by operating activities for 2009 consisted of net loss and non-cash items amounting to $113.1 million of cash generation, including $115.2 million of restructuring and asset impairment charges, and changes in certain assets and liabilities netting to $79.2 million. Contributing to these changes was a decrease in accounts receivable of $200.2 million and a decrease in inventories of $36.0 million, partially offset by a decrease in accounts payable and accrued liabilities of $118.1 million, a decrease in accrued income taxes of $12.0 million and a net change in other assets and liabilities of $26.9 million.

Cash Flow Used for Investing Activities
Cash flow used for investing activities was $71.8 million for 2011, an increase of $31.4 million, compared to $40.4 million in 2010. During the current year, cash flow used for investing activities included $83.4 million used for purchases of property, plant and equipment, which consisted primarily of upgrades of equipment and our enterprise resource planning (ERP) system.

We have projected our capital expenditures for 2012 to be approximately $100 million, which are expected to be used primarily to invest in equipment upgrades and manufacturing capabilities. We believe this level of capital spending is sufficient to maintain competitiveness and improve productivity.

Cash flow used for investing activities was $40.4 million for 2010, a decrease of $129.7 million, compared to $170.1 million in 2009. During 2010, cash flow used for investing activities included $56.7 million used for purchases of property, plant and equipment, which consisted primarily of equipment upgrades, and $17.0 million used for the acquisition of business assets, primarily the deferred purchase price of $16.0 million for a 2007 acquisition, as well as $27.8 million of cash proceeds from divestitures.

Cash flow used for investing activities was $170.1 million for 2009 and included $104.8 million used for purchases of property, plant and equipment, which consisted primarily of equipment upgrades, and $69.5 million used for the acquisition of business assets, primarily the Tricon acquisition with a net purchase price of $64.1 million.

Cash Flow Used for Financing Activities
Cash flow used for financing activities was $96.0 million for 2011, compared to $58.2 million in 2010. During the current year, cash flow used for financing activities included $57.9 million used for the purchase of capital stock, $39.8 million of cash dividends paid to shareowners and a $17.6 million net decrease in borrowings, partially offset by $18.3 million of dividend reinvestment and the effect of employee benefit and stock plans.

Cash flow used for financing activities was $58.2 million for 2010, compared to $15.5 million in 2009. During 2010, cash flow used for financing activities included a $143.0 million net decrease in borrowings and $39.3 million of cash dividends paid to shareowners, partially offset by $120.7 million in net proceeds from equity offering and $10.7 million of dividend reinvestment and the effect of employee benefit and stock plans.

In 2009, cash flow used for financing activities was $15.5 million and included a $128.0 million net increase in borrowings, $12.6 million in proceeds from termination of interest rate swap contracts and $4.9 million of dividend reinvestment and the effect of employee benefit and stock plans offset by $127.7 million used for the purchase of capital stock and $35.5 million of cash dividends paid to shareowners.

FINANCIAL CONDITION At June 30, 2011, total assets were $2,754.5 million, an increase of $486.7 million from $2,267.8 million at June 30, 2010. Total liabilities increased $161.4 million from $934.4 million at June 30, 2010 to $1,095.8 million at June 30, 2011.

Working capital was $446.1 million at June 30, 2011, a decrease of $76.8 million or 14.7 percent from $522.9 million at June 30, 2010. The decrease in working capital was primarily driven by an increase in current maturities of long-term debt and capital leases and notes payable to banks of $288.0 million due to the $306.0 million senior unsecured notes being reclassified from long-term to current as they are due in 2012, an increase in accounts payable of $97.3 million due to increased production and better working capital management, an increase in accrued payroll of $25.9 million due to the timing of the payroll disbursement at year end and an increase in accrued income taxes of $20.2 million, partially offset by an increase in inventories of $155.7 million driven by the impact of higher production to meet demand and higher raw material costs, an increase of $121.1 million in accounts receivable due to higher sales and an increase of $86.4 million in cash and cash equivalents. Foreign currency effects accounted for $54.4 million of the working capital change.

Property, plant and equipment, net increased $32.6 million from $664.5 million at June 30, 2010 to $697.1 million at June 30, 2011, primarily due to capital additions of $83.4 million, consisting of equipment upgrades and ERP system capitalization and foreign currency impact of $38.6 million, partially offset by depreciation expense of $81.9 million.

At June 30, 2011, other assets were $769.8 million, an increase of $82.4 million from $687.4 million at June 30, 2010. The primary drivers for the increase were an increase in other assets of $47.0 million, an increase in goodwill of $21.9 million and an increase in deferred income taxes of $18.0 million. The increase in other assets was primarily due to an increase in pension assets due to higher return on plan assets. Foreign currency effects accounted for $21.6 million and $5.3 million in the change in goodwill and deferred income taxes, respectively.

Long-term debt and capital leases decreased $312.8 million to $1.9 million at June 30, 2011 from $314.7 million at June 30, 2010. The decrease was driven by the reclassification of senior unsecured notes which are due in 2012 to current.

