Q1 2021 Kaman Corp Earnings Call

May 5, 2021

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Today's conference is scheduled to begin shortly please continue to standby and thank you for your patience.

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Yeah.

Good day, and thank you for standby and welcome to the come on Corporation first quarter 2021 conference call.

This time, all participants on on listen only mode.

After the speaker's presentation, there will be a question and answer session.

That's a question during the session you will need to press star one of the telephone.

Please be advised that today's conference is being recorded.

And further assistance please press star zero.

I would now like turn the conference over to your Speaker day, Jamie Coogan, Vice President Investor Relations and corporate development.

Please proceed.

Good morning.

I'd like to welcome everyone to commands first quarter, 2020 one earnings call.

<unk> the call today are Ian Walsh, Chairman, 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 of future economic performance and assumptions underlying these statements regarding the company and its business.

The company's actual results could differ materially from those indicated and any forward looking statements due to many factors the <unk>.

Most important of which are described in the company's latest filings with the Securities and Exchange Commission, including the company's first quarter 2021 results included on form 10-Q, and the current report on form 8-K filed yesterday evening and together with our earnings release.

We also expect to discuss.

Certain information.

That are non-GAAP measures as defined in applicable SEC rules and regulations reconciliations to the company's GAAP measures are included in the earnings release filed with yesterday's 8-K with that I'll turn the call over to Ian Walsh.

Thank you Jamie good morning, everyone and thank you for joining our first quarter 2021 earnings call.

I'd like to begin today's call with a brief summary of the quarter followed.

Followed by operational updates and our key product categories and an update on a couple of our R&D efforts.

I will then turn the call over to Rob for a more detailed discussion of our financial results for the quarter.

Relative to our internal plan and the guidance, we detailed on our fourth quarter call. We are off to a good start in 2021 with sales of $171 6 million and earnings per diluted share of 2009.

These results ran modestly ahead of our expectations, particularly on the profit line, which benefited from the timing of customer deliveries are favorable closeout of options and 14 of our GPS USG contract and strong cost control efforts.

Compared to the prior year net sales declined 17, 2% with organic sales down 14, 5%.

This was expected as we anticipated fewer deliveries this quarter for our <unk> program and our commercial aviation products faced a tough comp versus Q1, 2020, which was minimally impacted by the pandemic.

These declines were partially offset by recoveries and demand from our medical and industrial products.

Our first quarter adjusted EBITDA was $17 1 million or 10% of sales up 70 basis points sequentially, but down 260 basis points from the prior year period, which again was minimally impacted by the pandemic.

The lower year over year profit performance was largely the result of lower sales volume on our higher margin commercial and general aviation products, coupled with and unfavorable mix of GPS deliveries and the current quarter.

We call and 2021st quarter <unk> volume was weighted to our higher margin Dcs orders.

Despite lower sales our first quarter results benefited from a comprehensive cost control efforts with adjusted SG&A as a percentage of sales remained flat sequentially.

Turning to our product operating offerings, and beginning with our specialty bearings products and.

As anticipated sales were down compared to the first quarter of 2020 due to the impact of COVID-19.

Our self lubricating bearings continue to be impacted by pandemic as they are sensitive to the commercial aerospace volumes.

This headwind was partially offset by recoveries and our industrial bearings led by strong performance from our miniature bearings and engine aftermarket components and we expect the strength and these two product categories to continue through the remainder of 2021.

Furthermore, as commercial airline traffic begins to rebound and as vaccination rates rise and the United States and we anticipate a significant ramp and sales for our commercial bearings products, which will be weighted towards the second half of the year.

Sales for our Springs seals and contacts remained relatively flat this quarter when compared to the prior year, but are well ahead of the pandemic lows as evidenced by sequential increase and sales of 36% and.

Importantly, medical sales and the first quarter of 2021 for these products are not are now at or approaching pre pandemic levels and our order rates support and expected increase and elective surgeries, which we expect to benefit our medical and clinical products for the balance of the year.

Similar to bearings, we continue to expect improved performance for these products for the balance of 2021, particularly in the second half.

Turning to our joint programmable fuze program, we delivered approximately 8100 fuzes during the quarter below the 10000 units, we delivered and the prior year with less favorable profit contribution due to the mix of USG and Dcs fuses.

We are on plan to deliver 30000 to 35000 fuzes this year consistent with historical delivery levels for this product.

Looking at our <unk> program, we delivered one aircraft during the period and for the full year, we continue to expect to sell four aircraft in total.

We remain optimistic about the prospects for both manned and unmanned K Max programs and in April we completed the first test flight of our new unmanned helicopter that came Max Titan.

Our results for the first quarter, representing strong start to 2021 as we look ahead, we have continued confidence and our performance and the expected ramp up as we move through the year based on a meaningful recovery and our commercial aviation business and the second half.

Before turning the call over to Rob I would also like to provide and update on some of our R&D initiatives as we outlined initially as part of our industrial distribution divestiture in 2019, we saw a tremendous opportunity to refocus our efforts to build a lean and efficient command and drive shareholder value through innovation, which has been at the core of our culture throughout our rich.

<unk> 75 year history, we have diligently been investing and various R&D projects and I am pleased to provide and update on two exciting opportunities we have been working on.

First during the quarter, we opened our new production and sell for products manufactured using a proprietary titanium diffusion hardening process or th.

And with our unique GTH process, we're able to provide highly efficient high load components using a slightly material that provides both improved durability and weight reduction for our customers.

While our initial efforts are focused on marketing this technology to our core aerospace and defense customers. We are encouraged by initial feedback from prospective industrial and medical customers.

We believe this type of innovation will prove to be a meaningful driver and strong differentiator for command and I would like to congratulate development team for its incredible efforts and bringing this product to market.

Second we continue to make investments and the development of our unmanned and autonomous cargo technology.

As mentioned earlier, we completed the first test flight of our new unmanned and autonomous K Max tightened in April. This system is designed for rugged applications with lift capability of up to 6000 pounds.

This test advances our position as a leader and unmanned lift, allowing both our commercial and military customers the ability to operate and Thomas Lee and any location or weather.

