KENNAMETAL INC - 10-Q Quarterly Report

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FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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

FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2002

Commission file number 1-5318

KENNAMETAL INC.
(Exact name of registrant as specified in its charter)

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

WORLD HEADQUARTERS
1600 TECHNOLOGY WAY
P.O. BOX 231
LATROBE, PENNSYLVANIA 15650-0231
(Address of registrant's principal executive offices)

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

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

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

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

Title Of Each Class Outstanding at January 31, 2003
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Capital Stock, par value $1.25 per share 35,208,346

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KENNAMETAL INC.
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 2002

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
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KENNAMETAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
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(in thousands, except per share data)

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

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KENNAMETAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
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(in thousands)

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

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KENNAMETAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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(in thousands)

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

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KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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1. ORGANIZATION

Kennametal Inc. was incorporated in Pennsylvania in 1943 and maintains its
world headquarters in Latrobe, Pennsylvania. Kennametal Inc. and its
subsidiaries (collectively, "Kennametal") is a leading global manufacturer,
marketer and distributor of a broad range of cutting tools, tooling
systems, supplies and technical services, as well as wear-resistant parts.
We believe that our reputation for manufacturing excellence and
technological expertise and innovation in our principal products has helped
us achieve a leading market presence in our primary markets. We believe we
are the second largest global provider of metalcutting tools and tooling
systems. End users of our products include metalworking manufacturers and
suppliers in the aerospace, automotive, machine tool and farm machinery
industries, as well as manufacturers and suppliers in the highway
construction, coal mining, quarrying and oil and gas exploration
industries.

2. BASIS OF PRESENTATION

The condensed consolidated financial statements, which include our accounts
and those of our majority-owned subsidiaries, should be read in conjunction
with the Notes to Consolidated Financial Statements included in our 2002
Annual Report. The condensed consolidated balance sheet as of June 30, 2002
was derived from the audited balance sheet included in our 2002 Annual
Report. These interim statements are unaudited; however, we believe that
all adjustments necessary for a fair presentation were made and all
adjustments are normal, recurring adjustments. The results for the six
months ended December 31, 2002 and 2001 are not necessarily indicative of
the results to be expected for a full fiscal year. Unless otherwise
specified, any reference to a "year" is to a fiscal year ended June 30.
When used in this Form 10-Q, unless the context requires otherwise, the
terms "we," "our" and "us" refer to Kennametal Inc. and its subsidiaries.
We reclassified certain amounts in the prior years' consolidated financial
statements to conform with the current year presentation.

3. ACQUISITIONS

On August 30, 2002, we purchased the Widia Group (Widia) in Europe and
India from Milacron Inc. for EUR188 million ($185.3 million) subject to a
purchase price adjustment based on the change in net assets of Widia from
December 31, 2001 to the closing date. The total purchase price of $186.1
million includes the actual purchase price of $185.3 million plus $5.1
million of direct acquisition costs ($1.2 million paid in fiscal year 2002
and $3.9 million paid during the six month period ended December 31, 2002)
less $4.3 million of acquired cash. We financed the acquisition with funds
borrowed under our new three-year, multi-currency, revolving credit
facility which we entered into on June 27, 2002 with a group of financial
institutions. The acquisition of Widia improves our global competitiveness,
strengthens our European position and represents a strong platform for
increased penetration in Asia. Widia's operating results have been included
in our consolidated results for the second quarter and first half of fiscal
2003 since the acquisition date of August 30, 2002. As further discussed in
Note 12, Kennametal has signed a settlement agreement with respect to the
calculation of the post-closing purchase price adjustment.

In accordance with SFAS No. 141, "Business Combinations", we accounted for
the acquisition using the purchase method of accounting. Accordingly, the
preliminary purchase price allocations have been made based upon an
estimated fair value of net assets acquired resulting in the initial
recognition of approximately $62 million of goodwill and $36 million of
other intangibles. In accordance with SFAS No. 142, "Goodwill and Other
Intangible Assets" the goodwill will not be amortized but will instead be
subject to an annual impairment test. The preliminary purchase price
allocations are subject to adjustment and may be modified within one year
from the acquisition when additional information concerning asset and
liability valuations are obtained. Subsequent changes are not expected to
have a material effect on our consolidated financial position.

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KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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The unaudited pro forma consolidated financial data presented below gives
effect to the Widia acquisition as if it had occurred as of the beginning
of each period presented. The pro forma adjustments are based upon
available information and certain assumptions that we believe are
reasonable, including additional interest expense and amortization that
resulted from the transaction, net of any applicable income tax effects.
The unaudited pro forma consolidated financial data is not necessarily
indicative of the operating results that would have occurred had the
acquisition been consummated on the date indicated, nor are they indicative
of future operating results. Except for actions actually taken as of and
since the close of the transaction and for which any related impact would
be included in the actual results through the period end, anticipated cost
savings have not been reflected in this pro forma presentation. The
unaudited pro forma consolidated financial data should be read in
conjunction with the historical consolidated financial statements and
accompanying notes.

Additionally, during the first quarter of the current year, we acquired the
remaining nine percent minority interest of our subsidiary in Poland for
total consideration of $0.2 million. This subsidiary is now wholly-owned by
Kennametal. During the second quarter of the current year, we acquired an
additional one percent ownership interest from minority shareowners of our
subsidiary in Germany bringing our ownership to 99.2 percent for a total
consideration of $3.9 million. An additional payment of $2.3 million was
made during the second quarter related to minority shareowners that sold
their shares in the prior year. Total goodwill resulting from these
transactions is $5.2 million.

4. INVENTORIES

Inventories are stated at the lower of cost or market. We use the last-in,
first-out (LIFO) method for determining the cost of a significant portion
of our U.S. inventories. The cost for the remainder of our inventories is
determined under the first-in, first-out (FIFO) or average cost methods. We
used the LIFO method of valuing inventories for approximately 42 and 49
percent of total inventories at December 31, 2002 and June 30, 2002,
respectively. Because inventory valuations under the LIFO method are based
on an annual determination of quantities and costs as of June 30 of each
year, the interim LIFO valuations are based on our projections of expected
year-end inventory levels and costs. Therefore, the interim financial
results are subject to any final year-end LIFO inventory adjustments.

