Letter to Shareholders

Dear Shareholders,

When thinking about Kaman’s future, what excites me most is not our products, solutions, technologies, and infrastructure, important as these are to our continued success. What excites me most is the extraordinary blend of skills and talents our 5,300 employees across the globe bring to Kaman. Every day, here in Connecticut and as I travel to Kaman locations around the world, I see fresh examples of their dedication to exceeding customer expectations, supporting their colleagues, and building our company together.

This dedication was never more evident than in 2016, when we delivered solid results in the face of significant market headwinds. In Distribution, prolonged weakness in industrial end-markets weighed on our financial results. Despite this, we continued to invest in productivity initiatives, including operational process improvements and data analytics that position our Distribution segment to deliver improved future results. Importantly, the team at our Distribution segment has continued its focus on delivering outstanding experiences to our customers, resulting in record satisfaction scores. In Aerospace, strong growth put pressure on our people to step up and meet increased demand – and they delivered across the board.

In 2016, Kaman reported net earnings from continuing operations of $58.9 million, or $2.10 per diluted share, compared to $60.4 million, or $2.17, in 2015. Earnings were impacted by lower organic revenues in Distribution, which were 6.5% lower than the prior year. Once again, we generated very strong cash flow during the year: $107.7 million net cash provided by operating activities in 2016, compared to $109.6 million during 2015. With our January 2017 dividend payment, we have paid dividends for 47 consecutive years and remain committed to returning capital to shareholders. During 2016, our share repurchase program and dividends, combined, returned $33 million to shareholders, a record for the company.

We have also maintained our commitment to investing in the future of our company. This includes investments in machinery and equipment, expanded facilities, and new ERP systems in both Distribution and Aerospace. Perhaps most significantly, 2016 once again demonstrated our strong commitment to investing in our people. We graduated the first class of the Kamatics Apprentice Training Program, a multi-year machinist initiative. We inducted the fourth class of the Kaman Leadership Development Program for high potential employees, and launched Women Advocating Leadership at Kaman, or WALK, which aims to increase Kaman’s global representation of women in leadership roles. We also implemented a new Talent Management System, “My Kaman Career Connection,” which includes performance, succession, and learning modules that empower employees and managers to better track goals and progress.

“When I consider the future of Kaman, it’s the people who inspire the most confidence in our continued success. We have an exceptional team across all of our businesses. They are truly the future of this company.” Neal J. Keating
Chairman, President and Chief Executive Officer

Aerospace

Aerospace turned in another year of strong performance in 2016. Revenues for 2016 were $702.1 million, an increase of 17.5% from 2015 revenues of $597.6 million. These results reflect higher organic sales, due primarily to increased deliveries of the Joint Programmable Fuze (JPF) to the U.S. Government and the contributions from our 2015 acquisitions. Operating profit for 2016 increased 4.2% to $115.0 million from $110.3 million in 2015, reflecting strong operating performance. This represents a five-year compound annual growth rate of 7.4% in operating profit dollars.

Our specialty bearings product lines continued to record outstanding results in 2016, led by Kamatics, which celebrated its 50th anniversary. Demand from the Airbus A350 program continues to meet our high expectations. Our RWG facility in Höchstadt, Germany, which earned site qualification from Boeing in 2015, received its first Boeing order in 2016. We completed the expansion of our facility in Bloomfield, Connecticut, and continue to invest in other facilities to meet current and projected growth.

The integration of EXTEX, our 2015 acquisition, with our specialty bearings business has proceeded according to plan, and we are beginning to leverage our international sales force to open up significant new global opportunities. The acquisition of GRW Bearing GmbH (GRW), our largest-ever acquisition, also closed in late 2015. As with EXTEX, the integration of GRW into the Kaman family during 2016 has been very successful, and we look forward to the continued contributions of both companies as we enter 2017.

In our fuzing and precision product lines, the JPF achieved record production, revenue, and profit in 2016. The high reliability and functionality of this product has resulted in unprecedented interest and demand from outside the U.S. as well as domestically. Order backlog for the JPF remains strong, and to meet this demand, our Orlando, Florida and Middletown, Connecticut operations have expanded their workforces significantly.

