Kaman Corporation

Good day and thank you for standing by. Welcome to the Command Corporation Q4 2022 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 that session, you'll need to press star 1 1 on your phone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded, and I would now like to hand the conference over to your speaker today, Ms. Becky Staff, Vice President and Controller. Ms. Staff, please go ahead.

Good morning. Welcome to Command's fourth quarter 2022 earnings call. Leading the call today are Ian Walsh, Chairman, President, and Chief Executive Officer, and Jamie Coogan, Senior Vice President, Chief Financial Officer, and Treasurer. Before we begin, please note that some of the information discussed during today's call will consist of forward-looking statements 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 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 2022 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 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 forward slash investors, forward slash quarterly earnings calls. Now I'll turn the call over to Ian Walsh.

Thank you, Becky. Good morning, everyone, and thank you for joining us for our fourth quarter 2022 earnings call. I'll start by providing a summary of the quarter, followed by the decisive actions we have taken to improve our operations and position us for success in 2023 and beyond. I will then pass the call over to Jamie for a more detailed discussion of our financials and outlook. Our teams worked hard to overcome multiple challenges in 2022. We finished the year ahead of the revised EBITDA expectations we communicated in the third quarter earnings call, primarily driven by continued strength in our engineer product segment, coupled with meaningful progress and initiatives to enhance our overall operational performance. Our fourth quarter sales came in at $197.1 million compared to $175.1 million in the prior year. And for the full year, we reported sales of $688 million compared to $709 million in the prior year. Both the quarter and the full-year results benefited from strength in our engineer product segment that grew organically at 12 percent year-over-year and contributions from aircraft wheel and brake acquisition, offset by the planned reduction in volume in our JPF program. Our adjusted fourth quarter EBITDA was $31 million, which was up 31.4 percent from $23.6 million in the prior year. For the full year, our adjusted EBITDA was $80.2 million, which was above the range we communicated in November. This resulted from initiatives we launched during the year to improve execution and cost control. Performance in the quarter was further supported by strength in our engineered product segment as we continue to see steady recovery in the commercial aerospace market and growth in medical industrial end markets. In addition, we benefited from the contributions of our aircraft wheel and brake acquisition. We are very pleased with the integration and performance of this new business, and we look forward to their full year contribution in 2023. 2022 had several challenges that emerged with a couple of our businesses and their suppliers, which the teams had been working to correct. We also had the anticipated reduction in JPF volume. As we head into 2023, we continue to have a clear path forward on more stable footing with strong backlogs in our highest growth businesses. We have consciously reduced the primary sources of variation in our performance with our recent announcements on JPF and KMAX. Our 2023 outlook, which sets forth our expectations for the year, is based on the following assumptions. Number one, it includes only the small amount of firm JPF orders we have on hand. Number two, no contribution from KMAX aircraft sales. And number three, no margin contribution from our structures business. Later in the call, Jamie will take you through the 2023 outlook in more detail. Our primary near-term strategic objective continues to be our focus on our highest growth businesses, where our team's emphasis is on innovation, investing in product, and process advancements through a combination of incremental, CapEx, and IR&D. Other key objectives include the transition of our precision products business to next-generation fusing and autonomous component manufacturing. In our structure segment, we continue to focus on realizing the gains expected to result from the recently announced consolidation of our Jacksonville Structures business, improving our legacy programs, and winning new, more profitable OEM and aftermarket work. The deployment of operational best practices have already had a tremendous benefit at our Vermont Structures business. In just over a year, they have gone from low single digit to high teams EBITDA margins. As recently announced, we are consolidating our remaining JPF production in our existing Middletown, Connecticut facility. This will enable us to maintain adequate production capacity for potential future DCS volume while rationalizing our footprint and reducing our costs. We expect to complete the closure of the Orlando facility during the first half of 2024. After careful analysis and evaluation, we announced in January the discontinuation of K-Max production. We