-5-

KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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Inventories as of the balance sheet dates consisted of the following (in
thousands):

5. ENVIRONMENTAL MATTERS

We are involved in various environmental cleanup and remediation activities
at several of our manufacturing facilities. In addition, we are currently
named as a potentially responsible party (PRP) at the Li Tungsten Superfund
site in Glen Cove, New York. In December 1999, we recorded a remediation
reserve of $3.0 million with respect to our involvement in these matters,
which was recorded as a component of operating expense. This represents our
best estimate of the undiscounted future obligation based on our
evaluations and discussions with outside counsel and independent
consultants, and the current facts and circumstances related to these
matters. We recorded this liability because certain events occurred,
including the identification of other PRPs, an assessment of potential
remediation solutions and direction from the government for the remedial
action plan that clarified our level of involvement in these matters and
our relationship to other PRPs. This led us to conclude that it was
probable a liability had been incurred. At December 31, 2002, we have an
accrual of $2.8 million remaining relative to this environmental issue. No
cash payments have been made nor additional charges incurred against this
reserve during the current quarter and six months ended December 31, 2002.

In addition to the amount currently reserved, we may be subject to loss
contingencies related to these matters estimated to be up to an additional
$3.0 million. We believe that such undiscounted unreserved losses are
reasonably possible but are not currently considered to be probable of
occurrence. The reserved and unreserved liabilities for all environmental
concerns could change substantially in the near term 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 government agencies on these matters.

Additionally, we also maintain reserves for other potential environmental
issues associated with our Greenfield operations and a location operated by
our German subsidiary. At December 31, 2002, the total of these accruals
was $1.5 million and represents anticipated costs associated with the
remediation of these issues. No cash payments have been made against this
reserve during the quarter.

We maintain a Corporate Environmental, Health and Safety (EH&S) Department,
as well as an EH&S Policy Committee, to ensure compliance with
environmental regulations and to monitor and oversee remediation
activities. In addition, we have established an EH&S administrator at all
our global manufacturing facilities. Our financial management team
periodically meets with members of the Corporate EH&S Department and the
Corporate Legal Department to review and evaluate the status of
environmental projects and contingencies. On a quarterly basis, we
establish or adjust financial provisions and reserves for environmental
contingencies in accordance with Statement of Financial Accounting Standard
(SFAS) No. 5, "Accounting for Contingencies."

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KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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6. EARNINGS PER SHARE

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

For purposes of determining the number of diluted shares outstanding,
weighted average shares outstanding for basic earnings per share
calculations were increased due solely to the dilutive effect of
unexercised stock options by 287,701 for the three months ended December
31, 2002 and 292,918 and 446,791 for the six months ended December 31, 2002
and 2001, respectively. For the three months ended December 31, 2001, the
effect of unexercised stock options is anti-dilutive and accordingly is
excluded from the diluted loss per share calculation. Unexercised stock
options to purchase our capital stock of 1.7 million and 1.2 million shares
for the three months ended December 31, 2002 and 2001, respectively, and
1.7 million and 1.1 million for the six months ended December 31, 2002 and
2001, respectively, are not included in the computation of diluted earnings
per share because the option exercise price was greater than the average
market price for the respective period.

7. COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) for the three and six months ended December 31,
2002 and 2001 is as follows (in thousands):

-7-

KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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The components of accumulated other comprehensive after-tax loss consist of
the following (in thousands):

8. GOODWILL AND OTHER INTANGIBLE ASSETS

The carrying amount of goodwill attributable to each segment at December
31, 2002 and June 30, 2002 is as follows (in thousands):

The increase in the goodwill carried by the Metalworking Solutions and
Services Group (MSSG) is associated with the acquisition of Widia and the
acquisition of outstanding minority interests of our subsidiaries in
Germany and Poland.

Material amounts of recorded goodwill attributable to each of our reporting
units were tested for impairment during 2002 by comparing the fair value of
each reporting unit with its carrying value. This testing resulted in a
2002 non-cash, net of tax, charge of $250.4 million, specific to the
electronics (Advanced Materials Solutions Group (AMSG) segment - $82.1
million) and the industrial product group (MSSG segment - $168.3 million)
businesses, which were acquired in 1998 as part of the acquisition of
Greenfield Industries. The initial phase of the impairment tests were
performed within six months of adoption of SFAS No. 142, or June 30, 2002,
and are required at least annually thereafter. On an ongoing basis (absent
any impairment indicators), we expect to perform our impairment tests
during the June quarter of each fiscal year, in connection with our annual
budgeting process.

-8-

KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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The components of our other intangible assets are as follows (in
thousands), the remaining lives of which range from one to fifteen years.

9. RESTRUCTURING AND ASSET IMPAIRMENT CHARGES

2003 WORKFORCE RESTRUCTURING PROGRAM In October 2002, we announced a global
salaried workforce reduction of five percent. The reduction is expected to
cost between $9 million and $10 million. The components of the
restructuring accrual at December 31, 2002 for this program are as follows
(in thousands):

The restructuring accrual at December 31, 2002 represents expected future
cash payments for these obligations.

WIDIA INTEGRATION In connection with the integration of Widia, we have
implemented two integration programs (Kennametal Integration Restructuring
Program and Widia Integration) which together are expected to result in a
global headcount reduction of between 650 and 700 positions, approximately
80% of which is expected to be completed in 2003. We will also close four
manufacturing facilities and two warehouses.

KENNAMETAL INTEGRATION RESTRUCTURING PROGRAM In connection with the
integration of Widia, we have implemented an integration restructuring
program. This program will include both employee severance and facility
rationalization costs associated with existing Kennametal facilities.

The components of the restructuring accrual at December 31, 2002 for
this program are as follows (in thousands):

The restructuring accrual at December 31, 2002 represents future cash
payments for these obligations.

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KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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WIDIA INTEGRATION PLAN In connection with the acquisition, we have
established a Widia integration plan that will consolidate certain Widia
and Kennametal operations and functions. This integration plan is to
establish centers of excellence in functional areas and enable long-term
growth and competitive advantages. Certain costs that are incurred under
this plan will be accounted for under EITF 95-3 "Recognition of
Liabilities in Connection with a Purchase Business Combination." As a
result, certain costs associated with the Widia Integration Plan will be
recorded under purchase accounting. During the second quarter we
recorded a liability of $2.7 million and made cash payments of $1.9
million.

