Q3 2022 Kaman Corp Earnings Call

November 2, 2022

The conference will begin shortly to raise your hand during Q&A you can dial star one one.

[music].

Good day, ladies and gentlemen, and thank you for standing by welcome to the Command Corporation third quarter 2022 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question during the session you need to press star.

One one on your telephone keypad at this time I would like to turn the conference over to MS. Terri Bair with Baird you may begin.

Good morning, welcome to come in third quarter 2022 earnings call.

Leading the call today are Ian Walsh, Chairman, President and Chief Executive Officer, and Jamie Cook, Senior Vice President and Chief Financial Officer.

Before we begin please note that some of the information discussed during today's call will consist of forward looking statements setting.

Setting forth our current expectations with respect to this each of our business the economy and other 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 in any forward looking statements due to many factors the.

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 2022 results included on Form 10-Q, and our current report on 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.

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

Finally, we posted an earnings supplement on our website, which provides additional context on our financial performance you can find this presentation at Www Dot command Dot Com splashed investors last quarterly earnings call.

Now I'll turn the call over to Ian Walsh.

Thank you Carrie.

Good morning, everyone and thank you for joining us for our third quarter 2022 earnings call.

I'll start by providing highlights on the quarter, and then share some operational and business updates along with some respect of accomplishments and innovations each segment before passing the call over to Jamie for a more detailed discussion of our financial results and outlook for the remainder of the year.

As you may be aware in September we completed the acquisition of aircraft wheel and brake the largest in the history of our company.

They joined our engineered products segment and will be a very meaningful part of our company going forward when.

When you consider 2021 results they add approximately 10% towards sales and nearly 30% to our adjusted EBITDA.

This transaction has created a unique opportunity to expand our highly engineered product portfolio by investing in our high margin quality asset with potential for growth.

For more than 80 years aircraft, we wouldn't break has been a trusted provider of mission critical wheel and brake technology products and solutions. They have a strong OEM and aftermarket portfolio of more than 100 platforms specializing in wheels, and brakes and latest hydraulic components for helicopters fixed wing and UAV aircrafts.

They provide customized proprietary designs protected by intellectual property and are actively working to win new business, one such area for growth is or isn't carbon brakes for future military and civilian applications.

The benefit of carbon brakes compared to steel Briggs.

They're lightweight package.

Well.

Standby.

Or do we need to go line.

Okay.

Yes, Sir.

Are we.

Turning over.

Okay.

Good morning, welcome to <unk> third quarter 2022 earnings call.

The call today are Ian Walsh, Chairman, President and Chief Executive Officer, and Jamie Coogan, Senior Vice President and Chief Financial Officer.

Before we begin please note that some of the information discussed during today's call will consist of forward looking statements.

With our current expectations with respect to the future of our business the economy and other events.

The company's actual results could differ materially from those indicated in any forward looking statements due to many factors.

Most important of which are described in the company's latest filings with the Securities and Exchange Commission, including the company's third quarter 2022 results included on Form 10-Q, and a current report on 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 reconciliations to the company's GAAP measures are included in the earnings release filed with yesterday's 8-K.

Now I'll turn the call over to Ian Walsh.

Thank you Carrie.

Good morning, everyone and thank you for joining us for our third quarter 2022 earnings call.

I'll start by providing highlights on the quarter, and then share some operational and business updates along with some respective accomplishments and innovations each segment before passing the call over to Jamie for a more detailed discussion.

Our financial results and outlook for the remainder of the year.

As you may be aware in September we completed the acquisition of aircraft deal and break the largest in the history of our company.

They joined our engineered products segment and will be a very meaningful part of our company going forward.

When you consider 2021 results they add approximately 10% towards sales and nearly 30% to our adjusted EBITDA.

EBITDA.

This transaction has created a unique opportunity to expand our highly engineered product portfolio by investing in our high margin quality asset with potential for growth.

For more than 80 years aircraft wheel and brake has been a trusted provider of mission critical wheel and brake technology products and solutions they.

They have a strong OEM and aftermarket portfolio of more than 100 platform specializing in wheels brakes, Emily's hydraulic components for helicopters fixed wing and UAV aircrafts.

They provide customized proprietary designs protected by intellectual property and are actively working to win new business.

One such area for growth is in carbon brakes for future military and civilian applications.

The benefit of carbon grades compared to steel brakes.

Would that be a lightweight have competitive lifecycle costs offer more landing between overhauls and have increased heat tolerance.

The team has been working to advance carbon brake technology, which will allow them to compete on larger business aircraft platforms, and even E. Vito applications, where weight is imperative.

Now, let me start the business discussion with an update on general market conditions.

And across the commercial business and general Aviation markets continues to show signs of improvement through additional orders for our bearings Springs seals and contacts products in fact sales to Boeing and Airbus were higher for the fifth quarter in a row.

These trends support the higher sales and improved margins, we anticipate over the next few years.

The defense market is relatively stable, while our industrial and medical order rates continue to increase.

Sequentially consolidated performance for the third quarter improved organically with higher sales and adjusted EBITDA.

Performance for the period relative to our expectations was impacted by certain program execution some supplier challenges.

We have identified the most significant areas impacting our results and are working to correct. The issues that are creating the delays.

These issues are the primary driver for the downward revision in our outlook for 2022.

Engineered products posted strong results with both sequential and year over year sales growth. Despite some margin compression due to rising input costs and some supplier challenges that they face.

Our precision products and structures performance fell short for the quarter due to delays associated with the part availability for one component R. J P of program timing satisfaction of technical design changes from our customers on some of our missile fuse programs and a recovery of our aten and a supplier fire, which affected our black Hog program.

Gross margin for the company was 32, 5% relatively unchanged compared to the second quarter, but decreased 260 basis points from the third quarter of 2021.

Compared to the prior year quarterly sales and associated gross profit were lower for a J P and K Max programs, and we incurred an $800000 inventory step up associated with the purchase accounting for aircraft wheel and brake acquisition.

Our engineered product segment continues to deliver excellent results with quarterly sales, increasing 9% compared to the third quarter of 2021 inclusive of aircraft wheel and brake and $4 $4 million of foreign exchange headwinds.

