Kaman Corporation

Good day and thank you for standing by. Welcome to Command Corporation fourth quarter 2021 conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star one on your touch-tone telephone. Please be advised, today's conference is being recorded. If you require any further assistance, please press star then zero. I would now like to hand the conference over to your host today, Carrie Baer, Head of Investor Relations. Please go ahead.

Good morning. I'd like to welcome everyone to Command's fourth quarter 2021 earnings call. Conducting the call today are Ian Walsh, Chairman, President, and Chief Executive Officer, and Jamie Coogan, Senior Vice President and Chief Financial Officer. Before we begin, I'd like to note that some of the information discussed during today's call will consist of forward-looking statements. Setting forth our current expectations with respect to the future of our business, the economy, and other future events. These include projections of revenue, earnings, and other financial items, statements on plans and objectives of the company or its management, statements of future economic performance, and assumptions underlying those 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 company's fourth quarter 2021 results included on Form 10-K 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. 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 on our website, which provides additional context of financial performance and our outlook for 2022. You can find this presentation at www.command.com slash investors slash presentations. Now, I'll turn the call over to Ian Walsh.

Thank you, Carrie, and welcome aboard the Command team as our new head of investor relations. We are very glad you are here with us at this exciting time in our journey. And good morning, everyone, and thank you for joining our fourth quarter 2021 earnings call. I'll start by providing some highlights on the quarter and full year, share some operational and business updates on each of our new segments, and then discuss some important innovations before passing the call over to Jamie for a more detailed discussion of our financial results and our expectations for 2022. During 2021, sales declined. However, we achieved the financial targets for our adjusted metrics of EBITDA, EBITDA margin, and earnings per share, while delivering significantly more free cash flow. Gross margin increased more than 200 basis points to 33.4%, driven by improved performance in several of our businesses, primarily in our seals, springs, and contacts products. In the first half of 2021, the pandemic continued to present economic challenges. However, in the fourth quarter, we saw meaningful order increases across commercial, business, and general aviation markets, led by strong order intake for our bearings, springs, seals, and contacts products. In fact, sales to Boeing and Airbus increased the second quarter in a row. This is a promising indicator that airline demand is rebounding. These order increases have contributed to an improvement in our order backlog for the company, which increased 11% compared to the same time last year. 2021 was a year focused on building a new leadership team, as well as building a foundation for future growth that will allow us to achieve top quartile performance in each of our segments. I'm pleased to say that we also made notable progress on the implementation of our new operations excellence model. We've taken a number of steps, including the deployment of many new tools and systems to drive improved performance and more formal training across all our businesses. We are beginning to see the benefits of these actions as we eliminate waste and reduce variation in our processes. As part of our overarching strategy, we reported our results under a new segment structure. This reinforces Command's commitment to provide transparency and support of our growth strategy and portfolio management. Our three segments are engineered products, precision products, and structures. The new segments align well with our product capabilities and our new brand architecture. Over the coming months, you will see the rollout of the new brand strategy, which is rooted in a company's aim to simplify complexities for our customers and focus on innovation. Let me highlight the high-level strategy for each of our segments. Our engineer product segment displayed tremendous resiliency in 2021. We saw increased order rates for our products, and the team worked diligently to position the business to meet market demand. The strength in the medical and industrial markets is expected to continue in 2022, and we have increasing confidence in incremental recovery in commercial aviation. We will continue to provide innovative solutions that push the boundaries of application engineering and materials science to meet the needs of our customers across all of the end markets we serve. Our key-run technology, which supports our proprietary self-lubricating bearings, for