WIDIA RESTRUCTURING In connection with our acquisition of Widia, we assumed
$2.4 million of restructuring accruals related to restructuring programs
initiated by Widia prior to the acquisition date. These programs, initiated
in December 2001, relate to the severance of 156 European employees in both
production and administration. The accrual balance at December 31, 2002 of
$1.5 million represents a decrease of $0.9 million related to cash payments
made during the quarter.

2002 AMSG AND MSSG RESTRUCTURING In November 2001, we announced a
restructuring program whereby we expected to recognize special charges of
$15 to $20 million, including period costs, for the closure of three
manufacturing locations and the relocation of the production of a certain
product line to another plant, and associated workforce reductions. This
was done in response to continued steep declines in the end market demand
in the electronics and industrial products groups businesses. Additionally,
we implemented other worldwide workforce reductions and facility closures
in these segments in reaction to the declines in our end markets. All
initiatives under this program have been implemented and all charges have
been taken. Total restructuring and asset impairment charges of $17.3
million were recognized in 2002 and $2.5 million were recognized as a
component of cost of goods sold in 2002.

We implemented the measures associated with the closing and consolidation
of the AMSG electronics facility in Chicago, IL, and MSSG industrial
product group's Pine Bluff, AR, and Monticello, IN locations, the
production of a particular line of products in Rogers, AR and several
customer service centers. The components of the restructuring accrual at
December 31, 2002 for this program are as follows (in thousands):

The restructuring accrual at December 31, 2002 represents future cash
payments for these obligations, of which the majority are expected to occur
over the next two quarters.

2002 AND 2001 J&L AND FSS BUSINESS IMPROVEMENT PROGRAM In the J&L segment
for the September 2001 quarter, we recorded a restructuring and asset
impairment charge of $1.6 million, including $1.1 million for severance of
20 individuals, $0.3 million for facility closures and $0.2 million for
closure of the German operations. In the Full Service Supply (FSS) segment
for the first quarter of 2001, we recorded a nominal restructuring charge
for severance related to five individuals. Total restructuring and asset
impairment charges of $2.5 million and $0.6 million were recognized in 2001
for J&L and FSS, respectively.

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KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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In 2002, we continued our J&L and FSS business improvement programs
initiated in 2001. In the J&L segment during 2002, we recorded
restructuring and asset impairment charges of $5.3 million related to the
write-down of a portion of the value of a business system, $2.5 million for
severance for 81 individuals and $1.7 million related to the closure of 10
satellites and two call centers. In the FSS segment for 2002, we recorded
restructuring charges of $0.7 million for severance related to 34
individuals.

All initiatives under this business improvement program have been
implemented and all charges have been taken. There were no charges related
to this program during the current quarter. The components of the
restructuring accrual at December 31, 2002, for this program are as follows
(in thousands):

The restructuring accrual at December 31, 2002 represents future cash
payments for these obligations, of which the majority are expected to occur
over the next quarter.

2001 CORE-BUSINESS RESIZE PROGRAM In 2001, we took actions to reduce our
salaried workforce in response to the weakened U.S. manufacturing sector.
As a result of implementing this core-business resize program, we recorded
a restructuring charge of $4.6 million, related to severance for 209
individuals. All initiatives under these programs have been implemented.
The restructuring accrual at December 31, 2002 of $0.2 million represents
projected payments, the majority of which are expected to occur over the
next two quarters.

2000 RESTRUCTURING PROGRAM In 2000, we announced plans to close,
consolidate or downsize several plants, warehouses and offices, and
associated workforce reductions as part of our overall plan to increase
asset utilization and financial performance, and to reposition ourselves to
become the premier tooling solutions supplier. The components of the
charges were $4.8 million for asset impairment charges, $7.4 million for
employee severance, $6.3 million for facility rationalizations and $0.1
million for product rationalization. As of December 31, 2002, $0.1 million
remains accrued for facility rationalizations and is expected to be paid
within the next two quarters.

We continue to review our business strategies and pursue other
cost-reduction activities in all business segments, some of which could
result in future charges.

-11-

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

We operate four global business units consisting of Metalworking Solutions
& Services Group (MSSG), Advanced Materials Solutions Group (AMSG), J&L
Industrial Supply (J&L) and Full Service Supply (FSS), and corporate
functional shared services. Our external sales, intersegment sales and
operating income by segment for the three and six months ended December 31,
2002 and 2001 are as follows (in thousands):

11. NEW ACCOUNTING STANDARDS

In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143
addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. It applies to legal obligations associated with the
retirement of long-lived assets that result from the acquisition,
construction, development and/or the normal operation of a long-lived
asset. The adoption of this standard, effective July 1, 2002, had no
material impact on the results of our operations or financial position.

-12-

KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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In August 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," was issued. SFAS No. 144 addresses financial accounting
and reporting for the impairment of long-lived assets and for long-lived
assets to be disposed of and supersedes SFAS No. 121. This statement
retains the fundamental provisions of SFAS No. 121 for recognition and
measurement of the impairment of long-lived assets to be held and used and
measurement of long-lived assets to be disposed of by sale. The provisions
of this statement are effective for fiscal years beginning after December
15, 2001, and interim periods within those fiscal years. The adoption of
this standard effective July 1, 2002, had no material impact on the results
of our operations or financial position.

In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical Corrections," was
issued. This statement updates, clarifies and simplifies existing
accounting pronouncements. While the technical corrections to existing
pronouncements are not substantive in nature, in some instances they may
change accounting practice. The provisions of this standard related to SFAS
No. 13 are effective for transactions occurring after May 15, 2002.
Prospectively, as a result of the adoption of SFAS No. 145, debt
extinguishment costs previously classified as extraordinary items will be
reclassified as interest expense.

SFAS No. 146, "Accounting for Exit or Disposal Activities," was issued in
July 2002. SFAS No. 146 addresses significant issues regarding the
recognition, measurement and reporting of costs that are associated with
exit and disposal activities, including restructuring activities. The scope
of SFAS No. 146 includes (1) costs to terminate contracts that are not
capital leases; (2) costs to consolidate facilities or relocate employees;
and (3) termination benefits provided to employees who are involuntarily
terminated under the terms of a one-time benefit arrangement that is not an
ongoing benefit arrangement or an individual deferred-compensation
contract. The provisions of this statement will be effective for disposal
activities initiated after December 31, 2002, with early application
encouraged. Management is currently assessing the details of the standard
and is preparing a plan of implementation.

