Kaman Corporation

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 first quarter 2023 results included on Form 10-Q 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 call. Now I'll turn the call over to Ian Walsh.

Thank you, Becky. Good morning, everyone, and thank you for joining our first quarter 2023 earnings call. We are pleased to report a solid quarter for Command, and we're off to a good start for the year. Total company sales grew by 23.1% compared to the first quarter of 2022, or 11.4% organically. Our engineer product segment, which includes our recent acquisition of aircraft wheel and brake, led the way with 51.4% sales growth over the prior year. Excluding the contribution of aircraft wheel and brake, this segment was up 28.6%, with gross margin nearing 40% and adjusted EBITDA margins of 23.2%. We are beginning to see the early benefits of our cost reduction efforts and our teams are executing well as we work to reduce or eliminate the past sources of variation from our business. Consolidated performance was further supported by growth in our structure segment, partially offset by the anticipated decline in our precision product segment as our JPF program continues to wind down. As a result of stronger sales, early benefits of our cost reduction efforts and operating leverage, our first quarter operating income was $8.6 million, Adjusted EBITDA was $24.8 million, both more than doubling when compared to the prior year. In our fourth quarter report, we highlighted several strategic actions to enhance our profitability and reduce or remove sources of variation. First, we announced our intention to consolidate our JPF operations into a single facility. This will allow us to maintain operational readiness while substantially reducing our program cost as program volume winds down. During the first quarter, we began drawing down our Orlando workforce through phase one of our shutdown. This consolidation effort is on plan, and the teams are working diligently to keep this on pace and within budget. There is continued interest in JPF from our international customers, and we maintain a healthy level of other missile safe and armed production in Middletown, Connecticut. Second, we announced that we would discontinue producing our K-Max aircraft, As a reminder, KMAX units are not in our 2023 guidance, and any aircraft sold during the year would represent upside, particularly on revenue and cash flow guidance. Lastly, we announced incremental cost reduction measures for our corporate function. To this end, we have assembled a team including both internal and external resources to identify additional cost savings and margin enhancement opportunities. In total, from all these activities, we continue to expect between $22 million and $25 million in annual savings by 2024. Turning to our end markets and outlook, all of our end markets are performing well through the first quarter, led by commercial business and general aviation, where we had the contributions of aircraft wheel and brake acquisition and also saw significant organic sales growth to Boeing and Airbus compared to the prior year. Our defense business, we experienced the first quarter of year-over-year sales growth since 2020, a strength in our core defense portfolio more than offset the wind down in the JPF program. In our medical end market, we continue to demonstrate robust top-line growth with the positive organic contributions from our medical and plannable and analytical instrument product lines. Finally, in our industrial end market, sales were largely stable with modest organic growth during the period. Turning to our segments and beginning with engineered products, strong performance from this segment continued in the first three months of 2023 as a function of their differentiated technologies, strong barriers to entry, and pricing power. The first quarter results combined with the strength of our backlog gives us confidence in this segment's operating performance for the remainder of the year. Sales for this segment grew 51.4% from the prior year, which was inclusive of an $18.5 million contribution from aircraft bill and break. Sales growth was widespread across this portfolio, led by our self-lubricated bearings and PMA aftermarket businesses. Higher sales also translate to solid segment-level profitability as segment-level operating income and adjusted EBITDA came in ahead of our internal plan at 19.4 million and 30.1 million, respectively. Backlog for engineer products has never been stronger. In our precision product segment, sales declined 20.1% to 38 million, which is almost entirely due to lower volume of our JPF program. Segment operating income and adjusted EBITDA also declined to 1.7 million and 2.5 million respectively. Anticipated lower margin compared to the prior year resulted from lost operating leverage on lower sales coupled with higher R&D expense on new programs. We are planning for a significant portion of our cost reduction efforts to impact this segment as we are focused on building the foundation to support our new technologies and providing meaningful growth and long-term performance beginning in 2024 and beyond. Precision Products continues to pivot to development of next-generation products such as missile actuation systems, fuses, autonomous components, and autonomous air vehicles. We are underway with our Marine Corps-funded MULSE program for our new cargo UAV and look forward to working with PHI Aviation, who has given us a non-binding order for our first 50 commercial units. In our structure segment, performance improves sequentially and compared to the prior year, although absolute margin levels are still below our long-term targets. Our Vermont facility continues to exceed expectations and is the benchmark for operational optimization for other structures' facilities. In total, segment-level sales were up 14.5% from the prior year to $33.2 million, and the segment was near break-even at operating income level, while adjusted EBITDA margin was 1.7%. We continue to recover and improve the schedule, cost, and on-time delivery of our legacy programs while focusing on winning new, more profitable OEM and aftermarket work as we have demonstrated we can do. We are pleased with the progress we have demonstrated out of the gate in 2023, which reflects the positive impact of our transformational strategy, the underlying momentum in our business units, and initial success of the conscious and planned actions we took in 2022. In the near term, we continue to focus on several primary objectives. First, to provide the necessary capital resources to maximize the strongest growth opportunities in front of us, specifically in our engineer product segment, and to continue innovating and partnering with our customers to generate strong year-over-year organic growth and high margin and cash flow generation. Second, we seek to transition our precision product segment with thoughtful and targeted investment in next-generation products. The sunset of the JPF program, followed by the associated facility reduction plans, along with THE CONCLUSION OF KMAX PRODUCTION WERE SPECIFICALLY DESIGNED TO IMPROVE OUR NETWORKING CAPITAL PERFORMANCE AND REPOSITION THE SEGMENT FOR FUTURE OR PROPABLE GROWTH IN OUR REMAINING MISSILES PROGRAMS, MEMORY MEASURING PRODUCTS, AND FUTURE AUTONOMOUS COMPONENTS AND UNMANNED CARGO UOV PLATFORMS. THIRD, WE ARE DILIGENTLY WORKING TO IMPLEMENT BEST PRACTICES ACROSS OUR STRUCTURES SEGMENT AND TO HAVE ALL THREE OF OUR STRUCTURES BUSINESSES OPERATING IN A HEALTHY AND CONSISTENT MANNER WITH IMPROVED PERFORMANCE. AND FINALLY, We are working to reduce our leverage and interest expense following the important acquisition of aircraft wheel and brake. Generating strong free cash flow is our focus, as de-levering is a key priority in our near-term capital allocation strategy. I am proud of our team and the progress we have made in a short period of time. With our employees' dedication, resiliency, and ingenuity, we are able to continue our path to achieving greater and maximizing value to our stakeholders over time. Now we'll turn the call over to Jamie for a closer look at the numbers. Jamie?