Absent these items sales increased 11% for the period demonstrating the underlying strength of this segment.

Within the quarter, not only with medical demand strong, but sales of commercial bearings also improve.

Rates for many of our products also remain robust backlog. Excluding the addition from aircraft will break has increased nearly 40% since the beginning of the year.

Our employees continue to provide innovative solutions that push the boundaries of application engineering material science and process improvement, allowing us to meet the needs of our customers.

Recently, we have been working on industry 4.0 tools and techniques that next evolutionary step in lean business practices to streamline our capabilities to drive improved throughput and performance.

Additionally, we just implemented an advanced manufacturing technology sale in the third quarter.

This is a dedicated team with dedicated equipment that focuses on creating new processes to improve productivity and margin performance across a range of our most challenging products.

They are also developing cost optimization and industrialization strategy for new products by leveraging the knowledge of process and manufacturing subject matter experts.

This allows us to drive efficiency in our product manufacturing without causing disruption and waste in the production line.

We have seen early successes since implementation of itself.

We have identified savings of 50% to 80% on certain process steps for two of our most more complex bearing products.

Our precision products segment continues its important transition sales and margin in third quarter increased sequentially, but were slightly below our expectations.

During the quarter, we experienced a delay in receipt of a component from one of our suppliers, which changed the timing of shipments for GPS to later in the year and we had previously expected.

Accounts for a meaningful portion of the downward revision in our free cash flow expectations for the full year 2022.

In October we are very excited to announce that we reached another milestone in our strategy to expand a timeless technology in this segment with our purpose built cargo UAV unmanned aerial system.

Ice's Marine Corps selected command to build a cargo UAV prototype for their malls a program.

Marine Corps will be funding the build for the prototype in 2023 and once completed it will undergo a field user capability assessment.

We'll continue to take a stage gate approach to R&D funding.

And have released an additional $4 million for this program in the third quarter.

We believe this will be a major growth driver for Eric vehicles business and look forward to providing an affordable reliable and maintainable logistic vehicle Thomas market.

We are playing the first flight of our full scale cargo UAV demonstrator in the fourth quarter.

Our initial addressable market finished fully autonomous medium lift vehicle is the U S military and special operations command, along with a wide range of commercial applications, such as supporting oil and gas platforms and pipelines search and rescue humanitarian relief in the middle mile delivery for logistics companies.

There is no question that there was a very strong demand signal for our cargo UAV across the defense Department of defense and specific commercial operators.

Our structures segment continues to focus on strengthening operating margins and seeking new more profitable programs that fit our core capabilities. In fact, we have successfully executed on our plan to diversify this segment's program base by securing multiple military aftermarket contracts we expect.

<unk> from this higher margin work to begin in 2023.

For the quarter sales and margins were higher in the second quarter of 2022, however challenges with suppliers and execution of certain programs to lead the level of recovery that we expected in this segment and our ability to meet our plan for the quarter and the remainder of the year.

Within structures, we continue to take the necessary steps to right size our businesses in Jacksonville, We have finished the facility consolidation and in the third quarter, we sold our Mexico operations.

This has lowered operating cost while improving capacity utilization in Vermont, we continue to see strong performance. The team has been focusing on transforming the culture through improved communications and training successfully applying lean tools and process improvements and winning new profitable business.

This has resulted in average productivity year to date of 85% increasing from 81% last year, which is greatly improve their profitability.

Looking ahead, we remain confident that the return of the commercial aerospace market and the durable demand in aviation medical and industrial markets will benefit our high margin engineered products segment.

Vision products will continue to transform and is quickly shifting to autonomous systems and next generation safe and arm products.

Additionally, our structures segment will continue to benefit from our focus on operations Excellence and the addition of new more profitable programs, including more aftermarket.

We are excited about the opportunities before us as we position the company for best in class performance.

Lastly, we are very excited about the strategic investment in aircraft wheel and brake and they've been very pleased with how smoothly. The integration has been thus far.

We are now laser focused on delevering, our balance sheet as quickly as possible. So that we can continue to assess strategic opportunities that provide the highest return to our shareholders.

Now I will turn the call over to Jamie for more detailed discussion of our financial results.

Thank you Anne and good morning, everyone.

Today, I will discuss our third quarter results and provide an update on our outlook for the year.

On a consolidated basis, our net sales in the third quarter were $172 million compared to $161 million in the second quarter of 2022 and $180 million in the third quarter of 2021.

The decline of 4% year over year was largely due to lower sales for us.

J P F and K Max programs, partially offset by increased sales of commercial aerospace bearings.

Adjusted EBITDA in the third quarter was $20 $6 million or a margin of 12% compared to $16 $4 million or a margin of 10, 2% in the second quarter of 2022.

Sequential improvement resulted from higher sales and margins for our GPS program and higher volumes of commercial aerospace bearings in our engineered products segment. Additionally, we saw benefit from our sales and margin of our UA 60 program in our structures segment as the team in Jacksonville started the process of recovering from the supplier fire that impacted their results in the second quarter.

These increases were partially offset by lower profit for our K, Max spares and support program and our precision products segment.

When compared to the third quarter of 2021, adjusted EBITDA decreased 26% and margin declined 350 basis points. The decline resulted primarily from lower <unk> sales volume. Additionally, sales and margin for our defense Barrington K Max program were lower.

Decreases were partially offset by robust sales in the third quarter of 2022 for our commercial bearings.

Now I'd like to walk through each of our segments beginning with engineered products.

During the third quarter, we incurred an inventory step up was approximately $800000 related to the acquisition of aircraft wheel and brake with the remaining $2 $3 million of inventory step up to be taken during the fourth quarter.

Adjusted EBITDA for the third quarter increased to $21 $8 million with a margin of 23, 7% compared to the second quarter volumes increased in the third quarter for bearing products, serving commercial aviation, partially offset by lower sales and associated margins for engine aftermarket products and industrial bearings.

Year over year sales increased 11%, excluding the benefit of $2 $7 million of sales from aircraft wheel and brake in the $4 $4 million negative impact from foreign currency exchange rate.

Adjusted EBITDA increased $300000 and margin decreased 180 basis points.

Sales increased at a slightly lower combined margin for commercial Barrington spring field and contacts for industrial applications for defense and industrial bearing sales and margins decrease.

