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?

Thank you, Anne, and good morning, everyone. Today, I will walk you through our fourth quarter results before turning to our outlook for 2023. Our fourth quarter sales were $197.1 million, which was higher than the prior year period of $175.1 million. For the full year, total sales were $688 million, compared to $709 million in the prior year. Higher sales in the quarter stem primarily from organic growth in our engineered product segment and contributions from aircraft wheel and brake acquisition. Lower sales for the year were due to lower JPF shipments. Adjusted EBITDA in the fourth quarter increased 31.4% to $31 million, or a margin of 15.7%. compared to $23.6 million, or a margin of 13.5% in the fourth quarter of 2021. Higher EBITDA in the period mostly stemmed from the performance and engineered products and the addition of aircraft wheel and brake. For the full year, adjusted EBITDA was $80.2 million, compared to $95.5 million in 2021. Lower EBITDA resulted from lower sales in our safe and armed device programs and at our structured programs at Jacksonville and Wichita. This decrease was a function of program inefficiencies and supply chain matters that we communicated last quarter. As Ian mentioned, we've implemented a range of measures to lower our cost base and eliminate programs which historically have caused significant variation in performance. In the aggregate, we expect the cost reduction in program termination initiatives to produce approximately 22 to 25 million in annualized savings by 2024, with approximately 12 million to be realized in 2023. These savings are comprised of the following. $12 to $15 million associated with the closure of the Atlanta facility. We will begin to see savings between $3 to $4 million immediately as we reduce operating activity, with full savings achieved by the end of 2024. At least $7 million related to corporate restructuring, primarily focused on the right sizing of our corporate structure to current sales levels and the elimination of redundant functions between business units. And lastly, around $3 million related to the discontinuing production of KMAX aircraft. We remain committed to optimizing our cost structure and have focused on implementing additional cost-out measures this year in order to yield additional savings in 2023 as we continue to drive improved performance. Turning back to our results for the fourth quarter, gap earnings per diluted share were adversely affected by the impairment and restructuring charges taken during the quarter, resulting in a loss of $1.96 per share. Adjusting for these and other charges, we achieved adjusted earnings per diluted share of 42 cents. This compares to earnings per diluted share of 33 cents in the fourth quarter of 2021 and adjusted earnings per diluted share of 48 cents. For the full year, we reported a loss of $1.65 per diluted share and adjusted earnings per diluted share of $1.12. In the current period, adjustments were primarily related to restructuring, inventory, and contract cost write-offs related to the CAMACs, one-time costs related to the acquisition of aircraft wheel and brake, and a goodwill impairment charge due to lower demand on our JPF program. Adjustments in the prior year primarily related to discrete tax items and severance costs. A full reconciliation of GAAP to non-GAAP amounts can be found in our fourth quarter earnings release. Next, I'd like to turn to our guidance for 2023. Our team is focused on expanding our highest growth businesses where we can generate stronger returns while optimizing our cost structure to match the size of our business. Underlying demand remains strong in our most impactful end markets, and we expect continued growth and contribution from our specialty bearings businesses, our ball seal engineering business, and of course, our newly acquired aircraft wheel and brake business. As a result, we anticipate top line growth in 2023 with total revenue in the range of $730 million to $750 million. Full-year adjusted EBITDA is expected to be in the range of $95 million to $105 million, and operating cash flow for 2023 of $60 million to $70 million, leading to free cash flow expectations in the range of $35 million to $45 million. Approximately 36% of our adjusted EBITDA improvement is from growth in organic business and lower expenses due to the cost actions we've taken, with the remainder coming from the addition of aircraft wheel and brake. These increases are partially offset by the impact of lower JPF volume. Our diluted EPS expectations are lower than historical results, primarily because of higher interest costs on our outstanding debt due to the AWB acquisition and lower pension income we expect for 2023. As a reminder, pension income, which is recorded below operating income, was $20.6 million in 2022. This compares to our expected pension income of $1.5 million in 2023. This decrease was largely driven by market conditions impacting the actuarial assumptions for the plan. When combined with the lower JPF volume, these factors together account for $1.60 per share of degradation year over year, which was partially offset by the anticipated organic growth and the contribution of aircraft wheel and brake. Touching on the cadence of earnings for the year, We have worked to better level out our quarterly earnings, and in 2023, we expect a more balanced quarterly earnings profile. We expect approximately 45% of our full-year adjusted EBITDA to be realized in the first half, compared to 35% in 2022. Between the first and second quarter, we anticipate our adjusted EBITDA to be slightly weighted towards the second quarter. In order to improve the reliability of our guidance and improve transparency, we have excluded discrete items which have historically been high sources of variation. Specifically, these include unawarded or uncertain JPF DCS orders and sales of remaining KMAX aircraft held in inventory. We have also assumed no margin contribution from our structure segment. We expect to achieve success in these areas, but they are not incorporated in our guidance. If we are successful, this would provide upside to our expectations for 2023. With that, I'll turn the call back over to Ian for closing remarks.

Thanks, Jamie. As I mentioned earlier, we are entering 2023 in a much stronger position and a clear path forward as a result of planned and deliberate actions to create a more stable company with more predictable results. We continue to develop a culture with greater internal discipline, controls, and leadership. We are very proud to work alongside such a talented team of professionals with capabilities to design and develop highly engineered and sophisticated solutions for our customers. Our future is dependent on our talent, and I am thankful to our workforce of more than 3,000 dedicated employees whose commitment has been instrumental in our success. With that, I'd like to open the line for questions. May we have our first question, please?

