Dear Shareholders,

For Kaman, 2018 was a year of solid performance, both financially and operationally. As importantly, it was a year in which we continued to lay the foundation for our future, with investments and strategies that will enable us to continue the pace of growth we’ve exhibited in recent years.

We are investing in the programs and markets that show the most potential for delivering attractive returns. Many of our business units are deploying new technologies, including flexible automation, robotics, and data analytics, to make our company more efficient and more responsive. Additionally, we continue to invest in our people across the organization to develop the next generation of Kaman leaders. We’re also working harder than ever to strengthen the communities in which we live and work, not only because it’s the right thing to do, but also because it’s a smart decision as we continue to expand across the globe.

A look at 2018 results

In 2018, Kaman reported net earnings of $54.2 million, or $1.92 per diluted share, compared to $49.8 million, or $1.75 per diluted share, in 2017. Revenues increased across both our segments, with Distribution sales up 5.4%, driven by growth across all three of our product platforms. At Aerospace, Joint Programmable Fuze (JPF) program performance and the delivery of five K-MAX® aircraft benefited our year-over-year results.

Operating profit results for the year reflect a number of costs associated with the long-term restructuring of our Aerospace business, which included the sale of our Kaman Engineering Services and U.K. Tooling businesses during the fourth quarter. Despite the near-term impact to our results, these actions are designed to strengthen the performance at Aerospace through improved capacity utilization and operational efficiency.

The adoption of tax reform lowered our effective tax rate for the year, providing a benefit to our net earnings for 2018. We shared a portion of this benefit with our employees by making $20 million of additional voluntary contributions to our defined benefit pension plan and offering a $1,000 bonus to over 2,400 eligible employees.

We generated $162.4 million of net cash from operating activities in 2018, compared to $79.9 million during 2017. This increase in cash flow generation was primarily due to advance payments we received on a $324 million joint programmable fuze contract. The benefit from these advance payments was partially offset by $30 million of discretionary contributions made to our defined benefit pension plan during the year.

Our strong cash flow generation in 2018 has enabled us to reduce our leverage, strengthen our balance sheet, and improve the funded status of our defined benefit pension plan. Debt levels are at the low end of our long-term range, positioning us to execute on our strategic acquisition priorities. Our January 2019 dividend payment represents the 49th consecutive year of dividend payments, and we remain committed to returning capital to shareholders. During 2018, our share repurchase program and dividends, combined, returned $40.7 million to shareholders, a 26% increase over 2017.

Many of our business units are deploying new technologies, including flexible automation, robotics, and data analytics, to make our company more efficient and more responsive.

Aerospace

Our Aerospace segment reported revenues of $736.0 million in 2018, a 1.5% increase from 2017 revenues of $724.9 million. Aerospace ended the year with a consolidated backlog of $851.8 million, up over 38.3% from 2017. New JPF and Bell Helicopter AH-1Z orders have increased our backlog by $540 million during the year. We are also very pleased that demand for our specialty bearing products remained strong, with new order intake rates and backlog up significantly over the prior year, supporting continued growth for these products.

At Aerosystems, the K-MAX program continued its strong performance. From assisting with hurricane relief efforts in Florida and Puerto Rico to fighting wildfires in northern California and around the world, we are proud that the K-MAX is providing vital resources where they are critically needed. Due to this great work, and the resulting demand for the aircraft, we are extending K-MAX production.

In 2018, we continued to deepen our long-standing relationship with Bell Helicopter on the AH-1Z program. We delivered our 100th ship set of cabin structures and were awarded a contract extension on this latest-generation attack helicopter program.

Our Composite Structures group was awarded several new contracts, including flight-critical skin and skin-to-core composite assemblies for various Bell model helicopters, and complex composite components for Lockheed Martin’s Sikorsky Combat Rescue Helicopter. The Wichita Composites business also entered into agreements with Textron Aviation and Tamarack Aerospace Group to provide composite structures for several models of business aircraft.

Earlier this year, we expanded our manufacturing capacity at our composites facility in Vermont. A key component of this expansion is the implementation of a Smart Manufacturing Cell, which blends automation and legacy approaches to composite manufacturing; this will help support the rapid growth of this business, and uniquely positions Kaman to drive quality, cost, and schedule adherence for superior customer satisfaction.

We continued to see growth in demand for our safe and arm devices in 2018. For the year, we received JPF orders totaling over $475 million, and ended the year with backlog of $454.1 million. We were also awarded the largest single order in JPF history, and we anticipate strong JPF demand for years to come.