Incremental margin opportunities have been slightly tempered by some supplier challenges and rising input costs. In this segment. However, we are pleased with the way our teams have been managing these issues to limit the disruption while continuing to meet our customer requirements.

Demand for our spring steals and contacts as well as our commercial bearing products have continued to improve looking ahead. We expect continued strength in this market for the remainder of 2022 order intake during the quarter was was robust with our backlog increasing nearly 40% since the beginning of the year. Excluding the addition of aircraft Wieland break.

In our precision products segment adjusted EBITDA for the third quarter was $6 $5 million with a margin of 14, 1% sequentially results increased in the third quarter due to higher sales and associated gross profit for our <unk> program.

This was partially offset by a decrease in sales and margins for K, Max spares and support in our <unk> program.

Year over year quarterly adjusted EBITDA declined $8 $3 million and margin decreased 920 basis points, primarily due to lower <unk> sales and associated gross profit when compared to the third quarter of 2021, which had a much larger volume for this program. Additionally, sales and margin declined for our K Max program, and we had higher R&D.

<unk> expenses.

We are revising our expected <unk> deliveries for 2022 downward to 20 to 25000 fuses.

Deliveries planned for the second half of the year have been postponed slightly due to Atlanta component from one of our suppliers shifting cash collections for some of the deliveries into 2023.

And structures adjusted EBITDA for the third quarter with $900000 with a margin of two 8% compared to the second quarter sales increased 13% and adjusted EBITDA increased by $900000.

<unk> improved primarily due to increased sales and margin for our Sikorsky you H 60 Blackhawk program.

Year over year results declined from an adjusted EBITDA of $1 $2 million and a margin of three 7%, mostly due to lower sales and associated margin for certain composite programs. This was partially offset by higher sales and margin for our Boeing P. Eight a and rolls Royce programs.

For the remainder of the year.

Playa challenges and program execution are delaying the recovery we expected in this segment, which will impact <unk> earnings and cash flow performance for the full year.

SG&A increased $9 $7 million compared to the third quarter of 2000 $21 million to $49 million or 28% of net sales as a result of higher corporate development cost mostly associated with the acquisition of aircraft Wieland break.

When excluding aircraft willing break SG&A decreased to $38 1 million, which was 23% of sales as we continued to manage cost and seek opportunities to increase efficiencies across the organization.

Diluted earnings per share were <unk> <unk> for the quarter, which was lower than the 14th in the second quarter of 2022 and lower than the 53 in the third quarter of 2021.

On an adjusted basis diluted earnings per share were <unk> 32.

Compared to 31 in the second quarter of the year most of the <unk> adjustment in the third quarter of 2022 relates to costs associated with the acquisition of aircraft wheel and brake.

For the first nine months adjusted diluted earnings per share decreased from $1 45 per share in 2021 to <unk> 77 per share.

The decline from the first nine months of 2022 was primarily within our precision products segment with an impact from GPS of 67 per share and increased R&D spend for this segment of <unk> 13 per share.

These reductions were partially offset by strong performance from the engineered products segment, which represented an increase of 37 per share.

During the quarter, we had cash usage from operations of $6 7 million. This was driven by cash payments and related costs associated with our acquisition of aircraft wheel and brake and delayed collections and structures due to the program execution and supplier delays we've discussed.

Now I'd like to discuss our outlook for 2022.

Even the favorable sales mix and strength, we have seen sales and margins in our engineered product segment are anticipated to be in line with our prior expectations for the year.

In precision products are planned for the year includes the sale of four K Max aircrafts with an expectation that we will sell the two remaining aircraft prior to year end.

Profit expectations for this segment have decreased due to lower margin realized year to date on our missile fuse program and K, Max aftermarket spares and support as well as the $4 million of additional R&D for cargo UAV of which $2 5 million of expense and $1 5 million is for Capex of.

Of these amounts we expect approximately $1 1 million of additional expense and 600000 of additional capex to occur in the fourth quarter.

Lastly, cash flow performance for the segment is expected to be significantly lower due to the delay in supply of a component of our GPS program, which has caused a shift in shipments to later in the fourth quarter was pointing a meaningful portion of our cash receipts to the first quarter of 2023.

Within structures, we are experiencing challenges with supplier and program execution at our Jacksonville, and Wichita State, which has limited the recovery that we had previously anticipated and will result in lower profitability and cash flow generation compared to our prior expectations.

Our revised guidance also includes the expected results from aircraft wheel and brake and the incremental interest expense, we expect in the fourth quarter as a result of the transaction.

Our full year outlook is updated as follows sale.

Sales in the range of 695% to $710 million adjusted.

EBITDA in the range of $72 5 million to $77 $5 million EPS in the range of 95 per share to $1 10 per share and free cash flow in the range of a use of $10 million to a generation of $5 million.

With that.

I'll now turn the call back over to Ian for closing remarks.

Thank you Jamie we recognize the challenges we face today, our teams have the capabilities and the resources to work through our program supplier issues, including enhancing our customer interactions.

I'm confident we're laying the groundwork for a much stronger company that will generate improved EBITDA margin free cash flow conversion and return on invested capital leading to exceptional shareholder returns.

I would again like to welcome the aircraft will embrace team to command and to thank all of our dedicated and talented employees, who are working hard to meet our goals of enabling our customers to achieve greater in all that they do every day.

With that I'd like to open the line for questions. Operator can we have our first question. Please.

Ladies and gentlemen.

Quarter 2022 earnings call.

Leading the call.

Ladies and gentlemen, if you have a question or comment at this time. Please press Star then one one on your telephone keypad again, if you have a question or comment at this time. Please press star one one on your telephone keypad.

Please standby, while we comfort.

The Q&A roster.

Our first question or comment comes from the line of Steve Barger from Keybanc capital markets. Mr. Barger. Your line is open.

Thank you and good morning.

Jamie Steve.

If I look at the full year guide the implied <unk> will be the highest revenue quarter of the year, but EPS will be the second lowest obviously that implies deterioration in some or all of the segments sequentially. So does engineered holdup, well precision and structures deteriorate sequentially or can you talk us through.

Through what we should expect on a segment basis.