Kennametal shareowners’ equity was $1,638.1 million at June 30, 2011, an increase of $322.6 million from $1,315.5 million in the prior year. The increase was primarily due to net income attributable to Kennametal of $229.7 million, foreign currency translation adjustments of $120.1 million, effect of amortization of employee benefit plan gains into other comprehensive income of $35.2 million and capital stock issued under employee benefit and stock plans of $34.9 million, partially offset by purchase of capital stock of $57.9 million and cash dividends paid to shareowners of $39.8 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. For certain of these sites, we have evaluated the claims and potential liabilities and have determined that neither are material, individually or in the aggregate. For certain other sites, proceedings are in the very early stages and have not yet progressed to a point where it is possible to estimate the ultimate cost of remediation, the timing and extent of remedial action that may be required by governmental authorities or the amount of our liability alone or in relation to that of any other PRPs.

Other Environmental Issues We establish and maintain reserves for other potential environmental issues. At June 30, 2011 and 2010, the total of accruals for these reserves was $5.4 million and $5.2 million, respectively. These totals represent anticipated costs associated with the remediation of these issues. We recorded additional reserves of $1.5 million and $0.6 million in 2011 and 2010, respectively. We recorded unfavorable foreign currency translation adjustments of $0.6 million during 2011 and favorable foreign currency translation adjustment of $0.6 million during 2010, respectively. Cash payments of $0.8 million and $0.1 million were made against these reserves during 2011 and 2010, respectively. We also had a $1.1 million reversal of an international environmental liability in 2011. We maintain a Corporate EHS Department, as well as an EHS Steering Committee, to monitor compliance with environmental regulations and to oversee remediation activities. In addition, we have designated EHS coordinators who are responsible for each of our global manufacturing facilities. Our financial management team periodically meets with members of the Corporate EHS Department and the Corporate Legal Department to review and evaluate the status of environmental projects and contingencies. On a quarterly basis, we review financial provisions and reserves for environmental contingencies and adjust these reserves when appropriate.

EFFECTS OF INFLATION Despite modest inflation in recent years, rising costs, including 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.

DISCUSSION OF CRITICAL ACCOUNTING POLICIES In preparing our financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP), 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 of our consolidated financial statements set forth in Item 8. 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 2011, 2010 and 2009.

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 utilize the Black-Scholes valuation method to establish the fair value of all stock option 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 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. These valuations are sensitive to changes in market interest rates.

Pension and Other Postretirement and Postemployment Benefits We sponsor these types of benefit plans for certain 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 investment grade bond yield curves 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, 2011, a hypothetical 25 basis point increase or decrease in our discount rates would increase or decrease, respectively, our pre-tax income by approximately $2.7 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 2029. At June 30, 2011, a hypothetical 1 percent increase or decrease in our health care cost trend rates would be immaterial to our pre-tax income.

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 $7.0 million and $2.1 million to our pension and other postretirement benefit plans, respectively, in 2012.

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, 2011.

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, 2011, 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. In the event we were to determine that we are able to use our deferred tax assets and a valuation allowance had been recorded against the deferred tax assets, a decrease in the valuation allowance would be required.

NEW ACCOUNTING STANDARDS

Adopted

As of January 1, 2011, Kennametal adopted changes to intangible impairment testing for reporting units with zero or negative carrying amounts. These changes require an entity to perform all steps in the test for a reporting unit whose carrying value is zero or negative if it is more likely than not that an intangible impairment exists based on qualitative factors, resulting in the elimination of an entity’s ability to assert that such a reporting unit’s intangible assets are not impaired and additional testing is not necessary despite the existence of qualitative factors that indicate otherwise. The adoption of this guidance did not have an impact on our consolidated financial statements.

As of January 1, 2011, Kennametal adopted changes to the disclosures related to business combinations for a public entity that presents comparative financial statements. This guidance also expanded the supplemental pro forma business combination disclosures. The adoption of this guidance did not have an impact on our consolidated financial statements.

As of July 1, 2010, Kennametal adopted new guidance on consolidations for enterprises involved with variable interest entities. The guidance modifies how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar) rights should be consolidated and clarifies that the determination of whether a company is required to consolidate a variable interest entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. This guidance requires an ongoing reassessment of whether a company is the primary beneficiary of a variable interest entity and also requires additional disclosures about a company’s involvement in variable interest entities and any significant changes in risk exposure due to that involvement. The adoption of this guidance did not have an impact on our consolidated financial statements.

As of July 1, 2010, Kennametal adopted new guidance on accounting for transfers of financial assets. This guidance requires additional disclosure regarding transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. The adoption of this guidance did not have an impact on our consolidated financial statements.

As of July 1, 2010, Kennametal adopted new guidance on revenue recognition for multiple-deliverable revenue arrangements. The guidance allows companies to allocate arrangement consideration in multiple deliverable arrangements in a manner that better reflects the transaction’s economics and may result in earlier revenue recognition. In addition, the residual method of allocating arrangement consideration is no longer permitted. The adoption of this guidance did not have a material impact on our consolidated financial statements.

