Q1 2023 Kaman Corporation Earnings Call
Speaker 1: At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again.
Speaker 1: Please be advised that today's conference is being recorded. I would now like to hand the conference over to our speakers today. Please go ahead. Good morning. Welcome to Command's first quarter 2023 earnings call. Leading the call today are Ian Walsh, Chairman, President and Chief Executive Officer, and Jamie Coogan, Senior Vice President, Chief Financial Officer, and Treasurer. Before we begin, please note that some of the information discussed during today's call will consist of forward-looking statements.
Speaker 1: Setting forth our current expectations with respect to the future 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,
Speaker 1: 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 most important of which are described in the company's latest filings with the Securities and Exchange Commission.
Speaker 1: including the company's first quarter 2023 results, included on form 10Q and the current report on form 8K filed yesterday evening together with our earnings release.
Speaker 1: We also expect to discuss certain financial measures and information that are non-GRAPH measures as defined in applicable SEC rules and regulations. Reconciliation to the company's GAAP measures are included in the earnings release filed with yesterday's 8K.
Speaker 1: Finally, we posted an earnings call supplement on our website which provides additional contacts on our financial performance. You can find this presentation at www.command.com forward slash investors, forward slash quarterly earnings calls. Now I'll turn the call over to Ian Walsh. I'll turn the call over to Ian Walsh.
Speaker 1: Total company sales grew by 23.1% compared to the first quarter of 2022, or 11.4% organically. Our engineered product segment, which includes our recent acquisition of aircraft wheel and brake, led the way with 51.4% sales growth over the prior year. Excluding the contribution of aircraft wheel and brake, this segment was up 28.6%, with gross margin nearing 40%, and adjusted EBITDA margins of 23.2%. Thanks for watching!
Speaker 1: We are beginning to see the early benefits of our cost reduction efforts and our teams are executing well as we work to reduce or eliminate the past sources of variation from our business.
Speaker 1: Consolidated performance was further supported by growth in our structure segment, partially offset by the anticipated decline in our precision product segment, as our JPS program continues to wind down.
Speaker 1: As a result of stronger sales, early benefits of our cost reduction effort and operating leverage, our first quarter operating income was $8.6 million, and just at Yvda was $24.8 million, both more than doubling when compared to the prior year.
Speaker 1: In our fourth quarter report, we highly several strategic actions to enhance our profitability and reduce or remove sources of variation. First, we announced our intention to consolidate our JPL operations into a single facility.
Speaker 1: This will allow us to maintain operational readiness while substantially reducing our program cost as program volume winds down.
Speaker 1: During the first quarter we began drawing down our Orlando workforce through phase one of our shutdown.
Speaker 1: This consolidation effort is on plan and the teams are working diligently to keep this on pace and within budget.
Speaker 1: Second, we announced that we would discontinue producing our KMAX aircraft. As a reminder, KMAX units are not in our 2023 guidance and any aircraft sold during a year would represent upside, particularly on revenue and cash flow guidance. Lastly, we announced incremental cost reduction measures for our corporate function. To this end, we have assembled a team including both internal and external resources to identify additional cost savings and margin enhancement opportunities. In total, from all these activities, we continue to expect between 22 million and 25 million annual savings by 2024.
Speaker 1: In our defense business, we experienced the first quarter of year-round sales growth since 2020, as strengths in our core defense portfolio, more than offset the wind down in the JPS program. In our medical end market, we continued to demonstrate robust top line growth with the positive organic contributions from a medical and planable and analytical instrument product lines. Finally, in our industrial end market, sales were largely stable with modest organic growth during the period. In our industrial end market, sales were largely stable with modest organic growth during the period.
Speaker 1: For Intruder segments and beginning with engineer products, strong performance from this segment continued in the first three months of 2023 as a function of their differentiated technologies, strong barriers to entry and pricing power.
Speaker 1: The first quarter results combined with a strength and repack log gives us confidence in this segment's operating performance for the remainder of the year.
Speaker 1: Sales to the segment grew 51.4% from the prior year, which was inclusive of an 18.5 million contribution from Aircraft, Will and Bray.
Speaker 1: Backlog for engineer products has never been stronger. In a precision product segment, sales decline 20.1% to 38 million, which is almost entirely due to lower volume of a JPLF program. Sigmund operating income and the justity but not also declined to 1.7 million and 2.5 million respectively. Anticipated lower margin compared to the prior year resulted from lost operating leverage on lower sales coupled with higher R&D expense on new programs.
