Kaman Corporation

Good day and thank you for standing by. Welcome to the Command Corporation Q2 2023 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 the session, you will need to press star 1 1 on your telephone. 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. I would now like to hand the conference over to your speaker today, Jamie Renau, Assistant Comptroller. Please go ahead.

Good morning. Welcome to Command's second quarter 2023 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. Additionally, the company revised its prior period results due to errors identified related to inventory, which were determined not material to our previously issued financial statements. These items are described more fully in the company's latest filings with the Securities and Exchange Commission, including the company's second quarter 2023 results included on Form 10-Q, and the current report on Form 8K filed yesterday evening together with our earnings release. We also expect to discuss certain financial measures and information that are non-GAP measures as defined in applicable SEC rules and regulations. Reconciliations to the company's GAP 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.

Good morning, everyone, and thank you for joining our second quarter 2023 earnings call. Performance in the quarter was very strong, and we're delivering on our commitments to drive improved profitability and cash flow performance. Based on this performance, we are revising our guidance for the full year and now expect higher adjusted EBITDA in the range of $97.5 million to $107.5 million on sales volumes consistent with our prior expectations. Net sales grew 21.4% over the prior year period to $195.2 million, benefiting from the contribution of aircraft wheel and brake and organic growth of 8.2%. Results in the quarter demonstrate the continued strength we are seeing across our engineered product segment, which posted top-line growth of 48.7% or 25.1% organically over the prior year. We are pleased to report that all of our end markets have performed well during the first half of the year, led by commercial, business, and general aviation, where we benefited from the aircraft wheel and brake acquisition and organic growth, which was particularly strong across our engineer products portfolio, with the most meaningful growth coming from our engine aftermarket products. We see momentum in the defense end market with double digit growth in both the quarter and first half of the year. The success is primarily attributed to the strength of our core defense portfolio, which helped to offset softness in our safe and armed devices related to the wind down of the JPF program. In the medical end market, we remain in a positive trajectory with growth in the first half exceeding 10%. Stronger medical sales were attributed to higher volume on our miniature bearings and springs, seals, and contacts used in medical implantables and devices. Last year, industrial end market sales remained steady, with modest organic growth in the period. We also continued to work diligently to reduce our costs and improve efficiency, and I am pleased to report that these efforts led to an improvement in our net earnings for the period, and a meaningful improvement in both adjusted EBITDA dollars and margin. We achieved adjusted EBITDA of $32 million, or 16.4% of sales in the second quarter of 2023, compared to 16.1 million or 10% of sales in 2022. We've outlined and continue to execute on our strategic initiatives aimed at improving our profitability and streamline operations to reduce variability. First, we disclosed our plan to consolidate our JPF operations into a single facility. This will enable us to maintain operational readiness while significantly cutting down program costs as the volumes wind down. We remain on track to our plan for the facility closure and have begun to realize cost savings for these actions. We continue to deliver on a remaining JPF backlog and have recognized approximately $7 million in EBITDA related to this program in the first half of the year, which is not expected to repeat in the second half. We continue to pursue direct commercial sales of our JPF to allied countries and will provide further information when we receive these orders. As we've disclosed previously, we have made the hard decision to discontinue production of our K-Max aircraft. We successfully sold one aircraft during the second quarter, and we are actively pursuing a sale of the two remaining helicopters, which could provide incremental cash flow for the year. Our air vehicles team continues to work to pivot to higher margin growth opportunities going forward. Delivering our cost reduction commitment remains an important focus for the team. To date, the actions we have taken are expected to provide annual savings between $22 million and $25 million by 2024. And through the second quarter, we are on track to deliver these savings. Additionally, we're working to identify additional cost savings and margin enhancement opportunities that could provide benefits in excess of our previously announced programs. Turning to our segments and beginning with engineered products, we are extremely pleased with a strong segment performance that continued through the first half, leading to overall sales growth of 48.7% or 25.1% organically. We saw growth across our engineered products portfolio in the second quarter as we are recovering back to pre-COVID levels for our commercial aerospace and defense products and are benefiting from our additional market share wins. Higher sales led to improved profitability with operating margins of 23% adjusted EBITDA margin in excess of 30%. Organic growth in the quarter was primarily driven by higher demand for our self-lubricating bearings and engine aftermarket products. Our segment-level backlog remains robust as a result of strong demand and addition of aircraft room and break. We expect to see continued strong performance for this segment in the second half of the year, given the year-to-date strength and the continued demand for our products. Over the long run, we expect this segment to grow in the high single-digit to low double-digit range. In our precision product segment, sales declined 32 percent, which is almost entirely due to the anticipated wind down of the JPF program. Segment operating income and adjusted EBITDA were negative 1.9 million and negative 1.1 million, respectively, as we continue to make investments in next-generation technologies. The segment continues to be an area of focus for us to improve costs through the footprint consolidation project and working capital improvements with the succession of K-Max production, which we anticipate will drive improved operating results in the coming quarters. In our structure segment, sales of 33.6 million improved both sequentially and year-over-year by 1% and 13% respectively. Segment-level profitability continued to be pressured as we reported a small operating loss of $106,000 and adjusted EBITDA of $675,000. Segment performance in the quarter benefited from the receipt of an insurance claim settlement for costs incurred in the prior year related to a fire at one of our suppliers. As we move into the second half of 2023, we are pleased with the progress we have made so far this year. The positive outcomes can be attributed to our transformational strategy to reduce the variation in our business and improve our quality of earnings, free cash flow, the strong growth momentum in our engineer product segment, and the successful execution of planned actions initiated in 2022. As we look ahead, we remain focused on several key objectives. Our first objective is to ensure ample capital resources are allocated to capitalize on the most promising growth opportunities within our engineered product segment. We continue to foster innovation and strategic partnerships with customers to drive robust year-over-year organic growth, high margins, and strong cash flow generation. We are dedicated to transitioning our precision product segment by making thoughtful and targeted investments in next-generation products. The JPF facility reduction plans and the conclusion of KMAX production were all strategic moves to improve our operating performance. These actions will reposition the segment for more profitable growth in our remaining programs as we seek to benefit from the investments we are making in future autonomous components and the unmanned cargo UAV platform. In our structures segment, we are diligently implementing best practices, aiming for all three of our structures businesses to operate in a healthy, consistent manner. Our focus also includes reducing our leverage and interest expense after the acquisition of aircraft wheel and brake. In the quarter, we successfully refinanced our credit facility. I am proud of the hard work the team put forward in securing the $740 million commitment with the amendment of our revolving credit agreement, extending the maturity to 2028 while providing sufficient access to capital to repay our 2024 convertible notes and meet our working capital requirements, which Jamie will detail later. Our company has successfully navigated some difficult challenges over the past few years, and I am proud of the progress our team has achieved in a short time span. Our employees' dedication, resilience, and ingenuity have been instrumental to supporting the transformation of Command. Now we'll turn the call over to Jamie for a detailed analysis of the numbers. Jamie?