Issued

In June 2011, the Financial Accounting Standards Board (FASB) issued new guidance on presentation of comprehensive income. This new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. An entity can elect to present items of net income and other comprehensive income in one continuous statement (referred to as the statement of comprehensive income) or in two separate consecutive statements. Each component of net income and other comprehensive income, together with totals for comprehensive income and its two parts — net income and other comprehensive income, would need to be displayed under either alternative. The statement(s) would need to be presented with equal prominence as the other primary financial statements. This guidance is effective for Kennametal beginning July 1, 2012.

In May 2011, the FASB issued new guidance on fair value measurements and disclosure. The objective of the new guidance is a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between accounting principles U.S. GAAP and international financial reporting standards (IFRS). Many of the amendments in this new guidance represent clarifications to existing guidance or changes in the measurement guidance for determining fair value. The most significant change in disclosures is an expansion of the information required for Level 3 measurements. New disclosures are required about the use of a nonfinancial asset measured or disclosed at fair value if its use differs from its highest and best use. In addition, entities must report the level in the fair value hierarchy of assets and liabilities not recorded at fair value but where fair value is disclosed. This guidance is effective for Kennametal beginning January 1, 2012. We are in the process of evaluating the impact of adoption 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 provide predictability to 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 in cash flow, allowing us to focus more of our attention on business operations. With respect to interest rate management, these derivative instruments allow us to achieve our targeted fixed-to-floating interest rate mix as a separate decision from funding arrangements in the bank and public debt markets. We measure hedge effectiveness by assessing the changes in the fair value or expected future cash flows of the hedged item. The ineffective portions are recorded in other expense (income), net. See Notes 2 and 16 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, 2011 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, 2011 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, 2011 and 2010 rates were $37.6 million and $9.4 million, respectively. We would have paid immaterial amounts at June 30, 2011 and 2010, respectively, to settle these contracts, which represent the fair value of these contracts. At June 30, 2011, a hypothetical 10 percent strengthening or weakening of the U.S. dollar would change accumulated other comprehensive (loss) income, net of tax, by $1.5 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, 2011 and 2010, we had outstanding forward contracts to purchase and sell foreign currency with notional amounts, translated into U.S. dollars at June 30, 2011 and 2010 rates, of $39.3 million and $134.0 million, respectively. At June 30, 2011, a hypothetical 10 percent change in the year-end exchange rates would result in an increase or decrease in pre-tax income of $0.8 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 contracts to manage exposure to interest rate changes

related to these borrowings. We had forward starting interest rate swap contracts outstanding for forecasted transactions that effectively converted a cumulative notional amount of $150 million and $75 million from floating to fixed interest rates as of June 30, 2011 and 2010, respectively. These contracts are expected to be settled by December 2011. We would have paid $2.4 million and $2.3 million at June 30, 2011 and 2010, respectively, to settle these interest rate swap contracts, which represented the fair value of these contracts.

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 contracts. At June 30, 2011 and 2010, we had no such contracts in place.

DEBT AND NOTES PAYABLE At June 30, 2011 and 2010, we had $312.9 million and $337.7 million, respectively, of outstanding debt, including capital leases and notes payable. Effective interest rates as of June 30, 2011 and 2010 were 4.8 percent and 5.0 percent, respectively, including the effect of interest rate swaps. A hypothetical change of 10 percent in interest rates from June 30, 2011 levels would increase or decrease annual interest expense by approximately $2.2 million.

On June 25, 2010, we entered into a five-year, multi-currency, revolving credit facility (2010 Credit Agreement) that extends to June 2015. This agreement replaces the prior credit facility that was scheduled to mature in March 2011. The 2010 Credit Agreement permits revolving credit loans of up to $500.0 million for working capital, capital expenditures and general corporate purposes. We had no borrowings outstanding under the 2010 Credit Agreement as of June 30, 2011.

Also during July 2009, the Company completed the issuance of 8.1 million shares of its common stock generating net proceeds of $120.7 million which were used to pay down outstanding indebtedness under the revolving credit facility.

FOREIGN CURRENCY EXCHANGE RATE FLUCTUATIONS Foreign currency exchange rate fluctuations materially decreased earnings in 2011 and materially increased earnings in 2009. Such fluctuations did not materially impact earnings in 2010. 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, 2011 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, 2011, 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, 2011 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.

Report of Independent Registered Public Accounting Firm

To the Shareowners of Kennametal Inc.:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, shareowners’ equity and cash flow present fairly, in all material respects, the financial position of Kennametal Inc. and its subsidiaries at June 30, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2011 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, 2011, 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.