example, was selected to support NASA's historic launch of the James Webb Space Telescope. Our precision product segment is in a state of positive transition as we continue to streamline the organization, improve our business, and advance new product development efforts. We have recently completed two successful demonstrations with an overseas customer for our FireBurst height-of-burst sensor technology, leading to opportunities for commercial deliveries in the near term. Regarding JPF, we are laser-focused on continuing to fulfill our DCS funnel. Although we expect lower JPF sales over time, we are pursuing several meaningful DCS opportunities that are expected to increase our backlog and extend the life of the program. Ultimately, however, we anticipate offsetting the reduced volume with organic growth in other areas of our business. In addition, we continue to make substantial progress on our autonomous logistics technologies, Cargo UAV unmanned aerial system and KMAX Titan aerial system in partnership with Near Earth Autonomy. Moving to our structure segment, we have made meaningful progress in improving the financial performance of the business in this segment. We have accomplished this through strong deployment of our operations excellence model and believe there is significant opportunity for further enhancement. Our teams in Jacksonville, Wichita, and Vermont have embraced our model and are seeking opportunities to drive improved performance. In Jacksonville, for example, they are in the process of consolidating from four manufacturing plants down to two in order to eliminate excess capacity and optimize manufacturing for space and flow. In addition, they have focused their efforts on driving lean principles through their programs that has led to significant improvements in quality and on-time delivery. The results of these efforts were important enough to be recognized by Sikorsky, which increased the quantities from those originally planned in our follow-on multi-year contract for Black Hawk Toxic production awarded in December. Now let me highlight several exciting innovations underway as a result of listening to our customers and helping them solve their toughest problems. In our engineered product segment, we began manufacturing products in the first quarter utilizing our proprietary titanium diffused hardening process, which provides the benefits of titanium alloys while extending service and improving hardness, durability, and wear characteristics for a wide range of end markets outside of aerospace and defense. Our team is actively exploring a variety of medical applications, including those in orthopedics, while fielding requests for applications from Formula One racing teams and weapons accessory manufacturers. In our precision product segment, we are extremely excited to unveil our new cargo UAV unmanned aerial system in the third quarter. This is a purpose-built, fully autonomous, medium lift, logistics vehicle designed to be easily deployed and provide cost-effective, cargo hauling up to 800 pounds and up to 523 nautical miles when empty. Our initial addressable market is the U.S. military and special operations commands. In longer term, the platform capabilities lend themselves to a wide range of commercial applications, such as servicing oil platforms, search and rescue, and middle-mile delivery for logistics companies. We have had several companies looking to partner with us to help provide value-added capabilities, which could expand the use applications for this vehicle. In addition, we have received direct inquiries from U.S. and international military customers, and we're working to secure initial orders for the program. Finally, we are proud to announce that Cargo UAV Unmanned Aerial System was asked to participate in Phase 2 of the U.S. Air Force Agility Prime Program, a significant accomplishment for the team and validation as to the interest of the U.S. military. These are just some of our exciting growth opportunities that our command team will continue to execute against. Looking ahead, we feel confident the commercial aerospace market is rebounding as the economy continues to recover. We are seeing stronger demand in key and markets, especially in aviation, medical, and industrial, which are expected to benefit our very profitable engineered product segment. Precision products will continue to transform, advancing applications of Command's core competencies in precision manufacturing, sophisticated measuring equipment, and fully autonomous flight. Our structure segment will continue to get operationally healthier and focus on advanced composite applications. We are extremely excited for what's on the horizon with several of our new innovations as we position the company for best-in-class performance. Lastly, we will also continue to take a disciplined approach in identifying and pursuing the right strategic acquisitions. Now I will turn the call over to Jamie for a more detailed discussion of our financial results.