In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN 45 clarifies the requirements of
FASB Statement No. 5, "Accounting for Contingencies, relating to a
guarantor's accounting for, and disclosure of, the issuance of certain
types of guarantees. Management is currently assessing the details of the
standard and is preparing a plan of implementation.

In January 2003, SFAS No. 148 "Accounting for Stock-Based Compensation
Transition and Disclosure," was issued. This statement amends FASB
Statement No. 123, to provide alternative methods of transition for an
entity that voluntarily changes to the fair value based method of
accounting for stock-based employee compensation. It also amends the
disclosure provisions of that statement to require prominent disclosure
about the effects on reported net income of an entity's accounting policy
decisions with respect to stock-based employee compensation. Finally, the
Statement amends APB Opinion No. 28, Interim Financial Reporting, to
require disclosure about those effects in interim financial information.
The amendments to APB Opinion No. 28 are effective for financial reports
containing Condensed Financial Statements for interim periods beginning
after December 15, 2002. We will adopt the amendments to APB Opinion No. 28
and disclosures provisions of SFAS No. 148 effective January 1, 2003.

12. SUBSEQUENT EVENT

On February 12, 2003, Milacron Inc. and Kennametal signed a settlement
agreement with respect to the calculation of the post-closing purchase
price adjustment for the Widia acquisition pursuant to which Milacron is to
pay us approximately Euro 18.8 million ($20.2 million) in cash no later
than February 24, 2003. The purchase price adjustment of $20.2 million
has been reflected in these financial statements as a reduction to
goodwill.

-13-

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

SALES

Sales for the December 2002 quarter were $431.7 million, an increase of 14
percent from $380.3 million in the year-ago quarter. Included in the current
quarter were $56.4 million of sales contributed by the acquired Widia entities.
Excluding the positive benefit of Widia and other acquisitions and divestitures
of 14 percent and the favorable foreign currency effects of one percent, sales
declined one percent from the prior year. Declining North American and European
sales associated with continued weak industrial markets were partially offset by
improved Asian sales.

Sales for the six months ended December 31, 2002 were $836.0 million compared to
$787.0 million in the same period a year ago, an increase of six percent.
Included in the six month period were $77.9 million of sales contributed by the
acquired Widia entities. Excluding the positive benefits of Widia and other
acquisition and divestitures of nine percent and the favorable foreign currency
effects of one percent, sales declined four percent. Sales in North America
contributed to the majority of this decline due to weak market conditions. In
local currency and excluding the Widia acquisition, European sales also declined
due to weak market conditions throughout Europe.

GROSS PROFIT MARGIN

The gross profit margin for the December 2002 quarter was 31.8 percent, a 120
basis point increase compared with 30.6 percent in the year-ago quarter. The
increase is a result of favorable raw material prices, manufacturing
efficiencies from the Kennametal Lean Enterprise initiatives and a benefit from
foreign currency exchange offset, in part, by a combination of lower Widia
margins, unfavorable product mix and $1.6 million in decreased pension income.

Consolidated gross profit margin was 32.1 percent for the six months ended
December 31, 2002, compared with 31.3 percent in the same period a year ago.
Gross profit margin was affected by the factors mentioned above.

OPERATING EXPENSE

Operating expense for the December 2002 quarter was $115.7 million compared to
$93.1 million of a year ago. Approximately $17.1 million of this increase is
associated with the acquired Widia units. Excluding the incremental expense for
all acquisitions and divestitures of $15.9 million, unfavorable foreign exchange
of $2.6 million, $1.3 million of Widia integration activities, and accounting
for last year's temporary cost reduction actions including a week off without
pay for salaried employees, operating expense remained flat. Additionally,
increased insurance costs negatively pressured operating expense when compared
to the prior year.

For the six months ended December 31, 2002, operating expense was $220.5
million, an increase of 14.2 percent, compared to the same period a year ago.
Excluding $19.7 million of expense associated with all acquisitions and
divestitures, unfavorable foreign exchange of $4.8 million and $1 million in
decreased pension income, and accounting for last year's temporary cost
reduction actions including a week off without pay for salaried employees,
operating expense declined by a nominal amount.

-14-

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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RESTRUCTURING AND ASSET IMPAIRMENT CHARGE

2003 WORKFORCE RESTRUCTURING PROGRAM In October 2002, we announced a global
salaried workforce reduction of five percent. The reduction is expected to cost
between $9 million and $10 million, and is anticipated to generate in excess of
$10 million in cash savings during the remainder of fiscal 2003. The components
of the restructuring accrual at December 31, 2002 for this program are as
follows (in thousands):

The restructuring accrual at December 31, 2002 represents expected future
cash payments for these obligations.

WIDIA INTEGRATION In connection with the integration of Widia, we have
implemented two integration programs (Kennametal Integration Restructuring
Program and Widia Integration) which together are expected to result in a global
headcount reduction of between 650 and 700 positions, approximately 80% of which
is expected to be completed in 2003. We will also close four manufacturing
facilities and two warehouses.

KENNAMETAL INTEGRATION RESTRUCTURING PROGRAM In connection with the
integration of Widia, we have implemented an integration restructuring
program. This program will include both employee severance and facility
rationalization costs associated with existing Kennametal facilities.

The components of the restructuring accrual at December 31, 2002 for this
program are as follows (in thousands):

The restructuring accrual at December 31, 2002 represents future cash
payments for these obligations.

WIDIA INTEGRATION PLAN In connection with the acquisition, we have
established a Widia integration plan that will consolidate certain Widia
and Kennametal operations and functions. This integration plan is to
establish centers of excellence in functional areas and enable long-term
growth and competitive advantages. Certain costs that are incurred under
this plan will be accounted for under EITF 95-3 "Recognition of Liabilities
in Connection with a Purchase Business Combination." As a result, certain
costs associated with the Widia Integration Plan will be recorded under
purchase accounting. During the second quarter, we recorded a liability of
$2.7 million and made cash payments of $1.9 million.

WIDIA RESTRUCTURING In connection with our acquisition of Widia, we assumed $2.4
million of restructuring accruals related to restructuring programs initiated by
Widia prior to the acquisition date. These programs, initiated in December 2001,
relate to the severance of 156 European employees in both production and
administration. The accrual balance at December 31, 2002 of $1.5 million
represents a decrease of $0.9 million related to cash payments made during the
quarter.