Thank you. As a reminder, to ask a question, please press star 1 1 on your phone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Stand by as we compile the Q&A roster. And one moment for our first question. Our first question will come from Steve Barger of KeyBank Capital Markets. Your line is open. Thanks.

Good morning. Hey, good morning, Steve.

Hey, good morning, Steve.

Just first question on gross margin. When we think through JPF wind down, exiting KMAX, and restructuring, do you expect gross margin will exceed last year's low 30% range? And then longer term, What do you think the appropriate gross margin should be for this portfolio as you focus on engineered products?

I'll start off with that one, Steve. We do expect gross margin to be higher than what we anticipated last year, probably somewhere in the range of maybe 200 to 300 basis points, higher overall as we look to 2023, just given the incremental addition of aircraft wheel and brake into the portfolio and the absence of the KMAX sales.

Yeah, and Steve, looking forward, I mean, we have clear targets, as we've mentioned before, relative to what we feel is best class performance for each of our segments. Those businesses all know what those numbers are. So, you know, and that's the first piece. And the second piece is we're working hard with all of our activities relative to our supply chain and how we build, assemble, and deliver products. So we continue to chip away at that gross margin. We want gross margin expansion year over year.

And presumably, as you look further out, you'll exceed the couple hundred basis points that you expect this year as you continue to optimize the portfolio.

Absolutely. Yeah, we do indeed.

Yeah, Steve, one of the key drivers there is organic growth in the base business, especially on the engineer product side, comes through with very significant drop-through relative to earnings. So as that business continues to grow, we would expect to see incremental gross margin gains.

Yeah, got it. And a similar question on SG&A. When you have the portfolio you want, revenue is growing, things are running efficiently, what do you think the right SG&A percentage is? Because it seems like that's the biggest opportunity for cost savings as I look at the income statement.

Yeah, and we agree with you on that, Steve. You know, there's still a lot of work that we're going to do around cost and looking at cost overall in the organization. You know, I think optimally, you know, we want to be closer to 20%, and, you know, in the long run, get down below that 20% if possible with some incremental scale. So, you know, the team's working hard to think through ways to be more efficient, more productive on the G&A front.

Yeah, and, you know, I think the team has done a nice job just, again, offsetting a lot of those material, you know, or excuse me, the SG&A inbound costs that have crept up, you know, last couple years. So, you know, fundamentally, our target is to get, you know, close to 20 and definitely below 20.

And I hear you on the scale aspect of that. Do you need a billion dollars in revenue to be at 20? Or, you know, can you frame it up at all as just from an accountability standpoint?

Yeah, I mean, I think, you know, no, we don't think we need to be at a billion dollars to get to that 20% threshold. I think there's a significant level of efficiency that we can obtain at a slightly lower level than that. But, you know, again, it would be close. We'd be higher than we are today, but probably not at a billion dollars.

Yeah, and the scale will definitely help. But, again, we've got activities going on right now this year as a function of what we started, you know, a year and a half ago to really go after SG&A. So that continues. Okay.

I'll ask one more and then jump back in line. You had planned a full-scale test flight of cargo UAV towards the end of last year, and I think that's now first half of 23. Can you talk about timeline changes and just your updated thinking on the program?

Sure. So we actually said it was close to end of year early this year, and I actually just checked in with the team the other day. So we're very close to our first flight. As you can imagine, that's a very important milestone for us. The team's done a marvelous job. So we're very close to getting that first flight, and once we do, we'll make sure everybody knows about it. In terms of going forward, we've had significant success, not just funding from Congress, but also funding from the Marine Corps, as we've announced with the MOSE program. So that is now a funded program that we're working towards with the Marine Corps. They were just in last week. Very excited in a direction and kind of what their expectations are with that. Our anticipation is, you know, by early next year, where it's an 18-month window, the Marine Corps will take the next big step, which is to say, hey, whoever demonstrates the capability that they need and we're confident will be there, then they're going to fund a series of prototypes to mature the technology. From that point forward, they will then push prototypes into the field with customers, aka the Marines, who really give us the last kind of level of ingredients that we need to kind of finalize that first iteration. And then they want to go to full rate production. Full rate production is still targeted for the 26, 27 timeframe. And they've told us if we can move that in, they would be excited about that. So we're full steam ahead with cargo, which has been great.

As you go through the gating process here, how many competitors will be down selected for further testing? Do you know?

Right now there's two in the MULSE program. And we don't know if they would kind of take two the next step or not, so we'll see. So it's literally down to just two of us right now.

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

Okay. Thanks, too.

Thank you. And one more, please, for our next question. Our next question will come from Larry Solow. of CJS Securities. Your line is open.

Good morning, Jamie and Ian. Thanks for taking the questions. Just a follow-up on the cargo UAV question. How about commercial sales? Is there potential to get commercial sales before that 26, 27 timeframe, or is it kind of going to fall in line after the military moves first?

The answer is yes. We already have a tremendous amount of interest from several commercial customers, and we feel confident that they will move faster than the military, which, by the way, helps the military out tremendously. It's all about building hours and maturity on the aircraft. So we've got some exciting things happening right now that hopefully we'll be able to announce this year to demonstrate the interest of cargo. And, again, if you think about whether it's oil and gas and offshore, and humanitarian relief and some other things, there's just a tremendous amount of interest in the capability of what cargo brings. I will say the addressable market on the commercial side is orders of magnitude higher relative to the military. We've got interest right now, obviously, as I said, in the Marine Corps, but we also have strong interest in working right now with U.S. SOCOM and the Army. We know the Navy's already kind of been talking to us and the Air Force as well. So the services are really trying to think about distributed logistics. That is a big problem for them to solve, and we are on the forefront of that. Commercial side, just as much. You know, I just read an article recently about what's happening with Walmart and how they've demonstrated almost 6,000 flights on small stuff already. All of those prime and big boxes and some of the certainly the offshore oil and other companies are going to be looking for cargo.