Speaker 1: We are planning for a significant portion of our cost reduction efforts to impact this segment as we focus on building the foundation to support our new technologies and providing meaningful growth in long-term performance beginning in 2024 and beyond.
Speaker 1: Precision products continues to pivot to development of next generation products such as missile actuation systems, fuses, autonomous components, and autonomous air vehicles. We are underway with our Marine Corps funded MOLSE program for our new Cargo UAV and look forward to working with PHI Aviation who has given us a non-binding order for our first 50 commercial units.
Speaker 1: Our structure segment performance improves sequentially and compared to the prior year, although absolute margin levels are still below our long-term targets.
Speaker 1: Our Vermont facility continues to exceed expectations and is the benchmark for operational optimization for other structure facilities. In total, segment level sales were up 14.5 percent in the prior year to 33.2 million. The segment was near break even and operating income level.
Speaker 1: while adjusting the EBITDA margin was 1.7%. We continue to recover and improve the schedule, cost, and on-time delivery of our legacy programs while focusing on winning new, more profitable OEM and aftermarket work as we have demonstrated we can do. We are pleased with the progress we have demonstrated out of the gate in 2023, which reflects the positive impact of our transformational strategy.
Speaker 1: The underlying momentum in our business units and initial success of the conscious and planned actions we took in 2022. In the near term, we continue to focus on several primary objectives.
Speaker 2: First
Speaker 1: to provide the necessary capital resources to maximize the strongest growth opportunities in front of us, specifically in our engineering product segment, and to continue innovating and partnering with our customers to generate strong, year-to-year, again, a growth in high margin and cash flow generation. Second, we seek to transition our precision product segment.
Speaker 1: with thoughtful and targeted investment in next-generation products.
Speaker 1: The sunset of the JPF program followed by the associated facility reduction plans along with the conclusion of KMAX production were specifically designed to improve our networking capital performance and reposition the segment for future or profitable growth in a remaining missile programs, memory measurement products, medical courses, footprint delta
Speaker 1: and future autonomous components and unmanned cargo U of D platforms. Third, we are diligently working to implement best practices across our structure segment and to have all three of our structures business is operating in a healthy and consistent manner with improved performance.
Speaker 1: Generating strong free cash flow is our focus, as delivering is a key priority in our near-term capital allocation strategy. I am proud of our team and the progress we have made in a short period of time. With our employees' dedication, resiliency, and ingenuity, we are able to continue our path to achieving greater and maximizing value to our stakeholders over time. Now we'll turn the call over to Jamie for a closer look at the numbers. Jamie? Thank you, Ian. Good morning, everyone. Today, I will walk you through our first quarter results before turning to our outlook for 2023.
Speaker 3: come in the first quarter with $8.6 million compared to $3.1 million in the prior year. Adjusted EBIDA on the first quarter was $24.8 million, which more than doubled the prior year result of $12.2 million.
Speaker 3: EBITDA margin also increased 500 basis points, expanding to 12.7% from the 7.7% we recorded in the prior year. As a result of operating leverage on higher sales and early benefits of our cost reduction program, we move aggressively in the first quarter to execute on our cost reduction plan and in aggregate we continue to expect annual sales.
Speaker 3: to the following.
Speaker 3: 12 million to $15 million associated with the closure of the Orlando facility. We began to see some of these savings in the first quarter as we reduced our operating activity and executed on the first phase of our shutdown plan. We expect to see a contribution of this run rate in the balance of the year with full savings achieved by the end of 2024.
Speaker 3: At least $7 million related to corporate restructuring, primarily focused on the right sizing of our corporate structure to current sales levels, and the elimination of redundant functions between corporate and the businesses. To this end, we have now assembled a team comprised of internal and external resources to streamline certain administrative functions and reduce inefficiency.
Speaker 3: And lastly, around $3 million related to discontinuing production of the K-MAX aircraft.
Speaker 3: Turning back to our results, Gross Margin was 34.7%, which increased 270 basis points compared to the prior year. This was attributable to the addition of aircraft wheel and brake, better performance on our KMAX Aftermarket program, and execution on the cost savings initiatives we implemented last quarter.
Speaker 3: Higher dollar SGNA was related to the addition of aircraft wheel and brake. As a percentage of sales, lower SGNA was related to leverage on higher volume and cost controls. Interest expense in the quarter was $9.6 million, compared to $2.5 million in the prior year. As a result of higher interest rates and the added debt from the aircraft wheel and brake acquisition, Remain committed to delivering our balance sheet and maintaining a disciplined approach to shareholder returns. As we have some near-term maturities on the horizon, we are in discussions with our banking partners to ensure our goals and objectives for our capital structure will continue to be met.
