Q3 2023 Kaman Corp Earnings Call
Good day, and thank you for standing by.
Welcome to the campaign.
Operations in Q3 2023 conference call 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 the session you will need to press star one one on your telephone.
You would be inherent at it made it message advising your hand is raised.
To withdraw your question. Please press star one again, please be advised that today's conference is being recorded I would now like to hand, the conference over to Matthew Patterson.
Chief Accounting Officer and controller. Please go ahead.
Good morning, welcome to <unk> third quarter 2023.
Leading the call today are Ian Walsh, Chairman, President and Chief Executive Officer, and Carolyn Senior Vice President and interim 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.
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 any forward looking statements due to many factors. The most important of which are described in the company's latest filings with Securities and Exchange Commission.
The company's third quarter 2023 results, including unfortunate 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 call supplement which provides additional context on our financial performance you can find this presentation in the investor presentation section of our website.
Now ill turn the call over to Neil.
Good morning, everyone and thank you for joining our earnings call today.
Our strong performance continued into the third quarter as.
We remain focused on optimizing our cost structure and consistent execution against our objectives, which are to drive overall improved profitability free cash flow and return on invested capital.
Our results were led by continued strength in our engineered products segment based on this performance we are revising our outlook for the full year and now expect higher adjusted EBITDA in the range of $102 5 million to $110 million unexpected sales in the range of 765 million.
Two $775 million.
Net sales for the quarter grew six 4% over the prior year period to $183 million, reflecting the contribution from aircraft wheel and brake and approximately 21% organic growth from our engineered products segment.
These factors were offset primarily by lower <unk> sales during the period, which as anticipated as this program continues to wind down.
Continuing the trend from the second quarter, our end markets continued to perform well in the third quarter.
Commercial business and general aviation in the third quarter saw better than 30% growth year over year, our specialty bearings business continued to over perform as commercial markets continued to demonstrate robust demand industrial end markets improved notably in the third quarter with double digit organic growth compared to a relatively flat sales volume for the first.
Half of the year driven by growth in major bearings volumes for industrial solutions or.
Our medical and defense end markets continued to grow in the low to mid single digits.
We remain focused on our transformational strategy, which includes investing in our high growth high margin areas of our business optimizing our cost structure and eliminating the historic sources of variation within our business.
Pleased to report that these efforts continued to yield results in the third quarter with adjusted EBITDA dollars and margin improved meaningfully over the prior period.
In the third quarter of 2023, we achieved adjusted EBITDA of $25 2 million or 13, 8% of sales compared to $19 5 million or 11, 3% of sales in the prior year.
As we move into the fourth quarter. We are pleased with the progress we have made so far this year and still have remaining objectives to accomplish as we reposition our company.
Beginning with engineered product segment, we continued to invest in opportunities for organic growth to drive favorable mix and margin performance to our consolidated results. Our investment strategy also focuses on fostering innovation and developing strategic partnerships for the next generation of products and our precision products segment, we have made significant.
Progress to right size, our operations following the wind down of the GPS and K Max production programs and expect to complete the consolidation of our GPS production facilities in the first half of 2024.
We remain on track to realize $22 million to $25 million of cost savings in 2024 from our cost reduction programs that we previously disclosed.
Turning to our segment performance and beginning with engineered products in the third quarter. We continued to demonstrate strong performance with overall sales growth of 34, 3% of which approximately 21% was organic.
Sales volumes were broad based across our business units led by strength in traditional self lubricating bearings and PMA aftermarket programs.
Gulfstream continues to be a wonderful customer for us with our high load capacity self lubricating flap track rollers.
You continue to make progress on our TBH titanium diffusion of hurting innovation in both the medical and space propulsion applications. We have over 30 applications being tested and we are showing promising results at th as replacement in orthopedic surgery, where many patients are allergic to cobalt chrome plated parts.
Higher segment level sales generate a stronger profit with engineered products adjusted EBITDA, increasing 76, 5% to $38 4 million.
This stronger volume also demonstrated the operating leverage in our business as margins expanded by 740 basis points year over year to 31, 1%.
And our precision products segment sales declined 41, 5% to $27 1 million, which was attributed to the anticipated decline in <unk> volume compared to the prior year, excluding the effects of J P. F segment level sales increased $9 7 million driven by higher <unk> aftermarket sales and higher.
Fire burst deliveries offset partially by lower sales of legacy fusing programs during the period.
We recently completed delivery of our first tranche of Firebird units to our overseas customer.
Segment level, adjusted EBITDA was negative $2 5 million compared to $6 1 million in the prior year.
Lower segment adjusted EBITDA was a result of lost operating leverage as we wind down the GPS program and work to right size our facility footprint for our remaining legacy programs. As we have noted this is a focus area for us and a meaningful portion of our 22% to 25 million of cost savings identified is generated and the consolidation of our footprint.
Turning to our structures segment third quarter sales were $32 3 million compared to $3 $33 7 million in the prior year.
The modest decline from the prior year was primarily result of lower <unk> in UA 60, Blackhawk deliveries deliveries, partially offset by higher Rolls Royce and Sikorsky volume.
Our Beaumont facility continues to be our benchmark as they grow and win new more profitable programs, such as a new contract with <unk> Harris for their new ground based midcourse defense freedoms, and Rolls Royce Trent 7000 fans track liners for the Airbus <unk> hundred <unk>.
Third quarter segment level, adjusted EBITDA was negative $2 2 million compared to breakeven results in the prior year period.