So engineered should hold up pretty well, Steve and the expectation is that some of the incremental R&D spend for cargo is going to hit in the fourth quarter, which will drive that down theres going to be some probably some pressure on our K Max and spares.

Performance in the fourth quarter, driving precision products down as well as the potential for some continued deterioration in our legacy missile fuse programs.

That we had talked about impacting third quarter results. There is some expectation that that will continue in the period as well.

Structures performance.

Also as we go through that recovery, there's there's some downward pressure there as well so largely engineered products in line precision products and structures.

Are driving that down.

And youre expecting a loss in structures and <unk>.

On the operating margin line.

On the operating margin line, it's going to be a close call there will probably be closer to breakeven, but it could be a loss.

Okay.

The negative contribution from J P. F was 17 cents in the first quarter 53, and <unk> and now 67, and <unk> and sorry, if I missed this in your comments, but what do you think that will be in <unk> and how should we think about the negative contribution from that program in 2023.

Yes, Steve I got to go back I think in the very first quarter fourth quarter results, we put that in a round about an 86 impact year over year.

Overall from J P F on a downward trajectory.

Again, given the shift in our GTS performance, that's really impacting our cash flow expectations for that program not so much our profit expectations theres been a little bit of deterioration, but largely I think we still expect it to be about an 86% drag plus or minus over the course of the full year.

Yes, It was 67 alone in the <unk> right.

No that was year to date Steve.

Year to date, Okay I understand.

Okay, Yes.

Okay.

Obviously, the year Hasnt unfolded the way you guys would've liked to see but.

And I'm sure you don't want to talk about 2023, but do you have any kind of framework for investors to think about in terms of the roll off of a strong contributors versus the timeline for fixing the non contributors.

Yes, just broadly do you expect revenue growth can you expand gross margin from where this year ends just anything in terms of how youre thinking about 'twenty three.

Hey, Steve Good morning, this is Ian and I apologize everybody for the technical glitches.

Yes, so we're already obviously super focused on 'twenty three.

We had some speed bumps this quarter for sure. The teams are laser focused on correcting those problems, which I think we'll be in good shape by year end.

Regarding 23.

A couple of things one is.

We're in are kind of going in our third year around operational excellence across the board lot of training a lot of focus a lot of improvement. So far we've got demonstrated examples and even quite quite frankly, our structures business as well as some historic performance.

Vermont is shining star right now and some really good work going on engineered products businesses relative to industry four <unk>.

So a lot of efficiency that we expect to pick up next year as we continue to kind of build that capability inside.

<unk>.

Think about the top line for next year I think we're still putting those plans together, we see growth in most of our end markets, which is nice, especially on the on the medical.

In commercial side, which are all rebounding nicely. So again, we always lagged the market there, but we're seeing a nice uptick with single aisles and double ours will come online I think probably in 'twenty four 'twenty five a little bit there.

So top line I think.

I can't tell you the exact number their bottom line, we're definitely looking to see improvement year over year. We've got strong five year plans teams all know what those targets are we just hit a couple of speed bumps this quarter and Steve I'll, just add to that from a cost perspective, we're going to continue to look really hard at our cost structure.

And make necessary changes there and so as we get closer to 2023, where we should we should be able to provide maybe some incremental detail on that as well.

Alright, Thanks, I'll get back in line.

Thanks, Steve.

Thank you. Our next question or comment comes from the line of Larry Solow from CJS Securities.

Your line is open.

Hey, good morning, Larry everybody can you just lots of moving parts.

But just on the guidance can you just take a step back and just clarify so essentially you are.

EBIT on the EBITDA line, just to make it simpler lowering basically midpoint 75 from 96% to $20 million or so.

Can you maybe for starters tell us I assume.

We don't break business has a positive contribution in Q4 I don't know if it did in two weeks.

But I imagine that Q4, there'll be something a few million dollars.

Is it engineered product sounds like it certainly was a little it was.

Strong backlog strong, but seemed like it was a little bit slower than I thought we'd kind of sequential uptick. So is you had mentioned that you still expect that to be in line with full year projections, so as to the.

Net of.

The wheel and brake business and that is essentially.

Yes.

The $20 million and coming out of mostly precision products can you just give us a little more clarification on that.

Yes, so on that we do expect to have a positive contribution from aircraft wheel and brake as that comes online. There's some inefficiencies that result, just through acquisition transition right some overhead rate and sales mix challenges, but roughly that that's going to be in line with their historical performance, maybe a slight slightly lower.

For the full year period.

With that there is when you look at the guide for the full year. It is still a pretty wide range.

Because there are still a number of variables and so what we're trying to make sure as we account for those variables as we as we provide that guide for the full year.

The biggest of those and we talked about it on the call. We've got the supply component issue with J P. App that is shifted out some of our deliveries.

So what we're trying to account for there because of that Theres that theres a shift.

Potentially in some deliveries later in the year, there could be some potential incremental shift there we want to account for that as part of the guide and Additionally, as we mentioned Larry it's really additional risk at precision products and structures on some of our longer term programs.

Primarily focused on those missile fuse programs as.

As well some incremental absorption on some of our other long term structures programs there that could provide some challenge in the in the fourth quarter.

And on the shift on the J P. Specifically does that timing shift.

It sounds like you may still recognize a lot of that revenue in this year, but you just won't get the cash flows that is that correct.

More of a tactical hit.

There is a it's a more significant and meaningful cash flow impact for the full year, just given the shift in timing.

Deliveries and what we are trying to account for is that yes, there could there could potentially be one more shift in that delivery as we as we're trying to recover from the supply component issue that resulted in that initial shift the team feels confident that they resolve that issue.

And they're working hard to make sure that we meet those deliveries.

But right now again, we just want to make sure that as we go to the back half of the year, we're counting crowd the relative risk.

Absolutely and on the supply chain issues. It sounds like it's a little bit it's a mixture some external and some maybe internal as well.

Maybe internally, perhaps you have a better visibility to gauge on that but.

It sounds you got some pretty confident that most of these issues I realize the environment is really tough, but it sounds like.

Where we stand today, you kind of see.

By the end of the tunnel.

And resolution with most of the staff is not the end of the year by early next year.