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 11, 2011

CONSOLIDATED STATEMENTS OF INCOME

Year ended June 30 (in thousands, except per share data)		2011				2010				2009
Sales		$	2,403,493			$	1,884,067			$	1,999,859
Cost of goods sold			1,519,102				1,256,339				1,423,320
Gross profit			884,391				627,728				576,539
Operating expense			538,530				477,487				489,567
Restructuring and asset impairment charges (Notes 2 and 15)			12,586				43,923				173,656
Amortization of intangibles			11,602				13,090				13,134
Operating income (loss)			321,673				93,228				(99,818	)
Interest expense			22,760				25,203				27,244
Other expense (income), net			2,780				(8,577	)			(14,566	)
Income (loss) from continuing operations before income taxes			296,133				76,602				(112,496	)
Provision (benefit) for income taxes (Note 12)			63,856				26,977				(11,205	)
Income (loss) from continuing operations			232,277				49,625				(101,291	)
Loss from discontinued operations (Note 5)			-				(1,423	)			(17,340	)
Net income (loss)			232,277				48,202				(118,631	)
Less: Net income attributable to noncontrolling interests			2,550				1,783				1,111
Net income (loss) attributable to Kennametal		$	229,727			$	46,419			$	(119,742	)
Amounts attributable to Kennametal Shareowners:
Income (loss) from continuing operations		$	229,727			$	47,842			$	(102,402	)
Loss from discontinued operations (Note 5)			-				(1,423	)			(17,340	)
Net income (loss) attributable to Kennametal		$	229,727			$	46,419			$	(119,742	)
PER SHARE DATA ATTRIBUTABLE TO KENNAMETAL
Basic earnings (loss) per share:
Continuing operations		$	2.80			$	0.59			$	(1.40	)
Discontinued operations			-				(0.02	)			(0.24	)
		$	2.80			$	0.57			$	(1.64	)
Diluted earnings (loss) per share:
Continuing operations		$	2.76			$	0.59			$	(1.40	)
Discontinued operations			-				(0.02	)			(0.24	)
		$	2.76			$	0.57			$	(1.64	)
Dividends per share		$	0.48			$	0.48			$	0.48
Basic weighted average shares outstanding			82,063				80,966				73,122
Diluted weighted average shares outstanding			83,173				81,690				73,122

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)		2011				2010
ASSETS
Current assets:
Cash and cash equivalents		$	204,565			$	118,129
Accounts receivable, less allowance for doubtful accounts of $20,958 and $24,789			447,835				326,699
Inventories (Note 8)			519,973				364,268
Deferred income taxes (Note 12)			60,257				62,083
Other current assets			54,955				44,752
Total current assets			1,287,585				915,931
Property, plant and equipment:
Land and buildings			373,971				341,748
Machinery and equipment			1,396,306				1,281,872
Less accumulated depreciation			(1,073,215	)			(959,085	)
Property, plant and equipment, net			697,062				664,535
Other assets:
Investments in affiliated companies			829				2,251
Goodwill (Note 2)			511,328				489,443
Other intangible assets, less accumulated amortization of $78,712 and $63,343 (Note 2)			152,279				155,306
Deferred income taxes (Note 12)			29,876				11,827
Other			75,510				28,530
Total other assets			769,822				687,357
Total assets		$	2,754,469			$	2,267,823
LIABILITIES
Current liabilities:
Current maturities of long-term debt and capital leases (Note 10)		$	307,304			$	3,539
Notes payable to banks (Note 11)			3,659				19,454
Accounts payable			222,678				125,360
Accrued income taxes (Note 12)			38,098				17,857
Accrued vacation pay			37,311				34,615
Accrued payroll			65,265				39,374
Other current liabilities (Note 9)			167,206				152,806
Total current liabilities			841,521				393,005
Long-term debt and capital leases, less current maturities (Note 10)			1,919				314,675
Deferred income taxes (Note 12)			83,310				63,266
Accrued postretirement benefits (Note 13)			17,853				17,894
Accrued pension benefits (Note 13)			117,066				111,807
Accrued income taxes (Note 12)			3,094				5,193
Other liabilities			31,065				28,540
Total liabilities			1,095,828				934,380
Commitments and contingencies (Note 19)
EQUITY
Kennametal Shareowners’ Equity:
Preferred stock, no par value; 5,000 shares authorized; none issued			-				-
Capital stock, $1.25 par value; 120,000 shares authorized; 81,129 and 81,903 shares issued			101,411				102,379
Additional paid-in capital			470,758				492,454
Retained earnings			983,374				793,448
Accumulated other comprehensive income (loss)			82,529				(72,781	)
Total Kennametal Shareowners’ Equity			1,638,072				1,315,500
Noncontrolling interests			20,569				17,943
Total equity			1,658,641				1,333,443
Total liabilities and equity		$	2,754,469			$	2,267,823

