Kaman Corporation

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Command Corporation third quarter 2022 earnings conference call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you need to press star 1 1 on your telephone keypad. At this time, I would like to turn the conference over to Ms. Carrie Baer. Ms. Baer, you may begin.

Good morning. Welcome to Command's third quarter 2022 earnings call. Leading the call today are Ian Walsh, Chairman, President, and Chief Executive Officer, and Jamie Coogan, Senior Vice President and Chief Financial Officer. Before we begin, please note that some of the information discussed during today's call will consist of forward-looking statements, 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 in any forward-looking statement due to many factors, the most important of which are described in the company's latest filings with the Securities and Exchange Commission including the company's third quarter 2022 results included on form 10Q and the current report on form 8K 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 8K. Finally, we posted an earnings call supplement on our website, which provides additional context on our financial performance. You can find this presentation at www.command.com slash investors slash quarterly earnings call. Now I'll turn the call over to Ian Walsh.

Thank you, Carrie. Good morning, everyone, and thank you for joining us for our third quarter 2022 earnings call. I'll start by providing highlights on the quarter and then share some operational and business updates along with some respective accomplishments and innovations in each segment, before passing the call over to Jamie for a more detailed discussion of our financial results and outlook for the remainder of the year. As you may be aware, in September, we completed the acquisition of Aircraft, Wheel, and Brake, the largest in the history of our company. They joined our engineer product segment and will be a very meaningful part of our company going forward. When you consider 2021 results, they add approximately 10% to our sales and nearly 30% to our adjusted EBITDA. This transaction has created a unique opportunity to expand our highly engineered product portfolio by investing in a high margin quality asset with potential for growth. For more than 80 years, Aircraft Wheel and Brake has been a trusted provider of mission critical wheel and brake technology, products, and solutions. They have a strong OEM and aftermarket portfolio of more than 100 platforms specializing in wheels, brakes, and related hydraulic components for helicopters, fixed wing, and UAV aircraft. They provide customized proprietary designs protected by intellectual property and are actively working to win new business. One such area for growth is in carbon brakes for future military and civilian applications. The benefit of carbon brakes compared to steel brakes are that they are lightweight have competitive lifecycle costs, offer more landings between overhauls, and have increased heat tolerance. The team has been working to advance carbon break technology, which will allow them to compete on larger business aircraft platforms and even eVTOL applications where weight is imperative. Now let me start the business discussion with an update on general market conditions. Demand across the commercial, business, and general aviation markets continues to show signs of improvement through additional orders for our bearings, springs, seals, and contacts products. In fact, sales to Boeing and Airbus were higher for the fifth quarter in a row. These trends support the higher sales and improved margins we anticipate over the next few years. The defense market is relatively stable, while our industrial and medical order rates continue to increase. Sequentially, consolidated performance for the third quarter improved organically with higher sales and adjusted EBITDA. Performance for the period relative to our expectations was impacted by certain program executions from supplier challenges. The teams have identified the most significant areas impacting our results and are working to correct the issues that are creating the delays. These issues are the primary driver for the downward revision in our outlook for 2022. Engineer products posted strong results with both sequential and year-over-year sales growth, despite some margin compression due to rising input costs and some supplier challenges that they faced. Our precision products and structures performance fell short for the quarter due to delays associated with the part availability for one component in our JPF program, the timely satisfaction of technical design changes from our customers on some of our missile fuse programs, and the recovery of our A-10 and the supplier fire which affected our Black Hawk program. Gross margin for the company was 32.5%, relatively unchanged compared to the second quarter, but decreased 260 basis points from the third quarter of 2021. Compared to the prior year, quarterly sales and associated gross profit were lower for our JPF and KMAX programs, and we incurred an $800,000 inventory step-up associated with the purchase accounting for aircraft wheel and brake acquisition. Our engineer product segment continues to deliver excellent results, with quarterly sales increasing 9% compared to the third quarter of 2021, inclusive of aircraft wheel and brake and $4.4 million of foreign exchange headwinds. Absent these items, sales increased 11% for the period, demonstrating the underlying strength of the segment. Within the quarter, not only was medical demand strong, but