Okay, great.

I appreciate that call. And I'm not just switching gears back to engineer products. Obviously, we've had a nice recovery in commercial aviation. The economy has held up pretty well for the last couple of years. And this is, you know, certainly your biggest segment, probably your biggest driver for growth. Does the current economic situation, you know, as we look out, does that concern you at all that we, you know, if I'm getting slowed down, if they're pretty strong and I know backlog is strong as well. Do you have any concerns just over the economy and how that relates to your performance over the next few quarters even?

Yeah, I'll start. The nice part about engineer products, quite frankly, is they cover a very wide range of our end markets. So certainly you're heavily loaded on the commercial and aviation and GA, helicopter side, but also medical, industrial. And we're seeing strong growth rates in all of those. You know, we track the Boeing and Airbus build rates. Everybody knows what's going on there. But we have seen a nice recovery. I would tell you that, you know, from all the data I've seen, I think 2024 for the single aisles is going to really be back to pre-pandemic. Double aisles, I think, will be before, you know, the 20, I think, 8, 9 timeframe because we're seeing an uptick there and we've got really strong content on the double aisles. On the business jet market, we've made really strong inroads. and some of our other businesses like your craft wheel and brakes. Military side, we've got a strong position on a lot of future contracts, CH53. We're still working some stuff right now on V280, which everybody knows was a big program win for Bell. So I'm relatively optimistic on our end markets for our engineer products. And we saw, as we mentioned, really strong organic growth last year. We anticipate the same thing this year, mid-double-digit growth. And that drop-through for our engineer products is just fabulous.

Yeah, just to provide some more clarity there, right, where we are year-to-date on orders specifically out of our specialty bearings products, we are at pre-pandemic levels relative to order rates given at this time of the year. So, you know, very, very strong fill rates for this year's book of business. You know, and we got a high level of confidence there that that's going to kind of continue as we move through the year. And to Ian's point, you know, that little mid-teen sort of organic growth rate expected for 2023 out of engineer products with the incremental drop through in earnings power of that business, you know, is going to be well received, we believe.

Awesome. And excluding the wheel and brake business, obviously that's new business. But how about, you know, you guys have talked about a couple of some new products coming out, you know, I think in the titanium area. And then to your products, any update on that or when we might be hearing some things about new product introductions?

Yeah, we've actually made steady progress when we talk about titanium diffuse hardening process for their chematics business, which is our new proprietary technology. So, for example, we've got 30 parts that are now either approved or in testing that cover everything from space propulsion to There's a huge movement, as everybody knows, about limiting chrome plating, right, overseas in the EU, and titanium diffused hardening can do that. So the Airbus has been talking to us. We've got stuff already in work right now in the medical industry, and this is joint afroplasty and some other things. So the teams do a – and these take, obviously, a while to certify, right? So the team continues to develop, I think, a really strong testing portfolio of TDAH. that will migrate itself into time over time. And we're just going to be looking to really start to accelerate that growth here in the out years.

Great. I appreciate the call. Thanks, guys. Yep.

Thanks, Larry. Thanks, Larry.

Thank you. One moment, please, for our next question. Our next question will come from Seth Seisman of JP Morgan. Your line is open.

Hey, thanks very much, and good morning, guys.

Good morning.

So I wanted to start off asking about the revenue guide, and I think if we look at 22, and we, you know, pro forma for wheel and brake, it's $740 million. So basically, looking at flat sales at the midpoint in 2023, and it looks like based on what's in the backlog for JPF, it looks like there's about $100 million headwind from that in the guidance. And so if you took JPF out of both years, you'd probably be growing like 17% pro forma from 22 to 23. What are the main pieces that are driving that 17%?

I like your math, Seth. One other piece I might add to that is we did have some KMAX sales in 2022 as well that we are now planning to repeat year over year. So it's about, call it rough order, $14 million or so related to that as well. So where the growth is coming in, absent aircraft wheel and brake, absent JPF, absent KMAX, is really coming from engineered products. You know, significant portion of organic growth there, as we talked about, probably low to mid-teens rate of growth there. Structures on year-over-year is expected to grow. We've got some really nice volumes coming out of our Vermont facility and with the expected recovery on our A10 and Blackhawk. But as we mentioned as part of our guide, right, we're not – we're not – counting any incremental contribution margin from those businesses this year. You know, we need to make sure that we get them healthy and that those will be opportunity and upside to our plan overall.

Correct. Right. Okay. Okay. Got it. Got it. And then, so when we think about, I guess, when we think about what precision products looks like, you know, on a go-forward basis, like in the out years, Proforma, you know, without any JPF contribution, you know, that business will get to a place where it's kind of, you know, sub 100 and then kind of start growing from there in terms of the top line.

Yeah, and that's where you're going to see things like, you know, we do have a very strong portfolio of missile fuse programs. And as you know, with the defense spending and the support that's happening sort of around the world to kind of increase defense spending, we would expect and have seen some incremental orders come through for that, as well as our new fire burst technology here that is going to, you know, is expected to be a contributor over the course of this year.