Thank you, Ian, and good morning, everyone. Today, I will discuss our fourth quarter and full year results before providing an outlook for 2022. On a consolidated basis, our net sales in the fourth quarter were $175 million compared to $180 million in the third quarter of 2021. We recognized lower sales on both our JPF program as well as products serving the medical and industrial markets. Sales increased in the commercial, business, and general aviation markets, partially offsetting these declines. Net sales for the year were $709 million compared to $784 million in 2020. The decline of 9.6% was largely due to an anticipated reduction in JPF sales and the sale of our UK composites business. Adjusted EBITDA in the fourth quarter was $23.6 million, or a margin of 13.5%, compared to $27.8 million in or a margin of 15.5% in the third quarter of 2021. For the full year 2021, adjusted EBITDA declined 7% to $95 million. However, adjusted EBITDA margin improved 40 basis points from 13.1% in 2020 to 13.5% in 2021 as a result of our focus on operations excellence. Now I'd like to walk through each of our segments, beginning with engineered products. Compared to the third quarter, volumes declined in the fourth quarter, primarily for products serving the medical markets. Adjusted EBITDA for the fourth quarter was $19.4 million, with a margin of 23.5%. Despite the small decline during the quarter, annual results improved with higher demand in medical and industrial markets, and looking ahead, we expect continued strength in these markets into 2022. Annual sales and gross profit increased on seals, springs, and contacts for medical implantables, medical devices, and analytical instruments. This was partially offset by lower sales volume of commercial bearing products driven by the impacts of COVID-19 on commercial aerospace and markets, primarily in the first half of the year. Adjusted EBITDA for this segment for the full year 2021 was $69 million, with a margin of 21.8%. The demand for our springs, seals, and contacts, as well as for our bearings products, has improved significantly against the backdrop of ongoing economic recovery. We end the year with a backlog of $169 million in our engineered product segment, a 26% increase over the prior year, and we expect to see strong order rates for these products in 2022. In fact, to date, we are encouraged by the significant year-over-year order rate increases we have seen thus far in the year. Now moving to our precision product segment. Compared to the third quarter, gross profit declined in the fourth quarter due to lower sales of KMAX aircraft and spares. Additionally, we increased R&D investments in new technologies, such as the cargo UAV unmanned aerial system. Adjusted EBITDA for the fourth quarter was $9.7 million, with a margin of 16%. Annual results for this segment declined, driven by a decrease in JPF DCS sales and associated gross profit, combined with lower gross profit on our legacy FUSE programs. This was partially offset by higher sales and gross profit on our JPF USG program and higher sales and gross profit on our SH2 program with New Zealand. Adjusted EBITDA for the full year 2021 for this segment was $60 million, with a margin of 23.2%. We are managing our current JPF pipeline, and we are looking to secure additional DCS orders in the near term. We continue to make progress in R&D efforts with our patented height-averse sensors, and we are developing new sensor-infusing technologies for UAV platforms, counter-UAV ammunition, and hypersonics that bring in all new capabilities to our existing family of safe and armed devices. Now moving to our third segment, structures. Compared to the third quarter, results were relatively unchanged with lower gross profit due to changes in profit estimates for some of our long-term contracts. This was offset by higher sales volume on our AH1Z program. Adjusted EBITDA for the fourth quarter was $1.2 million with a margin of 3.6%. Annual results improved significantly. driven by the absence of losses from our former UK composites business, higher sales and gross profit on the A-10 program, and traction with our overall operations excellence deployment. Adjusted EBITDA for the full year was $3 million with a margin of 2.3%, compared to a loss of $3.7 million and a negative margin of 2.2% in 2020. We continue to identify opportunities for further operational improvement in our structure segment, which is expected to be healthier in 2022. We will continue to leverage our longstanding aerospace customer relationships with Sikorsky and Boeing, as well as utilize our technologies for additional medical imaging solutions in order to drive improvements in the financial performance for this segment. On a consolidated basis, gross margin increased in 2021 to 33.4%. We benefited from higher profitability for our seals, springs, and contacts, and we will continue to focus on driving improved performance through the deployment of our operations excellence model. SG&A as a percentage of net sales for 2021 was 21.5%. As we discussed on the prior quarter call, we will continue to manage cost and seek opportunities to increase efficiencies across our organization. One example of these activities is the facilities rationalization plan at our structures manufacturing sites that Ian mentioned earlier, which is expected to result in cost savings beginning in the first half of 2022, with total realization of approximately $4 million by 2024. Diluted earnings per share from continuing operations were 33 cents for the quarter, compared to 53 cents in the third quarter of 2021. On an adjusted basis, diluted earnings per share from continuing operations were 48 cents compared to the 60 cents in the third quarter. For the full year, diluted earnings per share from continuing operations were $1.57, compared to a loss per share of $2.54 in 2020. On an adjusted basis, diluted earnings per share from continuing operations were $1.93, compared to $2.11 in 2020. Recall in 2020, adjustments were largely driven by non-cash, non-tax goodwill impairment charge, an asset impairment charge on our former UK business, and costs associated with the Ball Seal acquisition. During the quarter, we generated adjusted free cash flow of $28 million, driven by strong cash collections and improved working capital management as a function of our focus on operations excellence. For the year, adjusted free cash flow generation was $56 million, compared to a usage of $1 million in 2020. Now I'll provide you with our outlook for 2022. We expect sales in the range of $720 million to $740 million, and we expect to deliver adjusted EBITDA of $93.7 million to $99 million, with an adjusted EBITDA margin on a consolidated level in the range of 13% to 13.4%. For the full year 2022, we currently expect earnings per diluted share to be in the range of $1.75 to $1.90. We expect cash flow from operating activities to be in the range of $65 million to $75 million, leading to an adjusted free cash flow of $40 million to $50 million. We expect the cadence of earnings to be weighted towards the second half of 2022, with our first quarter results being the lowest period of performance. Our results for 2022 reflect the continued strong performance expected in the medical and industrial end markets, and the anticipated incremental recovery of commercial, business, and general aviation and products through the balance of the year. With that, I'll turn the call back over to Ian for closing remarks.