Speaker 3: and we will continue to support the needs for access to capital to continue to grow the business. Free cash flow for the quarter came in ahead of our internal plan due to the timing of receipts, and we anticipate turning cash flow positive in the second half of the year.
Speaker 3: We reported a gap net loss of $19,000 or zero cents per diluted share compared to $4 million or $14 per diluted share in the prior year. Adjusted net earnings in the first quarter was $2.3 million or $8 per diluted share compared to $4.3 million or $15 per diluted share in the prior year.
Speaker 3: Included in the current period are adjustments for restructuring and severance and for integration and implementation activities related to the acquisition of aircraft wheel and brake, and initial cost associated with the setup of a new joint venture to satisfy offset requirements we have associated with a completed JPF DCS contract. For a full reconciliation of our gap to non-gap earnings, please review our earnings press release.
Speaker 3: Now, turning to our outlook. We are reaffirming our full year 2023 guidance. As the end detailed, our end markets are performing well. We continue to grow, share in our engineer product segment. Our overall backlog is robust, and we remain focused on expanding our highest growth businesses, where we can generate stronger returns while optimizing our cost structure to match the set.
Speaker 3: $70 million, leading to free cash flow expectations in the range of $35 million to $45 million.
Speaker 3: Approximately 35% of our adjusted EBITDA improvement is from growth in our organic business and lower expense due to the cost actions we've taken, with the remainder coming from the addition of aircraft wheel and brake. These increases are partially offset by the impact of lower JPF volume.
Speaker 3: As a reminder, to improve the reliability of our guidance and improve transparency, we have excluded discrete items which have historically been high sources of variation. Specifically, these include unawarded or uncertain JPF DCS orders and sales of remaining KMAX aircraft held in inventory.
Speaker 3: We have also assumed no margin contribution from our structure segment. We expected achieved success in these areas, but they are not incorporated in our guidance for 2023.
Speaker 3: With that, I will turn the call back over to Ian for closing remarks.
Speaker 1: Thanks, Jamie. We have begun 2023 on a much stronger footing-as-plan. Our team remains focused and diligent to deliver on the commitments we have made.
Speaker 1: From the performance of this quarter, the earnings power on growth of engineer product segment is evident. And when combined with improvements in our precision products and structure segment, we expect to be well positioned to substantially grow our earnings and steadily de-level our balance sheet.
Speaker 1: We continue to develop a culture with greater internal discipline, controls, and leadership. Our future will always be dependent on our talent, and I am thankful to our workforce, whose commitment has been instrumental in our success.
Speaker 1: With that, I'd like to open the line for questions. May we have our first question, please?
Speaker 4: Thank you. At this time we will conduct the question and answer session.
Speaker 4: As a reminder to ask the question, you will need to press Star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press Star 11 again. Please stand by while we compile the Q&A roster.
Speaker 4: Our first question comes from Steve Barger from Keybank.
Your line is now open.
Thanks. Good morning. Hey, good morning. Good morning, Steve. Good morning.
Can we start with the pivot for Precision? You said the most significant cost reductions will be in that segment, but I think you also said the segment will be the focus for developing and ramping next generation products. Can you talk through what a bridge looks like for revenue and margin as that progresses?
I can talk Steve a little bit about what we're certainly working on. You know, obviously the different components of precision products include, you know, JFF winding down, therefore the right main of the missile infused programs. There are some next generation fusing that we're working on.
which is with our OEMs, which we have strong relationships with. Part of that includes our Fireburst program, which again is a function of our offset requirements, working with our overseas partner, but we see a fairly large addressable market there over time. We also have our memory and measurement business, which is relatively.
all is our cargo program. And again with the recent
orders we've got from PHI, which is excellent in partnership there, a current MOLSE program, and other services who are coming online, specifically Army, very interesting solving this contest logistics problem. So that's kind of where the bulk of the growth is going to be over time. So how should we think about the base?
of the year as our operators utilize the aircraft over the course of the period and sort of take the winter months to do service and other necessary maintenance and programmatic related to that. You know, I think historically if you sort of strip out the K-Max sales again last year was about 15 million or so of K-Max aircraft sales, about 100 million or so worth of JPF sales.
inside of there. That gives you a better sense of, you know, on a kind of ongoing basis, what precision products would look like, excluding sort of the ramp up and the opportunities that Ian mentioned.
Yeah, that's helpful. Thanks. And just updated... Oh, sorry, go ahead. Nope, go ahead.