Yeah, I would guess the remaining fusing portfolio would see some pretty strong demand right now. Yep. Okay. And then the last one for me, maybe just turning to the balance sheet and kind of the thought process around 2024, you know, still over a year away until maturities are coming up. But, you know, they will go current during this year. So, you know, how do you think about preparing to address those during 2023?

Yes, we are working on that right now, Seth, talking with our trusted bank partners here as we work forward with that. We know the bank markets are open as of right now, that there's ample opportunity for us to refi. Our goal here is to make the assessment, make a determination, and sort of move to take care of those refinancings. You know, as you know, with the converts, though, it's a pretty attractive coupon rate right now. We do have sufficient capacity underneath our credit agreement, you know, to sort of handle, you know, any incremental with that. But we'll have more information on our expected refinancings as we proceed through the year. But, you know, absolutely, that is a process and project we're working through right now. Yep.

Great. Okay. Okay. Great. Thanks. Thanks very much.

Yep. Thanks, Seth. Thank you. Again, to ask a question, please press star 11 on your phone and wait for your name to be announced. To withdraw your question, please press star 11 again. One moment for our next question. Our next question is a follow-up from Steve Barger of KeyBank. Your line is open.

Thanks. Jamie, cumulative free cash flow over the past few years has been kind of a tough story. Can you talk to your confidence in this forecast?

Yeah, I mean, we feel good about our forecast for this year, Steve. We do have some opportunities, like we talked about in the prepared remarks, relative to the incremental sales of the three whitetails. We've got three whitetail KMAXs in inventory today. We do have the opportunity to convert those to cash. That is not included as part of our forecast for the full year. In addition to that, like we talked about, we are focused on working capital and incremental cost-outs. in order to drive improved cash flow performance. And so, you know, as we move through the course of the year this year, you know, we'll hopefully have some more information for you on that to kind of further shore up our current period cash flow as well as maybe provide incremental opportunities above the range. Yeah. And this is more of a forward-looking – oh, sorry, go ahead. No, I was just going to mention, I just, you know, for everybody's sake, you know, as we think about cash flow performance over the course of the year, you know, Q1 is typically, right, a little bit more of a use for us, and we would expect the cash flows to sort of turn positive, you know, as we move through the course of the year.

Yeah, understood. And looking forward, you know, I asked a question on SG&A, a similar question on free cash flow margin. Do you have a view yet on what this portfolio should produce as it trends more towards engineered products or whatever it's ultimately going to look like, how should free cash flow margin flow through?

Yeah, we would expect it to be akin to, you know, probably the peer group set, right, that we would look at from an engineered products perspective, Steve. So, you know, the goal here is to get that cost structure in line, move that inventory in a way, in a manner that's consistent with, you know, those folks of, you know, think about, you know, an RBC, think about, you know, those types of businesses that and their ability to generate cash, that's where our goal is and target is for command.

So high, single, low, double digit. Does that seem right? Yep. And the business plan approval letter for the Fireburst Manufacturing and Assembly Facility, can you talk through how that works from a cash use standpoint and when that turns to revenue?

Yeah, so what that is is, you may recall, we got some footnote disclosures on this inside of our 10-K. You know, when we had our initial award with the UAE, you know, we entered into some commitments there to provide offset credits associated with that program. So, the Fire Burst Agreement and Joint Venture is our way of satisfying those offset requirements. There will be some incremental cash contribution, but we don't really expect that to be anything meaningful until 2024 as we move forward.

Yeah, and Steve, just to add to that, we were just at IDEX. We just got our joint venture in place, which was a huge milestone to move Fireburst forward, but also relative to potential future DCS orders, thinking about that part of the world. The other thing from a cash flow perspective – I was going to mention was we had another huge milestone just this week. We had a production readiness review approval. This was back to our A-10 program, which we've been waiting on and working towards. So that's another, again, upside for us this year as we start to really get product out the door with the A-10 program from Wichita and Jacksonville.

Sounds good. And I'll just ask one more. Jamie, you were going pretty fast on guidance, so I can check the transcript. But I think you said EBITDA is heavier in the back half. Is that true for revenue as well?

Not as much. What happens is, Steve, as we get through the course of the year, we move through some of the accounting, right, that happens in like the first, second quarter of the year, whether it be vacation accruals, whether it be other types of accruals that we're establishing. We start to work our way through, and as the volume builds over the course of the year, we get better absorption. So that's the sort of natural cadence that we have through our process. So that inherently will always probably have us have Olivia a little bit back-end weighted, you know, relative to performance. But our goal, and as we are trying to demonstrate this year, is that we're trying to make that a little bit more even on a quarterly basis.

Right. So revenue a little more even, but EBITDA a little heavier because of the accruals and such in the front half.

Yeah, more or less. Okay. Got it. Thank you. Yep.

Thank you. I'm seeing no further questions in the queue. I would now like to turn the conference back to Ms. Becky Staff for closing remarks.

Thank you for joining us on today's conference call. We look forward to speaking with you again when we report our first quarter results.

This concludes today's conference call. Thank you all for participating. You may now disconnect. Have a pleasant day and enjoy your weekend.

The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 1 1.

Thank you. Thank you. you Bye. Thank you.

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 and 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 K-Max 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 K-Max 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, load 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 engineer 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. Tire volume also translated to improved profitability with EBITDA margin of 250 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?