Thank you, Ian. Good morning, everyone. Today I will walk you through our second quarter results before turning to our outlook for 2023. Second quarter sales were $195.2 million, up 21.4% from $160.8 million in net sales from the prior year. Higher sales in the quarter were attributable to organic growth of 8.2%, primarily in our engineered product segment, and the $21.2 million of contribution from our aircraft wheel and brake acquisition. Aircraft wheel and brake revenue was a little stronger in the second quarter as we pulled forward some volume to make way for their ERP go-live in the third quarter, which was well executed. This was partially offset by the expected lower JPF volume. Operating income in the second quarter was $17.6 million compared to $1.9 million in the prior year. Adjusted EBITDA in the second quarter was $32 million compared to just $16.1 million in the prior year. This improved performance reflects the benefit of strong organic growth, cost out measures we have taken to improve margin, and better leveling of our quarterly performance. EBITDA margin increased to 16.4% from 10% in the prior year. We continue to execute on our cost savings initiatives and continue to expect total savings of 20 to 25 million in 2024, with around 12 to 15 million to be realized in 2023. Turning back to our results, gross margin was 37%, which increased 480 basis points compared to the prior year. This was attributable to the addition of aircraft wheel and brake, higher organic volume in our engineer product segment, and benefits from our cost savings initiatives. Selling general and administrative expenses were $41.6 million, or 21.3% of sales, compared to $39.3 million, or 24.4% 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 due to the leverage on higher volume, the benefit from our cost control efforts, and lower corporate development costs. Interest expense in the quarter was $10.3 million compared to $2 million in the prior year as a result of higher interest rates and the added debt from aircraft wheel and brake. During the period, We refinanced our debt and extended the maturity to 2028, providing us ample visibility to execute on our deleveraging plans. Re-cash flow during the period was $17.4 million, which benefited from the sale of a K-Max aircraft in the quarter. Our convertible notes went current this quarter. We're continuing to evaluate our options for the refinancing of this instrument. And with the amendment to our credit facility, we maintain sufficient capacity to use proceeds from the facility to repay the convertible notes and satisfy our future working capital requirements. We intend to capture the benefits of the lower coupon rate on the convertible notes until we come to a refinancing decision on this instrument. During the second quarter, we reported GAAP net income of $5.3 million, or $0.19 per diluted share, compared to $3.8 million, or $0.13 per diluted share in the year-ago period. Adjusted net income during the period was $6.2 million, or $0.22 per diluted share, compared to $8.5 million, or $0.30 per diluted share in the prior year period. Lower earnings per diluted share in 2023 was attributable to the higher interest expense and lower pension income, partially offset by the stronger operating results we've seen in the year-to-date and quarter periods. For a full reconciliation of our GAAP to non-GAAP earnings, please review our earnings press release. Now turning to our outlook. We are revising our full year 2023 guidance. As Ian highlighted, our end markets are demonstrating strong performance. We are successfully increasing our market share and engineered product segment, and our overall backlog remains robust. Our primary focus remains on expanding our highest growth businesses, enabling us to generate more substantial returns. At the same time, we are diligently optimizing our cost structure to align it with the size and requirements of our business. Our results in the first half ran ahead of our plan with a portion of our performance attributable to $7.2 million of EBITDA from our JPF program as we delivered against our commitments and a modest pull forward in volume from aircraft wheel and brake ahead of their Q3 ERP go live. Looking at the back half of the year, we do not expect the JPF volume from the first six months to recur in the second half. As a result, we continued to target top-line growth in 2023 with total revenue in the range of $730 million to $750 million, consistent with our prior expectations. We have lowered our expectations for net earnings to $3.7 million to $11.3 million and diluted EPS to $0.13 per share to $0.40 per share or $0.29 per share to $0.56 per share adjusted to due to the higher expectations for interest expense. This increase in our interest expense is offsetting the increase we expect in operating income from our engineered product segment, which is driving our higher expected adjusted EBITDA, now in the range of $97.5 million to $107.5 million. Our expectations for operating cash flows of $60 million to $70 million and free cash flow of $35 million to $45 million remain consistent with our prior guidance as the higher interest expense, is offset by the cash benefit of improved performance in the cash collection on the sale of one KMAX aircraft. As a reminder, to improve the reliability of our guidance and improve transparency, we continue to exclude discrete items which have historically been high sources of variation. Specifically, these include unawarded or uncertain JPF DCS orders and the sale of the two remaining KMAX aircraft held in inventory. We also continue to assume no margin contribution from our structure segment, despite the approximately $800,000 of EBITDA we earned in the year-to-date period. We expect to achieve success in these areas, but they are not incorporated in our guidance for 2023. With that, I'll turn the call back over to Ian for closing remarks.