Any updates on the timing of cargo UAV when you're planning that initial full scale flight? What's happening in terms of development and customer conversations beyond what you already talked about? Yeah, so for first flight, you know, the team's been working really hard, obviously, to get to that first flight. We've got to...
You know, we anticipated having the first flake clearly this year. We're on a MULSA program schedule, so we obviously are on a timeline there. The good news is that we're spending more time working on testing all the proper components just to give more detail. I mean, it includes the entire set of everything from the power plant to propulsion.
We have structural tests, we've got dynamic testing, we've got a new world rig, we just established here on campus. So we're getting very close to that first flight, which is going to be exciting for us in the team certainly. And we are on schedule with the MOLSE program with the Marine Corps, which again, from the scheduled perspective has...
an award and late next year. That will then, and it could be a single award, it could be multiple award depending on the competition, we'll see, but that's gonna lead to funded multiple variants being produced that will then be field tested.
Once that field testing occurs, that probably takes another year and a half or so, then they go to look to have a single award and go to low rate and full rate production. So the Marine Corps is still trying to go as fast as they can, but technically they're trying to field this medium lift capability in the late 25, 26 timeframe, which also is in concert with what the commercial folks are looking to do as well. And then the commercial...
five and 26. You know, we'll see something incremental, you know, kind of funded R&D as we go through the developmental processes, but right as it relates to, you know, I'll call it commercial revenue on UNITS. It would be 25, 26 timeframe. And what we can't, what we don't have real clear sight of right now, just to see that more color is the army is working very closely with the Marine Corps. Naturally, they want to piggyback as much as they can off of the medium lift development.
you said you expect to be free cash flow positive in the back half. Do you have a target for debt reduction this year or can you get meaningfully below the 561 million you ended last year with?
Yeah, so we're going to, again, if you look at our cash flow guide, you look at sort of where we expect dividend payments and others to be Steve, right? It's about 20 million or so of incremental debt paydown just using sort of straight back, right? Now we do have opportunities and we are working diligently to overcome and improve our networking capital. You know, again, that was part of the announcements we made at the end of last year, was specifically designed to drive improved networking capital.
performance for the business. We also have the opportunities to continue to market and sell K-MAX aircraft, which could provide some cash upside for the full year. So we're working that very hard to try to get down that debt curve. We will see improved, I would say, leverage.
but that's going to come from, you know, improved financial performance, so stronger earnings, as well as the incremental debt pay down.
going to come from improved financial performance so stronger earnings as well as the incremental debt paydown. Thanks.
know, improve financial performance, so stronger earnings as well as the incremental debt paydown. Thanks. Yeah.
Thank you. One moment as I prepare the next question.
Larry Solo from CJF Securities. Your line is now open.
Great, that thanks and good morning everybody. Just a couple questions on engineered products that we can start there. So obviously really nice growth, as you mentioned, close to 30% organic. Just trying to parse out the growth where it's coming from between, it feels like it's mostly defense, but I know you spoke and obviously increasing exposure at least to medical.
maybe you can help us sort of parse out from a high level, you know, the markets it's growing in. And, and then also, um, you know, you mentioned pricing power and, and I know, you know, we've had some considerable inflation the last couple of years. So just trying to, you know, if you can help us see you getting, you know, better pricing today. Um, and also, you know, part of that question, I guess.
Part C, new products, some of your newer products driving some of this growth. Thanks. Yeah Larry, good morning. I'll start. The bulk of the growth is clearly coming from the commercial recovery as well as defense in certain markets and aftermarket.
with businesses like our X-TEX business and even aircraft wheel and brake. So that's where we're seeing a bulk of it. And again, a function of that is really the market share wins that we established effectively during COVID 2020 to 2021. We really did a lot of good work working with our customers to grab more content. And now as those platforms come back online, the growth rates you're seeing.
single-Ile for sure at Airbus and Boeing are materializing through those businesses. On the medical side, again, a lot of good progress with our medical folks such as Balsil and
GRW, most of our businesses at the end of last year ended with record backlogs, which was really encouraging. So now it's really a function of just executing against that growth. We had the largest backlogs, the earliest we've ever had, meaning this year. And when it comes to pricing power for this year, we did really spend a lot of time.
last year focusing on all of those inbound costs, a lot of supplier changes and things that were coming through. We actually changed a lot of our pricing procedures in terms of how frequently we were increasing prices, looking at recurring LTAs versus one-offs that come in.
And that's actually an ongoing process. So I would tell you that we've got a much stronger pricing philosophy this year than we have in the years past. Okay, great. No, that sounds encouraging. And just new products, anything, you know.