-15-

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

2002 AMSG AND MSSG RESTRUCTURING In November 2001, we announced a restructuring
program whereby we expected to recognize special charges of $15 to $20 million,
including period costs, for the closure of three manufacturing locations and the
relocation of the production of a certain product line to another plant, and
associated workforce reductions. This was done in response to continued steep
declines in the end market demand in the electronics and industrial products
groups businesses. Additionally, we implemented other worldwide workforce
reductions and facility closures in these segments in reaction to the declines
in our end markets. All initiatives under this program have been implemented and
all charges have been taken. Total restructuring and asset impairment charges of
$17.3 million were recognized in 2002 and $2.5 million were recognized as a
component of cost of goods sold in 2002.

We implemented the measures associated with the closing and consolidation of the
AMSG electronics facility in Chicago, IL, and MSSG industrial product group's
Pine Bluff, AR, and Monticello, IN locations, the production of a particular
line of products in Rogers, AR and several customer service centers. The
components of the restructuring accrual at December 31, 2002 for this program
are as follows (in thousands):

The restructuring accrual at December 31, 2002 represents future cash payments
for these obligations, of which the majority are expected to occur over the next
two quarters.

2002 AND 2001 J&L AND FSS BUSINESS IMPROVEMENT PROGRAM In the J&L segment for
the September 2001 quarter, we recorded a restructuring and asset impairment
charge of $1.6 million, including $1.1 million for severance of 20 individuals,
$0.3 million for facility closures and $0.2 million for closure of the German
operations. In the Full Service Supply (FSS) segment for the first quarter of
2001, we recorded a nominal restructuring charge for severance related to five
individuals. Total restructuring and asset impairment charges of $2.5 million
and $0.6 million were recognized in 2001 for J&L and FSS, respectively.

In 2002, we continued our J&L and FSS business improvement programs initiated in
2001. In the J&L segment during 2002, we recorded restructuring and asset
impairment charges of $5.3 million related to the write-down of a portion of the
value of a business system, $2.5 million for severance for 81 individuals and
$1.7 million related to the closure of 10 satellites and two call centers. In
the FSS segment for 2002, we recorded restructuring charges of $0.7 million for
severance related to 34 individuals.

-16-

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

All initiatives under this business improvement program have been implemented
and all charges have been taken. There were no charges related to this program
during the current quarter. The components of the restructuring accrual at
December 31, 2002, for this program are as follows (in thousands):

The restructuring accrual at December 31, 2002 represents future cash payments
for these obligations, of which the majority are expected to occur over the next
two quarters.

2001 CORE-BUSINESS RESIZE PROGRAM In 2001, we took actions to reduce our
salaried workforce in response to the weakened U.S. manufacturing sector. As a
result of implementing this core-business resize program, we recorded a
restructuring charge of $4.6 million, related to severance for 209 individuals.
All initiatives under these programs have been implemented. The restructuring
accrual at December 31, 2002 of $0.2 million represents projected payments, the
majority of which are expected to occur over the next quarter.

2000 RESTRUCTURING PROGRAM In 2000, we announced plans to close, consolidate or
downsize several plants, warehouses and offices, and associated workforce
reductions as part of our overall plan to increase asset utilization and
financial performance, and to reposition ourselves to become the premier tooling
solutions supplier. The components of the charges were $4.8 million for asset
impairment charges, $7.4 million for employee severance, $6.3 million for
facility rationalizations and $0.1 million for product rationalization. As of
December 31, 2002, $0.1 million remains accrued for facility rationalizations
and is expected to be paid within the next two quarters.

We continue to review our business strategies and pursue other cost-reduction
activities in all business segments, some of which could result in future
charges.

INTEREST EXPENSE

Interest expense for the December 2002 quarter increased 15.7 percent to $9.6
million from $8.3 million a year ago. This increase was primarily due to the
greater average level of borrowings during the current quarter due to the
additional borrowings of $185.3 million incurred to fund the Widia acquisition.
For the six months ended December 31, 2002, interest expense increased
approximately 2.4 percent to $18.1 million for the same reasons. Our average
U.S. borrowing rate for the quarter and six month period was 5.47 and 5.52
percent, respectively, compared to 5.02 and 5.28 percent for the three month and
six month periods of a year ago. The increase is due primarily to the ten-year
note issue, partially offset by lower short-term interest rates.

-17-

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

OTHER (INCOME) EXPENSE, NET

For the three months ended December 31, 2002 and 2001, other income was $1.7
million versus other expense of $0.1 million, respectively. Included in this
line item were fees of $0.5 million and $0.6 million, respectively, incurred in
connection with the accounts receivable securitization program. The decline in
these fees is due to lower interest rates in the commercial paper market. The
remainder of the increase is due to increased interest income of $0.6 million,
as a result of an increase in cash and marketable securities, and foreign
exchange gains of $1.3 million.

For the six months ended December 31, 2002 and 2001, other income, net was $1.1
million and $0.2 million, respectively. Fees associated with the accounts
receivable securitization program declined $0.4 million to $1.1 million in 2003
due to the factor mentioned above. The other significant components of the
increase was due to higher foreign exchange gains of $0.7 million and an
increase in interest income of $0.9 million.

INCOME TAXES

The effective tax rate for the three and six months ended December 31, 2002 was
21.9 percent and 30.0 percent, respectively, compared to an effective rate of
32.0 percent for the three and six month period ended December 31, 2001.
Management has updated the tax provision to reflect the impact of the Widia
acquisition on our effective tax rate.

CHANGE IN ACCOUNTING PRINCIPLE

We adopted SFAS No. 142, "Goodwill and Other Intangible Assets," effective July
1, 2001, which establishes new accounting and reporting requirements for
goodwill and other intangible assets, including new measurement techniques for
evaluating the recoverability of such assets. Under SFAS No. 142, all goodwill
amortization ceased effective July 1, 2001. Material amounts of recorded
goodwill attributable to each of our reporting units, including those affected
by the restructuring program announced in November 2001, were tested for
impairment by comparing the fair value of each reporting unit with its carrying
value. As a result of the adoption of this rule, we recorded a non-cash, net of
tax charge of $250.4 million, or $7.98 per diluted share specific to the
electronics (AMSG segment - $82.1 million) and the industrial product group
(MSSG segment - $168.3 million) businesses, which were acquired in 1998 as part
of the acquisition of Greenfield Industries. The fair values of these reporting
units were determined using a combination of discounted cash flow analysis and
market multiples based upon historical and projected financial information.
Under SFAS No. 142, the impairment adjustment recognized at adoption of this
standard was reflected as a cumulative effect of a change in accounting
principle, effective July 1, 2001.