Thanks, Jamie. 2021 was a foundation-building year for command in terms of people, processes, and performance. We will never be satisfied with our profitability until we are achieving top quartile performance. The improvements in the end markets we serve are encouraging. And we will capitalize on that opportunity by continuing to win more profitable programs, expand our market share, shed on profitable work, and improve our year-over-year organic growth. Together, with new leadership, we have developed a solid strategy, and we are well positioned to deliver on our priorities. As a quick recap of our overarching strategy, we continue to focus on three strategic pillars. First, we will grow our business through innovation, accelerating investments in our products, facilities, and people. Second, we will continue to be disciplined in our approach to accretive M&A and capital allocation. Third, we will continue driving operations excellence until it's in our DNA and we are best in class at what we do every day. These three pillars will lead us to top quartile financial performance in our segments. All are aimed at improving EBITDA margin, free cash flow conversion, and ROIC metrics that lead to exceptional shareholder returns. I am thankful to all our talented employees in our workforce, and around the world whom are making our vision become a reality and helping each and every one of our customers to achieve greater. With that, I'd like to open the line for questions. Can we have the first question, please?

Thank you. If you have a question at this time, please press star, then 1 on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. And our first question comes from the line of Steve Berger with KeyBank Capital Markets. Your line is open. Please go ahead.

Hi. Good morning, everyone. Good morning, Steve. I wanted to start with the bridge on slide 14, specifically the 86 cent headwind from JPF. That program was a bigger contributor last year than I would have guessed. Just directionally, how much will that business be down this year? And is it still a significant contributor? And to the extent that you can talk about that, is that a further headwind in 23?

Yeah, so, you know, we've talked about this program for some time now, right? We've been, you know, trying to be transparent in our disclosures here, and we wanted to demonstrate here the importance. Really, Steve, again, yes, JPF is a headwind, but we really like the growth that we're seeing in the rest of the business, and we think about the contribution of engineer products, the remaining precision products, and structures businesses. You know, there's good contribution there. In terms of, you know, we're going to continue to work through our backlog in JPF as we have that now. As we mentioned in our prepared remarks, we do have additional line of sight to additional DCS opportunities, but our focus really is on growing the remaining portion of the business.

Yeah, and Steve, this is Ian. Just to build on that, you know, we do have a good pipeline. We've got a lot of prospects out there, but we wanted to show this purposely to kind of demonstrate that we know what that program has been as it kind of runs its course. and we are super focused, like Jamie said, on really offsetting as much as we can with organic growth across the rest of our businesses, which we feel very strongly about relative to the upcoming years. And that's by way inclusive of some strategic acquisitions.