Sounds like it's only newer platforms, but are newer products contributing? I guess you always kind of have some newer products, but I know you've spoken to some newer next generation products, maybe titanium and stuff coming online. Maybe you can give us some kind of update on that and for the end of your product. We mentioned last time, and this is a continuing process with Comatix and TDH.
kind of things like joint arthroplasty and these are where you're putting in devices and spines or in planables. That's where a lot of the TDH comes into play and that's really a function of the fact that certain materials the human body is allergic to and what the medical industry is really understanding and figuring out is that titanium is not.
So that's a real opportunity for us there. There's other growth opportunities that we have. A lot of our OEMs need to think about platforms, whether it's Gulf Stream and folks like that, where they're coming online with new platforms. We've got content there. And then even with this program, like CH53K on the military side.
A lot of good work there and content there and we've had some recent meetings as everybody's aware. I was excited to see Bell win the Flora program with a V280. We just had a big meeting with our customer there as they're getting ready for production readiness review in a couple of years and locking in suppliers and we've got some content that we're working on with that customer. Great, just last of our major funds on the structure of business. It sounds like...
like maybe you know things will advance this year. You know we'll see that even a little bit of that flow to the bottom line is that you know a fair assessment.
Yeah, it is, you know, just so everybody understands too. Last year was really, it was a very isolated situation with only just two suppliers that really impacted our age 60 line, our Sokorsky Cockpit line at Jacksonville. And the team has worked really hard to have a recovery schedule that's now been built.
We are in lockstep with Sikorsky on that. Our supply chain problems have been corrected. We're now bringing in parts the way we need to and we're building cockpits back to rate. It doesn't mean that we're out of the woods yet. We're always working a supply chain stuff, but it's, and we built these cockpits for many, many years. We've been a titanium supplier of Sikorsky.
Our path forward is to get back to that level, and we anticipate doing that this year. The other program was 810, and that's a flow that goes from which it taught to Jax. Legacy program, a lot of issues with startup there in first articles. Those have all been corrected in past. We've passed our production rain is through with the customer and the Air Force, so we've now got parts flowing there, but again, we're still working supply issues as we move through it.
But I think we're on the heel there and looking for better performance for both those businesses.
Comparatively, Vermont, as we've mentioned, has just done a magnificent job with building their capacity, building their quality, and really driving margin improvement, certainly gross margin improvement, as a function of a lot of just basic lean practices, better tooling, and tire tolerances in their parts, which really drives the gross margin overall.
Great. I appreciate all the color. Thanks, Ian.
Yep. Thank you. One moment as I prepare the next question. Our next question comes from the line of Seth Seifman from JP Morgan. Your line is now open. Hey, thanks very much and good morning everyone. Good morning Seth. Good morning. I just wanted to start off kind of touching on the balance sheet and you kind of mentioned that looking at the capital structure.
I'm just kind of curious how you're thinking about the timeline there, given the upcoming, I guess, the converts will be current on the next balance sheet. And if that kind of factors into your thought process about when you want to sort of relook at some of the stuff on the balance sheet. Yeah, that's a good question. It does. I mean, we're working with our bank.
credit agreement. So, you know, I think our goal would be to continue to leverage the lower coupon rate on that for a period of time. But, you know, all I can kind of say right now is that we're sort of actively with talking to the bank group about the options we have in front of us. Okay. Okay. Great. Thanks. And then, you know, strong, strong results in
And, you know, or, you know, is there, is there a kind of, do you think about revenue kind of growing off of that $20 million run rate you saw in Q1?
Yeah, I think it is a good run rate. We do. I mean, typically we see if you look back historically to engineer products over the course of the year, we do actually see volumes increase in that business over the course of the year. What we'll see a lot of times are drop in orders and other things that come in that help to benefit the period outside of what we would consider to be our normal bill.
just on wheel and brake it seems like that's on a pace for you know maybe
at a 75-ish million bucks of sales this year. Is that a fair way to think about where that contribution might come in?
Yes, aircraft wheel and brakes is performing well. We have a high degree of confidence that they're going to hit those numbers. We're working with them right now to think about other future growth opportunities inside their business with the technology they have. Okay. Excellent. Cool. Thanks very much.
wheel and brakes is performing well. We have a high degree of confidence that they're gonna hit those numbers. And we're working with them right now to think about other future growth opportunities inside their business with the technology they have. Okay, excellent, cool, thanks very much. Thanks, Seth. Thanks, Seth.
Thank you for your question. At this time, I would now like to turn it back to Becky Staff for closing remarks. 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.
Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.