In addition to our heavy lift aircraft, we recognize the opportunity we have to leverage our core software technology and we have begun development of a new air lift application, which will serve a much wider addressable market. This next generation purpose built UAS addresses medium duty lift requirements and is expected to provide a.

<unk>.

And is substantially higher unit volumes.

To support this effort and coordination with our customers, we've committed and an incremental $3 5 million and additional R&D spend in 2021.

Although it is a bit early to disclose specifics we believe each of these initiatives has the capability to be meaningful contributors to our overall product portfolio and the coming years, and we look forward to updating investors on developments in the coming quarters now I will turn the call over to Rob for a closer look at the numbers Rob.

Thank you Ian and good morning, everyone.

Today I'll walk you through our first quarter results before turning to our outlook for the remainder of 2021.

During the first quarter net sales from continuing operations were $171 6 million down 17, 2% when compared to $207 3 million and the prior year.

Organic sales, which exclude sales associated with our former UK operations decreased 14, 5%.

As expected our first quarter results were impacted by the adverse effects of COVID-19 on our commercial aerospace products and lower <unk> volumes, partially offset by an increase and our industrial markets and favorable performance on R. J P of USG contract as we close out our option and 14 contract.

As Ian has commented we are pleased to see both our medical and industrial end markets begin to recover as economic activity rebounds, and COVID-19 vaccines continue to rollout.

Turning to our end markets defense sales were down 22% and the first quarter of 2021, compared with a year ago period, and down 10, 7% sequentially.

The decrease was driven by fewer overall deliveries of our joint programmable fuze, and the mix of USG and Tcs sales.

And as a result was in line with our expectations as the prior year included higher volumes and Dcs fuses and reflects the quarterly fluctuations, we normally see and our GPS program.

As expected sales on.

Commercial business and general Aviation markets were 24, 2% lower when compared to the year ago period, and down 15% sequentially while.

While we continue to forecast sales of our commercial aviation products to recover through the first half of the year, we expect a more meaningful rebound and the back half of 2021.

In addition, our diverse product portfolio and broad range of platforms, we support general and business aviation are expected to partially offset these declines.

Sales and our medical end markets were relatively flat compared to the prior year period and increased sequentially 22, 8%.

And we anticipate continued recovery in this market over the course of the year and are encouraged by the order rates, we have seen for these products.

And finally sales and our industrial end markets were up nine 5% from the year ago period, and five 8% sequentially driven by improved demand for our miniature bearings and we have seen strong order rates from these products as overall global economic conditions continue to improve.

Gross margin for the quarter was 38% compared to the 32, 7% and the prior year period.

190 basis point decrease over the first quarter of 2020 was primarily driven by the sales mix of <unk>, which was weighted more heavily to our higher margin Dcs sales and the prior year.

SG&A for the period decreased $16 million from the first quarter of 2020, and more importantly decreased $4 million sequentially.

As a percentage of sales SG&A was 26, 2%.

One basis point decrease from the fourth quarter of 2020.

Restructuring and severance expenses and the period was $1 4 million compared to $1 8 million and the first quarter of 2020 as we continue to take actions to manage our cost structure and drive improved profitability.

Adjusted EBITDA from continuing operations and the first quarter was $17 1 million or 10% of sales compared to $26 2 million or 12, 6% of sales and the first quarter of the prior year.

Sequentially, our efforts to maintain gross margin, while controlling SG&A allowed us to improve our adjusted EBITDA margins on a lower sales volume we saw on the first quarter.

We continue to closely manage our cost structure and are continually evaluating our business for cost reduction opportunities, while ensuring we continue to make incremental <unk> investments on some of our key programs to drive future growth.

On a consolidated basis, we recorded operating income of $5 6 million compared to an operating loss of $4 4 million and the first quarter of the prior year.

This result was impacted by lower TSA costs, and the absence of nonrecurring costs associated with our <unk> acquisition.

As mentioned previously with the sale of distribution and we agreed to provide certain services. During the transition period, we have substantially completed all of these activities. During the first quarter of 2021 and expect final closeout of this agreement and the near term.

We recorded diluted earnings per share from continuing operations of <unk> 29.

On a GAAP and net adjusted basis compared to a diluted loss per share of <unk> <unk> or <unk> 48.

Earnings on an adjusted basis and the prior year day.

Adjustments and the current quarter included restructuring severance and cause severance costs associated with the sale of our distribution and the finalization of the loss on our sale of our UK composites business.

During the quarter, we had free cash flow usage of $7 1 million compared to a usage of $61 million and the prior year period, when adjusted for the 25 million and retention payment made to <unk> employees and the first quarter, we generated adjusted free cash flow of $18 million.

Our results benefited from improved collections in the quarter more specifically the receipt of approximately $53 million and payments on outstanding J P F receivables.

Our full year outlook for 2021 remains unchanged from our prior expectations inclusive of the three and $5 million of additional R&D expenses associated with the development of our unmanned technologies Ian mentioned earlier we.

We are encouraged by our performance and the first quarter and see positive signs, which provide confidence and expected recovery and the back half of the year.

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

Thanks, Rob and while the end markets. We serve continue to recover from the impact of the global pandemic, we performed well and the first quarter and delivered results above our internal expectations.

We remain focused on implementing our operational excellence and model across all our businesses. This is designed to drive improved EBITDA margin free cash flow and return on invested capital and we're starting to see positive results we are poised.

Meaningfully improved consolidated performance as the year progresses, particularly and the back half of the year as volume and many of our highest margin products begin to accelerate.

As a result, we are on the path to a leaner cost structure with higher profitability.

And with an even stronger portfolio of businesses and product lines. Our continued R&D development efforts will allow us to accelerate our growth strategies and the coming years I'll now turn the call back to Jamie.

Thanks, Dan Operator May we have the first question. Please.

Operator.

Hi, Steve.

Oh, Hi, and I Didnt hear announcements so good.

Thanks, and you said each of the three initiatives you mentioned could be meaningful contributors over time.

