Q3 2020 Kaman Corp Earnings Call

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Ladies and gentlemen, thank you for standing by and welcome to the combined third quarter Twentytwenty earnings call. At this time, all participants are not listen only mode. After the speakers presentation. There will be a question and answer session to participate on that.

Portion of the call you'll need to press star one on your telephone please be advised that today's conference maybe recorded for any assistance during the conference fresh start in cereal I will now hand, the conference over to your Speaker today, James Gordon Vice President Investor Relations and business development.

Good morning.

I like to welcome everyone to commence third quarter 2020 earnings call conducting the call today are Neal Keating executive Chairman in Walsh, President and Chief Executive Officer, and Rob Starr Executive Vice President and Chief Financial Officer.

Before we begin I'd like to note that some of the information discussed during today's call will consist of forward looking statements setting forth our current expectations with respect to the future of our business the economy and other future events.

These include projections of revenue earnings and other financial items statements on plans and objectives of the company or its management statements.

The future economic performance and assumptions underlying these statements regarding the company and its business because.

The companys actual results could differ materially from those indicated in any forward looking statements due to many factors. The most important of which are described in the company's latest filings with the Securities and Exchange Commission, including the company's third quarter 2020 results included on form 10-Q, and the current report on form.

Form 8-K filed yesterday evening together with our earnings release.

We also expect to discuss certain financial measures and information that are non-GAAP measures as defined in applicable SEC rules and regulations WRECO.

Reconciliations to the company's GAAP measures are included in the earnings release filed with yesterday's 8-K.

Finally, we posted an earnings call supplement to our website that is designed to provide additional context on our financial performance key events for the period additional information on the makeup of our sales and cost savings actions and steps we've taken as a result of the COVID-19 outbreak.

You can find this presentation at Www Dot command dotcom slash investors slashed presentations with that I will turn the call over to Neal Keating.

Thank you Jamie good morning, everyone and thank you for joining us today for our third quarter 2020 earnings call.

As we announced in August I have transition to executive Chairman and will retire from the company following our 2021 annual shareholders meeting.

It's been a privilege to lead command for the last 13 years and I'm very proud of what the company has accomplished in that time.

But first let me give you a brief summary of my background.

I started my career after college in the United States Marine Corps, as an officer a naval aviator.

Afterward, I tend to Grad school and enjoying textron in 1999 at Bell helicopter and worked with a number of positions across textron, including senior Vice President and general manager of Lycoming engines, and senior Vice President and general manager of weapons and sensors, and then C O O of Textron systems.

I can go to my time at Textron as President and C. E O of true simulation and training before becoming the Chief operating officer at Rev Group.

A leading designer manufacturer and distributor, especially vehicles and related aftermarkets services in parts.

For those whom I have not yet met I look forward to the opportunity to meet you and hear your perspectives on the company.

Moving to what attracted me to come in first the only team have established command is a market leader.

Offering highly engineered aerospace defense and medical technologies and solutions.

They put the company and a strong financial position and in the third quarter with over 150 million in cash.

Subsequent to quarter, and we pay down an additional 50 million revolving credit agreement and.

And I believe the strength of our balance sheet as a foundation that will give us the ability to drive growth over the coming years.

Second I.

I was impressed by the company's history of innovation.

Command is demonstrating the ability to bring new solutions to his customers, which I strongly believe is the key to our future.

This includes consistent innovation and her bearings business.

Continued development of her Unman came Max helicopter program and the editions of G. R W and balls seal Ah.

Meaningful expansion to the medical and industrial markets with industry, leading technologies and advanced manufacturing processes.

There's innovation mindset is core to commands culture and will be critical as we look to grow organically and through acquisitions.

As I knew the completion of my second month with command I've had the opportunity to visit all of our domestic sites in person.

Meet with our overseas teams virtually and talk with some of our customers and suppliers.

This is allow me to learn more about the company and connect with our employees around the globe more.

Our product offering has been a key driver of your organic sales growth, we have seen in both the quarter and year to date periods.

This sales growth coupled with our strong gross margin performance and cost reduction and mitigation efforts resulted in improved financial performance.

Adjusted EBITDA margin of 190 basis points over the third quarter of last year.