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

CONSOLIDATED STATEMENTS OF CASH FLOW

Year ended June 30 (in thousands)		2011				2010				2009
OPERATING ACTIVITIES
Net income (loss)		$	232,277			$	48,202			$	(118,631	)
Adjustments for non-cash items:
Depreciation			81,869				83,339				83,247
Amortization			11,602				13,090				13,134
Stock-based compensation expense			18,852				16,640				9,412
Restructuring and asset impairment charges (Note 15)			2,914				855				115,212
Loss on divestitures			-				527				22,704
Deferred income tax (benefit) provision			(7,881	)			230				(10,898	)
Other			(9,872	)			(4,506	)			(1,088	)
Changes in certain assets and liabilities, excluding effects of acquistions and divestitures:
Accounts receivable			(89,153	)			(58,245	)			200,159
Inventories			(124,082	)			(2,576	)			36,048
Accounts payable and accrued liabilities			100,325				40,985				(118,133	)
Accrued income taxes			22,158				19,227				(11,969	)
Other			(8,212	)			7,060				(26,934	)
Net cash flow provided by operating activities			230,797				164,828				192,263
INVESTING ACTIVITIES
Purchases of property, plant and equipment			(83,442	)			(56,679	)			(104,842	)
Disposals of property, plant and equipment			9,755				5,141				2,914
Cash paid for acquisitions, net of cash acquired (Note 4)			-				(16,969	)			(69,485	)
Proceeds from divestitures (Notes 4 and 5)			-				27,788				1,544
Proceeds from sale of investments in affiliated companies			1,723				23				108
Other			139				276				(295	)
Net cash flow used for investing activities			(71,825	)			(40,420	)			(170,056	)
FINANCING ACTIVITIES
Net (decrease) increase in notes payable			(15,992	)			(27,335	)			14,311
Term debt borrowings			450,109				564,366				974,248
Term debt repayments			(451,748	)			(680,023	)			(860,522	)
Purchase of capital stock			(57,909	)			(306	)			(127,720	)
Net proceeds from equity offering			-				120,696				-
Proceeds from interest rate swap agreement termination (Note 7)			-				-				12,566
Dividend reinvestment and the effect of employee benefit and stock plans			18,328				10,677				4,873
Cash dividends paid to shareowners			(39,801	)			(39,316	)			(35,466	)
Other			988				(6,926	)			2,184
Net cash flow used for financing activities			(96,025	)			(58,167	)			(15,526	)
Effect of exchange rate changes on cash and cash equivalents			23,489				(17,935	)			(23,336	)
CASH AND CASH EQUIVALENTS
Net increase (decrease) in cash and cash equivalents			86,436				48,306				(16,655	)
Cash and cash equivalents, beginning of period			118,129				69,823				86,478
Cash and cash equivalents, end of period		$	204,565			$	118,129			$	69,823

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

Note: Amounts presented include cash flows from discontinued operations.

CONSOLIDATED STATEMENTS OF SHAREOWNERS’ EQUITY

		2011								2010								2009
Year ended June 30 (in thousands)		Shares				Amount				Shares				Amount				Shares				Amount
CAPITAL STOCK
Balance at beginning of year			81,903			$	102,379				73,232			$	91,540				76,858			$	96,076
Dividend reinvestment			8				10				12				15				28				35
Capital stock issued under employee benefit and stock plans			721				901				621				776				346				429
Equity offering			-				-				8,050				10,063				-				-
Purchase of capital stock			(1,503	)			(1,879	)			(12	)			(15	)			(4,000	)			(5,000	)
Balance at end of year			81,129				101,411				81,903				102,379				73,232				91,540
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year							492,454								357,839								468,169
Dividend reinvestment							354								290								569
Capital stock issued under employee benefit and stock plans							33,980								23,986								11,821
Equity offering							-								110,630								-
Purchase of capital stock							(56,030	)							(291	)							(122,720	)
Balance at end of year							470,758								492,454								357,839
RETAINED EARNINGS
Balance at beginning of year							793,448								786,345								941,553
Net income (loss)							229,727								46,419								(119,742	)
Cash dividends paid to shareowners							(39,801	)							(39,316	)							(35,466	)
Balance at end of year							983,374								793,448								786,345
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance at beginning of year							(72,781	)							11,719								142,109
Unrealized gain (loss) on derivatives designated and qualified as cash flow hedges, net of tax							642								(936	)							(3,006	)
Reclassification of unrealized (gain) loss on expired derivatives designated and qualified as cash flow hedges, net of tax							(679	)							(1,482	)							5,290
Unrecognized net pension and other postretirement benefit gains (losses), net of tax							28,087								(17,397	)							(14,283	)
Reclassification of net pension and other postemployment benefit losses, net of tax							7,131								2,975								1,496
Foreign currency translation adjustments, net of tax							120,129								(67,660	)							(119,887	)
Other comprehensive income (loss), net of tax							155,310								(84,500	)							(130,390	)
Balance at end of year							82,529								(72,781	)							11,719
NONCONTROLLING INTERESTS
Balance at beginning of year							17,943								20,012								21,527
Net income							2,550								1,783								1,111
Other comprehensive income (loss), net of tax							2,229								(1,177	)							(2,158	)
Purchase of noncontrolling interests							-								(401	)							(165	)
Cash dividends paid to noncontrolling interests							(2,153	)							(2,274	)							(303	)
Balance at end of year							20,569								17,943								20,012
Total equity, June 30						$	1,658,641							$	1,333,443							$	1,267,455

