“While the economic climate remains uncertain, I believe Kaman is better positioned than ever to capitalize on future growth opportunities.”Neal J. Keating
During 2013 Kaman made strong progress despite a challenging environment, delivering increases in both revenue and operating income. Our product diversification and ongoing commitment to operational improvement continued to show results. Just as importantly, we continued to execute on our longterm strategic plan, building a stronger Kaman well positioned to take advantage of growth opportunities in both our Distribution and Aerospace segments and able to weather the inevitable challenges that lie ahead.
Kaman reported 2013 net earnings from continuing operations of $56.7 million, or $2.09 per diluted share, compared to $53.9 million, or $2.03 per diluted share, in 2012, an increase of about 3%. Net sales for 2013 increased 5.6% to $1.68 billion, compared to $1.59 billion in 2012.
2013 marked our 44th consecutive year of dividend payments. Total return to shareholders was 9.9%, on top of total return of 37.2% in the prior year.
Our Distribution segment, facing a difficult industrial economy, turned in a 5.5% increase in revenues from continuing operations, from $1,012 million in 2012 to $1,068 million in 2013. Operating profits were lower, however. Aerospace revenues increased nearly 6% during the year and operating profits were up 15.1% over the prior year.
Free cash flow was $22.0 million, a noteworthy accomplishment in light of our robust investment program. Our program is focused on increasing manufacturing capacity as well as information technology and ERP systems.
Financial results are important, but by definition, focused on the past. It's the future that I'm excited about. I believe that Kaman is positioned to capitalize on a number of long-term growth opportunities in both of our business segments. In Aerospace, we have achieved improved balance between commercial and defense programs that will provide increased growth over time. In Distribution, acquisitions have increased scale and capabilities, which bodes well for top-line and bottom-line growth. Our strong balance sheet gives us the flexibility we need to take advantage of opportunities as they arise. Our management team and employees across the company have the experience, expertise and dedication required to lead us into the future.
Our Aerospace business made strong progress during 2013 as we continued to advance our "One Kaman" strategy, leveraging our cross-business capabilities to provide our customers with a single source for a broad array of products and services. "One Kaman," along with selectively adding more design-and-build content, will enable us to solve our aerospace and defense clients' toughest engineering challenges, and offer Kaman more opportunities to deepen relationships.
Aerospace revenues for 2013 were a record $614.0 million, an increase of 5.7% from 2012. Operating income for 2013 was $102.6 million, also a record, compared to $89.1 million in 2012, an increase of 15.1%. Operating margins in Aerospace rose to 16.7% in 2013, up from 15.3% in 2012.
A review of selected key programs offers a high-level look at how our diversity and strongly integrated Aerospace businesses will create value for our customers and our shareholders.
Our specialty bearing product lines continued to deliver outstanding performance in 2013. New programs include the Airbus A350, which made its first flight in 2013 and represents the largest Kaman bearing content of any aircraft in our company's history. The Airbus A350 is a terrific example of how investments in new programs can yield significant results in the long-term. To sustain this strong momentum, we began construction of a new bearing manufacturing facility in Höchstadt, Germany during 2013. This new facility will support our commitment to operational excellence and will double our capacity. We expect the new facility to be fully operational in the first half of 2014.
The Joint Programmable Fuze (JPF) has become our largest program, reflecting strong demand for our unique product. Considerable operational improvements have contributed to the program's outstanding performance. In 2013, we signed a new four-year U.S. Air Force contract, adding to the growth of our program backlog, which ended the year at $100 million. Kaman is the sole provider of the JPF to the U.S. Air Force as well as twenty-seven other nations.
In the fourth quarter of 2013, we completed initial deliveries on our AH-1Z program for Bell Helicopter and the U.S. Marine Corps. This program could exceed 150 aircraft and $200 million in revenue over the coming years. It is also an excellent illustration of our "One Kaman" strategy, leveraging synergy between our tooling and assembly capabilities to deliver an integrated solution to our customer. Another program that illustrates the success of "One Kaman" is the 747-8 wing-to-body fairing program for Boeing. Kaman Engineering Services originally designed this structure for Boeing and now we will leverage the combined capabilities of four Kaman facilities to deliver the finished product to the final assembly line in Everett, Washington.
The Unmanned K-MAX® aircraft operating in Afghanistan continues to provide outstanding performance to the Marine Corps, including lifesaving protection to our men and women in uniform. The Unmanned K-MAX®'s peerless ability to resupply combat troops safely, precisely and efficiently earned it high praise from the Marine Corps, which is expanding its role in Afghanistan.
In May 2013 we signed a $120 million contract with the New Zealand Ministry of Defence to provide ten state-of-the-art SH-2G(I) Super Seasprite aircraft. Program execution will occur over approximately three years. We began recognizing revenue in 2013 and expect to generate cash proceeds of $60–$65 million over the life of the program.
We recorded higher revenues from our largest commercial platform, the Boeing 777, as well as a number of other commercial programs. Our BLACK HAWK program, which has contributed almost $500 million in revenue since inception, continues to perform well, and in October, we delivered our 1,000th cockpit to Sikorsky, a significant milestone.