Yes, let me just some more color there so we.

We have the benefit of time on our side and the supplier fire happened back in March that kind of directly impacted our Sikorsky program.

A lot of outsource parts there that we had to go second source. So those are all coming online now that's good Jamie mentioned there was a single part literally for J P. F. Very critical part we had a failure.

That has actually literally been corrected and approved so now it's just a question of production ramp up to get those things delivered and then we got constraints around boats and paperwork and stuff like that but again those are all coming online last one really that we've been wrestling with is a legacy program. A 10 program, which is working with of course our customer.

A lot of challenges there everything from a technical data package changes old tooling old design coming online new testing. So we've been working through all that and again time is on our side here. So.

Literally working through the final kind of fixes and changes right now to deliver those products between Q4 and early Q1.

Okay great.

I got you here.

On Premier.

Sure.

On some of the new products or maybe thats in the pipeline.

You talked a lot about the cargo you will review this morning, it sounds like certainly some exciting.

Upcoming milestones and move it in progress there.

Thing else I think the titanium products you had spoken about last couple of calls are just new newer products new introductions that we should sort of look forward to over the next if not in 'twenty three 'twenty four.

I'll give you just to kind of a range of some of our are exciting.

Product developments here first obviously cargo as it is a big one for us.

Your milestone win by the team.

With the Marine Corps.

We are working also hand in hand with several commercial operators.

We anticipate some really nice.

Results there in terms of.

Of help and support and potentially orders so a lot of a lot of opportunity there and cargo side for sure but military commercial.

Shifting over to some other things like we've got a lot of strong activity on the medical side with blood circulation pumps in and Michael pumps really good technology, there coming out of our Germany facilities fire burst coming online new content on Gulfstream.

Those are just a few examples of some of the great innovations and concluding quite frankly, a lot of new players in the market. When you look at <unk> and some of the players there so.

Again, we're laying some really strong groundwork line new platforms Flora Flora you guys know that that's a program that's coming out here hopefully this year maybe into next year, we're well positioned on both of those those those Oems.

Great I appreciate all the color. Thank you so much.

Thanks Ray.

Just a point of clarification on the structures comment that was made.

Again, I would not accounting for our the performance of our Vermont facility in there they would actually be incrementally positive overhead structures.

As a result of the strong performance, we've seen out of the Vermont facility.

Thank you I'm showing no additional questions in the queue at this time I would like to turn the conference back over to MS. Carrie bear for any closing comments.

Thank you everyone for joining the command Corporation third quarter earnings call. Today, we're looking forward to talking with you next year about our fourth quarter results.

Hum.

Our outlook for 2023.

Hi, Julien.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may now disconnect everyone have a wonderful day.

[music].

Ask a question during the session you will need to press star one one on your telephone keypad at this time I would like to turn the conference over to MS. Terri Bair with Baird you may begin.

Good morning, welcome to come in third quarter 2022 earnings call, leading the call today are Ian Walsh, Chairman, President and Chief Executive Officer, and Jamie Cuda, and senior Vice President and Chief Financial Officer.

Before we begin please 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 events.

The company's 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 2022 results included on Form 10-Q, and our current report on form 8-K filed yesterday evening together with our earnings release.

Finally, we posted an earnings call supplement on our website, which provides additional context on our financial performance.

You can find this presentation at Www Dot command Dot Com splashed investors last quarterly earnings call.

Now I'll turn the call over to Ian Walsh.

Thank you Carrie.

Good morning, everyone and thank you for joining us for third quarter 2022 earnings call.

Our financial results and outlook for the remainder of the year.

As you may be aware in September we completed the acquisition of aircraft wheel and brake the largest in the history of our company.

They joined our engineered products segment and will be a very meaningful part of our company going forward.

When you consider 2021 results they add approximately 10% towards sales and nearly 30% to our adjusted EBITDA.

This transaction has created a unique opportunity to expand our highly engineered product portfolio by investing in our high margin quality asset with potential for growth.

For more than 80 years aircraft, we wouldn't break has been a trusted provider of mission critical wheel and brake technology products and solutions. They had a strong OEM and aftermarket portfolio of more than 100 platforms specializing in wheels breaks emily's hydraulic components for helicopters fixed wing and UAV aircrafts.

Provide customized proprietary designs protected by intellectual property and are actively working to win new business, one such area for growth is or isn't carbon brakes for future military and civilian applications.

The benefit of carbon brakes compared to steel Briggs.

They're lightweight have competitive lifecycle costs offer more landings between overhauls and have increased heat tolerance.

Team has been working to advance carbon brake technology, which will allow them to compete on larger business aircraft platforms, and even E. Vito applications, where weight is imperative.

Now, let me start the business discussion with an update on general market conditions.

These trends support the higher sales and improved margins, we anticipate over the next few years.

The defense market is relatively stable, while our industrial and medical order rates continued to increase.

Sequentially consolidated performance for the third quarter improved organically with higher sales and adjusted EBITDA.

Performance for the period relative to our expectations was impacted by certain program execution some supplier challenges.

Teams have identified the most significant areas impacting our results and are working to correct. The issues that are creating the delays.

These issues are the primary drivers for the downward revision in our outlook for 2022.

Engineered products posted strong results with both sequential and year over year sales growth. Despite some margin compression due to rising input costs and some supplier challenges that they face.

Our precision products and structures performance fell short for the quarter due to delays associated with the part availability for one component in our GPS program. The timely satisfaction of technical design changes from our customers on some of our missile fuse programs and the recovery of our <unk> and a supplier fire, which affected our black Hog program.

Gross margin for the company was 32, 5% relatively unchanged compared to the second quarter, but decreased 260 basis points from the third quarter of 2021.

Compared to the prior year quarterly sales and associated gross profit were lower for our <unk> programs and we incurred an $800000 inventory step up associated with the purchase accounting for aircraft wheel and brake acquisition.

Absent these items sales increased 11% for the period demonstrating the underlying strength of this segment.

Within the quarter, not only with medical demand strong, but sales of commercial bearings also improve.

Order rates for many of our products also remained robust backlog. Excluding the addition from aircraft Wieland break has increased nearly 40% since the beginning of the year.

