Aerojet Rocketdyne Holdings, Inc.

Thanks and welcome to the Aerojet Rocketdyne third quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kelly Anderson, VP of Controller and Investor Relations. Thank you, Kelly. You may begin.

Thank you. Good morning and welcome to the Aerojet Rocketdyne third quarter 2022 earnings results conference call. Leading our discussion today are Eileen Drake, Chief Executive Officer and President, and Dan Bailey, Chief Financial Officer. Following their prepared remarks, we will open the line for your questions. Before we begin the call, I'd like to remind you that our remarks this morning may contain forward-looking statements that relate to the future performance of the company, and these statements are intended to qualify for the safe harbor protection from liability established by the Private Securities Litigation Reform Act. Any such statements are not guarantees of future performance and factors that could influence our results are highlighted in today's press release and others are contained in our filings with the Securities and Exchange Commission. Such statements are based upon information available to the company as of the date hereof and are subject to change for future developments. Except as required by law, the company does not undertake any obligation to update such statements. Our remarks this morning and in today's press release also contain non-GAAP financial measures within the meaning of Regulation G promulgated by the Securities and Exchange Commission. Included in such release is the reconciliation of these non-GAAP financial measures to the comparable financial measures calculated in accordance with GAAP. Finally, we have posted supplemental slides regarding our quarter that are available on Aerojet Rocketdyne's investor relations site for download, which we encourage you to review. With that, I'd like to turn the conference call over to Eileen Drake, Chief Executive Officer and President of Aerojet Rocketdyne. Eileen, please go ahead.