Thanks, Jamie. As we progress through 2023, we are pleased to see that our strategic plans are yielding strong results just as we anticipated. Our team remains aligned, steadfast, and dedicated to executing our long-term strategy to improve total shareholder returns as we turn the corner on our transformational journey. The outstanding performance of our engineer product segment in this quarter demonstrates its earning power and growth potential and remains a focal point for our continued investment. As we continue to make improvements in our precision products and structure segments, we are confident that we will be well positioned to achieve substantial earnings growth and steadily reduce our debt. We are actively building a culture of enhanced internal discipline, controls, and leadership. Our future success will always depend on the talent and dedication of our workforce, and we are immensely grateful for their contributions and teamwork. With that, I'd like to open the line for questions. May we have the first question, please?

In order to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we'll compile the Q&A roster. And our first question comes from the line of Steve Barger with KeyBank Capital Markets. Your line is now open.

Hi, good morning. This is Jacob Moore. I'm for Steve. Thanks for taking the questions. You got it.

Thanks, Jacob.

Yeah, of course. Based on your updated but mostly maintained four-year guide, I think that implies a slightly worse second half than first. So my first question is, is there something unusual in engineer products to keep performance that drove this outcome that's not going to continue in the back half? Was that all pulled forward from 3Q? And then a close second to that is on precision products. Should we expect similar performance on the operating income line with JPF essentially out of the picture at this point?