Could you rank those by timing and market opportunity and just help us frame up reasonable expectations for the benefits.

Yes, Steve I can and.

Said three I I was talking about two on I'm, not sure where the third and th and the tightened right I'm sorry, yes, yes.

Th right now is like I said, we've got the first self certified this is Ben and worked for several years very strong engineering around it and proprietary level of material science.

This year is very marginal we're just introducing a certain customers, we've got some little bit of incremental sales and there but nothing significant.

I would say that's more of a medium term that's in the next two to three years to really see that ramp up significantly.

And when it comes to.

The other two which came back.

And the tightened program.

That cash.

Testing and development and funding by the Marine Corps is and work. This year like I said, we just had our first successful test flight, we've got a big demo later in the year.

On timing why it's hard to tell but probably by the end of next year is when we wanted to see significant or not significant but kind of better level of funding to take it to the next level of development on it and operational prove out.

The other opportunity.

And to me is.

Something that again, we are this is not concept stuff, we are already and the development phase I think thats also a situation where we're funding that internally this year.

And next year with the intent that the services will then partner with US by the end of next year going into year, three and four and five year window on that opportunity, we would expect to see sales.

Got it.

And this maybe a tough question to answer, but as you've come to understand the portfolio and and just how youre thinking about potential M&A.

How are you thinking about longer term organic growth.

This steady low single digit growth with some M&A on top or do you envision this portfolio being more mid to high single digit growth given your end market exposures, just trying to get a sense for reasonable expectations.

No I understand I think it depends on the market and it's hard to tell right now and the segments that we're and so for example, I think everybody understands kind of worried defense hits and the cycles that that goes through.

I think for us it's on that relative to the two initiatives I just talked about that's going to drive some I think higher.

Level.

<unk> for us and that near to longer term longer term being at three to five year window the commercial.

Business I think is going to recover very nicely again, we're still waiting for Q2 to see how things play out, but we're very optimistic and very encouraged by what we're seeing so far.

I think what we're going to see.

Stronger low double digit growth is and the medical side. If you look at kind of the trends right now and the market reports, we're getting we've got a little bit of content on pacemakers. For example, but we've got significant content on neuro transmitters and Thats a segment debt again.

Again, our businesses feel very comfortable is going to be growing and anywhere from 9% to 11% range in the next five years.

And industrial I think somewhere in that same neighborhood quite frankly.

We're going to see better growth and next three to five years.

That's really good detail on and I guess, just as you net that out do you does that bring the portfolio back to kind of low to mid single digits, just organically on a normalized basis.

Yes.

Kind of predict more of a kind of higher single digit.

Performance on average.

Great and last one from me and more near term you said bearings and spring sales and contact should have much have have a much better back half do you expect that both <unk> and <unk> can be up year over year or is that more likely just <unk> given how you see the ramp.

And again I'll look at the numbers.

Closer I think we're probably going to be year over year.

Perhaps a little bit better depending on on how the ramp goes.

But that's hard to tell right now.

Yes, Steve This is Rob I think.

We're certainly the second half relative to first half, we're expecting a very significant ramp in particular on the commercial markets.

And look at our order rates sequentially and those markets relative to where we were in the fourth quarter and seeing very significant levels of growth both in our medical and.

And commercial market and we're really across all of the units within our specialty bearings. So we're very encouraged by that.

And so.

And I think just following up on what Ian was mentioning and do it.

Expect to see kind of year over year improvements.

And in the back half of the year and some of that will also come down to timing of K Max deliveries.

Michael on that.

I will also play a meaningful role and as you know given the sale point there that can move the needle.

Plus minus.

Alright. Thanks.

Thank you, Steve and thanks, Steve.

Thank you wanted to enroll from any of you wish to ask a question at this time. Please press Star then one on you touched on PR firm on that.

Question comes from COVID-19.

And with Alembic Global your line is open.

Hey, good morning, and and Robin Jamie.

Hey, guys I, just wanted to get a little bit better feel for the second quarter.

So we've got this kind of 11% sequential drop and backlog here part of it was J P. F. I guess running off and I think part of it another big chunk looks to be bearings kind of running down are you expecting backlog to grow and the second quarter and.

Because new bearings orders coming in and are you expecting sales to be up sequentially also from the first quarter.

Yes, Pete this is Rob a couple of things.

Our current expectation and to see.

And Q2 over Q1.

That is our expectation the other thing to keep in mind is.

As we transition and our portfolio over time towards on the bearing side as.

His wallet and when we think about our business with policy on that market. Those are much shorter lead cycle businesses in general so.

What I can tell you is that sequentially.

We did see order rates up very significantly and both of those and.

We don't see anything thats not expect that to continue as we roll through the balance of the year as a matter of fact for Q2.

We feel pretty good about the outlook for that quarter.

And just given the visibility we have right. We're sitting here in early May we haven't we have not rolled up April results as yet.

But certainly and our reviews with the P&L leads.

We remain confident and our forecast, which is why we are holding the outlook.

Yes at this point.

Okay. Okay. So the lead times are so short on these bearings and medical products.

You could book and ship it within the quarter and we would never even see it at the end of quarter backlog is what youre, saying.

Thats correct, I mean that I mean, there are certain orders.

We will go over quarter ends, but yes, we absolutely see within quarter orders and ship, yes, okay and the.

Other one.

And I feel like I'm reading, a lot about the bite and administration.

Having done its review of Middle East weapon sales.

It seems like Theyre looking to kind of lift restrictions pretty quickly here.

And from what Im seeing or are you guys seeing that.

Are your restrictions on your fuse orders from the Middle East do you expect it to be lifted and would that be upside to revenue. This year or can you guys have a good sense on what's going on.

Yes, I think we're seeing the same things.

Pete and and again certain countries are alright differently and ships and not to go on each country per se, but to your point and.

And I've seen this before this exact same cycle and I think I know I said this last time and my expectation is that you go through about a 8% to nine month window of kind of everybody kind of pausing cranking down and things and then they start to loosen up because theres significant relationships we have.