Yeah, understandable. Just given the size of the contribution last year, can you just give us a directional idea of how much that is down for 22 versus 21?

Yeah, I mean, we've got $100 million worth of backlog right now for that program. And we have that inside the 10K there, the disclosures there related to 10K. You know, we've not typically disclosed, you know, forward-looking profitability on those specific programs, just given customer mix as we negotiate contracts. But, you know, that has been a very, you know, profitable program for us in the past.

Yep.

The mix this year is weighted a little bit more towards USG, right? So we are having lower profitability year over year just on mix given the pricing of the units that are expected to go out this year.

Understood. Thanks. And the biggest positive contributor in that bridge is the improvement in structures. Can you tell us what that margin was in 2019 on an EBIT or EBITDA basis? And just talk about your confidence level in that specific area of improvement And, you know, just what does that segment look like when it is top quartile?

Yeah, why don't I start with the margin in 2019. It was about 3% positive, Steve, you know, in that period of time. And what I'll do is maybe pass that over to Ian to talk about the longer-term vision there for that segment.

Yeah, Steve, that's like we talked about. It's been a major focus for us to get that segment healthy. And we've got different sites, different programs. There's actually a variation around it. So quite frankly, our Vermont business historically has had really nice margins. But some of the other businesses, we had programs that weren't the right types of programs. And the nice part is we've got incoming work, new programs, TH47, Boom, for example, really working the A10, Bell programs. The Blackhawk program, for example, very, you know, really nice following order with much stronger profitability as a function of all the work that we did last year. So really kudos to the team there. Fundamentally, though, where we're trying to go, and I think that's the right question, is, you know, we feel comfortable, and if you look at improvement just between 2021 and what we're shooting for this year, You know, the structures programs, when you're doing high-end composites, complex composite materials, you know, that should be high single digits, you know, and that's where we're trying to get to, and even, you know, low double digits. That's the target.

And so just a quick follow-up on that. Jamie, was that 3% EBIT or EBITDA? And same question for you, Ian. EBITDA. And so you're saying, Ian, high single digit EBITDA or double digit, if you can get there. And just last one. you know, timeframe for being able to see a high single-digit EBITDA margin in structures.

Yeah, so, and by the way, I want to mention, too, Wichita and Jacksonville, Wichita already has Part 145 certification, so there's also a little bit of a conscious shift to focus on some aftermarket work, which we are highly capable of doing, and we've got work coming in right now that's much more profitable. So, Our timeline right now, and I think this is true for the other segments, we've got effectively a five-year timeline to get there, but we feel very comfortable and confident that probably within a three-year mark we could be in the high single digits, and at a five-year mark we could be low double digits.

Got it. I'll get back in line. Thanks.

Okay. Thanks, Jude.

Thank you. And our next question comes from the line of Seth Cifan with J.P. Morgan. Your line is open. Please go ahead.

Thanks very much. Good morning.

Hey, Seth.

So I guess I was wondering a little bit in engineered products, if we think about kind of getting aircraft build rates back to the 2019 level, and I guess there could be some back and forth there. Maybe there's never as many 787s, but maybe there's some more A320s. a kind of mid-decade profile, what you guys are thinking about for build rates mid-decade on commercial aircraft. What kind of sales are we looking at? How much recovery is ahead for that engineered products business?

Yeah, that's a great question. So if you look back, we tried to put some disclosures in there to show you exactly where – you know, engineer products was in 2019. So you can see the sales bridge back to 2019 at the peak of aerospace. You know, at that point in time, we did not have the ball seal business unit at that point. That was about a $270 million business generating around 28, 29% EBITDA margins, you know, effectively. So, you know, as we look at the performance today, we believe that there is opportunity for incremental, you know, top line growth as we get back to that recovery. And this is some of our discussions we've had over the past year. Because of the actions that we've taken with that business from a cost, from an investment in automation and new technologies, some new facilities to sort of streamline our processes and operations, we do expect the drop-through on those incremental sales opportunities to come through fairly meaningfully.