Our positive free cash flow in the quarter and receivable collections that have occurred in October put us in a position to achieve positive free cash flow for the year.

18.6% sequentially from the second quarter ended appears the second quarter performance for these products may represent the low point for the year we.

We are continuing to monitor the resurgence of COVID-19, which may lead to the additional deferral of elective procedures and push out our recovery in sales for these products.

Doggett ball field rose, 7% sequentially.

We are encouraged by the increase we saw him backlog. However, we expect headwinds in the fourth quarter, primarily related to the industrial portion of the business.

Gross margin for the quarter was 31.3%.

Compared to 33.5% in the prior year period, the 220 basis point declined over the third quarter of 2019 was driven by mix and reduced volume for a commercial bearings.

Internal research and development continues to be a primary focus for us as we look to drive future organic growth spending in 2020 on these programs, which is included in our SG&A line item on the income statement is.

Has increased over 2019 and the quarter. We spent approximately five 5 million and through the first nine months. We've spent 17 million an 18% increase over the comparable nine month period in the prior year.

SG&A as a percentage of sales declined to 21.1% for the quarter from 24% in the prior year.

$25.7 million in savings for the year.

In addition, we have identified actions, which have not yet been fully implemented that when coupled with the actions. We've taken to date will generate approximately $50 million in annualized savings.

We expect 80% of the $50 million in savings to be structural as we anticipate a portion to return when conditions improve.

During the quarter, we recorded a 50.3 million noncash nontax impairment charge related to the goodwill associated with our Aerosystems reporting unit.

This reporting unit is made up of our air vehicles, and metallic and composite structures businesses.

There from continuing operations of a negative $1.39 compared to a diluted earnings per share of 36 and the prior a year.

When adjusted we saw an increase in the adjusted diluted earnings per share, 52%, earning 70 cents per share in the third quarter of 2020 compared to the 46 adjusted diluted earnings per share in the third quarter of 2019.

During the quarter, we generated free cash flow of 22.4 million, reducing our free cash flow usage for the year to $66 $6 million.

This usage was driven by an increase in receivables due to the timing of payments from J P. F. Dcs customers near term working capital billed for came ask an employee related cash payments such as the 10 million pension contribution made in the first quarter.

Quarter.

In conclusion, we are well positioned to continue to execute on our strategy and managed the business through this rapidly changing operating environment.

With that I will turn the call back over to Ian.

Thanks, Rob.

Before we open the line for questions I want to share one last observation during my initial time here at command.

Throughout the interview and Onboarding process. The team shared stories about how special command was had a culture is present through the work that has performed every day and how this culture permeates his talented and dedicated employees.

In my brief time here I could not agree more values of command come through loud and clear and I'm very proud to be a part of this company.

Things before I before being understood.

But to answer your question more directly at a high level is just I'll tell ya I see incredible potential intrinsic value that that we can unlock in this company as a function of where it is today if I think about the the kind of near term there are three things.

That I I feel incredibly excited about number one.

To drive the organic gross.

An M&A standpoint.

Couple of quick thoughts on <unk>, having been this industry a long time looking at all the same reports in reading as much as I can and obviously talking to some of our customers.

I think the recovery that the the commercial aerospace market has been.

Always very resilient.

It does come back it's going to take a little bit of time different to some of our other markets, perhaps a medical which we anticipate clean like back sooner.

In terms of how to position the company I fuel again from what I understand right now and quite frankly.

Seeing the businesses and how we operate in what we do.

I'm really trying to get get deeper into those end customers and understand the diversity of our portfolio, which is which is tremendous.

I think that we've gotten very solid positions on many of those platforms I.

I think there's more work to be done and how to expand our footprint on those platforms and working with the customers.

I think the aerospace and defense is core to what we are and what we do but the same time I do feel whether it's through acquisitions or building on like I said the focus on engineer in Holly precision parts and those kinds of things that we are going to continue to kind of move in that direction.

I think that's where we'll find I think really strong returns.

Understood and then you said in your opening remarks, the strength of the balance sheet sets the foundation for growth.

What's the upper range of what you would stretch too in terms of debt to EBITDA and philosophically do you believe in a stable debt to cap kind of profile are you more inclined to lever up for a deal and then focused free cash flow towards debt reduction until the next thing comes along.