Thank you, Anne, and good morning, everyone. Today I will walk you through our fourth quarter results before turning to our outlook for 2023. Our fourth quarter sales were $197.1 million, which was higher than the prior year period of $175.1 million. For the full year, total sales were $688 million, compared to $709 million in the prior year. Higher sales in the quarter stem primarily from organic growth in our engineered product segment and contributions from aircraft wheel and brake acquisition. Lower sales for the year were due to lower JPF shipments. Adjusted EBITDA in the fourth quarter increased 31.4% to $31 million, or a margin of 15.7%. compared to $23.6 million or a margin of 13.5% in the fourth quarter of 2021. Higher EBITDA on the period mostly stemmed from the performance and engineered products and the addition of aircraft wheel and brake. For the full year, adjusted EBITDA was $80.2 million compared to $95.5 million in 2021. Lower EBITDA resulted from lower sales in our safe and armed device programs and at our structured programs at Jacksonville and Wichita. This decrease was a function of program inefficiencies and supply chain matters that we communicated last quarter. As Ian mentioned, we've implemented a range of measures to lower our cost base and eliminate programs which historically have caused significant variation in performance. In the aggregate, we expect the cost reduction in program termination initiatives to produce approximately 22 to 25 million in annualized savings by 2024, with approximately 12 million to be realized in 2023. These savings are comprised of the following. $12 to $15 million associated with the closure of the Atlanta facility. We will begin to see savings between $3 to $4 million immediately as we reduce operating activity, with full savings achieved by the end of 2024. At least $7 million related to corporate restructuring, primarily focused on the right sizing of our corporate structure to current sales levels and the elimination of redundant functions between business units. And lastly, around $3 million related to the discontinuing production of KMAX aircraft. We remain committed to optimizing our cost structure and have focused on implementing additional cost-out measures this year in order to yield additional savings in 2023 as we continue to drive improved performance. Turning back to our results for the fourth quarter, gap earnings per diluted share were adversely affected by the impairment and restructuring charges taken during the quarter, resulting in a loss of $1.96 per share. Adjusting for these and other charges, we achieved adjusted earnings per diluted share of 42 cents. This compares to earnings per diluted share of 33 cents in the fourth quarter of 2021 and adjusted earnings per diluted share of 48 cents. For the full year, we reported a loss of $1.65 per diluted share and adjusted earnings per diluted share of $1.12. IN THE CURRENT PERIOD, ADJUSTMENTS WERE PRIMARILY RELATED TO RESTRUCTURING, INVENTORY, AND CONTRACT COST WRITE-OFFS RELATED TO THE CAMAX, ONE-TIME COSTS RELATED TO THE ACQUISITION OF AIRCRAFT WHEEL AND BRAKE, AND A GOODWILL IMPAIRMENT CHARGE DUE TO LOWER DEMAND ON OUR JPF PROGRAM. ADJUSTMENTS IN THE PRIOR YEAR PRIMARILY RELATED TO DISCRETE TAX ITEMS AND SEVERANCE COSTS. A FULL RECONCILIATION OF GAP TO NON-GAP AMOUNTS CAN BE FOUND IN OUR FOURTH QUARTER EARNINGS RELEASE. NEXT, I'D LIKE TO TURN TO OUR GUIDANCE FOR 2023. Our team is focused on expanding our highest growth businesses where we can generate stronger returns while optimizing our cost structure to match the size of our business. Underlying demand remains strong in our most impactful end markets, and we expect continued growth and contribution from our specialty bearings businesses, our ball seal engineering business, and of course, our newly acquired aircraft wheel and brake business. As a result, we anticipate top line growth in 2023 with total revenue in the range of $730 million to $750 million. Full-year adjusted EBITDA is expected to be in the range of $95 million to $105 million, and operating cash flow for 2023 of $60 million to $70 million, leading to free cash flow expectations in the range of $35 million to $45 million. Approximately 36% of our adjusted EBITDA improvement is from growth in organic business and lower expenses due to the cost actions we've taken, with the remainder coming from the addition of aircraft wheel and brake. These increases are partially offset by the impact of lower JPF volume. Our diluted EPS expectations are lower than historical results, primarily because of higher interest costs on our outstanding debt due to the AWB acquisition and lower pension income we expect for 2023. As a reminder, pension income, which is recorded below operating income, was $20.6 million in 2022. This compares to our expected pension income of $1.5 million in 2023. This decrease was largely driven by market conditions impacting the actuarial assumptions for the plan. When combined with the lower JPF volume, these factors together account for $1.60 per share of degradation year over year, which was partially offset by the anticipated organic growth and the contribution of aircraft wheel and brake. Touching on the cadence of earnings for the year, We have worked to better level out our quarterly earnings, and in 2023, we expect a more balanced quarterly earnings profile. We expect approximately 45% of our full year adjusted EBITDA to be realized in the first half, compared to 35% in 2022. Between the first and second quarter, we anticipate our adjusted EBITDA to be slightly weighted towards the second quarter. In order to improve the reliability of our guidance and improve transparency, we have excluded discrete items, which have historically been high sources of variation. Specifically, these include unawarded or uncertain JPF DCS orders and sales of remaining KMAX aircraft held in inventory. We have also assumed no margin contribution from our structure segment. We expect to achieve success in these areas, but they are not incorporated in our guidance. If we are successful, this would provide upside to our expectations for 2023. With that, I'll turn the call back over to Ian for closing remarks.