Our employees continue to provide innovative solutions that push the boundaries of application engineering material science and process improvement, allowing us to meet the needs of our customers recently, we have been working on industry four <unk> tools and techniques that next evolutionary step in lean business practices to streamline our capabilities to drive it.

Proved throughput and performance. Additionally.

Additionally, we just implemented an advanced manufacturing technology sale in the third quarter.

This is a dedicated team with dedicated equipment that focuses on creating new processes to improve productivity and margin performance across a range of our most challenging products.

We're also developing cost minimization and industrialization strategies for new products by leveraging the knowledge of process and manufacturing subject matter experts.

This allows us to drive efficiency in our product manufacturing without causing disruption and waste in the production line.

We have seen early successes since implementation of itself, where we have identified savings of 50% to 80% on certain process steps for two of our most more complex bearing products.

Our precision products segment continues its important transition sales and margin in third quarter increased sequentially, but we were slightly below our expectations during.

During the quarter, we experienced a delay in receipt of a component from one of our suppliers, which changed the timing of shipments for GPS to later in the year and we had previously expected.

This accounts for a meaningful portion of the downward revision in our free cash flow expectations for the full year 2022.

In October we are very excited to announce that we reached another milestone in our strategy to expand autonomous technology. In this segment with our purpose built cargo UAV unmanned aerial system.

Ice's Marine Corps selected command to build a cargo UAV prototype for their malls a program.

The marine Coe will be funding the build for the prototype in 2023 and once completed it will undergo a field user capability assessment.

We will continue to take a stage gate approach to R&D funding.

And have released an additional $4 million for this program in the third quarter.

We believe this will be a major growth driver for Eric vehicles business and look forward to providing an affordable reliable and maintainable logistics vehicles with Thomas market.

We are playing the first flight of our full scale cargo UAV demonstrated in the fourth quarter.

Our initial addressable market for this fully autonomous medium lift vehicle is the U S military and special operations command, along with a wide range of commercial applications, such as supporting oil and gas platforms and pipelines search and rescue humanitarian relief in the middle mile delivery for logistics companies there.

There is no question that there was a very strong demand signal for our cargo UAV across the defense Department of defense and specific commercial operators.

Our structures segment continues to focus on strengthening operating margins and seeking new more profitable programs that fit our core capabilities.

In fact, we have successfully executed on our plan to diversify the segment's program base by securing multiple military aftermarket contracts. We expect contribution from this higher margin work to begin in 2023.

For the quarter sales and margins were higher in the second quarter of 2022, however challenges with suppliers and execution certain programs to lead the level of recovery that we expected in this segment and our ability to meet our plan for the quarter and the remainder of the year.

This has resulted in average productivity year to date of 85% increasing from 81% last year, which is greatly improve their profitability.

Vision products will continue to transform and is quickly shifting to autonomous systems and next generation safe and arm products.

Additionally, our structures segment will continue to benefit from our focus on operations Excellence and the addition of new more profitable programs, including more aftermarket.

We are excited about the opportunities before us as we position the company for best in class performance.

Lastly, we are very excited about the strategic investment in aircraft wheel and brake and they've been very pleased with how smoothly. The integration has been thus far.

We are now laser focused on delevering, our balance sheet as quickly as possible. So that we can continue to assess strategic opportunities that provide the highest return to our shareholders.

Now I will turn the call over to Jamie for more detailed discussion of our financial results.

Thank you Anne and good morning, everyone.

Today, I will discuss our third quarter results and provide an update on our outlook for the year.

On a consolidated basis, our net sales in the third quarter were $172 million compared to $161 million in the second quarter of 2022 and $180 million in the third quarter of 2021.

The decline of 4% year over year was largely due to lower sales for our GPS and K Max program, partially offset by increased sales of commercial aerospace bearings.

Adjusted EBITDA in the third quarter was $26 million or a margin of 12% compared to $16 $4 million or a margin of 10, 2% in the second quarter of 2022.

Sequential improvement resulted from higher sales and margins for our GPS program and higher volumes of commercial aerospace bearings in our engineered products segment. Additionally, we saw benefit from our sales and margin of our UA 60 program and our structure segment as the team in Jacksonville started the process of recovering from the supplier fire that impacted their results in the second quarter.

These increases were partially offset by lower profit for our K, Max spares and support program and our precision products segments.

When compared to the third quarter of 2021, adjusted EBITDA decreased 26% and margin declined 350 basis points. The decline resulted primarily from lower <unk> sales volumes. Additionally, sales and margin for our defense bearings and K Max program were lower.

Decreases were partially offset by robust sales in the third quarter of 2022 for our commercial bearings.

Now I'd like to walk through each of our segments beginning with engineered products during.

During the third quarter, we incurred an inventory step up of approximately $800000 related to the acquisition of aircraft. We opened break with the remaining $2 $3 million of inventory step up to be taken during the fourth quarter.

Year over year sales increased 11%, excluding the benefit of $2 $7 million of sales from aircraft wheel and brake in the $4 $4 million negative impact from foreign currency exchange rates.

Adjusted EBITDA increased $300000 and margin decreased 180 basis points.

Sales increased at a slightly lower combined margin for commercial Barrington spring deals and contacts for industrial applications for defense and industrial bearings sales and margins decrease.

The demand for our spring sales and contacts as well as our commercial bearing products have continued to improve looking ahead. We expect continued strength in this market for the remainder of 2022 order intake during the quarter was was robust with our backlog increasing nearly 40% since the beginning of the year. Excluding the addition of aircraft wheel and brake.

This was partially offset by a decrease in sales and margins for K, Max spares and support in our <unk> program.

<unk> expenses.

We are revising our expected <unk> deliveries for 2022 downward to 20 to 25000 fuses.

Deliveries planned for the second half of the year have been postponed slightly due to a delay in a component from one of our suppliers shifting cash collections for some of the deliveries into 2023.

And structures adjusted EBITDA for the third quarter with $900000 with a margin of two 8% compared to the second quarter sales increased 13% and adjusted EBITDA increased by $900000.

<unk> improved primarily due to increased sales and margin for our Sikorsky you age 60 Blackhawk program.