sales of commercial bearings also improved. Order rates for many of our products also remain robust. Backlog, excluding the addition from aircraft wheel and brake, has increased nearly 40% since the beginning of the year. Our employees continue to provide innovative solutions that push the boundaries of application engineering, material science, and process improvement, allowing us to meet the needs of our customers. Recently, we have been working on industry 4.0 tools and techniques, the next evolutionary step in lean business practices to streamline our capabilities to drive improved throughput and performance. Additionally, we just implemented an advanced manufacturing technology cell in the third quarter. This is a dedicated team with dedicated equipment that focuses on creating new processes to improve productivity and margin performance across a range of our most challenging products. They are also developing cost minimization and industrialization strategies for new products by leveraging the knowledge of process and manufacturing subject matter experts. This allows us to drive efficiency in the product manufacturing without causing disruption and waste in our production line. We have seen early successes since implementation of this cell, where we have identified savings of 50 to 80% on certain process steps for two of our more complex bearing products. Our precision product segment continues its important transition. Sales and margin in the third quarter increased sequentially, but we were slightly below our expectations. During the quarter, we experienced a delay in receipt of a component from one of our suppliers, which changed the timing of shipments for GPF to later in the year than we had previously expected. This accounts for a meaningful portion of the downward revision in our free cash flow expectations for the full year 2022. In October, we are very excited to announce that we reached another milestone in our strategy to expand autonomous technology in this segment with our purpose-built cargo UAV unmanned aerial system. The United States Marine Corps selected command to build a cargo UAV prototype for their MALS-A program. The Marine Corps will be funding the build for the prototype in 2023, and once completed, it will undergo a field user capability assessment. We will continue to take a stage-gate approach to R&D funding and have released an additional $4 million for this program in the third quarter. We believe this will be a major growth driver for our air vehicles business and look forward to providing an affordable, reliable, and maintainable logistics vehicle for the autonomous market. We are playing the first flight of our full-scale cargo UAV demonstrator in the fourth quarter. Our initial adjustable market for this fully autonomous medium lift vehicle is the US military and special operations commands, along with a wide range of commercial applications, such as supporting oil and gas platforms and pipelines, search and rescue, humanitarian relief, and the middle mile delivery for logistics companies. There is no question that there is a very strong demand signal for our cargo UAV across the Department of Defense and specific commercial operators. Our structures segment continues to focus on strengthening operating margins and seeking new, more profitable programs that fit our core capabilities. In fact, we have successfully executed on our plan to diversify this segment's program base by securing multiple military aftermarket contracts. We expect contribution from this higher margin work to begin in 2023. For the quarter, sales and margins were higher than the second quarter of 2022. However, challenges with suppliers and execution in certain programs delayed the level of recovery that we expected in this segment and our ability to meet our plan for the quarter and the remainder of the year. Within structures, we continue to take the necessary steps to right size our businesses. In Jacksonville, we have finished the facility consolidation, And in the third quarter, we sold our Mexico operations. This has lowered operating costs while improving capacity utilization. In Vermont, we continue to see strong performance. The team has been focusing on transforming the culture through improved communications and training, successfully applying lean tools and process improvements, and winning new profitable business. This has resulted in an average productivity year-to-date of 85%. increasing from 81% last year, which has greatly improved their profitability. Looking ahead, we remain confident that the return of the commercial aerospace market and the durable demand in aviation, medical, and industrial markets will benefit our high-margin engineered product segment. Precision products will continue to transform and is quickly shifting to autonomous systems and next-generation safe and armed products. Additionally, our structure segment will continue to benefit from our focus on operations excellence and the addition of new, more profitable programs, including more aftermarket. We are excited about the opportunities before us as we position the company for best-in-class performance. Lastly, we are very excited about the strategic investment in aircraft wheel and brake and have been very pleased with how smooth the integration has been thus far. We are now laser-focused on duty-levering our balance sheet as quickly as possible so that we can continue to assess strategic opportunities that provide the highest return to our shareholders. Now I will turn the call over to Jamie for more detailed discussion of our financial results.