Certain countries have already reorganized and re establishing relationships with new administration. So I'm encouraged by that and again. These are orders that hasnt been cancelled they've just been secondly on hold so.

I would be.

My sense is debt.

And this year.

It's a it's probably 50 50, depending on what happens, but certainly by next year those things will start to open up again.

Okay. Okay.

Is helpful. I appreciate it.

And then just last one from me I guess.

Do you guys have a sense of obviously, we've still got a lot of 737 Max is that Boeing has to deliver from its own inventory do you guys have a sense of.

And if theres a lot of your own product still and the supply chain and it needs to be shipped still or do you get the sense that for your product and particular the supply chain.

Stocking has occurred and so.

And particularly for narrow body aircraft youre going to see that strong demand come through kind of and the back half of the year is that how you guys are thinking or.

Yes, and I'll tell you. This is Rob I mean, we have seen a level of sequential improvement and our 707 Max orders.

Granted at lower levels than where we had been certainly before the pandemic and before Boeing had their issues with 70% of the Max we.

We do anticipate as volume begin their ramp towards 31 a month.

And which they expect to achieve and the early part of next year.

That we will see certainly a back half of the year improvements and 737, Max and we have very good content on that platform and.

And to your point, the rebound and commercial.

Whether it be Boeing whether it be Airbus.

And it's going to play and in particular and narrow bodies I think people are generally.

Expecting kind of flat, let's call it on <unk>.

787, or $850 five per month, and those expectations have not changed and.

Following us.

Hopefully going to be able to clear up to 787 issues relatively quickly.

As it relates to some of the surface issues that they're working with spirit on.

Shouldn't be a long term issue. So we remain very encouraged by how things are playing out and of course.

How the pandemic plays out how the vaccine rollout on <unk>.

<unk> and what that really means will be a large.

Factor and how this plays out through the balance of 2021.

Alright, okay. Thanks for the color guys.

Thanks, Steve.

Thank you.

And comes from Seth <unk> with Jpmorgan. Your line is open.

Great.

Thanks, very much and good morning, everyone.

I guess on the.

Hi.

On the J P F.

It looks like the deliveries and the quarter kind of.

Annualized to something that's on the guidance range.

As we move through the year.

And kind of how does the mix change and then.

Having.

<unk> reached the <unk>.

And one of the labs when do you expect and next.

<unk> order to come in.

Alright, yes.

First part of your question to your point the first quarter was it was a different mix.

The rest of the year will be a.

Shift will be more Dcs, which is nice we've got line of sight to all of that like you said option 14 ended last year option and <unk> is in play that it goes into 2022 options and 16 that were working on this year will take us into 2023 and that's that.

It's just USG side, Fms and we still have a range of opportunities that we're working on for Dcs Dcs again and.

And I've said this before it's a little bit different dynamic still encouraging because those orders are lower volumes the cycle time around those is shorter.

Try and they try to keep it on a congressional notification level. So.

Plenty of folks and the pipeline, we talked about the administration their position on that we anticipate that loosening up a little bit.

Yes, youll see that shift be favorable and second half of the year.

Right and are those options 15, and 16 are those are those in the backlog.

So yes, so option that does drop option and <unk> is in the backlog options and 16 is not <unk>.

Currently expect the option and 16 award to occur and the second half of this year.

And as Ian mentioned that'll take production for 2023.

Alright.

Okay, Okay, great and then.

One thing I guess since.

Since the medical piece of the business.

The incremental piece that came in with policy all right around the time and the pandemic and.

Backups on almost flat year on year, when you think about where we're sort of a normal run rate is.

For that business.

Where is that relative to sort of this.

Low twenty's per quarter that we saw in Q1, 'twenty and Q1 'twenty one.

Yes.

Yes, that's a good question and I would say certainly as we indicated we're kind of back to kind of let's call. It pre pandemic levels.

There is some work to be done there.

There is still even though the elective surgeries and other and procedures are rebounding, they're still below what we would have forecasted let's call it a year ago right.

Given there is still some reluctance for people to visit their physicians COVID-19 is still very much and factor.

When we bought <unk> and.

We certainly continue to view it this way over the long term, we expect that business to deliver let's call. It high single digit growth year over year and so to me that is really the long term perspective, we have the right BD efforts and product development efforts.

So we feel very confident with that business long term work zone.

Yeah, and Seth just talking with the teams recently and looking we've actually got a cycle of strategic business reviews, coming up and just going be exciting for us this month, but.

The market and the U S seems to be covering a lot faster.

Pacific Rim Asia Pacific actually it's also a very strong growing market the addressable market for <unk>.

Is is massive so we're excited to see and really amp up their top line over the next couple of years.

Okay, great great.

And then maybe just as the last one on.

What are you seeing out on the M&A landscape of debt.

Yeah, I guess kind of.

How difficult is it to make progress on transactions before we see kind of more normalized type of numbers from companies coming out of the pandemic.

And how does the pipeline market.

For us.

And certainly the M&A pieces it is important for us.

We've we've redefined slightly our filters.

And we're really looking hard at I think a lot of great opportunities our funnel to your point is.

And relatively full.

And so we've got some exciting opportunities out there certainly some things and the near term that we're very excited about we continue to assess and we want to make sure that they are hitting all the right criteria around free cash flow and conversion and net EBITDA margin and net ROIC.

And our ROIC over time, so we're not going to.

Just go after anything for the sake of going after something we really want to fit into the strategy of our business, which is really on a highly engineered parts, which we've talked about and again the pipeline. So far looks looks great and we continue to assess it and we're excited about what's to come.

Excellent thanks very much.

Thank you Seth Thanks Seth.

Thank you once again, if you wish to ask a question at this time. Please press Star then wondering you touched on telephones.

Our next question is a follow up from Steve Barger with Keybanc capital markets. Your line is open.

Hey, thanks.

Going back to the orders that are on hold if that opens up do you have the capacity to ramp up right away or would it take you a while to work those back into the production schedule.

We do we.

We have the capacity.

The folks at both of our sites and a very nice job certainly our facility down in Florida.