Year over year results declined from an adjusted EBITDA of $1 2 million and a margin of three 7%, mostly due to lower sales and associated margin for certain composite programs. This was partially offset by higher sales and margin for our Boeing P. Eight a and rolls Royce programs.

For the remainder of the year.

Flyer challenges and program execution are delaying the recovery we expected in this segment, which will impact planned earnings and cash flow performance for the full year.

SG&A increased $9 7 million compared to the third quarter of 2000 $21 million to $49 million or 28% of net sales as a result of higher corporate development cost mostly associated with the acquisition of aircraft Wieland break when.

When excluding aircraft willing break SG&A decreased to $38 1 million, which was 23% of sales as we continue to manage cost and seek opportunities to increase efficiencies across the organization.

Diluted earnings per share were <unk> <unk> for the quarter, which was lower than the 14th in the second quarter of 2022 and lower than the 53 in the third quarter of 2021.

On an adjusted basis diluted earnings per share were <unk> 32.

Compared to 31 in the second quarter of the year most of the <unk> adjustment in the third quarter of 2022 relates to costs associated with the acquisition of aircraft wheel and brake.

For the first nine months adjusted diluted earnings per share decreased from $1 45 per share in 2021 to <unk> 77 per share.

These reductions were partially offset by strong performance from the engineered products segment, which represented an increase of 37 per share.

During the quarter, we had cash usage from operations of $6 $7 million.

This was driven by cash payments and related costs associated with our acquisition of aircraft wheel and brake and delayed collections and structures due to the program execution and supplier delays we've discussed.

Now I'd like to discuss our outlook for 2022.

Given the favorable sales mix and strength, we have seen sales and margins in our engineered product segment are anticipated to be in line with our prior expectations for the year in.

In precision products are planned for the year includes the sale of 14, Max aircrafts with an expectation that we will sell the two remaining aircraft prior to year end.

Of these amounts we expect approximately $1 1 million of additional expense and 600000 of additional capex to occur in the fourth quarter.

Lastly, cash flow performance for the segment is expected to be significantly lower due to the delay in supply of a component for our GPS program, which has caused a shift in shipment to later in the fourth quarter postponing a meaningful portion of our cash receipts to the first quarter of 2023.

Our revised guidance also includes the expected results from aircraft wheel and brake and the incremental interest expense, we expect in the fourth quarter as a result of the transaction.

Our full year outlook is updated as follows sale.

Sales in the range of 695% to $710 million adjusted EBITDA in the range of $72 5 million to $77 $5 million EPS in the range of 95 per share to $1 10 per share and free cash flow in the range of a use of $10 million to adjourn.

<unk> of $5 million.

With that.

I'll now turn the call back over to Ian for closing remarks.

Thank you Jamie we recognize the challenges we face today and our teams had the capabilities and the resources to work through our program supplier issues, including enhancing our customer interactions.

I am confident we are laying the groundwork for a much stronger company that will generate improved EBITDA margin free cash flow conversion and return on invested capital leading to exceptional shareholder returns.

I would again like to welcome the aircraft, we won't break team to command and.

And to thank all of our dedicated and talented employees, who are working hard to meet our goals of enabling our customers to achieve greater and all that they do every day.

With that I'd like to open the line for questions. Operator can we have our first question. Please.

Ladies and gentlemen.

Question or comment quarter 2022 earnings call.

Leading the call.

Please standby, while we confirm.

The Q&A roster.

Our first question or comment comes from the line of Steve Barger from Keybanc capital markets. Mr. Barger. Your line is open.

Thank you good morning.

Jamie it's Dave.

If I look at the full year guide the implied <unk> will be the highest revenue quarter of the year, but EPS will be the second lowest obviously that implies deterioration in some or all of the segments sequentially. So does engineered hold up well precision and structures deteriorate sequentially or can you talk us through.

Through what we should expect on a segment basis.

Yes, so engineered should hold up pretty well, Steve and the expectation is that some of the incremental R&D spend for cargo is going to hit in the fourth quarter, which will drive that down theres going to be some probably some pressure on our K Max and spares our performance in the fourth quarter driving precision products down as well as the potential for some continued deterioration.

In our legacy missile fuse programs.

That we had talked about impacting third quarter results. There is some expectation that that will continue in the period as well.

<unk> performance also as we go through that recovery, there's some downward pressure there as well so largely engineered products in line precision products and structures.

Are driving that down.

And youre expecting a loss in structures and <unk>.

On the operating margin line.

On the operating margin line, it's going to be a close call there will probably be closer to breakeven, but it could be a loss.

Okay.

The negative contribution from J P. F was <unk> 17 in the first quarter 53, and <unk> and now 67, and <unk> and sorry, if I missed this in your comments, but what do you think that will be in <unk> and how should we think about the negative contribution from that program in 2023.

Yes, Steve I got to go back I think in the very first quarter of fourth quarter results, we put that in the round about 86 impact year over year.

Overall from GPS on a downward trajectory.

Given the shift in our GPS performance, that's really impacting our cash flow expectations for that program not so much our profit expectations. There has been a little bit of deterioration, but largely I think we still expect it to be about an 86% drag plus or minus over the course of the full year.

Yeah. It was 67 alone in the <unk> right.

No that was year to date Steve.

The year to date.

Yes.

Okay.

Obviously, the year Hasnt unfolded the way you guys would've liked to see but.

And I'm sure you don't want to talk about 2023, yet, but do you have any kind of framework for investors to think about in terms of the roll off of strong contributors versus the timeline for fixing the non contributors.

I guess just broadly do you expect revenue growth can you expand gross margin from where this year ends just anything in terms of how youre thinking about 'twenty three.

Hey, Steve Good morning, this is Ian and I apologize to everybody for the technical glitches.

Yes, so we're already obviously super focused on 'twenty three.

We had some speed bumps this quarter for sure. The teams are laser focused on correcting those problems, which I think we'll be in good shape by year end.

Regarding 2003.

A couple of things one is we're in are kind of going in our third year around operational excellence across the board lot of training a lot of focus a lot of improvements. So far we've got demonstrated examples and even quite quite frankly, our structures business as well as some historic performance.

Vermont, a shining star right now and some really good work going on in engineered products businesses relative to industry four <unk>. So.