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - NATURE OF OPERATIONS

Kennametal Inc. delivers productivity to customers seeking peak performance in demanding environments by providing innovative custom and standard wear-resistant solutions, enabled through our advanced materials sciences, application knowledge and commitment to a sustainable environment. We believe that our reputation for manufacturing excellence, as well as our technological expertise and innovation in our principal products, has helped us to achieve a leading market presence in our primary markets. End users of our products include metalworking manufacturers and suppliers across a diverse array of industries, including the aerospace, defense, transportation, machine tool, light machinery and heavy machinery industries, as well as manufacturers, producers and suppliers in a number of other industries including coal mining, highway construction, quarrying, and oil and gas exploration and production industries. Our end users’ products include items ranging from airframes to coal mining, engines to oil wells and turbochargers to construction.

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.

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 and bank deposits at June 30, 2011.

ACCOUNTS RECEIVABLE 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, 2011 and 2010 was $55.3 million and $68.3 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 of the asset or asset group, 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 OTHER INTANGIBLE ASSETS Goodwill represents the excess of cost over the fair value of the net assets 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 annual 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:

(in thousands)		Industrial				Infrastructure				Total
Goodwill		$	406,626			$	247,199			$	653,825
Accumulated impairment losses			(150,842	)			-				(150,842	)
Balance as of June 30, 2009		$	255,784			$	247,199			$	502,983
Acquisitions / Divestitures			536				-				536
Translation			(13,188	)			(888	)			(14,076	)
Change in goodwill			(12,652	)			(888	)			(13,540	)
Goodwill		$	393,974			$	246,311			$	640,285
Accumulated impairment losses			(150,842	)			-				(150,842	)
Balance as of June 30, 2010		$	243,132			$	246,311			$	489,443
Adjustments		$	252			$	-			$	252
Translation			17,719				3,914				21,633
Change in goodwill			17,971				3,914				21,885
Goodwill			411,945				250,225				662,170
Accumulated impairment losses			(150,842	)			-				(150,842	)
Balance as of June 30, 2011		$	261,103			$	250,225			$	511,328

We recorded no goodwill or intangible asset impairments in 2011 and 2010. We also recorded goodwill impairment charges of $37.3 million related to our surface finishing machines and services business and $62.9 million related to our engineered products business in 2009.

During 2010, we acquired the remaining noncontrolling interest of a consolidated entity which resulted in additional Industrial goodwill of $0.7 million.

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

		Estimated				2011								2010
		Useful Life				Gross Carrying				Accumulated				Gross Carrying				Accumulated
(in thousands)		(in years)				Amount				Amortization				Amount				Amortization
Contract-based			4 to 15			$	6,349			$	(5,380	)		$	6,357			$	(5,218	)
Technology-based and other			4 to 15				39,743				(25,442	)			37,136				(20,422	)
Customer-related			10 to 20				113,977				(38,275	)			108,470				(29,255	)
Unpatented technology			30				19,540				(4,740	)			19,216				(4,572	)
Trademarks			5 to 20				10,902				(4,875	)			10,647				(3,876	)
Trademarks		Indefinite					40,480				-				36,823				-
Total						$	230,991			$	(78,712	)		$	218,649			$	(63,343	)

During 2011, we recorded foreign currency translation adjustments which increased intangible assets by $8.5 million. During 2010, we recorded foreign currency translation adjustments which decreased intangible assets by $6.0 million. We also recorded a $10.8 million impairment charge in 2009 for the indefinite-lived trademark for our surface finishing machines and services business.

Amortization expense for intangible assets was $11.6 million, $13.1 million and $13.1 million for 2011, 2010 and 2009, respectively. Estimated amortization expense for 2012 through 2016 is $10.8 million, $10.1 million, $9.8 million, $9.5 million, and $9.1 million, respectively.

PENSION AND OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS We sponsor these types of benefit plans for certain 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 investment grade bond yield curves 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 2029.

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.

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 the issuance of capital stock under stock option grants, restricted stock awards and restricted stock units. The difference between basic and diluted earnings per share relates solely to the effect of capital stock options, restricted stock awards and restricted stock units.

For purposes of determining the number of diluted shares outstanding at June 30, 2011 and 2010, weighted average shares outstanding for basic earnings per share calculations were increased due solely to the dilutive effect of unexercised capital stock options, unvested restricted stock awards and unvested restricted stock units by 1.1 million and 0.7 million shares, respectively. For June 30, 2009, the effect of unexercised capital stock options, unvested restricted stock awards and unvested restricted stock units was anti-dilutive and therefore has been excluded from diluted shares outstanding as well as from the diluted earnings per share calculation. Unexercised capital stock options, restricted stock units and restricted stock awards of 0.4 million, 2.3 million and 2.6 million shares at June 30, 2011, 2010, and 2009, 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 the inclusion would have been anti-dilutive.

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.

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 2011, 2010 and 2009.