Thanks, Jamie. As I mentioned earlier, we are entering 2023 in a much stronger position and a clear path forward as a result of planned and deliberate actions to create a more stable company with more predictable results. We continue to develop a culture with greater internal discipline, controls, and leadership. We are very proud to work alongside such a talented team of professionals with capabilities to design and develop highly engineered and sophisticated solutions for our customers. Our future is dependent on our talent, and I am thankful to our workforce of more than 3,000 dedicated employees whose commitment has been instrumental in our success. With that, I'd like to open the line for questions. May we have our first question, please?

Thank you. As a reminder, to ask a question, please press star 1-1 on your phone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Stand by as we compile the Q&A roster. And one moment for our first question. Our first question will come from Steve Barger of KeyBank Capital Markets. Your line is open. Thanks.

Good morning. Hey, good morning.

Hey, good morning, Steve.

Just first question on gross margin. When we think through JPF wind down, exiting KMAX, and restructuring, do you expect gross margin will exceed last year's low 30% range? And then longer term, What do you think the appropriate gross margin should be for this portfolio as you focus on engineered products?

I'll start off with that one, Steve. We do expect gross margin to be higher than what we anticipated last year, probably somewhere in the range of maybe 200 to 300 basis points, higher overall as we look to 2023, just given the incremental addition of aircraft wheel and brake into the portfolio and the absence of the KMAX sales.

Yeah, and Steve, looking forward, I mean, we have clear targets, as we've mentioned before, relative to what we feel is best class performance for each of our segments. Those businesses all know what those numbers are. So, you know, and that's the first piece. And the second piece is we're working hard with all of our activities relative to our supply chain and how we build, assemble, and deliver products. So we continue to chip away at that gross margin. We want gross margin expansion year over year.

And presumably, as you look further out, you'll exceed the couple hundred basis points that you expect this year as you continue to optimize the portfolio.

Absolutely. Yeah, we do indeed.

Yeah, Steve, one of the key drivers there is organic growth in the base business, especially on the engineer product side, comes through with very significant drop-through relative to earnings. So as that business continues to grow, we would expect to see incremental gross margin gains.

Yeah, got it. And a similar question on SG&A. When you have the portfolio you want, revenue is growing, things are running efficiently, what do you think the right SG&A percentage is? Because it seems like that's the biggest opportunity for cost savings as I look at the income statement.

Yeah, and we agree with you on that, Steve. You know, there's still a lot of work that we're going to do around cost and looking at cost overall in the organization. You know, I think optimally, you know, we want to be closer to 20%, and, you know, in the long run, get down below that 20% if possible with some incremental scale. So, you know, the team's working hard to think through ways to be more efficient, more productive on the G&A front.

Yeah, and, you know, I think the team has done a nice job just, again, offsetting a lot of those material, you know, or excuse me, the SG&A inbound costs that have crept up, you know, last couple years. So, you know, fundamentally, our target is to get, you know, close to 20 and definitely below 20.

And I hear you on the scale aspect of that. Do you need a billion dollars in revenue to be at 20? Or, you know, can you frame it up at all as just from an accountability standpoint?

Yeah, I mean, I think, you know, no, I don't think we need to be at a billion dollars to get to that 20% threshold. I think there's a significant level of efficiency that we can obtain at a slightly lower level than that. But, you know, again, it would be close. We'd be higher than we are today, but probably not at a billion dollars.

Yeah, and the scale will definitely help. But, again, we've got activities going on right now this year as a function of what we started, you know, a year and a half ago to really go after SG&A. So that continues. Okay.

I'll ask one more and then jump back in line. You had planned a full-scale test flight of cargo UAV towards the end of last year, and I think that's now first half of 23. Can you talk about timeline changes and just your updated thinking on the program?

Sure. So we actually said it was close to end of year early this year, and I actually just checked in with the team the other day. So we're very close to our first flight. As you can imagine, that's a very important milestone for us. Team's done a marvelous job. So we're very close to getting that first flight, and once we do, we'll make sure everybody knows about it. In terms of going forward, we've had significant success, not just funding from Congress, but also funding from the Marine Corps, as we've announced with the MOSE program. So that is now a funded program that we're working towards with the Marine Corps. They were just in last week. Very excited in a direction and kind of what their expectations are with that. Our anticipation is, you know, by early next year, where it's an 18-month window, the Marine Corps will take the next big step, which is to say, hey, whoever demonstrates the capability that they need and we're confident will be there, then they're going to fund a series of prototypes to mature the technology. From that point forward, they will then push prototypes into the field with customers, aka the Marines, who really give us the last kind of level of ingredients that we need to kind of finalize that first iteration. And then they want to go to full rate production. Full rate production is still targeted for the 26, 27 timeframe. And they've told us if we can move that in, they would be excited about that. So we're full steam ahead with cargo, which has been great.

As you go through the gating process here, how many competitors will be down selected for further testing? Do you know?

Right now there's two in the MULSE program. And we don't know if they would kind of take two the next step or not, so we'll see. So it's literally down to just two of us right now.

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

Okay. Thanks, too.

Thank you. And one more, please, for our next question. Our next question will come from Larry Salo of CJS Securities. Your line is open.

Good morning, Jamie and Ian. Thanks for taking the questions. Just a follow-up on the cargo UAV question. How about commercial sales? Is there potential to get commercial sales before that 26, 27 timeframe, or is it kind of going to fall in line after the military moves first?