Massive lean effort, we've redone the lines so the efficiency and productivity is very strong right now.

And should those orders come in and we do have the ability to ramp up.

Okay.

And I know you've been adding resources to the M&A team and you've just said you've reworked some of the filters can you just talk about what some of those filters are gating factors are.

That you are having the team focus on four deals that theyre going to take it to the next level of diligence.

Yeah.

And in terms of the filters.

We really looked at it from the criteria. We currently had was solid we went through and exercise that I described before a very strong exercise, we really looked at the portfolio of our businesses. We looked at the things that really provide a total shareholder return statistically relative to our peer groups.

And that into our filters.

So depending on which side of the business, we're looking at or what type of business. We really wanted to understand what it takes to get to top quartile performance over a five year window and that's that's really the center target for us and Theres, a plenty of opportunities that fit that criteria, which we're looking at right now.

And again back to the.

The price of those multiple around it.

On the synergies that we think we can achieve those.

Those are all part of that.

<unk> and <unk>.

And.

Prove the capability of our M&A team.

To look at those things.

And we'll see how it plays out here and the near term.

And I know you can never predict the timing of M&A, but.

And it's clearly a focus for you right is it fair to say you would be disappointed if you can't close the deal and the next few quarters.

I think Thats fair.

Yeah, Steve just just one one thing and this is Rob I would just want to make sure that's very clear.

Our capital deployment priorities are unchanged right, we've been very clear that M&A will play a very integral role.

And as Ian mentioned, and we will retain our discipline there.

So the pipeline is active but we are also looking at and internal investments obviously return on capital to shareholders continues to play an important part of the overall return picture for our investors.

So we remained highly disciplined and.

And this effort.

Understood. Thanks.

Thanks, Steve.

Thank you and I'm currently showing no further questions at this time and I'll turn the call back over to Jamie Coogan for closing remark.

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

This concludes today's conference call. Thank you for participating.

Right.

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And then.

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And then.

[music].

Good day, and thank you for standby and welcome to the come on Corporation first quarter to go from quarter, One conference call on.

At this time all participants are all on the commodity milk.

After the speaker's presentation, there will be a question and local fashion.

I'll ask a question during the session you will need to press star one on your telephone.

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Have you acquired and further assistance Please press star zero.

Oh, and I always kind of comparable to what you think a day, Jamie Coogan, Vice President Investor Relations and corporate development. Please.

Please proceed.

Good morning.

I'd like to welcome everyone to commands first quarter 2021 earnings call.

Conducting the call today are Ian Walsh, Chairman, President and Chief Executive Officer, and Rob Starr Executive Vice President and Chief Financial Officer.

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

Statements of future economic performance and assumptions underlying these statements regarding the company and its business.

The company's actual results could differ materially from those indicated and 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 Companys first quarter 2020. One results included on form 10-Q, and the current report on form 8-K filed yesterday evening together with our earnings release.

We also expect to discuss.

Certain information.

Okay.

Thank you Jamie.

Morning, everyone and thank you for joining our first quarter 2021 earnings call.

I'd like to begin today's call with a brief summary of the quarter.

Followed by operational updates and our key product categories and an update on a couple of our R&D efforts.

I will then turn the call over to Rob for a more detailed discussion of our financial results for the quarter.

Relative to our internal plan and the guidance, we detailed our fourth quarter call. We are off to a good start in 2021 with sales of $171 6 million and earnings per diluted share of 2009.

These results ran modestly ahead of our expectations, particularly on the profit line, which benefited from the timing of customer deliveries of favorable closeout of option 14 of our GPS USG contract and strong cost control efforts.

Compared to the prior year net sales declined 17, 2% with organic sales down 14, 5%.

This was expected as we anticipated fewer deliveries this quarter for our GPS program and our commercial aviation products faced a tough comp versus Q1, 2020, which was minimally impacted by the pandemic.

These declines were partially offset by recoveries and demand from our medical and industrial products.

Recall and 2021st quarter J P. S volume was weighted to our higher margin Dcs orders.

Despite lower sales our first quarter results benefited from our comprehensive cost control efforts with adjusted SG&A as a percentage of sales remained flat sequentially.

Turning to our product operating offerings and beginning with our specialty bearings products.

And as anticipated sales were down compared to the first quarter of 2020 due to the impact of COVID-19.

And our self lubricating bearings continue to be impacted by pandemic as they are sensitive to commercial aerospace volumes.

This headwind was partially offset by recoveries and our industrial bearings led by strong performance from our miniature bearings and engine aftermarket components and we expect a strength and these two product categories to continue through the remainder of 2021.

Similar to bearings, we continue to expect improved performance for these products and the balance of 2021, particularly in the second half.

Turning to our joint programmable fuze program, we delivered approximately 8100 fuzes during the quarter below the 10000 units we delivered in the prior year with less favorable profit contribution due to the mix of USG and Dcs fuses.

We are on plan to deliver 30000 to 35000 fuzes this year consistent with historical delivery levels for this product.

Looking at our K Max program, we delivered one aircraft during the period and for the full year, we continue to expect to sell four aircraft in total.

We remain optimistic about the prospects for both manned and unmanned K Max programs and in April we completed the first test flight of our new unmanned helicopter TK Maxx Titan.

<unk> 75 year history, we have diligently been investing and various R&D projects and I'm pleased to provide and update on two exciting opportunities we have been working on.

First during the quarter, we opened our new production and sell for products manufactured using a proprietary titanium diffusion hardening process or th.

And with our unique PVH process, we're able to provide highly efficient high load components. Using this lightweight materials that provides both improved durability and weight reduction for our customers.

Second we continue to make investments and the development of our unmanned and autonomous cargo technology.

As mentioned earlier, we completed the first test flight of our new unmanned and autonomous K Max tightened in April. This system is designed for rugged applications with lyft and capability of up to 6000 pounds.

This test advances our position as a leader and unmanned lift, allowing both our commercial and military customers the ability to operate and Thomas Lee and any location or weather.