As we have noted throughout the year and reflected in our guidance. We are working to optimize production of legacy programs have driven our historical variability in this segment. We continue to anticipate full year segment level profitability at around breakeven for the year.
Sure.
As we enter the final quarter of 2023, we're pleased with the measurable progress we have made across our company.
Our positive momentum can be attributed to the ongoing execution of our strategic initiatives streamlining operations and investing in our high performing businesses to enhance the overall quality of our earnings looking forward, we maintain our commitment to several key objectives first we are disciplined in deploying our capital resources to the most promising growth.
<unk> within our engineered products segment.
Our emphasis continues to be on fostering innovation to drive substantial year over year organic growth achieve margin improvement and generate strong cash flows.
And in precision products segment, we are committed to transitioning our business by making prudent and targeted investments in next generation products.
Our decision to consolidate our <unk> facilities and conclude K Max production are aimed at enhancing operational performance and reducing variability.
These actions will reposition position precision products business units for profitable growth in future years.
We also expect to benefit from the continuing investments being made in our cargo UAV system. A purpose built autonomous medium lift logistic vehicle, which has targeted military and commercial customer requirements in a large addressable market.
We are excited to recently see the contract with our partners at near with autonomy by the U S. Army Futures command to demo in 2020 for a cargo UAV capable of moving loads in our pounds in flying distances over 100 miles.
Our cargo UAV is being designed to carry Ethernet pounds as a Max range of 500 miles.
Within our structures segment, we continued to diligently implement best practices.
The aim of ensuring that all three of our structures businesses operate consistently and healthy manner.
Now I'll turn the call over to Carol for a closer look at the numbers Carol Alright. Thank you Ian Good morning, everyone. I'll walk you through our third quarter results before turning to our outlook for 2023.
Third quarter sales were $183 million up six 4% from the prior year aircraft wheel and brake, which we acquired in mid September 2022.
Contributed sales of $16 9 million.
Organic sales were relatively flat with strong organic revenue growth across our engineered products segment for approximately 21% offset by lower sales in our precision products segment related to the previously discussed wind down in the U S government GPS program, which was anticipated and a slight reduction in sales in our structures segment.
Operating income in the third quarter was $11 9 million, including $1 9 million from aircraft wheel and brake that's.
That's an increase of $12 6 million compared to a slight operating loss in the prior year.
Adjusted EBITDA in the third quarter was $25 2 million, an increase of almost 30% compared to the prior year of $19 5 million.
EBITDA margin increased 250 basis points to 13, 8%.
Higher profitability stemmed, mostly from the benefits of organic growth greater operating leverage from higher sales and cost saving measures taken over the past 12 months that are intended to enhance our operating performance.
We continue to execute on our previously announced cost savings initiatives and we expect total savings of $22 million to $25 million in 2024 with over $12 million to be realized in 2023.
Turning back to our results gross margin was 35, 3%, which increased 350 basis points compared to the prior year.
This was attributable to the addition of aircraft wheel and brake higher organic volume in our engineered products segment and benefits from our cost savings initiatives.
Selling general and administrative expenses were $42 5 million a decrease of 13, 3% due to the absence of corporate development costs incurred in the prior year, which was associated with the acquisition of aircraft Wieland break.
As a percentage of sales lower SG&A was due to operating leverage on higher volume cost control measures and lower corporate development costs.
Interest expense in the quarter was $9 4 million compared to $3 6 million in the prior year as a result of higher interest rates and the additional debt from the aircraft wheel and brake acquisition.
As we noted last quarter, we refinanced our debt in the second quarter of this year and extended our maturity to 2028, providing us ample flexibility through our deleveraging plans.
Third quarter free cash flow was $3 8 million and year to date free cash flow is $9 $8 million.
We currently expect to settle our convertible notes with available borrowing capacity under our credit agreement. However, we continue to assess other potential options for the refinancing of these instruments prior to their scheduled maturity in May 2024.
With the extension of our credit agreement, we maintain sufficient.
Passing to use proceeds from this facility to repay the convertible notes and satisfy our working capital requirements.
During the third quarter, we reported GAAP net income of $1 5 million or <unk> <unk> per diluted share that compares to a loss of 280000 or <unk> <unk> loss per diluted share in the prior year period.
Adjusted net income during the period was $2 7 million or <unk> 10 per diluted share and.
And that compares to $8 1 million or 29 cents per diluted share in the prior year period.
Lower earnings per diluted share in 2023 was attributable to higher interest expense, partially offset by stronger operating results.
For a full reconciliation of our GAAP to non-GAAP earnings. Please review our earnings press release.
Now turning to our outlook.
We're revising our full year 2023 outlook to account for the strength, we are seeing in our engineered products segment.
As Ian highlighted our end markets are demonstrating strong performance, we're successfully increasing our market share in engineered products and our overall backlog remains robust.
Our primary focus continues to be expanding our highest growth businesses, enabling us to generate more substantial returns.
At the same time, we're optimizing our cost structure to align with the size and requirements of our business.
Our results in the first nine months of this year are ahead of expectations with a portion of our performance attributable to $7 2 million of EBITDA from our GPS program as we delivered against commitments in the first half of 2023.
While we do not expect significant GP up volumes in the fourth quarter. We now expect total revenue in the range of 765 million to $775 million driven by the strength, we're seeing in engineered products.
We've increased our expectations for net earnings to $6 5 million to $12 2 million and diluted EPS of <unk> 23 per share to <unk> 43 per share or <unk> 40 per share to <unk> 60 per share on an adjusted basis. This increase.
