Neal J. Keating

Dear Shareholders,

Strong revenue and earnings growth, along with significant progress toward achieving our long-term strategic goals, combined to make 2011 an outstanding year for Kaman. While the economic outlook remains uncertain, I am confident that Kaman is making meaningful progress in both of our businesses, with the products, services and most importantly, the people we need to continue to prosper.

During 2011, Kaman reported net earnings of $51.1 million, or $1.93 per diluted share, compared to $35.6 million, or $1.36 per diluted share, in 2010, an increase of 41.9%. Net sales for 2011 increased 13.6% to $1.50 billion, compared to $1.32 billion in 2010.

Cash flow performance during 2011 was good, particularly in light of our robust program of capital expenditures, which we view as critical investments in the future of our company. Kaman achieved $16.0 million in free cash flow during 2011, compared to $15.8 million during 2010. Excluding a $15 million payment to the Australian government in 2011, our free cash flow was $31.0 million. We continue to focus on total return to shareholders, as demonstrated by our recent 14% dividend increase and stock repurchases. It is a source of pride to everyone at Kaman that 2011 marked the 41st consecutive year that Kaman has paid a cash dividend to shareholders. Also, we recently moved our stock listing to the New York Stock Exchange from the NASDAQ. We expect that this move, which required meeting the Exchange's stringent listing requirements, will provide greater visibility and put us in the company of the world's leading corporations.

We have always been a company focused on the future, developing strategies that will enable us to meet the changing needs of the industries we serve.

We continued to maintain a strong balance sheet during 2011. In fact, we maintain an investment grade credit rating, which speaks to the rating agency's confidence in our financial management and overall strategy. We took advantage of favorable credit market conditions to re-price our senior secured credit facilities, which reduced our borrowing costs. This will contribute to our ability to fund growth initiatives in the future. In fact, a strong balance sheet enabled Kaman to fund five key acquisitions during 2011, which I will review later in this letter.

Industrial Distribution

From both a financial perspective and an operational perspective, 2011 was a very strong year for Industrial Distribution. We completed a reorganization designed to enhance the customer experience and streamline operations, invested in efficiency-boosting technology, and made key acquisitions that significantly add to our product line and geographic footprint. Sales rose 14.3% in 2011 to $950.8 million, from $832.0 million in 2010. Operating net income for 2011 was $48.1 million, an increase of 59.1% from $30.3 million in 2010. These results point to a very encouraging improvement in Industrial Distribution's operating margins, which reached 5.1% in 2011, up from 3.6% in 2010.

Acquisitions were an important part of the story in 2011. In September, we acquired Target Electronic Supply, Inc. of Westwood, Massachusetts. Target, a leading motion control distributor in the New England trading area, increases our already strong position in those markets and will become part of our Minarik operation. In October, Industrial Distribution acquired Plains Bearing Corp., a full-line bearing and power transmission distributor in Lubbock, Texas. Plains Bearing is one of the leading independent bearing and power transmission distributors in its territory, and an excellent addition to the Kaman sales and service network.

The largest acquisition came in December when Industrial Distribution acquired Catching Fluidpower, Inc., a leading distributor of fluid power products based in Bolingbrook, IL. Catching is one of Parker Hannifin's premier tri-motion distributors, covering a wide variety of product technologies, from hydraulic and pneumatic pumps to filtration products, seals and other necessary fluid power components. In conjunction with the acquisition, Parker Hannifin has recognized Kaman nationally as a value-added reseller of Parker hydraulics, fluid connectors and pneumatic automation products. As with last year's acquisition of Minarik in the automation and motion control space, we view Catching as an excellent platform on which to expand our range of the technology-driven products demanded by customers. We are pleased that Rich Guminski, President, and his senior management team at Catching have agreed to join Kaman.

I am particularly enthusiastic about these acquisitions because of our track record of successfully integrating past acquisitions into our Industrial Distribution business. Each of our 2010 acquisitions is performing well, and I expect similarly outstanding performance from Target, Plains and Catching in 2012 and beyond.

Our long-term strategy for Industrial Distribution embraces both acquisitions and organic growth. During 2011, the business recorded several national account wins, including Kohler and Constellation Brands. Our relentless focus on customer service and value-added solutions helped to secure two key renewals, with Procter & Gamble and USG. In 2011, Industrial Distribution further strengthened its focus on customer service, and improved its operating efficiency, through significant investments in information technology, including a VoIP system that will enable us to respond faster to customers and suppliers. This investment proved its value during 2011's Hurricane Irene and the unusual October snowstorm, which caused widespread power outages in the Northeast. During both incidents, Industrial Distribution seamlessly serviced 100% of its customers by rerouting thousands of telephone calls throughout our new customer service network. The strategy behind these technology investments was further validated by InformationWeek, which named Kaman Industrial Distribution to its 2011 InformationWeek 500 list, which annually identifies and honors the nation's most innovative users of information technology.