In addition to our heavy lift aircraft, we recognize the opportunity we have to leverage our core software technology, and we began development of a new air lift application, which will serve a much wider addressable market. This next generation purpose built UAS addresses medium lift duty lift requirements and is expected to provide a potential.

And for substantially higher unit volumes.

To support this effort and coordination with our customers we have committed at an incremental $3 5 million and additional R&D spend in 2021.

Although it is a bit early.

And to disclose specifics we believe each of these initiatives has the capability to be meaningful contributors to our overall product portfolio and the coming years, and we look forward to updating investors on developments in the coming quarters now I will turn the call over to Rob for a closer look at the numbers Rob.

Thank you Ian and good morning, everyone.

Today I will walk you through our first quarter results before turning to our outlook for the remainder of 2021.

During the first quarter net sales from continuing operations were $171 6 million down 17, 2% when compared to $207 3 million and the prior year.

Organic sales, which exclude sales associated with our former UK operations decreased 14, 5%.

As expected our first quarter results were impacted by the adverse effects of COVID-19 on our commercial aerospace products and lower <unk> volumes, partially offset by an increase and our industrial markets and favorable performance on our <unk> USG contract as we closeout, our option and 14 contract.

As Ian has commented we are pleased to see both our medical and industrial end markets begin to recover as economic activity rebounds, and COVID-19 vaccines continue to rollout.

Turning to our end markets defense sales were down 22% and the first quarter of 2021, compared with a year ago period, and down 10, 7% sequentially.

The decrease was driven by fewer overall deliveries of our joint programmable fuze, and the mix of USG and Tcs sales.

And as a result was in line with our expectations as the prior year included higher volumes and Dcs fuses and reflects the quarterly fluctuations, we normally see and are Jcs program.

As expected sales on.

And our commercial business and general Aviation markets were 24, 2% lower when compared to the year ago period and down 15% sequentially.

And we continue to forecast sales of our commercial aviation products to recover through the first half of the year, we expect a more meaningful rebound and the back half of 2021. In addition, our diverse product portfolio and broad range of platforms, we support general and business aviation are expected to partially offset these declines.

Sales and our medical end markets were relatively flat compared to the prior year period and increased sequentially 22, 8%.

And we anticipate continued recovery in this market over the course of the year and are encouraged by the order rates, we have seen for these products.

Finally sales and our industrial end markets were up nine 5% from the year ago period, and five 8% sequentially driven by improved demand for our miniature bearings. We have seen strong order rates from these products as overall global economic conditions continue to improve.

Gross margin for the quarter was 38% compared to the 32, 7% and the prior year period.

190 basis point decrease over the first quarter of 2020 was primarily driven by the sales mix of <unk>, which was weighted more heavily to our higher margin Dcs sales and the prior year.

SG&A for the period decreased $16 million from the first quarter of 2020, and more importantly decreased $4 million sequentially.

As a percentage of sales SG&A was 26, 2% a 10 basis point decrease from the fourth quarter of 2020.

Restructuring and severance expenses and the period was $1 4 million compared to $1 8 million and the first quarter on 2020, as we continue to take actions to manage our cost structure and drive improved profitability.

Adjusted EBITDA from continuing operations and the first quarter was $17 1 million or 10% of sales compared to $26 2 million or 12, 6% of sales and the first quarter of the prior year.

Sequentially, our efforts to maintain gross margin, while controlling SG&A allowed us to improve our adjusted EBITDA margins on a lower sales volume we saw on the first quarter.

On a consolidated basis, we recorded operating income of $5 6 million compared to an operating loss of $4 4 million and the first quarter of the prior year.

This result was impacted by lower TSA costs, and the absence of nonrecurring costs associated with our <unk> acquisition.

We recorded diluted earnings per share from continuing operations of <unk> 29 on a GAAP and net adjusted basis compared to a diluted loss per share of <unk> <unk> or 48.

Earnings on an adjusted basis and the prior year day.

Our results benefited from improved collections in the quarter more specifically the receipt of approximately $53 million and payments on outstanding J P F receivables.

We are encouraged by our performance and the first quarter and see positive signs, which provide confidence and the expected recovery and the back half of the year.

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

Thanks, Rob and while the end markets. We serve continued to recover from the impact of the global pandemic, we performed well on the first quarter and delivered results above our internal expectations.

We remain focused on implementing our operational excellence model across all our businesses. This is designed to drive improved EBITDA margin free cash flow and return on invested capital and we're starting to see positive results we are poised.

To meaningfully improved consolidated performance as the year progresses, particularly and the back half of the year as volume and many of our highest margin products begin to accelerate.

As a result, we are on the path to a leaner cost structure with higher profitability.

Thanks, Dan Operator May we have the first question. Please.

Operator.

Hi, Steve.

Oh, Hi, and I didn't hear her announcement, yes. So good.

Thanks, and you said each of the three initiatives you mentioned could be meaningful contributors over time.

Could you rank those by timing and market opportunity and just help us frame up reasonable expectations for the benefits.

Yeah, Yeah, Steve I can and.

Three I I was talking about two on I'm not sure what the third and the th and the tightened right I'm sorry, yes, yes.

Th right now is like I said, we got the first sell certified this is Ben and work for several years very strong engineering around it and proprietary level of material science.

This year is very marginal we're just introducing a certain customers, we've got some little bit of incremental sales and there but nothing significant.

I would say that's more of a medium term that's in the next two to three years to really see that ramp up significantly.

And when it comes to.

The other two which came back.

The Titan program.

And at that cash.

Testing and development and funding by the Marine Corps is and work. This year like I said, we just had our first successful test flight and we've got a big demo later in the year.

On timing wise hard to tell but probably by the end of next year is when we want to see significant or not significant but kind of better level of funding to take it to the next level of development on it and operational prove out.

The other opportunity.

And to me is.

Something that again, we are this is not concept stuff, we are already and the development phase I think thats also a situation where we're funding that internally this year and next year with the intent that the services will then partner with us by the end of next year going into year, three and four so we and five.

On a window on that opportunity, we would expect to see sales.

Got it.

And this maybe a tough question to answer, but as you've come to understand the portfolio and and just how youre thinking about potential M&A.