It was primarily driven by our expectation of drop through from the engineered products segment.
Coupled with our cost optimization efforts.
Set partially by interest expense.
Our expectations of engineered products drop through in cost reduction is also driving our improved adjusted EBITDA outlook, which is now in the range of $102 5 million to $110 million.
This updated outlook considers both strength in engineered products and some incremental risk related to the precision products and structures segments.
Our expectations for operating cash flow of $60 million to $70 million and free cash flow of $35 million to $45 million remains consistent with our prior outlook as we continue to make investments that will support future growth in our engineered products segment and improvements in our structures segment.
As a reminder to improve the reliability of our outlook and improved transparency, our previous outlook excluded discreet items, which have historically been sources of variation.
Specifically these included untoward, it or uncertain GPS Dcs orders and sales of the two remaining K Max aircraft held in inventory.
Our current outlook now considers the sale of an additional K Max aircraft in Q4 as well as the delivery of a limited volume of J P. F orders currently in backlog.
With that I'll turn the call back over to Ian for closing remarks.
Thanks Carol.
With one quarter left to go in 2023, we continue to see that our transformational strategy is producing strong results at our level loading our quarters.
<unk>, our historical sources of creation and aligning with our expectations.
Our team remains focused to deliver on our long term strategy to maximize shareholder value.
The third quarter highlights the exceptional performance of our engineered products segment, emphasizing is substantial earnings power and growth potential. This segment remains a key focus for our ongoing investment.
We are confident that as we make future improvements in our precision products and structures segments, you'll be well positioned to achieve significant earnings growth, while steadily reducing our debt burden.
Chuck is important I'm thrilled with our progress on the cultural transformation of our company as we strive towards becoming a high performance team with consistent execution and innovation.
We believe that our future success depends on our core capabilities and dedication of our workforce reflect the values of our founder Charles Command.
And their deep desire to solve our customers' most difficult problems. We are truly appreciative of the many contributions and collaborative teamwork shown by our colleagues.
Through the first three quarters of 2023 has been instrumental in our transformational journey.
I'd like to open the line for questions, maybe we have our first question. Please.
Thank you.
We now conduct the question and answer session to ask a question. Please press star one.
Your telephone and wait for your name to be announced.
To withdraw your question please.
Press Star one again.
Please standby, while we compile the Q&A roster.
Our first question comes from Steve Barger from.
Key Banc capital markets. Please go ahead.
Steve.
Okay. Please stand by while a compounded Q&A roster.
Our next question comes from Tony Bancroft from Gamco Ginkgo.
Investors Inc. Please go ahead.
Good morning, gentlemen, nice job on the quarter.
Just one question.
I came on late so I, just if I just heard Carol the very and discussing the convertible refi.
Our refinancing would you would you mind just going through maybe just the mechanics.
And what the plan is.
Increasing what the incremental rate increase is going to be.
Near term the terms for the for the to refinance that.
Hey, Toni good morning.
Look I think what we see.
It's probably not not anything really, particularly new we have enough capacity under our refinance credit agreement to deploy our revolver against those convertible notes and as we sit here today. There is no reason to believe thats not our prime path.
That said, we're getting economic benefits from our convertible notes today I think we got time to evaluate if theres anything different that we would want to do in that area, but as we sit here today with the credit capacity. We have we feel comfortable that's a good option for us so probably not going to get into terms and rates here.
On the call, but feel good about the options, we got in front of us.
Okay. Thanks, so much I appreciate it.
You bet.
Thank you well one with Brian next question.
We have Steve Barker from Keybanc capital markets. Please go ahead.
Hi, Good morning, guys can you hear me now.
So unclear.
Hey, good morning, this is jake or more on the call for Steve Thanks for taking the question.
You bet.
So first two quick ones here on the guidance change I think implied <unk> sales of a sequential step up do you expect that to happen in all three segments or maybe what are the dynamics by segment if not.
Well, yes, we do.
Generally don't issue segment level outlook, but you heard us talk about the strength in engineered products and that has really been the economic driver for us here today, we expect that to continue in.
In Q4, we did mention that we've got one of the K Max helicopters in our outlook those helicopters sitting our precision products segment.
But really when you think about all three elements of our outlook for sales EBITDA and the free cash flow is our confidence that our engineered products segment and the progress we've seen year to date that really allows us to elevate our outlook and sales elevated our outlook on EBITDA and to hold our outlook on the free cash flow.
Yeah Jake.
This is zane I'll, just add on structures and precision products, a little bit more color maybe.
We continue to focus very heavily on to get healthy on our structures businesses, we feel really confident.
And all the work that we've done early this year to correct material flow manpower issues getting back to tack time for example, in a <unk> <unk> movement and deliveries from from Wichita to Jack's all really start to manifest manifest themselves and in the fourth quarter.
Result of all the good work we've done earlier this year just doing a lot of challenges. So thats, good and precision products same thing really transitioning a lot of our work.
And effort on the quality signature for our fusing programs and transitioning like I said from from came extra cargo J P F wind down.
And getting cost out of that business. So I think we're in good shape.
Got it understood.
The answer to their kind of flows into my next question, which was the implied big step up in <unk> free cash flow.
And there is coming from the <unk> sale is that right.
Well again, the confidence is really coming from the engineered products segment and we've got good line of sight to our free cash flow outlook, we considered all three segments, obviously, the risks and opportunities yes.
Yes, the K Max aircraft sale.