Yeah, I mean, if you look at the historics, they've been exceptionally strong, certainly for businesses like Comatics. The content that we have across Airbus and Boeing, whether it's in the A220s, 320s. We know that the double aisles are going to recover a lot slower. We've expanded content on 737, even 777X. So I think we're in a very strong position, as Jamie said, not just from that recovery, which the bill rates are all increasing. We know travel's gone up. But also from an operational perspective, what we've done to expand the margins there. And a lot of good work still in work to automate a lot of our processes and get costs out.

And just to add to that, as we think about cost this year and CapEx this year, we do see some incremental cost as we are investing for growth across all of our engineered products companies, frankly. So it's new engineering, it's new sales and business development talent, as well as capital expenditures to continue our trend towards automation and new technologies across You know, there's a little bit of that's weighing on our results for 2022 to a certain extent, and that you'll note our CapEx expectations for the year are a little bit higher than, you know, they were last year.

Okay, great. And then following up on structures, I guess, you know, just stepping back and thinking about it in big picture and, you know, looking at the profitability of the different segments and, the, you know, what you guys have highlighted as kind of the, you know, the relative strength of the company being in engineered products. I mean, the structures, the strategic, you know, structures in the portfolio over time and being a strategic part of command, I guess, how do you think about that?

Yeah. Yeah. You know, we consciously wanted to segment, as we've talked about before, for all different reasons and good reasons. And, you know, what I want to make sure, you know, people understand is that early in the year last year, we were already focused on this and really trying to understand where the, you know, best in class, top core, top performance is for each of those segments. So early last year, we laid those trajectories. We set those game plans in place, those strategies over five years. So our focus right now is to get each of our segments to that top quartile performance. As we go year over year, and again, a lot of effort operationally, like we talked about the training that's underway, consolidation that's underway, investment we're making on the front end of our business to expand our top line. if we feel that structures, for example, can't get to that top performance, well, then we're going to take a hard look at it and what it means to the portfolio. Because fundamentally, from a consolidated basis, we know exactly where we need to be in five years.

Okay, great. And then just in the M&A market, I guess, how are things looking these days? You know, what's developed there incrementally maybe over the past, you know, probably something we talk about each quarter, but since it's year-end kind of over the past year in terms of, you know, the landscape, the opportunities, the multiples, and how you're thinking about things.

Yeah. We are and remain very active, as we've talked about before, on the acquisition front. We talked last year about how we kind of – we did a – a hard look at our filters and really trying to focus on the right type of acquisition that fits into our portfolio. So last year, it wasn't for lack of effort. We were, you know, pursuing several opportunities. But at the same time, to your point about multiples, small, medium, and large didn't matter. Really some almost crazy irrational behavior out there. We want to be very patient. We want to be very conscious and disciplined in the use of capital. And quite frankly, you know, investing in ourselves. We've got plenty of opportunities, investment in ourselves, but we remain very active. We've got a nice pipeline. We continue to pursue certain strategic acquisitions that we think makes a lot of sense for the business. And we'll continue to do that. We know that's a big part of our growth and also repositioning the company in terms of getting that top quarter performance. So we will continue to pursue that very hard.

Great. Okay, that's it for me for now, but thanks very much.

Thanks, Seth. Thanks, Seth.

Thank you. And, again, if you have a question at this time, please press star, then 1. And our next question comes from the line of Pete Skibitsky with Emblec Global. Your line is open. Please go ahead.

Hey, good morning, guys. Hey, Pete. Hey, guys, I wanted to get a better, just to extend kind of the margin discussion around engineered products. I wanted to get a better sense of how to think about kind of the future cycle peak margin in that business. You know, the 24% almost, you know, at the peak of 2019 is a great number, and I think, you know, it came down after that. Obviously, on the aerospace down cycle, I think also then you have the ball seal purchase intangibles flowing through there. So I was wondering if you could maybe give us a sense of – what that amortization looks like in engineered products in the next few years so we could just get a sense of what the new kind of peak number is likely to be, including the amortization.