How are you thinking about longer term organic growth.

No I understand I think it depends on the market and it's hard to tell right now and the segments that we're and so for example, I think everybody understands kind of worried defense sits and the cycles that that goes through.

I think for us it's on that relative to the two initiatives I just talked about that's going to drive some I think higher.

And level.

<unk> for us and that near to longer term longer term being at three to five year window the commercial.

Business I think is going to recover very nicely again, we're still waiting for Q2 to see how things play out, but we're very optimistic and very encouraged by what we're seeing so far.

I think what we're going to see.

Again, our business is feel very comfortable is going to be growing and anywhere from 9% to 11% range over next five years.

And industrial I think somewhere in that same neighborhood quite frankly.

And we're going to see better growth and next three to five years.

That's really good detail and and I guess, just as you net that out do you does that bring the portfolio back to kind of low to mid single digits, just organically on a normalized basis.

Yes.

And kind of predict more of a kind of higher single digit.

Performance on average.

And again I'll look at the numbers all day.

Closer I think we're probably going to be year over year.

Perhaps a little bit better depending on on how the ramp goes.

But thats hard to tell right now.

Yes, Steve This is Rob I think.

We're certainly the second half relative to first half, we're expecting a very significant ramp in particular on the commercial markets.

And look at our order rates sequentially and those markets relative to where we were in the fourth quarter and seeing very significant levels of growth both in our medical and.

And commercial markets and were really across all of the units within our specialty bearings. So we're very encouraged by that.

And so.

And I think just following up on what Ian was mentioning do it.

Expect to see kind of year over year improvements.

And in the back half of the year and some of that will also come down to timing of K Max deliveries.

Michael on that.

I will also play a meaningful role and as you know given the sale point there that can move the needle.

Plus minus.

Yes.

Alright. Thanks.

Thank you Steve Thanks, Steve.

Thank you want to go away from you if you wish to ask a question at this time. Please press Star then one on you touched on telecom.

Next question comes from COVID-19.

And with Alembic Global your line is open.

Hey, good morning, Ian and Robin Jamie.

Hey, guys I, just want to get a little bit better feel for the second quarter.

So we've got this kind of a 11% sequential drop and backlog here part of it was J P. F. I guess running off and I think part of it and not a big chunk looks to be bearings kind of running down are you expecting backlog to grow and the second quarter and.

Because new bearings orders coming in and are you expecting sales to be up sequentially also from the first quarter.

Yes, Pete this is Rob a couple of things.

Our current expectation is to see.

And Q2 over Q1.

And that is our expectation.

The thing to keep in mind is.

As we transition our portfolio over time towards on the bearing side.

As well as when we think about our business with policy on that market those are much shorter lead cycle.

Businesses in general so.

What I can tell you is that sequentially.

We did see order rates up very significantly and both of those and we do.

Don't see anything.

And that expect that to continue as we roll through the balance of the year as a matter of fact for Q2.

So we feel pretty good about the outlook for that quarter.

Given the visibility we have right. We're sitting here in early May we haven't we have not rolled up April results as yet.

But certainly and our reviews with the P&L leads.

We remain confident and our forecast, which is why we are holding the outlook.

Yes at this point.

Okay. Okay. So the lead times are so short on these bearings and medical products.

You could book and ship it within the quarter and we would never even see it at the end of quarter backlog is what you're saying.

Thats correct.

And there are certain orders.

Certainly.

Gulf of quarter ends like yes, we absolutely see within quarter orders and ship, yes, Okay and.

The other one.

And I feel like I'm reading, a lot about the bite and administration.

Having done its review of Middle East weapon sales.

It seems like Theyre looking to kind of lift restrictions pretty quickly here.

From what I'm seeing or are you guys seeing that.

Or youre the restrictions on your fuse order from the Middle East do you expect it to be lifted and.

That would be upside to revenue this year or can you you guys have a good sense on what's going on yes.

Yes, I can.

We're seeing the same things.

Pete and and again certain countries are alright differently and ships and not to go on each country per se, but to your point and on.

And I've seen this before this exact same cycle and I think I know I said this last time.

Expectation is that you go through about a 8% to nine month window of kind of everybody kind of pausing cranking down and things and then they start to loosen up because there are significant relationships we have.

Certain countries have already reorganized and they're re establishing relationships with new administration. So unencumbered by that again. These are orders that hasnt been cancelled they've just been simply on hold so.

And would be.

My sense is that.

This year I think it's a.

It's probably 50 50, depending on what happens, but certainly by next year those things will start to open up again.

Okay. Okay.

That's helpful. I appreciate it.

Last one from me I guess.

Do you guys have a sense of that.

Obviously, we still got a lot of 737 Max is there.

Boeing has to deliver from its own inventory do you guys have a sense of.

And if theres a lot of your own product still and the supply chain and it needs to be shipped still or do you get the sense that for your product and particular the supply chain. The destocking has occurred and so particularly for narrow.

Aero body aircraft, you're going to see that strong demand come through what kind of and the back half of the year is that how you guys are thinking or.

Let me add some color on that yes. This is Rob I mean, we have seen a level of sequential improvement and our 707 Max orders.

Granted at lower levels than where we had been certainly before the pandemic and before falling had their issues with 77 Max.

We do anticipate as volume begin their ramp towards 31 a month.

And which they expect to achieve and the early part of next year.

That we will see certainly a back half of the year improvement and 707, Max when we have very good content on that platform and to your point the rebound and commercial.

Whether it be Boeing and whether it be Airbus.

And it's going to play and in particular as the narrow bodies I think people are generally.

And I'm expecting kind of flat, let's call it.

And on 787 or 850 about five per month.

And as expectations have not changed.

Boeing is I think hopefully going to be able to clarify the 787 issues relatively quickly.

As it relates to some of the surface issues that they're working with spirit on that shouldn't be a long term issue. So we remain very encouraged by how things are playing out and of course.

And how the pandemic plays out how the vaccine rollout on <unk>.

And what that really means will be large.

Factor and how this plays out through the balance of 2021.