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 utilize the Black-Scholes valuation method to establish the fair value of all stock option 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. On October 26, 2010, the Company’s shareowners approved the Kennametal Inc., Stock and Incentive Plan of 2010 (2010 Plan). The 2010 Plan authorizes the issuance of up to 3,500,000 shares of the Company’s capital stock plus any shares remaining unissued under the Kennametal Inc. Stock and Incentive Plan of 2002, as amended (2002 Plan). Under the provisions of these Plans, 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 2011, 2010 and 2009 was $0.8 million, $0.1 million, and $0.7 million, respectively. In addition to stock option grants, these Plans permit the award of stock appreciation rights, performance shares, performance units, restricted stock and restricted stock units to directors, officers and key employees.

RESEARCH AND DEVELOPMENT COSTS Research and development costs of $33.3 million, $28.0 million and $27.6 million in 2011, 2010 and 2009, 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 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.

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES As part of our financial risk management program, we use certain derivative financial instruments. We do not enter into derivative transactions for speculative purposes and, therefore, hold no derivative instruments for trading purposes. We use derivative financial instruments to provide predictability to the effects of changes in foreign exchange rates on our consolidated results, achieve our targeted mix of fixed and floating interest rates on outstanding debt and forecasted transactions. Our objective in managing foreign exchange exposures with derivative instruments is to reduce volatility in cash flow, allowing us to focus more of our attention on business operations. With respect to interest rate management, these derivative instruments allow us to achieve our targeted fixed-to-floating interest rate mix, as a separate decision from funding arrangements, in the bank and public debt markets.

We 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. 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 expense (income), net.

Certain currency 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 expense (income), net.

CASH FLOW HEDGES Currency Forward contracts and range forward contracts (a transaction where both a put option is purchased and a call option is sold) are designated as cash flow hedges and 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 expense (income), net when the underlying sale of products or services is recognized into earnings.

Interest Rate Floating-to-fixed interest rate swap contracts, 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 contracts convert a portion of our floating rate debt to fixed rate debt. We record the fair value of these contracts as an asset or a liability, as applicable, in the balance sheet, with the offset to accumulated other comprehensive income (loss), net of tax.

FAIR VALUE HEDGES Interest Rate Fixed-to-floating interest rate swap contracts, designated as fair value hedges, are entered into from time to time to hedge our exposure to fair value fluctuations on a portion of our fixed rate debt. These interest rate swap contracts convert a portion of our fixed rate debt to floating rate debt. When in place, these contracts require periodic settlement, and the difference between amounts to be received and paid under the contracts is recognized in interest expense.

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 expense (income), net were $6.6 million for 2011. Gains from foreign currency transactions included in other expense (income), net were $3.5 million and $6.8 million for 2010 and 2009, respectively.

NEW ACCOUNTING STANDARDS

Adopted

As of January 1, 2011, Kennametal adopted changes to intangible impairment testing for reporting units with zero or negative carrying amounts. These changes require an entity to perform all steps in the test for a reporting unit whose carrying value is zero or negative if it is more likely than not that an intangible impairment exists based on qualitative factors, resulting in the elimination of an entity’s ability to assert that such a reporting unit’s intangible assets are not impaired and additional testing is not necessary despite the existence of qualitative factors that indicate otherwise. The adoption of this guidance did not have an impact on our consolidated financial statements.

As of January 1, 2011, Kennametal adopted changes to the disclosures related to business combinations for a public entity that presents comparative financial statements. This guidance also expanded the supplemental pro forma business combination disclosures. The adoption of this guidance did not have an impact on our consolidated financial statements.

As of July 1, 2010, Kennametal adopted new guidance on consolidations for enterprises involved with variable interest entities. The guidance modifies how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar) rights should be consolidated and clarifies that the determination of whether a company is required to consolidate a variable interest entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. This guidance requires an ongoing reassessment of whether a company is the primary beneficiary of a variable interest entity and also requires additional disclosures about a company’s involvement in variable interest entities and any significant changes in risk exposure due to that involvement. The adoption of this guidance did not have an impact on our consolidated financial statements.

As of July 1, 2010, Kennametal adopted new guidance on accounting for transfers of financial assets. This guidance requires additional disclosure regarding transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. The adoption of this guidance did not have an impact on our consolidated financial statements.

As of July 1, 2010, Kennametal adopted new guidance on revenue recognition for multiple-deliverable revenue arrangements. The guidance allows companies to allocate arrangement consideration in multiple deliverable arrangements in a manner that better reflects the transaction’s economics and may result in earlier revenue recognition. In addition, the residual method of allocating arrangement consideration is no longer permitted. The adoption of this guidance did not have a material impact on our consolidated financial statements.

Issued

In June 2011, the Financial Accounting Standards Board (FASB) issued new guidance on presentation of comprehensive income. This new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. An entity can elect to present items of net income and other comprehensive income in one continuous statement (referred to as the statement of comprehensive income) or in two separate consecutive statements. Each component of net income and other comprehensive income, together with totals for comprehensive income and its two parts — net income and other comprehensive income, would need to be displayed under either alternative. The statement(s) would need to be presented with equal prominence as the other primary financial statements. This guidance is effective for Kennametal beginning July 1, 2012.