Thanks, Kelly, and good morning, everyone, and welcome to AirJet Rocket9's third quarter 2022 earnings call. Today, I'll discuss our results for the quarter at a high level and touch on our longer-term objectives for the business. I'll then turn it over to Dan for a review of our financial results, macro trends, and outlook. I'm pleased to share that AirJet Rocket9 demonstrated strong operating profit and improved cash flow for the quarter. Adjusted EBITDA was nearly 14% in Q3, and free cash flow was $22 million, keeping us on track for positive cash generation in the back half of the year as expected. Sales for the quarter were also up, both sequentially and year-over-year. Book-to-bill is 0.9 on a year-to-date basis, and backlog remains healthy at $6.7 billion. underscoring AirJet Rocket9 as a preferred supplier for our nation's defense and space systems. Our focus in Q3 remained on supporting our defense development programs, which continue to perform well as they mature. This includes a next-generation interceptor, GBSD, now called Sentinel, and hypersonics programs, all of which were solid performers. At the same time, we're enhancing our competitive position through strategic investment, operational efficiencies, and cost controls. This will support sustained profitable growth across our programs. We did continue to experience some headwinds to sales related to supply chain delays, most notably on the RS-25 program. However, the program is meeting its material receipt plan in October, and we continue to believe that timing delays are short-term in nature. RS-25 sales were up from 13% of sales in the second quarter to 15% of sales in the third quarter, and this trend is expected to continue through the fourth quarter. It's important to note that Aerojet RocketEye's RS-25 engines are not impacting NASA's Artemis launch schedule in any way. The RS-25 engines for the first two Artemis launches have already been delivered to NASA and engines for the third and fourth launches are complete and nearly complete, respectively. As you will recall from last quarter, we took a significant charge on a portion of the standard missile program, resulting from supply chain issues, combined with an outlook from the U.S. government and customers that they would like to increase annual production rates. As an update on that contract, I'm pleased to tell you that we're on target with our plan to substantially increase annual production capacity, which included opening a second production facility earlier this month. We feel confident that this proactive investment will not only allow us to complete our current contract within the period of performance, but also puts a capacity in place to address anticipated quantity increases starting in 2024. We remain confident in our ability to hit our revenue and adjusted EBITDA targets, excluding EAC adjustments for the year. And Dan will expand on this in his comments shortly. Turning now to our long-term objectives, we are intently focused on investing in line with our nation's defense and space priorities and driving improvements to our competitive edge to position AirJet Rocket9 for enhanced shareholder value creation. I'll start with the work we're doing to provide reliable and innovative products for America's national security and support a diversified mix of defense and space programs, several of which we've outlined in our supplemental slide deck. On the defense side, we're continuing our work on Sentinel the nation's next ground-based strategic deterrent, including advancing the development of both the third stage large solid rocket motor and the post-boost propulsion system. Among other milestones, we announced that we successfully conducted the post-boost propulsion system critical design review for Sentinel, passing a major review gate on the path to flight readiness and paving the way for fabrication, demonstration and testing of propulsion components prior to production. We are also pleased to announce that Aerojet Rocket Line was selected to power the Navy's Compact Rapid Attack Weapon, or CRA, as part of the Raytheon Missile and Defense Team's development of this next-generation torpedo. Our company will provide the afterbody, propulsion system, and tail for the new torpedo. The new torpedo will use innovative stored chemical energy propulsion systems, or SCEPs, which will significantly improve its capabilities. This work will build on the successful testing of our SCEPs lithium boiler earlier this year, which we developed through our R&D investment at our Coleman Aerospace Facility. In addition to the use of SCEPs for compact, rapid attack weapons torpedoes were also under contract to the U.S. Navy to develop skeps for the Navy's largest Mark 54 Mod 2 torpedo. Against the backdrop of these program wins, we're also advancing important work in hypersonic and counter-hypersonic tests and development. As we've talked about previously, AirJet Rocketdyne is an industry leader in hypersonic propulsion technology which will be increasingly important to us as we look to the future. Turning now to space, we're looking forward to NASA's Artemis I launch in just a few weeks. The company has provided critical elements to the Artemis I mission with propulsion on both the SLS rocket and the uncrewed Orion spacecraft. Artemis I is the first in a series of missions to return American astronauts including the first woman and the first person of color to the moon. This launch will come on the heels of NASA's Double Asteroid Redirection Test, or DART, in which a spacecraft impacted a near-Earth asteroid propelled by 12 irritant rocket iron thrusters. The goal of this mission was to demonstrate a method of asteroid deflection by deliberately striking an asteroid at high speed to change the asteroid's motion in space. As the spacecraft closed in on the asteroid, our flight-proven propulsion systems conducted last-minute cost corrections to ensure its accurate impact. In addition to providing the chemical propulsion system for the spacecraft, AirJet RocketEye's NASA evolutionary xenon thruster commercial, or NEXT-C system, was also tested during the mission to assess the thrusters potential application for future deep space missions. NEXT-C is a next generation solar electric propulsion system designed and built by Irrigate Rocket Iron based on mission proven technology developed at NASA's Glenn Research Center. This quarter, Irrigate Rocket Iron also provided all of the thrust needed to power the successful launch of a United Launch Alliance Delta IV heavy rocket carrying a classified payload for the National Reconnaissance Office. ULA used our reliable and flight-proven RS-68 and RL-10 propulsion systems, which have delivered 100% mission success since the Delta IV program's inception. Two remaining Delta IV heavy launches are slated for the first quarters of 2023 and 2024. In addition to our strong alignment with national defense and space priorities, we're also taking actions to increase efficiency, manage our costs, and position the company for a strong and successful future. Today, I want to highlight our investment in a few of our facilities to make us more competitive. This quarter, we opened a new 51,000 square foot building in Camden, Arkansas, which consolidates multiple manufacturing activities under one roof, with the ability to eventually support large-scale solid rocket motors to power next-generation missiles. The new facility integrates solid rocket motor manufacturing activities, improving operational efficiency, increasing production capacity, reducing costs, and providing for even safer operations. The facility results in reduction of the need to transport motors across our Camden site during manufacturing by more than 90%. The first program to begin production in the new manufacturing facility is a propulsion system for the Pac-3 missile segment enhancement. We're also leasing a new facility to expand our presence in Huntsville, Alabama by nearly 380,000 square feet. This will provide additional job opportunities and builds on a 700% increase over the last five years in the number of employees we have working at our facilities in Huntsville. This facility solidifies Huntsville as our manufacturing center of excellence, and the expansion allows us to increase defense manufacturing capacity once it becomes operational in 2023. In addition, we're delivering results from prior long-term investments in our Huntsville and Camden facilities. We previously transferred production of large solid rocket motors to these sites as part of our competitive improvement program. Our teams at those facilities are incorporating innovative materials and applying efficient manufacturing processes to design and produce the advanced technology systems needed to power defense across multiple domains. For example, this quarter with the Air Force Research Laboratory at Edwards Air Force Base, California, we successfully tested a next generation large solid rocket motor called ESR-19, which was designed and fabricated in Huntsville and cast and cured in Camden. This advanced solid rocket motor improves cost and performance by incorporating a graphite composite case, an affordable advanced nozzle, and a high-energy, long-life solid propellant. A demonstration of this new capability is directly applicable to legacy large solid rocket motor applications and is a building block for multiple systems under development today. Before handing the call over to Dan, I want to reiterate that we continue to execute on our goals, and are making strong progress to position the company for the future. We're investing in new capabilities which directly support our nation's defense and space priorities, as well as increasing our capacity to meet growing demands for our products. With that, I'll turn the call over to Dan and join you later to answer questions.