As to our outlook. We are also expressing a range. So we've got multiple pathways to get there but.
But Ian was talking just a little bit about structure.
We don't we don't talk a lot about cash flow at the segment level, but I can tell you that.
Structures has been a drag on cash year to date, we don't expect it to be a drag on cash flow in the fourth quarter and so we expect more of the real strengths, we're seeing out of engineered products to drop through in the form of free cash flow in Q4.
Okay, Okay got it.
Moving to the segments just starting on engineered products margin was pretty good this quarter.
Sustainable is that do you expect something similar in <unk> or are there variables that could prevent sustainable growth margin growth there.
Yes, I mean, you can kind of back into your margin expectation based on the sales outlook range and the EBITDA outlook range, there, but what I can tell you is the demand environment.
<unk> remains robust and engineered products.
As strong as the organic sales have been I think up 21%.
The orders have been very strong we're running at year to date book to Bill North of one point.
And even with the increased velocity.
We've seen through our shops in the engineered product side, our largest business unit <unk> has seen its sold over do you actually increase materially over the course of the year. So in other words there are orders that.
Our customers are waiting for us to fulfill and we just need to get them through the shops. So the challenge for US has really been working with our suppliers in the supply chain to get the support we need to hit the volumes.
The labor necessary.
Coming out of Covid, it's been an industry trend getting the labor to processes volume. So as we look ahead to Q4 and beyond we see on.
On the back of a commercial aerospace.
Macro story pretty solid growth ahead of us and given the fact that we have not just OEM, but also aftermarket exposure, we fully intend to.
Get full value for our pricing and to ensure that we're covering the the price cost mix equation adequately so feel pretty solid.
Got it that makes sense moving to precision products.
I think margins are being dragged down, thereby R&D related to the cargo UAV program. So I mean first is that correct and then if so how long does that persist.
Yes.
You got it right that the cargo sits within our precision products segment now the big story in our precision products segment as you on those.
The GPM volumes relative to we've talked about this a lot, but GPS volumes have come down substantially as the U S government programs winds down and so the challenge is really maintaining a solid quality and cost signature in the legacy fuse business, we're putting a lot of effort around that.
<unk>.
Are aware of our prior disclosures around the consolidation of <unk> and attacking cost there to that site consolidation at our Middletown facility.
But youre right the cargo R&D program sits within precision.
And though we get significant.
The proportion of our funding from the U S government on the contracts the prototype contracts that we have underway any company funded R&D associated with the cargo does flow through the precision products line.
I'll, let I'll hand over to Ian to talk a little bit more about cargo and sort of the trajectory that we see there, but that's that's sort of the accounting on it yes exactly so.
We obviously have a very important program with cargo underway as we said from the beginning our investment strategy is milestone based we just talked about the contract we've got with U S Army with our partners in here with autonomy, which is very exciting.
We've also talked about first flight I know people are interested in that we was we were months away. Obviously the program ramped up we're weeks away and now we're days away, which is very exciting, but I think from an R&D perspective, we're being very very thoughtful very mindful around not only the investment necessary to get cargo to market and hit certain milestones.
And our competitive.
Fly offs and things for next year.
And also obviously, what's going on underneath with the rest of the fusing program, but really it's a balance with engineered products. Our engineered products segment also has a very healthy iron D budget.
All of those businesses that sit in that segment have a very robust pipeline of innovations and things are attacking from a share perspective customer perspective, so really balancing best we can with cargo and using our products.
Okay got it thats helpful.
While we're on the cargo or maybe the mosaic program can you just remind us the timeline milestones within the mosaic program that you're planning to hit and then maybe a follow up to that is this army demonstration basically just a larger scale model of the current design.
Okay. So two things one is from a milestone perspective.
Yes, we are tracking towards with a U S. Marine Corps on mosaic, which is a fly off.
No set time, yet for next year, but we anticipate it being in later half of next year. So we're tracking to schedule there.
And then from there as I express before typically what happens.
Is the winter it could be one or it could be others.
We then get follow on contracts to build multiple variants to be field tested right and thats. The next step that would be over a year year and a half or so you collect all that data use. These these prototypes in different environments get that customer feedback and then you go to kind of a low rate production environment, which would be in the 20 526 timeframe typically.
Army little bit same but different so that the demonstration that we have been invited to which by the way is invite only you have to you have to submit certain proposals. It's not just an open ended competition or demonstration. So you have to be invited the same mosaic that we have as I mentioned that capability there hits the requirements.
The army is looking for for a medium lift.
Platform Thomas platform. So this is our futures command.
Demonstration that <unk> been hosting to really look at technology, because they have the same problem that Marine Corps has which is how do you move things around and extended battlefield.
So extend logistics contest to logistics things like that so what we don't know yet is after the army milestone where they go from there it's a little bit different process, but I can tell you that the army has demand for unmanned cargo capability is is probably the largest in the services just by nature of what they do.
So that's kind of our path to milestone with those two programs and service side.
Great. That's it for me. Thank you for taking my questions.
Thanks, Jacob you bet.
Thank you.
As a reminder, if you would like to ask a question. Please press star one one and wait for your name to be announced.
I am showing no further questions at this time I would now like to turn the conference back over to Matthew Peterson for closing remarks.
Thank you for joining us on today's conference call. We look forward to speaking with you again as we report our fourth quarter results.
This concludes today's conference.
Carl Thank you for participating you may now disconnect.
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Good day, and thank you for standing by.
Welcome to the campaign.
Operations Q3, 2023 conference call 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 would be in here and add immediate message advising your hand he's raised.