NET INCOME

Net income for the quarter ended December 31, 2002 was $2.5 million, or $0.07
per diluted share, compared to a net loss of $2.5 million, or $0.08 per diluted
share, in the same quarter last year. Excluding special charges in each period,
net income was $9.4 million, or $0.27 per diluted share, in the December 2002
quarter, compared to net income of $10.0 million, or $0.32 per diluted share, in
the December 2001 quarter. The decline in earnings is attributable to the
dilutive effect of the Widia acquisition, partially offset by improved margins.

Net income for the six months ended December 31, 2002 was $13.3 million, or
$0.38 per diluted share, compared to a net loss of $240.4 million, or $7.66 per
diluted share, in the same period last year. Excluding special charges in each
period, net income was $20.6 million, or $0.58 per diluted share, in the six
months ended December 31, 2002 compared to net income of $23.5 million, or $0.75
per diluted share, in the six months ended December 31, 2001. The decline in
earnings is attributable to the factors mentioned above.

-18-

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

The following table provides a comparison of our reported results, and the
results excluding special charges for 2003 and 2002. The results for the current
quarter and six months ended December 31, 2002 include the results of the
acquired Widia entities subsequent to the acquisition date of August 30, 2002.

-19-

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

BUSINESS SEGMENT REVIEW

We operate four global business units consisting of Metalworking Solutions &
Services Group (MSSG), Advanced Materials Solutions Group (AMSG), J&L Industrial
Supply (J&L) and Full Service Supply (FSS), and corporate functional shared
services.

METALWORKING SOLUTIONS & SERVICES GROUP

MSSG sales grew 29 percent compared to the December 2001 quarter due primarily
to the acquisition of Widia. Widia sales contributed $56.4 million in the
December quarter. Favorable foreign exchange effects accounted for three percent
of the gain due to a weaker U.S. dollar. Excluding Widia and foreign exchange,
North America sales were flat, while in Europe, sales were down six percent.
This was offset by Asia (also excluding Widia) that was up 12 percent, in local
currency. Automotive in North America was strong but showed signs of easing late
in the quarter while aerospace remained weak. Light and heavy engineering,
machine tool builders and tool and die makers have had modest improvements over
the quarter. European markets were similar to North America. Product pricing
realization continues to be an issue with increased pressure experienced in both
the North American and European markets.

Operating income of $24.2 million increased compared to $23.7 million last year
excluding restructuring charges of $4.8 million and $6.2 million in 2002 and
2001, respectively, and integration costs of $1.4 million in 2002. Operating
income increased due primarily to Kennametal Lean Enterprise initiatives, lower
raw material prices, restructuring benefits, and on-going cost controls offset
in part by unfavorable product mix.

For the six months ended December 31, 2002, MSSG sales increased 16 percent
compared to the same period last year, excluding favorable foreign exchange
effects of three percent due to the weaker U.S. dollar. Most of this increase
was associated with the Widia acquisition which contributed $77.9 million in net
sales during the six month period. Excluding the Widia acquisition and favorable
foreign exchange effects, sales in North America and Europe were down five
percent and six percent, respectively, all in local currency. This was offset by
increases in sales (excluding Widia) in South America of 73 percent and Asia of
13 percent, all in local currency.

Operating income was $49.3 million compared to $48.3 million last year,
excluding restructuring charges of $4.8 million and $6.2 million in 2002 and
2001, respectively, and integration cost of $2.1 million in 2002. The increase
in operating income is due to the factors mentioned above.

ADVANCED MATERIALS SOLUTIONS GROUP

AMSG sales, excluding the Carmet acquisition, and favorable foreign exchange
effects of one percent, declined by three percent from the December 2001
quarter. Lower demand for products used for oil and gas exploration and mining
contributed to the decline. Improved year-over-year sales in the engineered
products markets partially mitigated this decrease, on a local currency basis.

-20-

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

Despite the lower sales, operating income was $8.0 million compared to $5.3
million last year, excluding restructuring costs of $2.3 million and $6 million
in 2002 and 2001, respectively. Aggressive cost-cutting measures, including
improved manufacturing efficiencies, lower raw material costs, and the benefits
derived from the previously-implemented restructuring efforts contributed to the
increase in operating income.

Compared to the same period last year, AMSG sales declined six percent in the
six months ended December 31, 2002, excluding foreign exchange effects, and
excluding the Carmet acquisition. The decline is predominately attributable to
weak market conditions in the energy business. Operating income was $18.5
million compared to $15.7 million last year, excluding restructuring costs of
$2.1 million and $6.0 million in 2002 and 2001, respectively. The increase is
due to the factors mentioned above.

J&L INDUSTRIAL SUPPLY

J&L sales were flat compared to last year excluding the effects of the Strong
Tool divestiture of $8.3 million. Sales for this segment related primarily to
automotive and aerospace customers. Operating income was $2.2 million in the
December 2002 and 2001 quarters, excluding special charges in both periods.
Operating income remained flat due to the continued sales volume and pricing
pressures. J&L operating income for the three months ended December 31, 2002 and
2001 was reduced by $0.5 million and $5.9 million related to restructuring
charges, respectively.

For the six months ended December 31, 2002, J&L sales declined three percent
compared to last year, excluding the effects of the Strong Tool divestiture of
$16.4 million, due to slower sales in automotive and aerospace during the first
quarter of 2003, although some positive activity was experienced in the
automotive market towards the end of the first quarter of 2003 and into the
second quarter of 2003. Operating income was $4.4 million for the six months
ended December 31, 2002, compared to $4.5 million in the prior year, excluding
special charges in each period. J&L operating income for the six months ended
December 31, 2002 and 2001 was reduced by $0.5 million and $7.5 million,
respectively, related to restructuring and asset impairment charges.