I guess.

Implication would be that revenues are expected to be at a much lower level for a long time now as well in that unit just maybe some some additional color there.

Yeah, Pete this is Rob.

A couple of things we didn't we conduct on a you know it certainly most years.

Minus the pandemic an annual review of any triggering events that would have US review the goodwill that and we do it annually and.

2020 can you.

Ballpark for us the size of the receivable you're expecting from from overseas.

Sure I.

I'll give you some level of detail therapy, but youre correct 2019 free cash from continuing operations was right around 20 million.

We continue to expect to achieve in that range for this year.

One of the key is the receivables on our Dcs customer JP F.

We have received a good portion of that already in October so.

We clearly timing still remains.

Letting that can't perfectly tell exactly when we're going to be paid but that is really the big chunk of what moves us over the hump.

Into positive free cash there are some other items.

We have a K Max sale are expected in the fourth quarter that will also be a meaningful contributor to cash in the quarter. Once again timing. The team is working very diligently with a number of leads that are very close.

And what's the redirected those expenses into iron D into integrals opportunities yeah.

Yeah. Thanks for the clarification on on the structural take out it's it's pretty meaningful. So so thanks for all the help I appreciate it.

You're welcome Thank state next week.

Thank you as a reminder to ask a question you would need to pass dollar then one on your telephone.

Our next question comes on the line Seth seismic with J P. Morgan Your line is now open.

Hi, Good morning, guys. It's it's actually Tyler on from that same how are Ya.

Good morning, Tyler.

Okay. So I guess you know just looking at cue for looking at your fuses guide you know if we look at it and assume that you guys deliver towards the high end of that range I mean, the way we were thinking about it is.

Maybe maybe revenues around the mid sixties range for safe and on devices would you guys say this is a fair way to think about this or or is there a different way to look at it.

Yeah, It's Tyler I mean, if if we achieve towards the high end I I think your assumptions is within range.

Not an unreasonable expectation, but I would say that that largely comes down to the mix.

The you know what we're R. D. C. S is relative to R. U S government contract. There is a difference there in top line. So it just depends on the mix and that is something that the team managers based upon demand signals from the U S government as well as our our other international customers.

Okay got it and then just a quick follow up.

I mean, I guess in this market we've been given the forecast for deceleration for the Big defense contractors in just the budget overall, so how should we think about the non fused portion of your defense business going forward maybe for the next couple of years.

Yeah, we we typically we haven't really provided much of that much of a guide on that especially like a multiyear guide I mean, certainly when you think about the size of the overall defense budget and what our portion of that is and where are we play.

We do have a decent exposure on missiles, obviously and.

Missions.

That appears to be an area, where there's there's still lacking inventory and I think when you look at some of our other structure is programs.

You know whether it be a tan.

Age onesie.

Oh 860.

Those are the very good long term programs for us so it's.

Looking at an overall defense budget for a company of our size you know I mean, it's a little different when you're looking at a Lockheed or you know like a Northrop Grumman right. There in so many different huge projects that they will feel it more so for us it's more programs specific and we overall feel good about the platform is that we're on.

From the line of Chris Dankert with Longbow Research. Your line is now open.

Hey, good morning, everyone. Congrats again Neal welcome Ian Yeah. Thanks for taking my question here.

I guess first off given.

The high utilization of K Max in the quarter.

Was there any kind of unusual or increased aftermarket sales growth there or is it pretty in line with what you guys had been expecting.

Yeah, Chris This is Rob.

As it relates to Cemex, Yes, you know the utilization was good I you know we can all.

See the news out west and.

And see that the tragic amount of fires I would say its in pretty much in line with our expectations.

By and large I mean, we have a.

Okay. Our current expectation is that yes, when we got on the call in the February timeframe will look to provide a guy for 2021.

Okay, Okay, great it'll be eagerly awaited [laughter]. Thanks, guys, yeah. Thank you being street.

Thank you we have no further questions.

I would now like to turn the call back to Mr. James input closing remarks.

Thank you for joining us on today's conference call. We look forward to speaking with you again, when we when we report our fourth quarter results.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.

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