To withdraw your question. Please press star one again, please be advised that today's conference is being recorded I would now like to hand, the conference over to Matthew Patterson.
Chief Accounting Officer and controller. Please go ahead.
Good morning, welcome to <unk> third quarter 2023 earnings call, leading the call today are Ian Walsh, Chairman, President and Chief Executive Officer, and Carolyn Senior Vice President and interim 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.
These include projections of revenue earnings and other financial items statements on plans and objectives of the company or its management.
That's a 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 most important of which are described in the company's latest filings with the Securities and Exchange Commission.
Including the Companys third quarter 2023 results, including on four included on Form 10-Q, and the current report on form 8-K filed yesterday evening together with our earnings release.
We also expect to discuss certain financial measures and information that are non-GAAP measures as defined in applicable SEC rules and regulations.
Conciliations to the company's GAAP measures.
Rooted in the earnings release filed with yesterday's form 8-K.
Finally, we posted an earnings call supplement which provides additional context on our financial performance you can find this presentation in the Investor presentation section of our web site.
Now ill turn the call over to Guillermo.
Good morning, everyone and thank you for joining our earnings call today.
Our strong performance continued into the third quarter as.
As we remain focused on optimizing our cost structure and consistent execution against our objectives, which are to drive overall improved profitability free cash flow and return on invested capital.
Our results were led by continued strength in our engineered products segment based on this performance we are revising our outlook for the full year and now expect higher adjusted EBITDA in the range of $102 5 million to $110 million unexpected sales in the range of 765 million.
Two $775 million.
Net sales for the quarter grew six 4% over the prior year period to $183 million, reflecting the contribution from aircraft wheel and brake and approximately 21% organic growth from our engineered products segment.
These factors were offset primarily by lower <unk> sales during the period, which as anticipated as this program continues to wind down.
Continuing the trend from the second quarter, our end markets continued to perform well in the third quarter.
Commercial business and general aviation in the third quarter saw a better than 30% growth year over year, our specialty bearings business continued to over perform as commercial markets continued to demonstrate robust demand industrial end markets improved notably in the third quarter with double digit organic growth compared to relatively flat sales volume for the first.
Half of the year driven by growth in natural bearings volumes for industrial solutions or.
Our medical and defense end markets continued to grow in the low to mid single digits.
We remain focused on our transformational strategy, which includes investing in our high growth high margin areas of our business optimizing our cost structure and eliminating the historic sources of variation within our business I am pleased to report that these efforts continued to yield results in the third quarter with adjusted EBITDA dollars and margin improving means.
<unk> over the prior period.
In the third quarter of 2023, we achieved adjusted EBITDA of $25 2 million or 13, 8% of sales compared to $19 5 million or 11, 3% sales in the prior year.
As we move into the fourth quarter. We are pleased with the progress we have made so far this year and still have remaining objectives to accomplish as we reposition our company.
Beginning with engineered product segment, we continued to invest in opportunities for organic growth to drive favorable mix and margin performance to our consolidated results.
Our investment strategy also focuses on fostering innovation and developing strategic partnerships for the next generation of products.
Precision products segment, we have made significant progress to right size our operations following the wind down of the GPS and K Max production programs and expect to complete the consolidation of our jbs production facilities in the first half of 2024.
We remain on track to realize $22 million to $25 million of cost savings in 2024 from our cost reduction programs that we previously disclosed.
Turning to our segment performance and beginning with engineered products in the third quarter. We continued to demonstrate strong performance with overall sales growth of 34, 3% of which approximately 21% was organic.
Higher sales volumes were broad based across our business units led by strength in traditional self lubricating bearing.
And PMA aftermarket programs.
Gulfstream continues to be a wonderful customer for us with our high load capacity self lubricating flap track rollers.
Can you continue to make progress on our TBA or titanium diffusion of hurting innovation in both the medical and space propulsion applications. We have over 30 applications being tested and we are showing promising results at th as replacement in orthopedic surgery, where many patients are allergic to cobalt chrome plated parts.
Higher segment level sales generate a stronger profit with engineered products adjusted EBITDA, increasing 76, 5% to $38 4 million.
This stronger volume also demonstrated the operating leverage in our business as margins expanded by 740 basis points year over year to 31, 1%.
And our precision products segment sales declined 41, 5% to $27 1 million, which was attributed to the anticipated decline in <unk> volume compared to the prior year, excluding the effects of GBS segment level sales increased $9 7 million driven by higher <unk> aftermarket sales and higher.
Fire burst deliveries offset partially by lower sales of legacy fusing programs during the period.
We recently completed delivery of our first tranche of Firebird units to our overseas customer.
Segment level, adjusted EBITDA was negative $2 5 million compared to $6 1 million in the prior year.
Lower segment adjusted EBITDA was a result of lost operating leverage as we wind down the GPS program and work to right size our facility footprint for our remaining legacy programs. As we have noted this is a focus area for us and a meaningful portion of our 22 to 25 million of cost savings identified is generated and the consolidation of our footprint.
Turning to our structure segment third quarter sales were $32 3 million compared to $3 $33 7 million in the prior year.
The modest decline from the prior year was primarily result of lower <unk> in UA 60, Blackhawk deliveries deliveries, partially offset by higher Rolls Royce and Sikorsky volume.
Our Beaumont facility continues to be a benchmark as they grow and win new more profitable programs, such as a new contract with <unk> Harris for their new ground based midcourse defense rebounds in a rolls Royce Trent 7000 fast track liners for the Airbus <unk> hundred <unk>.