conducted a thorough review of the program last year, talked with our customers and channel partners, and assessed the future adjustable market. While KMAX is a unique and capable platform, it would continue to struggle with low volume and a high level of competition, therefore creating unpredictability in orders. The low margins and significant working capital requirements for this program do not meet our expectations for EBITDA margin, cash flow, and ROIC. The discontinuation of KMAX production removes a significant source of variation and use of cash going forward. We will continue to support the existing fleet, including providing operators with repair, spare parts, motor blade exchanges, and fleet services, including training. Lastly, we have identified and taken incremental action to optimize our total cost structure, inclusive of the corporate headquarters. These activities include reducing layers, consolidating support functions, and eliminating redundancies between business units and corporate in an effort to continue to lower our SG&A. Now let me turn to the business discussion with an update on general market conditions. Demand across the commercial, business, and general aviation markets continues to improve as we are seeing high levels of orders for our bearings, springs, seals, and contacts. As of the end of January, the outstanding backlog in our specialty bearings business is now exceeding pre-pandemic levels set in 2019. These trends support the higher sales and improved margins we anticipate over the coming year. Although we expect our defense sales to decline year over year due to lower JPF volume, the remaining portion of our defense business looks to benefit from increased defense spending and the ramp-up in production of new defense programs. The defense market and budget show moderate growth, and we continue to identify areas to support our national interest overseas in a complex and rapidly changing global environment. In our industrial medical end markets, order rates continue to increase and provide meaningful organic growth. By segment and beginning with engineered products, strong performance continued in the fourth quarter, driven by outperformance in these business units relative to our outlook. Sales for this segment increased 38.1% and 18.7% for the quarter and full year respectively, benefiting from organic growth and the addition of aircraft wheel and brake. Organic sales growth for both the quarter and the year was 16.2% and 12.2% respectively. Higher volume also translated to improved profitability with EBITDA margin of 260 basis points for the quarter and 240 basis points for the full year, with aircraft volume rate contributing 130 basis points and 40 basis points, respectively. In our precision product segment, sales declined 17.7% and 27.8% for the fourth quarter and full year, respectively, as we transition these businesses to new growth products and markets. This anticipated decline resulted from lower JPS volume and the corresponding reduction EBITDA margin contribution. Much of our announced restructuring is focused in this segment, as a discontinuation of KMAX and the closure of the Orlando facility will provide opportunity for further cost savings, allowing us to focus on the development of new technologies and the improvement of our other missile fuse programs. In our structures segment, our Vermont facility continues to exceed expectations and serve as a blueprint for success. Key initiatives for this facility include cash improvement efforts, quality improvement plans, and facility optimization as we prepare for growth opportunities. Our other structures facilities will mirror these efforts as we move into 2023 and continue our journey to bring this segment to acceptable financial performance levels. During 2022, challenges persisted in our Wichita and Jacksonville facilities on two legacy programs, which drove a $1.6 million operating loss for the quarter. We took great strides in 2022 and early 2023 to continue to transform command and reposition our company for long-term growth. These actions and the strength of our underlying businesses will enhance our earnings power and allow us to deliver improved financial performance going forward. These transformative initiatives were designed and executed with our highest growth opportunities in mind as we continue to demonstrate that our core competencies of innovation and solving our customers' most complex problems will stay at the center of our strategy. As we look to the year ahead, we are focused on execution against the strong backlog we have in our engineer product segment, while being thoughtful and deliberate with our investment spend on new technologies and precision product segment. Our near-term priorities in 2022 are very clear. Continue to reduce or eliminate sources of variation to our annual performance, which will help us better level load our overall performance quarter to quarter. Continue to advance our processes, drive cash generation, and reduce our leverage. Our long-term strategy remains intact as we re-strengthen our balance sheet and continue to grow our company more profitably. Now, I'll turn the call over to Jamie for a closer look at the numbers. Jamie?