FULL SERVICE SUPPLY

FSS sales decreased 12 percent compared to last year due to the loss of sales
associated with the discontinuance of certain customer relationships. Operating
income is lower year-over-year due to the inability of the margins contributed
by the reduced volume to cover fixed costs. This issue is being remedied through
right-sizing efforts under the 2002 and 2001 FSS Business Improvement Program,
as described in Note 9 - Restructuring and Asset Impairment Charges, as well as
through a continuous program to reduce operating expense. Additionally, new
marketing and business development programs are underway to replace the lost
sales.

Compared to the same period last year, FSS sales declined 19 percent for the six
months ended December 31, 2002. For the six month period, FSS had an operating
loss of $0.4 million, a decline of $1.8 million compared to the same period last
year. These declines are due to the same factors as mentioned above.

-21-

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

LIQUIDITY AND CAPITAL RESOURCES

Our cash flow from operations is the primary source of financing for capital
expenditures and internal growth. During the six months ended December 31, 2002,
we generated $75.4 million in cash flow from operations, an increase of $4.4
million compared to the year-ago period. The increase resulted primarily from
cash generated by a federal income tax refund of $15.0 million offset by an
increase in working capital levels.

Net cash used for investing activities was $211.7 million, an increase of $188.7
million compared to the six months ended December 31, 2001. The increase is
almost entirely due to the net cost paid for Widia of $184.9 million.
Additionally, capital expenditures of $22 million were incurred during the
current period. We have projected our capital expenditures for 2003 to be in the
range of $50 to $60 million, including Widia, and will be primarily used to
support new strategic initiatives, new products and to upgrade machinery and
equipment. We believe this level of capital spending is sufficient to maintain
competitiveness and improve productivity.

On February 12, 2003, Milacron Inc. and Kennametal signed a settlement agreement
with respect to the calculation of the post-closing purchase price adjustment
for the Widia acquisition pursuant to which Milacron is to pay us approximately
Euro 18.8 million ($20.2 million) in cash no later than February 24, 2003. The
purchase price adjustment of $20.2 million has been reflected in these financial
statements as a reduction to goodwill.

During the remainder of fiscal 2003, we also expect to incur $50 to $60 million
of cash restructuring charges on a pre-tax basis associated with the integration
of Widia and with the 2003 salary workforce reduction efforts announced in
October 2002. We anticipate that cash provided from operating activities will
exceed capital expenditures and cash restructuring charges, and debt will be
further reduced throughout fiscal 2003.

Net cash provided from financing activities was $141.3 million, an increase of
$191.7 million compared to the same period last year. This increase is due to
the incremental borrowings required to finance the Widia acquisition of $184.9
million, partially offset by debt repayments.

In September 2001, we continued our program to repurchase, from time to time,
our outstanding capital stock for investment or other general corporate
purposes. During the first quarter of the prior fiscal year, we purchased
375,000 shares of our capital stock at a total cost of $12.4 million. No shares
were repurchased during the current quarter or the six month period ending
December 31, 2002. As a result of last year's repurchases, we had completed our
repurchase program announced January 31, 1997 of 1,600,000 shares and brought
the total purchased under the authority of the second repurchase program
announced in October 2000 to approximately 200,000 shares, of a total 2,000,000
authorized. The repurchases were financed principally by cash from operations
and short-term borrowings. Cumulatively, we have repurchased 1,755,900 shares
under the authority of these programs. Repurchases may be made from time to time
in the open market, in negotiated or other permissible transactions.

FINANCIAL CONDITION

Total assets were $1,818.1 million at December 31, 2002, compared to $1,523.6
million at June 30, 2002. Net working capital was $473.6 million, up 26.2
percent from $375.3 million at June 30, 2002. The increase in total assets
(including goodwill) and net working capital is primarily related to the Widia
acquisition which increased total assets by $283.4 million and working capital
by $63.5 million. The Widia acquisition also was the primary reason for
increases in accounts receivable, the allowance for doubtful accounts,
inventories, net property, plant and equipment, long-term debt and pension and
other post-employment benefits.

Primary working capital as a percentage of sales (PWC%) at December 31, 2002 was
27.5 percent, down from 27.9 percent reported at June 30, 2002 and down slightly
from 27.7 percent at December 31, 2001. Inventory turnover increased to 3.0 at
December 31, 2002, compared to 2.9 at June 30, 2002 and 3.0 at December 31,
2001, due to continued initiatives aimed at maintaining favorable inventory
turns. The total debt-to-total capital ratio increased to 44.9 percent at
December 31, 2002 from 36.2 percent at June 30, 2002, primarily due to the
borrowings to fund the Widia acquisition.

-22-

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

NEW ACCOUNTING STANDARDS

In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. It applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and/or the normal operation of a long-lived asset. The adoption of this
standard, effective July 1, 2002, had no material impact on the results of our
operations or financial position.

In August 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," was issued. SFAS No. 144 addresses financial accounting and
reporting for the impairment of long-lived assets and for long-lived assets to
be disposed of and supersedes SFAS No. 121. This statement retains the
fundamental provisions of SFAS No. 121 for recognition and measurement of the
impairment of long-lived assets to be held and used and measurement of
long-lived assets to be disposed of by sale. The provisions of this statement
are effective for fiscal years beginning after December 15, 2001, and interim
periods within those fiscal years. The adoption of this standard effective July
1, 2002, had no material impact on the results of our operations or financial
position.

In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections," was issued. This
statement updates, clarifies and simplifies existing accounting pronouncements.
While the technical corrections to existing pronouncements are not substantive
in nature, in some instances they may change accounting practice. The provisions
of this standard related to SFAS No. 13 are effective for transactions occurring
after May 15, 2002. Prospectively, as a result of the adoption of SFAS No. 145,
debt extinguishment costs previously classified as extraordinary items will be
reclassified as interest expense.

SFAS No. 146, "Accounting for Exit or Disposal Activities," was issued in July
2002. SFAS No. 146 addresses significant issues regarding the recognition,
measurement and reporting of costs that are associated with exit and disposal
activities, including restructuring activities. The scope of SFAS No. 146
includes (1) costs to terminate contracts that are not capital leases; (2) costs
to consolidate facilities or relocate employees; and (3) termination benefits
provided to employees who are involuntarily terminated under the terms of a
one-time benefit arrangement that is not an ongoing benefit arrangement or an
individual deferred-compensation contract. The provisions of this statement will
be effective for disposal activities initiated after December 31, 2002, with
early application encouraged. Management is currently assessing the details of
the standard and is preparing a plan of implementation.