Third quarter segment level, adjusted EBITDA was negative $2 2 million compared to breakeven results in the prior year period as.
As we have noted throughout the year and reflected in our guidance. We are working to optimize production of legacy programs and has driven our historical variability in this segment. We continue to anticipate full year segment level profitability at around breakeven for the year.
As we enter the final quarter of 2023, we are pleased with the measurable progress we have made across our company.
Positive momentum can be attributed to the ongoing execution of our strategic initiatives streamlining operations and investing in our high performing businesses to enhance the overall quality of our earnings looking forward, we maintain our commitment to several key objectives first we are disciplined in deploying our capital resources to the most promising growth.
These within our engineered products segment.
Our emphasis continues to be on fostering innovation to drive substantial year over year organic growth achieve margin improvement and generate strong cash flows.
Products segment, we are committed to transitioning our business by making prudent and targeted investments in next generation products.
Our decisions to consolidate our <unk> facilities and conclude K Max production are aimed at enhancing operational performance and reducing variability.
These actions will reposition position precision products business units for profitable growth in future years.
We also expect to benefit from the continuing investments being made in our cargo UAV system. A purpose built autonomous medium lift logistic vehicle, which is targeted military and commercial customer requirements in a large addressable end market.
Were excited to recently see the contract with our partners at near with autonomy by the U S. Army Futures command to demo in 2020 for a cargo UAV capable of moving loads in our pounds in flying distances over 100 miles.
Our cargo UAV is being designed to carry Ethernet pounds as a Max range of 500 miles.
Within our structures segment, we continued to diligently implement best practices with the aim of ensuring that all three of our structures businesses operate consistently and healthy manner.
Now I will turn the call over to Carol for a closer look at the numbers Carol Alright. Thank you Ian Good morning, everyone. I'll walk you through our third quarter results before turning to our outlook for 2023.
Third quarter sales were $183 million up six 4% from the prior year aircraft wheel and brake, which we acquired in mid September 2022 contributed sales of $16 9 million.
Organic sales were relatively flat with strong organic revenue growth across our engineered products segment of approximately 21% offset by lower sales in our precision products segment related to the previously discussed wind down of the U S government GPS program, which was anticipated and a slight reduction in sales in our structures segment.
Operating income in the third quarter was $11 9 million, including $1 9 million from aircraft wheel and brake.
That's an increase of $12 6 million compared to a slight operating loss in the prior year.
Adjusted EBITDA in the third quarter was $25 2 million, an increase of almost 30% compared to the prior year of $19 5 million.
EBITDA margin increased 250 basis points to 13, 8%.
Higher profitability stemmed, mostly from the benefits of organic growth greater operating leverage from higher sales and cost saving measures taken over the past 12 months that are intended to enhance our operating performance.
We continue to execute on our previously announced cost savings initiatives and we expect total savings of 22% to $25 million in 2024 with over $12 million to be realized in 2023.
Turning back to our results gross margin was 35, 3%, which increased 350 basis points compared to the prior year.
This was attributable to the addition of aircraft wheel and brake higher organic volume in our engineered products segment and benefits from our cost savings initiatives.
Selling general and administrative expenses were $42 5 million a decrease of 13, 3% due to the absence of corporate development costs incurred in the prior year, which were associated with the acquisition of aircraft wheel and brake.
As a percentage of sales lower SG&A was due to operating leverage on higher volume cost control measures and lower corporate development costs.
Interest expense in the quarter was $9 4 million compared to $3 6 million in the prior year as a result of higher interest rates and the additional debt from the aircraft wheel and brake acquisition.
As we noted last quarter, we refinanced our debt in the second quarter of this year and extended our maturity to 2028, providing us ample flexibility through our deleveraging plans.
Third quarter free cash flow was $3 8 million and year to date free cash flow is $9 8 million.
We currently expect to settle our convertible notes with available borrowing capacity under our credit agreement. However, we continue to assess other potential options for the refinancing of these instruments prior to their scheduled maturity in May 2024.
With the extension of our credit agreement, we maintain sufficient capacity to use proceeds from this facility to repay the convertible notes and satisfy our working capital requirements.
During the third quarter, we reported GAAP net income of $1 5 million or <unk> <unk> per diluted share that compares to a loss of 280000 or one loss per diluted share in the prior year period.
Adjusted net income during the period was $2 7 million or <unk> 10 per diluted share.
And that compares to $8 1 million or 29 cents per diluted share in the prior year period.
Lower earnings per diluted share in 2023 was attributable to higher interest expense, partially offset by stronger operating results.
For a full reconciliation of our GAAP to non-GAAP earnings. Please review our earnings press release.
Now turning to our outlook.
We're revising our full year 2023 outlook to account for the strength, we are seeing in our engineered products segment.
As Ian highlighted our end markets are demonstrating strong performance, we're successfully increasing our market share in engineered products and our overall backlog remains robust.
Our primary focus continues to be expanding our highest growth businesses, enabling us to generate more substantial returns.
At the same time, we're optimizing our cost structure to align with the size and requirements of our business.
Our results in the first nine months of this year are ahead of expectations with a portion of our performance attributable to $7 2 million of EBITDA from our GPS program as we delivered against commitments in the first half of 2023.
While we do not expect significant GP up volumes in the fourth quarter. We now expect total revenue in the range of 765 million to $775 million driven by the strength, we're seeing in engineered products.