Thank you, Ian, and good morning everyone. Today I will walk you through our first quarter results before turning to our outlook for 2023. First quarter sales were $194.5 million, which was up 23.1% from $158 million in the prior year. Higher sales in the quarter were attributable to organic growth of 11.4%, primarily in our engineer product segment, and an $18.5 million contribution from the aircraft wheel and brake acquisition. This was partially offset by the expected lower JPF volume, where in the quarter we recorded $15.3 million of sales for this program and have $4.8 million left in backlog as we enter the second quarter. Operating income in the first quarter was $8.6 million compared to $3.1 million in the prior year. Adjusted EBITDA in the first quarter was $24.8 million, which more than doubled the prior year result of $12.2 million. EBITDA margin also increased 500 basis points, expanding to 12.7% from the 7.7% we recorded in the prior year, as a result of operating leverage on higher sales and early benefits of our cost reduction program. We moved aggressively in the first quarter to execute on our cost reduction plan, and in aggregate, we continue to expect annual savings of $22 million to $25 million by 2024, with about $12 million to be realized in 2023. In the first quarter, these cost-out programs delivered approximately $2 million of savings. By category, our cost-out program is comprised of the following. $12 million to $15 million associated with the closure of the Orlando facility. We began to see some of these savings in the first quarter as we reduced our operating activity and executed on the first phase of our shutdown plan. We expect to see a contribution of this run rate in the balance of the year 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 corporate and the businesses. To this end, we have now assembled a team comprised of internal and external resources to streamline certain administrative functions and reduce inefficiency. And lastly, around $3 million related to discontinuing production of the KMAX aircraft. Turning back to our results, gross margin was 34.7%, which increased 270 basis points compared to the prior year. This was attributable to the addition of aircraft wheel and brake, better performance on our KMAX aftermarket program, and execution on the cost savings initiatives we implemented last quarter. First quarter SG&A was $43.7 million, or 22.5% of sales. compared to $39.7 million, or 25.1% of sales in the prior year. Higher dollar SG&A was related to the addition of aircraft wheel and brake. As a percentage of sales, lower SG&A was related to leverage on higher volume and cost controls. Interest expense in the quarter was $9.6 million, compared to $2.5 million in the prior year, as a result of higher interest rates and the added debt from the aircraft wheel and brake acquisition. We remain committed to delevering our balance sheet and maintaining a disciplined approach to shareholder returns. As we have some near-term maturities on the horizon, we are in discussions with our banking partners to ensure our goals and objectives for our capital structure will continue to be met, and we will continue to support the needs for access to capital to continue to grow the business. Free cash flow for the quarter came in ahead of our internal plan due to the timing of receipts, and we anticipate turning cash flow positive in the second half of the year. We reported a gap net loss of $19,000 or zero cents per diluted share compared to $4 million or 14 cents per diluted share in the prior year. Adjusted net earnings in the first quarter was $2.3 million or eight cents per diluted share compared to $4.3 million or 15 cents per diluted share in the prior year. Included in the current period are adjustments for restructuring and severance and for integration and implementation activities related to the acquisition of aircraft wheel and brake and initial cost associated with the setup of a new joint venture to satisfy offset requirements we have associated with a completed JTF-DCF contract. For a full reconciliation of our GAAP to non-GAAP earnings, please review our earnings press release. Now turning to our outlook. We are reaffirming our full year 2023 guidance. As Ian detailed, our end markets are performing well. We continue to grow share in our engineered product segment. Our overall backlog is robust and we remain 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. As a result, we continue to target 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 flows for 2023 of $60 million to $70 million, leading to free cash flow expectations in the range of $35 million to $45 million. Approximately 35% of our adjusted EBITDA improvement is from growth in our organic business and lower expense 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. As a reminder, 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 TAMAX 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 for 2023. With that, I will turn the call back over to Ian for closing remarks.