In 2015, we announced that our Aerosystems group had resumed production of commercial K-MAX® heavy-lift utility helicopters. The aircraft are being manufactured at our Jacksonville, Florida and Bloomfield, Connecticut facilities. We expect the first new helicopter to be delivered in the first half of 2017. The first customer for the new K-MAX® is a Chinese firm, with orders for three helicopters. This initial sale was the result of a multi-year effort to gain access to the significant Chinese market. In addition, we continue to work with both the U.S. military and Department of the Interior to develop additional functionality, with the goal of establishing a program of record for the unmanned K-MAX® aircraft, developed with Lockheed Martin.

As part of our long-term strategic plan, Kaman Aerospace has continued expanding its footprint to capitalize on market opportunities and stay close to current and prospective customers. Today, we have twenty-one facilities in six countries, including the U.S.; our non-U.S.-based Aerospace workforce is now fully one-third that of our domestic workforce. Kaman Aerospace is truly a global organization well positioned in the ever-changing aerospace market.

Pictured in the Bloomfield paint booth is the first K-Max® built at the company’s Jacksonville plant.

Distribution

Our Distribution business faces a challenging market environment. While the broader economy continues to expand, mostly driven by consumer spending on services, including housing, health care, and transportation, the industrial sector on which our Distribution business depends has not been growing. Largely as a result of this, Distribution revenues declined 6.0% in 2016 to $1.11 billion, from $1.18 billion in 2015. Operating profit from continuing operations for 2016 was $41.9 million, compared to $49.4 million in 2015. Thanks to dedicated expense management, designed to offset some of the impact of the economic climate, operating margins from continuing operations were 3.8% in 2016, down just 40 basis points from 4.2% in 2015.

During 2016, we launched an initiative at Distribution to strengthen the business through implementing operational process improvements and building proprietary data analytical tools. These efforts have been successful; today, Distribution is well positioned for future growth and improved profitability.

Through a number of acquisitions over the last five years, as well as through organic expansion, Parker Hannifin is now Distribution’s largest supplier, a partnership that remains strong not only within the Fluid Power platform, but also across all three Distribution platforms. During 2016, we invested in upgrading and expanding several of our ParkerStore locations across the United States, allowing us to provide a better, higher quality experience to our customers.

To further strengthen our platform, we have invested in our facility infrastructure and have consolidated locations. Upgraded facilities will drive more efficient operations and enable us to deliver greater value to our customers. It is worth noting that the cost of implementing quality and productivity enhancements tends to mask the bottom-line improvements achieved in Distribution; we expect that they will lead to margin growth in 2017, as the costs of implementing these improvements wind down.

In 2016, we saw continued consolidation among suppliers, which favors larger national service providers like Kaman. In 2017 and beyond, we will maintain our focus on delivering value-added services, which create higher margins and competitive differentiation. We will seek attractive opportunities to further build our platforms through targeted, strategic acquisitions in the large but still fragmented distribution industry.

A Look Ahead

Last year’s progress demonstrated the power of our diversified business strategy, as strength in Aerospace markets offset weakness in Distribution markets. Our Aerospace business will continue to focus on further developing our industry-leading portfolio of engineered products while driving operational excellence across all areas of the business. In Distribution, we will look to the margin enhancement initiatives discussed above to improve profitability while maintaining our focus on our three-platform strategy. In both businesses, we will carefully evaluate acquisitions and other investments that enable us to deliver greater value to our customers and shareholders. Across Kaman, we will be sharpening our focus on sustainability, from monitoring and control of our greenhouse gas emissions to supporting next-generation aircraft that use more sustainable fuels.

Before I sign off, I want to acknowledge the retirement, on January 3rd, of Ronald Galla, Kaman’s Senior Vice President and Chief Information Officer. When Ron joined Kaman in 1984, he was the company’s first corporate IT employee. Since that time, Ron has presided over three decades of revolutionary technological change that, under his leadership, have transformed our organization and supported our growth. On behalf of everyone at Kaman, I wish Ron a long and happy retirement, which he has certainly earned.

Finally, I began this letter by mentioning the amazing dedication and talent of Kaman’s 5,300 employees. I would like to end it on the same note, along with deep gratitude to our loyal customers, our supportive Board of Directors, and our shareholders.

 

Neal Keating

Neal J. Keating
Chairman, President and
Chief Executive Officer

Paul Kuhn

Paul Kuhn 1941 – 2016

Last year saw the passing of Paul Kuhn, who served as Chairman, President and Chief Executive Officer of Kaman from 2001 – 2008. Paul, who joined the company in 1999, led a fundamental transformation of Kaman and left it much stronger than when he joined.

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