We've increased our expectations for net earnings to $6 5 million to $12 2 million and diluted EPS of <unk> 23 per share to <unk> 43 per share or <unk> 40 per share to <unk> 60 per share on an adjusted basis.
This increase was primarily driven by our expectation of drop through from the engineered products segment.
Coupled with our cost optimization efforts offset partially by interest expense.
Our expectations of engineered products drop through in cost reduction is also driving our improved adjusted EBITDA outlook, which is now in the range of $102 5 million to $110 million.
This updated outlook considers both strength in engineered products and some incremental risk related to the precision products and structures segments.
Our expectations for operating cash flow of $60 million to $70 million and free cash flow of $35 million to $45 million remains consistent with our prior outlook as we continue to make investments that will support future growth in our engineered products segment and improvements in our structures segment.
As a reminder to improve the reliability of our outlook and improved transparency, our previous outlook excluded discreet items, which have historically been sources of variation.
Specifically these included untoward, it or uncertain GPS Dcs orders and sales of the two remaining K Max aircraft held in inventory.
Our current outlook now considers the sale of an additional K Max aircraft in Q4 as well as the delivery of a limited volume of J P. F orders currently in backlog.
With that I'll turn the call back over to Ian for closing remarks.
Thanks Carol.
With one quarter left to go in 2023, we continue to see that our transformational strategy is producing strong results better level loading our quarters by reducing our historical sources of variation and aligning with our expectations. Our team remains focused to deliver on our long term strategy to maximize shareholder value.
The third quarter highlights the exceptional performance of our engineered products segment, emphasizing is substantial earnings power and growth potential. This segment remains a key focus for our ongoing investment.
We are confident that as we make future improvements in our precision products and structures segments, we will be well positioned to achieve significant earnings growth, while steadily reducing our debt burden.
Just as important I'm thrilled with our progress on the cultural transformation of our company as we strive towards becoming a high performance team with consistent execution and innovation.
We believe that our future success depends on our core capabilities and dedication of our workforce reflect the values of our founder Charles Command.
And their deep desire to solve our customers' most difficult problems. We are truly appreciative of the many contributions and collaborative teamwork shown by our colleagues.
Through the first three quarters of 2023 has been instrumental in our transformational journey.
I'd like to open the line for questions, maybe we have our first question. Please.
Thank you.
We now conduct the question and answer session to ask a question. Please press star one one on your telephone and wait for your name to be announced.
To withdraw your question please.
Please press star one again.
Please standby, while we compile the Q&A roster.
Our first question comes from Steve Barger from Keybanc.
Keybanc capital markets. Please go ahead.
Steve.
Yeah.
Okay. Please stand by while a compounded Q&A roster.
Our next question comes from Tony Bancroft from Gamco Gamco.
Investors Inc. Please go ahead.
Good morning, gentlemen, nice job on the quarter.
Just one question.
I came on late so I, just if I just heard Carol the very yen discussing the convertible refi.
Our refinancing would you would you mind just going through maybe you can just the mechanics.
Or what the plan is.
Increasing what's the increments rates increase is going to be.
The term the terms for the for the to refinance that.
Hey, Toni good morning.
Look I think what we said.
It is.
Not not anything really, particularly new we have enough capacity under our refinance credit agreement to deploy our revolver against those convertible notes and as we sit here today. There is no reason to believe thats not our prime path.
That said, we're getting economic benefits from our convertible notes today I think we got time to evaluate if theres anything different that we would want to do in that area, but as we sit here today with the credit capacity. We have we feel comfortable that's a good option for us so probably not going to get into terms and rates here.
On the call, but feel good about the options, we got in front of us.
Okay. Thanks, so much I appreciate it.
You bet.
Thank you we'll move for our next question.
We have Steve Barker from Keybanc capital markets. Please go ahead.
Hi, Good morning, guys can you hear me now.
So unclear.
Good morning, this is jake or more on the call for Steve Thanks for taking the questions.
You bet.
So first two quick ones here on the guidance change I think implied <unk> sales of a sequential step up do you expect that to happen in all three segments or maybe what are the dynamics by segment if not.
Well, we generally don't issue segment level outlook, but you heard us talk about the strength in engineered products and that has really been the economic driver for us here today, we expect that to continue in.
In Q4, we did mentioned that we've got one of the K Max helicopters in our outlook those helicopters sitting our precision products segment.
But really when you think about all three elements of our outlook for sales EBITDA and the free cash flow is our confidence in our engineered products segment and the progress we've seen year to date. It really allows us to elevate our outlook and sales elevated our outlook on EBITDA and to hold our outlook on the free cash flow.
Yes, Jacob this is Ian I will just add on structures and precision products, a little bit more color maybe like.
We continue to focus very heavily on to get healthy on our structures business is we feel really confident that all the work that we've done early this year to correct material flow manpower issues getting back to tack time for example, in a <unk> <unk> movement and deliveries from from <unk>.
Talking to Jack's all really start to manifest manifest themselves and in the fourth quarter as a result of all the good work. We've done earlier. This year just doing a lot of challenges. So thats good and precision products same thing really transitioning a lot of our work.
And effort on the quality of signature for our fusing programs and transitioning like I said from from.
K Max to cargo J P F wind down.
And getting cost out of that business. So I think we're in good shape.
Got it understood that you.
The answer to their kind of flows into my next question, which was the Empire Big step up in <unk> free cash flow.
Confidence in there is coming from the <unk> sale is that right.
Well again, the confidence is really coming from the engineered products segment and we've got good line of sight to our free cash flow outlook, we considered all three segments, obviously, the risks and opportunities.