Alright, okay. Thanks for the color guys alright.

Great Thanks, and thanks Pete.

Thank you next question comes from Seth <unk> with Jpmorgan. Your line is open.

Great.

Thanks, very much and good morning, everyone.

And I guess on the.

Yes.

Hi.

On the J P F.

It looks like the deliveries and the quarter kind of.

Annualize to something that is on the guidance range.

As we move through the year.

And kind of how does the mix change and then.

Be having.

<unk> reached.

At the end of one of the lots.

And do you expect the next next order to come in.

Alright, yes, Sir.

First part of your question.

To your point the first quarter was it was a different mix.

And the rest of the year will be.

A shift it will be more Dcs, which is nice we've got line of sight to all of that like you said option 14 ended last year.

And <unk> 15 is in play now and it goes into 2020 two options and 16 that we're working on this year will take us into 2020 three and that's just USG side Fms and we still have a range of opportunities that we're working on for Dcs Dcs again is and.

And I've said this before it's a little bit different dynamic still encouraging because those orders are lower volumes the cycle time around those is shorter.

We're trying and they try to keep it on the congressional notification level. So.

Plenty of folks and the pipeline, we talked about the administration their position on that we anticipate that loosening up a little bit.

So, yes, youll see that shift be favorable and second half of the year.

Right and are those options 15 and 16.

Are those in the backlog.

So yeah. So option that is Rob option and 15 is and the backlog options and 16 is not.

We currently expect the option 16 and warrant to occur and the second half of this year.

And as Ian mentioned that'll take production into 2023.

Alright.

Okay, Okay, Great and then one thing I guess.

Since the medical piece of the business.

A lot of incremental piece that came in with policy all right around the time and the pandemic and.

Backup so almost flat year on year, when you think about where we're sort of a normal run rate is.

And for that business.

Where is that relative to sort of this low twenty's per quarter that we saw in Q1, 'twenty and Q1 'twenty one.

Yes, so yes, that's a good question and I would say certainly as we indicated we're kind of back to kind of let's call. It pre pandemic levels. There is some work to be done.

There is still even though the elective surgeries and other and procedures are rebounding, they're still below what we would have forecasted let's call it a year ago right.

Just given there is still some reluctance for people to visit their physicians COVID-19 is still very much a factor.

When we bought <unk> and.

And we certainly continue to view it this way over the long term, we expect that business to deliver let's call. It high single digit growth year over year and so to me that is really the long term perspective, we have the right BD efforts product development efforts.

So we feel very confident with that business long term, where it's gone.

Yeah, and and Seth just talking with the teams recently and and looking we've actually got a cycle of strategic business reviews, coming up and just going be exciting for us this month, but the market and the U S seems to be recovering a lot faster.

Graham Asia Pacific actually it's also a very strong growing market the addressable market for <unk>.

<unk> is massive so we're excited to see and really amp up their top line over the next couple of years.

Okay, great. Thanks.

And then maybe just as the last one.

What are you seeing out on the M&A landscape at that time.

Yeah, you know I guess kind of.

How difficult is it to make progress on transactions before a risky and kind of more normalized type of numbers from companies coming out of the pandemic.

And how does the pipeline market.

For us.

And certainly the M&A pieces it is important for us.

We've we've redefined slightly our filters were really looking hard at I think a lot of great opportunities our funnel to your point is is.

Is relatively full.

And so we've got some exciting opportunities out there certainly some things and the near term that we're very excited about we continue to assess and we want to make sure that theyre hitting all the right criteria around free cash flow and conversion and net EBITDA margin and net.

Oh I see over time, so we're not going to.

Go after anything for the sake of going after something we really want to fit into the strategy of our business, which is really on a highly engineered parts, which we've talked about and again the pipeline. So far looks looks great and we continue to assess it and we're excited about what's to come.

Excellent thanks very much.

Thanks, Ed.

Thank you once again, if you wish to ask a question at this time. Please press Star then one are you touched on telecom.

Our next question is a follow up from Steve Barger with Keybanc capital markets. Your line is open.

Hey, thanks.

Going back to the orders that are on hold if that opens up do you have the capacity to ramp up right away or would it take you a while to work those back into the production schedule.

We do.

We have the capacity.

And the folks at both of our site is on a very nice job certainly our facility down in Florida.

Mass of lean effort, we've redone the lines. So the efficiency and productivity is very strong right now and should those orders come in and we do have the ability to ramp up.

Okay.

And I know you've been adding resources to the M&A team and you've just said you've reworked some of the filters can you just talk about what some of those filters are gating factors are.

That you are having the team focus on for deals that are going to take it to the next level of diligence.

Yeah.

In terms of the filters.

Really looked at it from the criteria. We currently had was solid and we went through and exercise that I described before a very strong exercise, we really looked at the portfolio of our businesses. We looked at the things that really provide a total shareholder return statistically relative to our peer groups, we've mapped that into our <unk>.

Filters, so depending on which side of the business, we're looking at or what type of business. We really wanted to understand what it takes to get to top quartile performance over a five year window and that's that's really the center target for us and Theres, a plenty of opportunities that fit that criteria, which we're looking at right now.

And again back to the <unk>.

Rice of those the multiple around it.

On the synergies that we think we can achieve.

And those are all part of that we have and.

And <unk>.

Prove the capability of our M&A team to.

And to look at those things.

And we will see how it plays out here on the near term.

And I know you can never predict the timing of M&A, but.

It's clearly a focus for you right is it fair to say you would be disappointed if you can't close the deal and the next few quarters.

I think Thats fair.

Yeah, Steve just just one one thing and that is Rob I would just want to make sure that is very clear is our broader capital deployment priorities are unchanged right. We've been very clear that M&A will play of our integral role.

And as Ian mentioned, and we will retain our discipline there.

So we remained highly disciplined.

And this effort.

Understood. Thanks.

Thanks, Steve.

Thank you and I'm currently showing no further questions at this time I will turn the call back over to James Coogan for closing remark.

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

This concludes today's conference call. Thank you for participating on this.

Cool.

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