In May 2011, the FASB issued new guidance on fair value measurements and disclosure. The objective of the new guidance is a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and IFRS. Many of the amendments in this new guidance represent clarifications to existing guidance or changes in the measurement guidance for determining fair value. The most significant change in disclosures is an expansion of the information required for Level 3 measurements. New disclosures are required about the use of a nonfinancial asset measured or disclosed at fair value if its use differs from its highest and best use. In addition, entities must report the level in the fair value hierarchy of assets and liabilities not recorded at fair value but where fair value is disclosed. This guidance is effective for Kennametal beginning January 1, 2012. We are in the process of evaluating the impact of adoption on our consolidated financial statements.

NOTE 3 – SUPPLEMENTAL CASH FLOW INFORMATION

Year ended June 30 (in thousands)		2011				2010				2009
Cash paid during the period for:
Interest		$	26,624			$	28,626			$	26,328
Income taxes			95,382				3,788				18,020
Supplemental disclosure of non-cash information:
Contribution of capital stock to employees’ defined contribution benefit plans			948				6,352				1,738
Change in fair value of derivative contracts			-				-				730
Changes in accounts payable related to purchases of property, plant and equipment			-				-				(12,800	)

NOTE 4 – ACQUISITIONS AND DIVESTITURES

During 2009, we acquired Tricon for a net purchase price of $64.1 million. As part of our Infrastructure segment, we acquired Tricon to expand our products and solutions in the surface and underground mining markets, including hard rock and coal. During 2009, we also made an acquisition within our Industrial segment. Also during 2009, we made final payments for two Industrial acquisitions that we made in Europe during 2008. During 2009, we had one divestiture that was accounted for as discontinued operations, see Note 5.

NOTE 5 – DISCONTINUED OPERATIONS

Effective June 30, 2009, we divested HSS from our Industrial segment as part of our continuing focus to shape our business portfolio and rationalize our manufacturing footprint. This divestiture was accounted for as discontinued operations. The net assets disposed of as a result of this transaction had a net book value of approximately $51 million and consisted primarily of inventory and equipment, as well as owned and leased facilities. Cash proceeds from this divestiture amounted to $28.5 million, the majority of which was received in 2010. We incurred pre-tax charges related to the divestiture of $2.3 million and $25.9 million during 2010 and 2009, respectively. The pre-tax charges as well as the related tax effects were recorded in discontinued operations. We do not expect to incur any additional pre-tax charges related to this divestiture.

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

(in thousands)		2010				2009
Sales		$	-			$	80,630
Loss from discontinued operations before income taxes		$	(2,269	)		$	(25,923	)
Income tax expense (benefit)			(846	)			(8,583	)
Loss from discontinued operations		$	(1,423	)		$	(17,340	)

NOTE 6 – FAIR VALUE MEASUREMENTS

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

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

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

Level 3: Inputs that are unobservable.

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

(in thousands)		Level 1				Level 2				Level 3				Total
Assets:
Derivatives (1)		$	-			$	896			$	-			$	896
Total assets at fair value		$	-			$	896			$	-			$	896
Liabilities:
Derivatives (1)		$	-			$	3,330			$	-			$	3,330
Total liabilities at fair value		$	-			$	3,330			$	-			$	3,330

As of June 30, 2010 the fair values of the Company’s financial assets and financial liabilities measured at fair value on a recurring basis are categorized as follows:

(in thousands)		Level 1				Level 2				Level 3				Total
Assets:
Derivatives (1)		$	-			$	43			$	-			$	43
Total assets at fair value		$	-			$	43			$	-			$	43
Liabilities:
Derivatives (1)		$	-			$	3,453			$	-			$	3,453
Total liabilities at fair value		$	-			$	3,453			$	-			$	3,453

⁽¹⁾ Foreign currency derivative and interest rate swap contracts are valued based on observable market spot and forward rates and are classified within Level 2 of the fair value hierarchy.

NOTE 7 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

As part of our financial risk management program, we use certain derivative financial instruments. See Note 2 for discussion on our derivative instruments and hedging activities policy.

The fair value of derivatives designated and not designated as hedging instruments in the consolidated balance sheets at June 30 is as follows:

(in thousands)		2011				2010
Derivatives designated as hedging instruments
Other current assets — range forward contracts		$	87			$	34
Other current liabilities — range forward contracts			(159	)			(2	)
Other assets — forward starting interest rate swap contracts			772				-
Other liabilities — forward starting interest rate swap contracts			(3,169	)			(2,348	)
Total derivatives designated as hedging instruments			(2,469	)			(2,316	)
Derivatives not designated as hedging instruments
Other current assets — currency forward contracts			37				9
Other current liabilities — currency forward contracts			(2	)			(1,103	)
Total derivatives not designated as hedging instruments			35				(1,094	)
Total derivatives		$	(2,434	)		$	(3,410	)