From our first delivery in 2004, we have provided the highly reliable JPF to the U.S. and allied militaries around the world. In December, we celebrated a key milestone for the program when we delivered the 300,000th Kaman manufactured JPF to the U.S. Air Force. We are proud of our performance on this program and look forward to continuing our relationship with the U.S. Air Force into the future.

Kaman’s innovative spirit and operational excellence were recognized by Airbus, which designated our Kamatics and RWG businesses, together, as a Strategic Technology Partner. We are proud of this elite distinction, which is afforded to few companies worldwide. To support our continued growth, we completed the building expansion of our Kamatics facility in Bloomfield, Connecticut, to meet the increased demand for our highly engineered, self-lubricating bearing products; we are planning to further increase capacity in 2019. Additionally, we continue to invest in our European operations, including an expansion at our facility in the Czech Republic, which will allow us to further enhance our capabilities and provide additional capacity.

Distribution

Our Distribution business demonstrated solid improvement in 2018. Revenues rose 5.4% to $1.14 billion, from $1.08 billion in 2017. Operating profit for 2018 was $51.5 million, compared to $51.4 million in 2017. Operating margins of 4.5% in 2018 were down 30 basis points from the 4.8% achieved in 2017 due in large part to higher employee related costs during the year.

These results reflect strength in all three Distribution platforms: Automation, Fluid Power, and Bearings and Power Transmission, each of which showed year-over-year sales growth. Backlog also increased by over $8 million since year-end 2017 to $134.3 million.

Distribution won numerous major Corporate Accounts in 2018, providing additional opportunities across all three platforms. These new customers contributed to our organic sales growth in 2018, and we expect them to drive continued growth in 2019. In addition, Distribution saw sales growth across a range of the markets we serve, led by machinery manufacturing, paper manufacturing, food manufacturing, and merchant wholesalers and durable goods.

Optimizing our facilities network is another core component of our overall strategy to enhance customer service and operational efficiencies. We continue to consolidate our facilities to co-locate product offerings from across our three platforms. Additionally, we have made investments to expand select facilities and added value-add capabilities at a number of locations. Examples include our new Peoria, Illinois Parker Store; the expansion of our Anaheim, California and Greenfield, Indiana Engineered Services Group facilities; and the expansion of our Salt Lake City Belt Shop. We expect these improvements to enhance our capabilities and further strengthen our customer relationships in these key geographies.

Focus Forward

Despite economic and political uncertainty, I continue to see significant growth opportunities in both our businesses. At Aerospace, we are well positioned with a good balance of commercial and defense programs. Our JPF, AH-1Z, and BLACKHAWK programs provide opportunities to benefit from continued defense spending. Higher build rates for commercial aircraft and the continued innovation in new materials and aircraft design are increasing the number of engineered products integrated into new platforms, providing a growth catalyst for our specialty bearings business.

For our Distribution business, supplier consolidation favors larger national service providers like Kaman. We are well positioned to benefit from our customers’ need for value-added services, while the trend toward automation in factories is increasing demand for fluid power and high-speed automation solutions.

To capitalize on these opportunities, we continue to invest in facility modernization and expansions, and in business systems and data analytics capabilities. As we grow, we will continue to carefully consider strategic acquisitions that complement our existing businesses.

Perhaps most importantly, we are investing in our people. In addition to providing training opportunities and mentoring programs, we made progress in our efforts to further diversify our workforce. While our efforts are not limited to advancing women, I am particularly proud of the strides made by Women Advocating Leadership at Kaman, or WALK. This initiative has grown beyond our expectations and has been embraced by women and men across the organization.

No discussion of the people of Kaman would be complete without acknowledging the contributions of Richard J. Swift, the former CEO of Foster Wheeler Ltd. and a valued member of our Board of Directors, who will retire at our 2019 Annual Meeting. Dick’s advice has been invaluable to our company and our shareholders over the past 16 years. I am personally very grateful for Dick’s counsel and leadership, and on behalf of everyone at Kaman, I thank him for his service and wish him well in the future.

Finally, as I visit Kaman facilities around the globe, I am always inspired by the talent, ingenuity, and dedication of our 5,100 employees. As we focus on the future of our company, I know that they are our best assurance of building an even stronger, more prosperous Kaman for our shareholders, our customers, our communities, and each other.

Neal Keating
Chairman, President and Chief Executive Officer