It seems appropriate to begin this review of Aerospace operations with the unmanned K–MAX® program, which not only illustrates Kaman's capacity for innovation but also has the potential to save the lives of our men and women in uniform. Built by Team K–MAX, a joint effort of Lockheed Martin and our Helicopters division, the unmanned K–MAX was named one of The 50 Best Inventions of 2011 by Time Magazine, which lauded the aircraft for providing "a safer way to supply troops deep inside hostile territory." The unmanned K–MAX recently became the first-ever U.S. Marine Corps unmanned resupply aircraft system to deploy in an operational environment in Afghanistan. In addition to the Marine Corps program, we were awarded a contract under an Army technology program to develop additional mission capability for the K–MAX.

Overall, our Aerospace business turned in a good performance during 2011, with excellent improvements in our specialty bearing product lines and solid results across many of our programs. Revenues for 2011 were $547.4 million, an increase of 12.5% from 2010 revenues of $486.5 million. Operating income for 2011 was $80.4 million, compared to $67.2 million in 2010, an increase of 19.8%.

Our Specialty Bearings and Engineered Products business benefited from a robust recovery of the commercial airliner industry, particularly at Boeing and Airbus. Kaman has built a significant position on the Boeing 787, which began deliveries last year. The program will begin ramping up production rapidly in 2012. The Airbus A350 has been well received, and will represent the largest Kaman bearing content ever. It is worth noting that Kaman bearings are on virtually every aircraft manufactured worldwide, and we continue to win new positions year after year, with order intake in 2011 setting a record. In addition, we continue to develop non-aerospace applications for our bearings such as marine and hydroelectric generation markets.

While our Joint Programmable Fuze (JPF) program faced acceptance testing challenges during 2011, we still managed to secure the long-term outlook for the program. The team at our Fuzing and Precision Products division worked diligently to resolve these issues and return the program to a normal production schedule. In fact, we currently have a backlog on the JPF through 2013, and we were recently notified that Kaman will continue to be the sole source supplier of joint programmable fuzes to the U.S. Air Force for at least four more years.

Other Aerospace programs continued to perform well. The BLACK HAWK cockpit program, our largest, achieved deliveries last year of 163 cockpits. The A–10 re-wing program was delayed, but is beginning to ramp up to a run rate of four ship sets per month by the end of 2012. The first re-winged A–10 had a successful first flight recently, so we are very optimistic about the long-term success of this significant program. We also continue to be enthusiastic about the AH–1Z Viper program. We made significant progress toward completing the first AH–1Z cabin, which is expected to be delivered in late 2012. To accommodate the A–10, AH–1Z and other programs, we expanded our Jacksonville, Florida facility, adding 100,000 square feet of manufacturing capacity.

Acquisitions have and will continue to play an important role in our Aerospace growth strategy. Global Aerosystems, acquired in 2010, has more than met our expectations, enabling us to bid on design and build content programs. Last year we acquired Vermont Composites, a leader in the design and manufacture of composite aerostructures and advanced composite medical equipment. Vermont Composites accelerates our overall growth, further diversifies our platform positions, and enhances our standing in the higher-growth markets for composite structures, particularly in the intelligence, surveillance and reconnaissance sectors.

Building the Future

In 2009, Kaman's board and management jointly established sales and profit objectives for 2014: for Aerospace, $1 billion in revenues with margins in the high teens, and for Industrial Distribution, $1.5 billion in revenues, with a 7% operating margin. These were ambitious objectives, established at a time of great economic and financial uncertainty, but I am confident that we are well on our way to achieving them, particularly in light of our strong performance in 2011. In Aerospace, we are well-positioned to weather shifts in defense spending, which we anticipate will focus more on reset of existing aircraft and leveraging cutting-edge intelligence, surveillance and reconnaissance technologies. These shifts play directly to the strengths of our Aerospace platforms. In Industrial Distribution, we should benefit from the slow but steady economic growth that many economists are forecasting.

Last year was marked by the deaths of several leaders of our company including our founder, Charles Kaman, whose spirit of innovation, determination and teamwork continues to inspire everyone at the company. We also lost long-time directors – John Murtha, whose guidance had been invaluable for parts of six decades; and Fred Watkins, who served on our Board for many years and, as a director emeritus, continued to attend our annual meeting into his nineties. Finally, we were saddened by the passing of William "Bill" Brown, our Vice President of Business Development for the Aerospace Group. Bill was known across the world in the aerospace industry and was a great ambassador for our company and a great friend to us all. He is missed.

The loss of these leaders underscores the important role of talented, dedicated people to Kaman's success. Charlie Kaman once said, "Kaman Corporation is people. The most important factor in our growth has been the demonstrated capability of our people to rise to new challenges, meet them, and go on from there." His words inspired our new corporate website, which adopts the theme "We are Kaman" to highlight the more than 4,600 people who, day after day, year after year, make this a great company. I would like to thank all of them for their continued hard work, and acknowledge the ongoing counsel and support of our Board of Directors and the confidence of our loyal shareholders.

Neal Keating Signature

Financial Highlights

In thousands except per share amounts

2011 2010
Net Sales $ 1,498,153 $ 1,318,513
Net Earnings 51,142 35,611
Total Assets 996,398 895,757
Per share amounts:
Net earnings per share:
Basic 1.95 1.37
Diluted 1.93 1.36
Dividends declared .60 .56
Shareholders' equity 14.22 13.93