In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN 45 clarifies the requirements of FASB
Statement No. 5, "Accounting for Contingencies, relating to a guarantor's
accounting for, and disclosure of, the issuance of certain types of guarantees.
Management is currently assessing the details of the standard and is preparing a
plan of implementation.

In January 2003, SFAS No. 148 "Accounting for Stock-Based Compensation
Transition and Disclosure," was issued. This statement amends FASB Statement No.
123, to provide alternative methods of transition for an entity that voluntarily
changes to the fair value based method of accounting for stock-based employee
compensation. It also amends the disclosure provisions of that statement to
require prominent disclosure about the effects of reported net income of an
entity's accounting policy decisions with respect to stock-based employee
compensation. Finally, the Statement amends APB Opinion No. 28, Interim
Financial Reporting, to require disclosure about those effects in interim
financial information. The amendments to APB Opinion No. 28 are effective for
financial reports containing Condensed Financial Statements for interim periods
beginning after December 15, 2002. We will adopt the amendments to APB Opinion
No. 28 and disclosures provisions of SFAS No. 148 effective January 1, 2003.

-23-

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

FORWARD-LOOKING STATEMENTS

This Form 10-Q contains "forward-looking" statements within the meaning of
Section 21E of the Securities Exchange Act of 1934. You can identify these
forward-looking statements by the fact they use words such as "should,"
"anticipate," "estimate," "approximate," "expect," "may," "will," "project,"
"intend," "plan," "believe" and other words of similar meaning and expression in
connection with any discussion of future operating or financial performance. One
can also identify forward-looking statements by the fact that they do not relate
strictly to historical or current facts. These statements are likely to relate
to, among other things, our goals, plans and projections regarding our financial
position, results of operations, cash flows, market position and product
development, which are based on current expectations that involve inherent risks
and uncertainties, including factors that could delay, divert or change any of
them in the next several years. Although it is not possible to predict or
identify all factors, they may include the following: global economic
conditions; risks associated with integrating and divesting businesses and
achieving the expected savings and synergies; demands on management resources;
risks associated with international markets such as currency exchange rates, and
social and political environments; competition; labor relations; commodity
prices; demand for and market acceptance of new and existing products, and risks
associated with the implementation of restructuring plans and environmental
remediation matters. We can give no assurance that any goal or plan set forth in
forward-looking statements can be achieved and readers are cautioned not to
place undue reliance on such statements, which speak only as of the date made.
We undertake no obligation to release publicly any revisions to forward-looking
statements as a result of future events or developments.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------------------

We have experienced certain changes in our exposure to market risk from June 30,
2002.

During the quarter and six months ended December 31, 2002, we recognized a
non-cash decrease of $0.6 million and an increase of $18.8 million,
respectively, in our long-term debt associated with our fixed-to-floating
interest rate swap agreements. In accordance with the accounting mandated by
SFAS No. 133, the decline that has occurred in the variable interest rate market
over the last six months has necessitated this favorable mark-to-market
adjustment of our interest rate swap.

Additionally, as a result of the recent acquisition of Widia, we now have an
increased exposure to fluctuations in the value of the Euro. As a result of the
acquisition, management believes that there now exists a more balanced
distribution of investment in the North American and European markets which is
subject to both favorable or unfavorable foreign currency fluctuation.

ITEM 4. CONTROLS AND PROCEDURES
- --------------------------------------------------------------------------------

Within 90 days before filing this report, an evaluation was performed under the
supervision and with the participation of our management, including the Chief
Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on that evaluation, management, including the CEO and CFO,
concluded that our disclosure controls and procedures were effective to ensure
that information required to be disclosed in reports that we file or submit
under the Securities and Exchange Act of 1934 is recorded, processed, summarized
and reported in accordance with the rules and forms of the Securities and
Exchange Commission. It should be noted that the design of any system of
controls is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions, regardless of
how remote. There have been no significant changes in our internal controls or
in other factors that could significantly affect internal controls subsequent to
their evaluation.

-24-

PART II. OTHER INFORMATION

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- --------------------------------------------------------------------------------

The information set forth in Part II, Item 4 of the Company's September 30, 2002
Form 10-Q is incorporated by reference herein.

ITEM 5. OTHER INFORMATION
- --------------------------------------------------------------------------------

During the six-month period ended December 31, 2002, the Audit Committee
approved new or recurring engagements of PricewaterhouseCoopers LLP for the
following non-audit services: (1) tax compliance and planning; and (2) services
related to the Widia acquisition.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------------

(a) Documents filed as part of this Form 10-Q

(10) Material Contracts

(10.1) Purchase Price Adjustment Settlement Agreement and
Unconditional Mutual Release dated February 12, 2003
between and among Milacron Inc., Milacron B.V. and
Kennametal Inc.

(99) Additional Exhibits

(99.1) Certification Pursuant to 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 executed by Markos I.
Tambakeras, Chief Executive Officer of Kennametal
Inc. and F. Nicholas Grasberger III, Chief Financial
Officer of Kennametal Inc.

(b) Reports on Form 8-K

The following were filed during the quarter ended December 31, 2002.

Form 8-K for the event dated January 28, 2003, reporting under
Item 5. Other events and Regulation FD Disclosure regarding the
election of Larry Stranghoener to the Board of Directors.

Form 8-K dated January 29, 2003, reported under Item 9.
Regulation FD Disclosure regarding the press release announcing
second quarter fiscal 2003 financial results.

-25-

SIGNATURES

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

KENNAMETAL INC.

Date: February 14, 2003 By: /s/ TIMOTHY A. HIBBARD
--------------------------------------
Timothy A. Hibbard
Corporate Controller and
Chief Accounting Officer

-26-

CERTIFICATIONS

I, Markos I. Tambakeras, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Kennametal Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: February 14, 2003

/s/ MARKOS I. TAMBAKERAS
------------------------------------
Markos I. Tambakeras
Chairman, President and
Chief Executive Officer

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I, F. Nicholas Grasberger III, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Kennametal Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: February 14, 2003

/s/ F. NICHOLAS GRASBERGER III
----------------------------------
F. Nicholas Grasberger III
Vice President and Chief Financial
Officer

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