So a lot of efficiency that we expect to pick up next year as we continue to kind of build that capability inside.

<unk>.

About the top line for next year I think we're still putting those plans together, we see growth in most of our end markets, which is nice, especially on the on the medical.

And commercial side, which all rebounding nicely. So again, we always lagged the market there, but we're seeing a nice uptick with single aisles and double ours will come online I think probably in 'twenty four 'twenty five a little bit there.

So top line I think.

Uh huh.

Can't tell you the exact number their bottom line, we're definitely looking to see improvement year over year. We've got strong five year plans teams all know what those targets are we just hit a couple of speed bumps this quarter and Steve I'll, just add to that from a cost perspective, we're going to continue to look really hard at our cost structure.

And make necessary changes there and so as we get closer to 2023, we should we should be able to provide maybe some incremental detail on that as well.

Alright, Thanks, I'll get back in line.

Thanks, Steve.

Thank you. Our next question or comment comes from the line of Larry Solow from CJS Securities.

So your line is open.

Hey, good morning, Larry everybody can you just lots of moving parts I realize but just on the guidance can you just take a step back and just clarify so your essentially your.

Lowering EBIT just on the EBITDA line just to make it simpler.

During the basically midpoint 75 from 96% to $20 million or so.

Can you maybe for starters tell us I assume.

The wheel and brake business has a positive contribution in Q4 I don't know if it did in two weeks.

I imagine that Q4, there'll be something a few million and then is it engineered products sounds like it certainly was a little it was.

Strong backlog strong, but it seemed like it was a little bit slower than I thought we'd get a sequential uptick. So is you had mentioned that you still expect that to be in line with full year projections.

Is that net of.

No.

We don't break business and that is essentially.

The $20 million coming out of mostly precision products could you just give us a little more clarification on that.

Yes, so on that we do expect to have a positive contribution from aircraft will break as that comes online. There's some inefficiencies that result, just through acquisition transition right some overhead rate and sales mix challenges, but roughly that's going to be in line with their historical performance, maybe a slight slightly lower.

For the full year period.

With that.

When you look at the guide for the full year. It is still a pretty wide range.

Because there are still a number of variables and so what we're trying to make sure as we account for those variables as we as we provide that guide for the full year.

The biggest of those and we've talked about it on the call. We've got the supply component issue with J P. F that is shifted out some of our deliveries.

So what we're trying to account for there is because of that theres that theres a shift.

Primarily focused on those missile fuse programs as.

As well as some incremental absorption on some of our other long term structures programs there that could provide some challenge in the fourth quarter.

And on the shift on the <unk>, specifically does that timing shift.

It sounds like you.

You may still recognize a lot of that revenue in this year, but you just won't get the cash flows.

Correct.

So it's more of a hit.

There is it's a more significant and meaningful cash flow impact for the full year, just given the shift in timing.

If deliveries and what we are trying to account for is that there could potentially be one more shift in that delivery as we as we're trying to recover from the supply component issue that resulted in that initial shift the team feels confident that they resolve that issue.

And they're working hard to make sure that we meet those deliveries.

So again, we just want to make sure that as we go into the back half of the year were accounting for all the relative risks.

Absolutely and then on the <unk>.

Slide 10 initiatives it sounds like it's a little bit it's a mixture.

External and some maybe internal as well.

And maybe internally, perhaps you have a better visibility to gauge on that but it sounds you got some pretty confident that most of these issues I realize the environment is really tough, but it sounds like where we stand today you kind of see.

Light at the end of the tunnel.

And resolution with most of these are not the end of the year by early next year.

Yes. This is Larry just some more color there. So we have the benefit of time on our side and the supplier fire happened back in March that kind of directly impacted our Sikorsky program.

A lot of outsource parts there that we had to go second source. So those are all coming online now that's good Jamie mentioned and there was a single part literally for GPS very critical part we had a failure.

That has actually literally been corrected and approved so now it's just a question of production ramp up to get those things delivered and then we got constraints around boats and paperwork and stuff like that but again those are all coming online last one really that we've been wrestling with is a legacy program <unk> program. This is working with of course our customer.

A lot of challenges there everything from a technical data package changes old tooling, all design coming online new testing. So we've been working through all that and again time is on our side here. So.

Literally working through the final kind of fixes and changes right now to deliver those products between Q4 and early Q1.

Okay great.

I got you here.

<unk>.

Sure.

Some of the new products or maybe thats in the pipeline.

You talked a lot about the cargo you would be this morning, it sounds like certainly some exciting.

Upcoming milestones and move it in progress there.

I think the titanium products you had spoken about last couple of calls are just new newer products new introductions that we should sort of look forward to over the next if not in 'twenty three 'twenty four.

I'll give you just to kind of a range of some of our are exciting.

Product developments here first obviously cargo as it is a big one for us.

Milestone win by the team with.

With the Marine Corps.

We are working also hand in hand with several commercial operators.

We anticipate some really nice.

Results there in terms of.

Help and support and potentially orders so a lot of a lot of opportunity there and cargo side for sure both military and commercial.

Shifting over to some other things like we've got a lot of strong activity on the medical side with blood circulation pumps and micro pumps really good technology, there coming out of our Germany facilities fire burst coming online new content on Gulfstream.

Those are just a few examples of some of the great innovations and concluding quite frankly, a lot of new players in the market. When you look at <unk> and some of the players there so.

Again, we're laying some really strong groundwork lot of new platforms Flora Flora you guys know that that's a program that's coming out here hopefully this year maybe into next year, we are well positioned on both of those those those Oems.

Great I appreciate all the color. Thank you so much.

Thanks Ray.

Just a point of clarification on the structures comment that was made.

Again, I was not accounting for the performance of our Vermont facility in there they would actually be incrementally positive overhead structures.

As a result of the strong performance, we've seen out of the Vermont facility.

Thank you I'm showing no additional questions in the queue at this time I would like to turn the conference back over to MS. Carrie bear for any closing comments.

Thank you everyone for joining the command Corporation third quarter earnings call. Today, we're looking forward to talking with you next year about our fourth quarter results.

Discuss our outlook for 2023.

With that.

For the day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may now disconnect everyone have a wonderful day.

Q3 2022 Kaman Corp Earnings Call

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