Yeah. Jamie, you talked amortization. Pete, I'll kind of talk again targets and kind of where we're aiming. You know, when you look at the portfolio of the businesses we have in engineer products, we actually have a nice, I mean, they're all highly high performers, but we do have a variation there. We've got some that are well above that consolidated margin and some a little bit below. And so I look at where, for example, Ball Seal is. I look at our traditional, you know, performance with Comatics. We've got our two German sites, RWG and GRW. Tons of potential there. and a real focus of effort to expand those margins. You know, from a target perspective, you know, we feel that, you know, we should be north of a 25%, and we've got businesses, like I said, above that. So we're highly confident that in a three-year window and certainly at the five-year mark, that's the top performance we're shooting for. That's where those businesses need to be.

Yeah, and again, Pete, we don't specifically break out the depreciation from the amortization for the engineer products business unit. But, you know, again, as we look at the prior performance in 2019, you know, if you were to look at EBITDA for that business, it would be closer to 28%, 29%. You know, so there's sort of a kind of on a run rate basis, 600 basis points in the, we'll call it the legacy engineer products before the acquisition of all seal.

Okay, okay. Okay, so Ian, you think you could be north of 25% at some point, even including that amortization? I do. That's an EBIT number, not an EBITDA number? It's EBITDA. It's EBITDA, okay, okay. Okay, then just last one for me, just to follow up on the JPF conversation. The FUSE guidance for 2022, I think it was $25,000 to $30,000, Does that include this $45 million DCS order that you guys have been talking about for a couple quarters or no?

No, that does not. So, you know, that's in work. And, again, we've got a high degree of confidence that we'll secure that here at some point. But it does not include that.

Yeah, and just to reference, you know, again, we have to remember our JPF program is unique in that, you know, FUSE deliveries do not necessarily always correlate one-to-one with FUSE revenue, right, given the overtime nature of our USG program versus, you know, deliveries underneath the DCS programs. So just kind of make sure that everyone's aware of that.

Yeah, understood. I appreciate it. And... So there are some DCS opportunities that are out there. You guys still are working that. They're just not as mature as the $45 million opportunity, I guess. Is that the way to think about it?

Yep, that's the way to think about it. And, again, we've got a line of sight, I think, a strong line of sight between now and certainly 2023 for those orders. Okay.

Okay. All right, thanks, guys.

Okay. Thanks, people.

Thank you. And we have a follow-up question from the line of Steve Berger with KeyBank Capital Market. Your line is open. Please go ahead.

Hey, thanks. I hate to harp on structures. Obviously, it's weighed on results for a long time. I know you have these target ranges of three to five years. But can you just tell us, in general, how long do the contracts on these programs run? And Do you think you'll be able to drive pricing on top of the efficiencies you're looking to get to help accelerate this improvement program?

Yeah, no, actually, absolutely. And credit to our team down in Jacksonville specifically, we use them as an example. They just recently signed their new multi-year contract. The duration on those is typically five years. So, you know, we just turned over the latest multi-year contract. We'll start performing under the new contract this year. That does have improved pricing underneath it. And on top of that, again, we're driving cost out of the organization. These are longer term in nature, for sure, the nature and types of this work, which is why we are so focused on lean practices and driving cost out of the operations to be more efficient on the current contracts. But that also positions us better to when we win new work, that that new work comes in at a more profitable rate than historically it would have. I don't know if there's anything you want to add, Ian.

Yeah, again, we're consciously also looking at the type of work that we're pursuing. We've got some really nice near-term prospects that we're expecting to land this year that will demonstrate that. Much higher margins, much more in line with our hiring capabilities. So again, we're kind of in that you know, fix, get healthy stage operationally, which is showing really nice results, which includes that consolidation piece we talked about. Even, like I said, Vermont and what we're doing with some of our structures on the medical side, that is much more profitable work. Really have some nice growth there last year with a team up in Vermont. And even with the folks down in Jacksonville, like I said, with the Part 145 work that they're doing, So we feel confident that we're definitely going to get healthier there as we go. And to your point, yeah, we were in some work that was not profitable for a period of time, and we've exited some of that work, and we've actually gone back and renegotiated some of the pricing on some of that legacy work.