Momentum in new-program wins and increased production rates led to a strong 2013. This includes A350 airframe bearings; the AH-1Z cabin; CH-47 inlet screens; the Learjet 85 composite door; the G7000/G8000 fixed leading edge; the Trent 700 nacelle panels; the G280 winglet; and the 747-8 wing-to-body fairing. We are extremely pleased that, as we ended the year, our backlog grew to over $600 million and quoting activity on new programs remains strong.
Distribution revenues from continuing operations rose 5.5% in 2013 to $1.07 billion, from $1.01 billion in 2012, the result of growth from key strategic acquisitions. Operating income from continued operations for 2013 was $43.3 million, a decrease of 14.3% from $50.6 million in 2012. Operating margins were 4.1% in 2013, versus 5.0% in 2012. Lower operating margins resulted from lower than anticipated organic sales growth, first quarter charges to properly align our cost structure, and challenges at our Mexico operations.
Our platform diversification strategy, launched in 2012, served us well in a challenging environment. Today, we focus on three complementary platforms Bearings and Power Transmission; Fluid Power; and Automation, Control and Energy. These three platforms combined address a $35 billion served market. To sustain the positive momentum of 2013, we are continuing to scale our Distribution business through growth: broadening and diversifying our product offering and expanding our geographic footprint to enhance our position in the national accounts market. Today, we operate from 235 locations and five distribution centers enabling us to provide a high level of customer service across our markets.
Our Parker Hannifin strategy, launched in 2011, created a strategic alignment with the world's premier fluid power OEM. In 2013, we continued to make progress in transitioning our legacy fluid power business to Parker offerings. We acquired two additional Parker distributors, Western Fluid Components, Inc., and Northwest Hose and Fittings, Inc., which have allowed us to consolidate operations in the Northwest market and adjacent territories. These acquisitions complement Kaman's strong presence in these markets and our previous Parker-related acquisition of Catching Fluid Power. Fluid power is a $7.2 billion market, and our acquisition and organic growth strategy positions us to capitalize on this very large and growing segment.
During 2013, Kaman acquired Ohio Gear & Transmission, a distributor of mechanical power transmission equipment, bearings and electric automation systems as well as a designer and fabricator of specialized gearing products to industries such as food, packaging, material handling, and general machinery. Ohio Gear provides entry into the Cleveland market, which represents a geographic region where we were previously under-represented. We will also benefit from Ohio Gear's superb design, build and assembly capabilities for a wide variety of standard and unique gearing products.
In 2012, we began efforts on a new ERP system to support the growth of our Distribution segment. This $45 million investment, the largest non-acquisition investment in the segment's history, will consolidate twelve systems into one state-of-the-art platform, providing us with significant operational improvement opportunities. We made excellent progress during 2013, and expect to begin system implementation during the first half of 2014.Standing (left to right): Thomas W. Rabaut, George E. Minnich, Eileen S. Kraus, E. Reeves Callaway III, Scott E. Kuechle, and Brian E. Barents Seated (left to right): Neal J. Keating, Richard J. Swift, A. William Higgins, and Karen M. Garrison
While the economic climate remains uncertain, I believe Kaman is better positioned than ever to capitalize on future growth opportunities. Both of our business segments have executed on their long-term growth plans, Aerospace through diversification, design-and-build and "One Kaman," and Distribution through scaling up its product offering and geographic footprint. Across the corporation we are relentlessly focused on lean operations, which will help drive improved cash flow and profit optimization.
I've highlighted some of our major investments in this letter. But our most significant investment is surely in our people. During 2013, we completed a pilot supervisory leadership training program at Specialty Bearings. Based upon its success we plan to roll it out to other parts of the organization in 2014. We've invested in IT training and have held eleven project management workshops with almost 100 participants from across the organization in 2013. More than 400 have participated since we began these workshops in 2011. In addition, we have identified our third group of participants for the Kaman Leadership Development Program. Taken together, these and other programs continue to enhance the capabilities of our people.
In 2013, Kaman continued to support the communities in which we live and do business. I am particularly proud that, in 2013, Kaman formally recognized the "Employer Support for the Guard and Reserve" program. By signing this pledge, Kaman agreed to support our employees who serve in the armed forces. Although we have always supported employees who serve in the armed forces, I was proud to sign the pledge on behalf of every Kaman employee.
2013 also marked the retirement of William C. Denninger, Executive Vice President and Chief Financial Officer. Bill's leadership and counsel over these last five years have been invaluable to me and to the company. Bill has been part of a leadership group that completed eleven acquisitions and a number of capital market transactions that have kept Kaman well-capitalized to finance our growth objectives. He has had a long and distinguished career as a finance executive, and I wish him well in his retirement.
Robert D. Starr has been appointed to the position of Senior Vice President and Chief Financial Officer. Rob, who joined the Company in 2009, previously served as Vice President and Treasurer. His experience, drive, intellect and passion for our company made him the right choice to serve as Kaman's next CFO.
As I review 2013 and look to the future of Kaman, I continue to be humbled and inspired by the talent and commitment of our employees. Along with a dedicated Board of Directors, they give me confidence that the best days for our company lie ahead.
Finally, thank you, our loyal shareholders for your continued confidence.