The answer is yes. We already have a tremendous amount of interest from several commercial customers. and we feel confident that they will move faster than the military, which, by the way, helps the military out tremendously. It's all about building hours and maturity on the aircraft. So we've got some exciting things happening right now that hopefully we'll be able to announce this year to demonstrate the interest of cargo. And, again, if you think about whether it's oil and gas and offshore and humanitarian relief and some other things, there's just a tremendous amount of interest in the capability of what cargo brings. I will say the addressable market on the commercial side is orders of magnitude higher relative to the military. We've got interest right now, obviously, as I said, in the Marine Corps, but we also have strong interest in working right now with U.S. SOCOM and the Army. We know the Navy has already kind of been talking to us and the Air Force as well. So the services are really trying to think about distributed logistics. That is a big problem for them to solve, and we are on the forefront of that. Commercial side, just as much. You know, I just read an article recently about what's happening with Walmart and how they've demonstrated almost 6,000 flights on small stuff already. All of those prime and big boxes and some of the, certainly the offshore oil and other companies are going to be looking for cargo.

Okay, great.

I appreciate that call. And how about just switching gears back to engineered products for Obviously, we've had a nice recovery in commercial aviation. The economy has held up pretty well for the last couple of years. And this is, you know, certainly your biggest segment, probably your biggest driver for growth. Does the current economic situation, you know, as we look out, does that concern you at all that we, you know, if I'm getting a slowdown, they're pretty strong, 22, and I know backlog is strong as well. Do you have any concerns just over the economy and how that, you know, relates to your performance of the next, you know, few quarters even?

Yeah, I'll start. You know, the nice part about engineer products, quite frankly, is they cover a very wide range of our end markets. So certainly you're heavily loaded on the commercial and aviation and GA, helicopter side, but also medical industrial. And we're seeing strong growth rates in all of those. You know, we track the Boeing and Airbus build rates. Everybody knows what's going on there. But we have seen a nice recovery. I would tell you that, you know, from all the data I've seen, I think 2024 for the single aisles is going to really be back to pre-pandemic. Double aisles, I think, will be before, you know, the 20, kind of, I think, 8, 9 timeframe because we're seeing an uptick there and we've got really strong content on the double aisles. On the business jet market, we've made really strong inroads. If you look at what Comatics and some of our other businesses, like your craft wheel and brakes, Military side, we have a strong position on a lot of future contracts, CH-53. We're still working some stuff right now on V-280, which everybody knows was a big program win for Bell. So I'm relatively optimistic on our end markets for our engineer products. And we saw, as we mentioned, really strong organic growth last year. We anticipate the same thing this year, mid-double-digit growth. And that drop-through for our engineer products is just fabulous.

Yeah, just to provide some more clarity there, right, where we are year to date on orders specifically out of our specialty bearings products, we are at pre-pandemic levels relative to order rates given at this time of the year. So, you know, very, very strong fill rates for this year's book of business. You know, and we've got a high level of confidence there that that's going to kind of continue as we move through the year. And to Ian's point, you know, that low mid-teen sort of organic growth rate expected for 2023 out of engineer products with the incremental drop through in earnings power of that business, you know, is going to be well received, we believe.

Awesome. And excluding the wheel and brake business, obviously that's new business. But how about, you know, you guys have talked about a couple of some new products coming out, you know, I think in the titanium area. And then to your products, any update on that or when we might be hearing some things about new product introductions?

Yeah, we've actually made steady progress when we talk about titanium diffuse hardening process for their chematics business, which is our new proprietary technology. So, for example, we've got 30 parts that are now either approved or in testing that cover everything from space propulsion to There's a huge movement, as everybody knows, about limiting chrome plating, right, overseas in the EU, and titanium-diffused hardening can do that. So the Airbus has been talking to us. We've got stuff already in work right now in the medical industry, and this is joint afroplasty and some other things. So the teams do a – and these take, obviously, a while to certify, right? So the team continues to develop, I think, a really strong testing portfolio of TDAH. that will migrate itself into time over time. And we're just going to be looking to really start to accelerate that growth here in the out years.

Great. I appreciate the call. Thanks, guys. Yep.

Thanks, sir. Thanks, Larry.

Thank you. One moment, please, for our next question. Our next question will come from Seth Seisman of JP Morgan. Your line is open.

Hey, thanks very much, and good morning, guys. Good morning. So I wanted to start off asking about the revenue guide, and I think if we look at 22, and we, you know, pro forma for wheel and brake, it's $740 million. So basically, looking at flat sales at the midpoint in 2023, and it looks like based on what's in the backlog for JPF, you know, it looks like there's about $100 million headwind from that in the guidance. And so, you know, if you took JPF out of both years, you'd probably be growing like 17% pro forma from 22 to 23. What are the main pieces that are driving that 17%? Yeah.

I like your math, Seth. One other piece I might add to that is we did have some K-Max sales in 2022 as well that we are not planning to repeat year over year. So it's about, call it rough order, $14 million or so related to that as well. So where the growth is coming in, absent aircraft wheel and brake, absent JPF, absent K-Max, is really coming from engineered products. Significant portion of organic growth there, as we talked about, probably low to mid-teens. rate of growth there. Structures on year-over-year is expected to grow. We've got some really nice volumes coming out of our Vermont facility and with the expected recovery on our A-10 and Blackhawk. But as we mentioned as part of our guide, right, we're not counting any incremental contribution margin from those businesses this year. You know, we need to make sure that we get them healthy and that those will be opportunity and upside to our plan overall.

Correct. Right. Okay. Okay. Got it. Got it. And then, so when we think about, I guess, when we think about what precision products looks like, you know, on a go-forward basis, like in the out years, pro forma, you know, without any JPF contribution, you know, that business will get to a place where it's kind of, you know, sub 100 and then kind of start growing from there in terms of the top line.