That's great. Sorry if this is in the K. I can find it later. But how much of that $100 million in JPF will ship this year?

Yeah, again, we're going to continue to work through that, you know, so I would imagine the expectation would be, you know, we'd sort of work through as much of that as we can over the course of this year, Steve. Okay. Yeah.

And, you know, there's obviously some unfortunate events in the news this week. What does that mean, if anything, for the Fuse business or Safe and Arm, whether it's from supply chain or inquiries or whatever? You know, how are you just thinking about that?

I think to answer your question, from a supply chain perspective, we don't think there's really any risks there, quite frankly. And we've looked at that. I think, you know, our teams already have done a nice job with the situation that's going on there, looking at what that might mean. And specifically for JPF, quite frankly, it is just way too hard to tell. We know exactly, you know, as we've disclosed, where that program is. It's running its course. We've got our pipeline. We don't expect to have any issues there. So other than that, we really don't have much to comment on.

Yeah, I figured, but I thought I'd ask. For cargo UAV, you said there's direct inquiries from various customers. What's your estimate from when you can secure orders? And kind of same question for when that might ship. Is there a timeline that you can talk about?

Yeah, sure can. So, you know, our timeline right now, and I actually was literally just yesterday down at Camp Lejeune with our Marine Special Forces teams talking with them, really productive meeting. I would tell you that our timeline from a military perspective, so the militaries, whether it's Marine Corps, Air Force, like things we've talked about, they want to have these types of capabilities flying before 2025. From a commercial perspective, they would definitely want them earlier, but that's a function of how, again, we're ramping up this program. We're going to be flying a full-scale prototype this year. We know that getting it to a technology readiness level of six or seven is where we need to be, and we're confident we're going to be there. So quite frankly, we would expect to have some level of funding from the services that which this year, and some initial orders coming in possibly later this year, either not from the military because they went from a programmatic perspective. So there could be a couple of those cargoes that we could be building under kind of a T&E or test and evaluation perspective. And from a commercial perspective, we've seen, whether it's airlines, logistics companies, they are very comfortable getting early orders in. So our teams are, and that's kind of part of the investment too, really thinking about how we approach those markets in the right smart way to get orders starting to come in later this year with the intent, again, delivering orders, delivering product before 2025. And that's doable for us.

And so how do you think about the addressable market in 2025 and then maybe longer term as commercial takes off?

Well, we're starting to see some initial analysis come in right now. And from a commercial perspective, if you look at unmanned systems, that addressable market is $5 to $10 billion. It's a huge market. On the military side, it's less, naturally, and very strategic and targeted. So we've got anywhere from ranges of hundreds to several thousands. That's kind of the range we would be talking about for services, certainly in the Marine Corps. Army is a little different. Air Force is a little different. So all in all, it's a very nice market for us, both in the military and the commercial side.

I know it's hard to know this now, but if you're selling hundreds in 2025, what's the margin profile on that program?

Well, I'll put it this way. It sits under our precision products for a reason because that is a precision product. And if you look at the margins that we're showing, that's the margins that we're shooting for.

Got it. And then one final. If you can't find good M&A candidates for whatever reason or you find some that are small, would you consider a buyback or other avenues of capital allocation or are you just really content to wait for the right deals?

No, we're looking at all those options, and the board is very supportive of that. So the answer is yes. But at the same time, we're not going to overpay, and we feel there are plenty of really nice targets out there that we're going to continue to look at and go after, for sure.

Great. Thanks for the time.

Yep.

Thanks, Steve.

Thank you. And I'm showing no further questions at this time. And I would like to turn the conference back over to Carrie Bear for any further remarks.

Thank you, Michelle. And thank you, everybody, for joining our fourth quarter 2021 conference call today for our earnings. And we look forward to getting back to you and talking with you when we provide our update on our first quarter 2022 earnings. Have a great day.

This concludes today's conference call. Thank you for participating. You may now disconnect.