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Streamline Cost and Organizational Structure A successful manufacturing company must drive costs down year after year. In the past three years we have repositioned Kennametal to achieve that objective. A new organizational structure based on global business units utilizing shared services permanently removed layers and cost. Restructuring as necessary within each of the business units also decreased costs and reduced our break-even points. Having streamlined our cost and organizational structures, we will utilize lean programs to provide cost competitiveness on an ongoing basis. 

Growth and Strategy Sustainability We have not neglected investment in sustainable growth while engaged in repositioning the company. New product development has been refocused and made more efficient as demonstrated by an increase in the percent of sales from new products to 35 percent, from just 17 percent less than three years ago. The strength and depth of our management team has been enhanced through active recruitment of new talent, development of existing talent and the trans- formation of the compensation systems to reward performance, not just effort. In addition to increased marketing investments, we are transforming our sales model to better address customer needs. All of these efforts were made in the midst of both restructuring efforts and a lengthy manufacturing recession, and we expect they will generate substantial growth far into the future. 

## 2002 Accomplishments on the Path to Growth 

Restructuring Our Current Businesses Last year we brought JLK Direct Distribution Inc. back into Kennametal, and separated the business into two units: J&L Industrial Supply, a catalog business, and Full Service Supply, an integrator. Both of those businesses now have new management and have been completely restructured. They are each extremely well positioned for future growth in industrial manufacturing. 

The electronics business in the Advanced Materials Solutions Group business unit has been repositioned in response to significant changes in the telecom and personal computer industries. In fact, we have moved the manufacturing off shore, including initiating production in China. We also concluded the restructuring of the industrial products group in our metalworking unit. 

With these actions, we are confident that we have configured the company appropriately for the future. Therefore, in order to preserve key staffing, we took several short-term cost actions in addition to restructuring to manage through the current downturn. Our employees demonstrated a notable depth of spirit and character as they shouldered the burden of financial sacrifice to preserve the jobs necessary for us to respond rapidly to an economic rebound. 

Kennametal Lean Enterprise In 2002 we formalized our lean initiatives with the launch of the Kennametal Lean Enterprise. We implemented 300 projects during the year, and realized savings in excess of $11 million. To direct the adoption of lean practices in every Kennametal operation around the world, we established a core team of experienced internal global consultants. We have instituted a process for the identification and global sharing of best practices. Lean is vital to our future competitiveness – it is our mechanism to offset inflationary pressures and raise productivity consistently year in and year out. Moreover, we believe we have only scratched the surface of the potential benefits of becoming Lean. 