Yeah, and that's where you're going to see things like, you know, we do have a very strong portfolio of missile fuse programs. And as you know, with the defense spending and the support that's happening sort of around the world to kind of increase defense spending, we would expect and have seen some incremental orders come through for that, as well as our new fire burst technology here that is going to, you know, is expected to be a contributor over the course of this year.

Yeah, I would guess the remaining fusing portfolio would see some pretty strong demand right now. Yep. Okay. And then the last one for me, maybe just turning to the balance sheet and kind of the thought process around 2024, still over a year away until maturities are coming up, but they will go current during this year. So how do you think about preparing to address those during 2023?

Yes, we are working on that right now, Seth, talking with our trusted bank partners here as we work forward with that. We know the bank markets are open as of right now, that there's ample opportunity for us to refi. Our goal here is to make the assessment, make a determination, and sort of move to take care of those refinancings. You know, as you know, with the converts, though, it's a pretty attractive coupon rate right now. We do have sufficient capacity underneath our credit agreement, you know, to sort of handle, you know, any incremental with that. But we'll have more information on our expected refinancings as we proceed through the year. But, you know, absolutely, that is a process and project we're working through right now. Yep.

Great. Okay. Okay. Great. Thanks. Thanks very much.

Yep. Thanks, Seth. Thank you. Again, to ask a question, please press star 11 on your phone and wait for your name to be announced. To withdraw your question, please press star 11 again. One moment for our next question. Our next question is a follow-up from Steve Barger of KeyBank. Your line is open.

Thanks. Jamie, cumulative free cash flow over the past few years has been kind of a tough story. Can you talk to your confidence in this forecast?

Yeah, I mean, we feel good about our forecast for this year, Steve. We do have some opportunities, like we talked about in the prepared remarks, relative to the incremental sales of the three whitetails. We've got three whitetail KMAXs in inventory today. We do have the opportunity to convert those to cash. That is not included as part of our forecast for the full year. In addition to that, like we talked about, we are focused on working capital and incremental cost-outs. in order to drive improved cash flow performance. And so, you know, as we move through the course of the year this year, you know, we'll hopefully have some more information for you on that to kind of further shore up our current period cash flow as well as maybe provide incremental opportunities above the range.

Yeah. And this is more of a forward-looking – oh, sorry, go ahead.

No, I was just going to mention, I just, you know, for everybody's sake, you know, as we think about cash flow performance over the course of the year, you know, Q1 is typically, right, a little bit more of a use for us, and we would expect the cash flows to sort of turn positive, you know, as we move through the course of the year.

Yeah, understood. And looking forward, you know, I asked a question on SG&A, similar question on free cash flow margin. Do you have a view yet on what this portfolio should produce as it trends more towards engineered products or whatever it's ultimately going to look like, how should free cash flow margin flow through?

Yeah, we would expect it to be akin to, you know, probably the peer group set, right, that we would look at from an engineered products perspective, Steve. So, you know, the goal here is to get that cost structure in line, move that inventory in a way, in a manner that's consistent with, you know, those folks of, you know, think about, you know, an RBC, think about, you know, those types of businesses that and their ability to generate cash. That's where, you know, our goal is and target is for command.

So, high, single, low, double-digit. Does that seem right? Yep, yep. And the business plan approval letter for the Fire Burst Manufacturing and Assembly Facility, can you talk through how that works from a cash use standpoint and when that turns to revenue?

Yeah, so what that is is, you may recall, we got some footnote disclosures on this inside of our 10K. You know, when we had our initial award with the UAE, you know, we entered into some commitments there to provide offset credits associated with that program. So, the Fire Burst Agreement and Joint Venture is our way of satisfying those offset requirements. There will be some incremental cash contribution, but we don't really expect that to be anything meaningful until 2024 as we move forward.

Yeah, and Steve, just to add to that, we were just at IDEX. We just got our joint venture in place, which was a huge milestone to move Fireburst forward, but also relative to potential future DCS orders, thinking about that part of the world. The other thing from a cash flow perspective – I was going to mention was we had another huge milestone just this week. We had a production readiness review approval. This was back to our A10 program, which we've been waiting on and working towards. So that's another, again, upside for us this year as we start to really get product out the door with the A10 program from Wichita and Jacksonville.

Sounds good. And I'll just ask one more. Jamie, you were going pretty fast on guidance, so I can check the transcripts. But I think you said EBITDA is heavier in the back half. Is that true for revenue as well?

Not as much. What happens is, Steve, as we get through the course of the year, we move through some of the accounting, right, that happens in like the first, second quarter of the year, whether it be vacation accruals, whether it be other types of accruals that we're establishing. We start to work our way through, and as the volume builds over the course of the year, we get better absorption. So that's the sort of natural cadence that we have through our process. So that inherently will always probably have us be a little bit back-end weighted, you know, relative to performance. But our goal, and as we are trying to demonstrate this year, is that we're trying to make that a little bit more even on a quarterly basis.

Right. So revenue a little more even, but EBITDA a little heavier because of the accruals and such in the front half.

Yeah, more or less. Okay. Got it. Thank you. Yep.

Thank you. I'm seeing no further questions in the queue. I would now like to turn the conference back to Ms. Becky Staff for closing remarks.

Thank you for joining us on today's conference call. We look forward to speaking with you again when we report our first quarter results.

This concludes today's conference call. Thank you all for participating. You may now disconnect. Have a pleasant day and enjoy your weekend.