Yes, the K Max aircraft sale contributes to our outlook. We are also expressing a range. So we've got multiple pathways to get there.
But Ian is talking just a little bit about structures. We don't we don't talk a lot about cash flow at the segment level, but I can tell you that.
Structures has been a drag on cash year to date, we don't expect it to be a drag on cash flow in the fourth quarter and so we expect more of the real strengths, we're seeing out of engineered products to drop through in the form of free cash flow in Q4.
Okay, Okay got it.
Moving to the segments just starting on engineered products margin looks pretty good this quarter. How sustainable is that do you expect something similar in <unk> or are there variables that could prevent sustainable growth margin growth there.
Yes, I mean, you can kind of back into your margin expectation based on the sales outlook range and the EBITDA outlook range, there, but what I can tell you is the demand environment remains robust and engineered products.
As strong as your organic sales have been I think up 21% the.
The orders have been very strong we're running at year to date book to Bill North of one point al.
And even with the increased velocity.
We've seen through our shops in the engineered product side, our largest business unit <unk> has seen it sold over do you actually increase materially over the course of the year. So in other words there are orders that are.
Our customers are waiting for us to fulfill and we just need to get them through the shops. So the challenge for US has really been working with.
Our suppliers in the supply chain to get the support we need to hit the volumes and you get the labor necessary coming out of Covid, it's been an industry trend getting the labor to processes volume. So as we look ahead to Q4 and beyond we see.
On the back of a commercial aerospace.
Macro story pretty solid growth ahead of us and given the fact that we have not just OEM, but also aftermarket exposure, we fully intend to.
Get full value for our pricing and to ensure that we're covering the the price cost mix equation adequately so feel pretty solid.
Got it that makes sense moving to precision products.
Margins are being dragged down, thereby R&D related to the cargo UAV program. So first is that correct and then if so how long does that persist.
Yes.
You got it right that the cargo sits within our precision products segment now the big story in our precision products segment as you all know is the.
J P F volumes relative to we've talked about this a lot, but GPS volumes have come down substantially as the U S government programs winds down and so the challenge is really maintaining a solid quality and cost signature in the legacy fuse business, we're putting a lot of effort around that.
<unk>.
Are aware of our prior disclosures around the consolidation of <unk> and attacking cost there to that site consolidation at our Middletown facility.
But you are right the cargo R&D program sits within precision products and though we get significant.
Significant proportion of our funding from the U S government on the contracts the prototype contracts that we have underway any company funded R&D associated with the cargo does flow through the precision products line.
I'll, let I'll hand over to Ian to talk a little bit more about cargo and sort of the trajectory that we see there, but thats sort of the accounting of it yes exactly so.
We obviously have a very important program with cargo underway.
As we said from the beginning our investment strategy is milestone based we just talked about the contract we've got with U S Army with our partners in here with autonomy, which is very exciting.
We've also talked about first flight I know people are interested in that.
We're months away, obviously as the program ramped up we're weeks away and now we're days away, which is very exciting, but I think from an R&D perspective, we're being very very thoughtful very mindful around not only the investment necessary to get cargo to market and hit certain milestones in our competitive playoffs and things for next year.
And also obviously, what's going on underneath with the rest of the fusing program, but really it's a balance with engineered products. Our engineered products segment also has a very healthy iron D budget all of those businesses that sit in that segment have a very robust pipeline of innovations and things are attacking from a share perspective or a customer perspective.
So really balancing that.
We can with cargo and engineered products.
Okay got it thats helpful.
While we're on the cargo or maybe the mosaic program can you just remind us the timeline milestones within the mosaic program that you are.
Turning to hit and then maybe a follow up to that is this army demonstration and basically just a larger scale model of the current design.
Okay. So two things one is from a milestone perspective.
Yes, we are tracking towards with their U S. Marine Corps on mosaic, which is a fly off.
No set time, yet for next year, but we anticipate it being in later half of next year. So we're tracking to schedule there.
And then from there as I express before typically what happens.
Is the winter it could be one or it could be others.
We then get follow on contracts to build multiple variance to be field tested right and thats. The next step that would be over a year year and a half or so you collect all that data use. These these prototypes in different environments get that customer feedback and then you go to kind of a low rate production environment, which would be in the 20 526 timeframe typically.
Army little bit same but different so that the demonstration that we have been invited to which by the way is invite only you have to you have to submit certain proposals. It's not just an open ended competition or demonstration. So you have to be invited the same mosaic that we have as I mentioned the capability there hits there.
<unk>, what the army is looking for for a medium lift.
Platform Thomas platform. So this is our futures command this.
Demonstration that they've been hosting to really look at technology, because they have the same problem that greencore has which is how do you move things around and extended battlefield.
So extend logistics contest to logistics things like that so what we don't know yet is after the army milestone where they go from there it's a little bit different process, but I can tell you that the army has demand for unmanned cargo capability is is probably the largest in the services just by nature of what they do.
So thats kind of our path to milestone with those two programs and service side.
Great. That's it for me thank you for taking the questions.
Thanks, Jacob you bet.
Thank you.
As a reminder, if you would like to ask a question. Please press star one one and wait for your name to be announced.
I am showing no further questions at this time I would now like to turn the conference back over to Matthew Peterson.
Closing remarks.
Thank you for joining us on today's conference call. We look forward to speaking with you again as we report our fourth quarter results.
This concludes today's conference call. Thank you for participating you may now disconnect.