Yeah, so, you know, I'll start, Jacob, with an engineer products, right? First half results did benefit from the increase in sales we saw on our higher margin engine aftermarket components. You know, those were a strong contributor for us in the first half of the year and specifically in the second quarter. And, you know, we do have the opportunity to repeat the performance in that product offering in the back half of the year. However, we're currently forecasting that at a slightly lower volume for the product. In addition, and as we mentioned in our prepared remarks, we did, you know, pull in a little bit of sales associated with aircraft wheel and brake into Q2 from Q3 in order to kind of de-risk the ERP go live as we continue the integration efforts of that. One of the big components there was getting their new ERP up and running, and that was well executed by the team here in the third quarter. And then finally, you know, sales of our spring seals and contacts, and these are typically for our medical implantable devices. Those typically have a very strong first half of the year with a little bit of softness in the back half. All in all, though, we are working really hard to balance our performance front half to back half, and this requires some form of change in organizational mindset as we work through our forecasting planning processes. We believe that the strength in the first half of the year does de-risk our expected performance in the second half. And at this point, kind of halfway through the year, we are comfortable with where we are, but it's fair to say that there's a disproportionate opportunity relative to the guide on the upside versus the downside. However, we do want to remain disciplined in the approach to guide for the full year, given the lessons learned.

Okay. Yeah, that's helpful, Jamie. Thank you. And then maybe if I could, on precision products, should we expect similar performance on the operating income line in the back half?

Yeah, so on a JPF perspective, right, that did include $7 million in the first half of the year related to JPF. You know, and as we go through the back half of the year, you know, we do expect performance. You know, the underlying performance of the business had some, you know, EAC retro adjustments and other items in the first half, which drove away some of the benefit we expected from JPF. So, you know, it's probably fair to think that on a net net basis, it will be largely in line front half to back half. For that segment.

Okay, got it. Thank you. And then for a 2nd, 1, just on the balance sheet, I appreciate the color and the convertible notes. So, just with the understanding that you want to pay down that this year and improve your leverage. Can you comment on the sustainability of the cash flow you generated into Q, given the sale of that and how you expect the back half to look from that perspective?

Yeah, absent the KMAX, we kind of were largely in line with our expected cash flow performance in the first half. You know, we've historically been a user of cash in the first half of the year. A lot of that has come down, though, to the parts of the business that we are currently in the process of, you know, working our way through, whether that be KMAX production, JPF production. You may recall historically those were significant users of cash as we built up inventory, typically for deliveries in the back half of the year. You know, that decision we made in the front half, we had some cash commitments that were already on the hook. We believe that the actions we've taken will improve the kind of cadence of cash earnings in future periods. And when we look at our engineered products businesses largely, you know, their conversion metrics are significantly greater than what command has historically seen for cash conversion on an annualized basis. So, you know, we feel good. We think that that cash flow is sustainable, you know, in future periods. And we are looking to the back half of the year for, you know, continued cash generation, which we will use to continue to delever.

Okay, understood. Thanks for taking the questions. I have some more, but I'll hop back in line.

You got it. Thanks. Thanks, Jacob.

Again, in order to ask a question, please press TAR 1-1 on your telephone. That is star 1-1 on your telephone. And we have a follow-up question from Steve Barger. Your line is now open.

Yeah, Jacob, we did get word this morning that some of the other analysts were on other calls this morning, and so there were some conflicts relative to timing. So I'm happy to take any follow-up questions you might have.

Understood. Thanks. I appreciate that. So, first one, just on end markets, specifically in engineer product, looks like commercial area has been running pretty nicely for command lately. Can you just comment on the sustainability of that above trend growth? Ian, I know you mentioned a high single digit, low double digit range over the long term. So, today, do you have an idea of when we get back down to that sustainable level?

Yeah, I think. When we look at all the reports, you know, there's clearly a very nice recovery that's happening on the commercial side, predominantly Boeing and Airbus for sure. We're seeing that across not just them, but also GA, Rotocraft, and even business aviation. So, you know, I feel very comfortable with the forecast that we've talked about before, where when you look at those end markets for us on the engineering products business, they're going to continue to be very strong. As Jamie mentioned, as we mentioned last time, we started the year with record backlogs, backlogs that, quite frankly, we achieved way earlier than normal. So really, we're focused on the execution piece for engineering products. We've got, you know, tons of opportunity to drive there across not just the traditional engineering products, but as we mentioned, even the aftermarket side of things.

And Jacob, I'll just add to that. I think there's probably still some room to run on above average growth for a period, specifically as Boeing and Airbus start to get their build rates back to those more historical levels. We're still not at those historical build rate levels that we had in 2019. You know, we have talked in the past about some market share wins that we were able to make during the downturn during COVID, which are not fully reflected in the historical results. And when you look at, you know, traffic miles, we've all been to the airport and airports are crazy busy, but the reality of the situation is we're still kind of below those sort of pre-COVID levels, all things being equal. So, you know, they're running older planes more and more. That benefits the kind of aftermarket components of our business. And we still have opportunity to see build rate increases and those market shares come in meaningfully to the top line performance.

Okay, great. That's helpful. Thank you. And then my last couple here are just on cargo, UAV. First, can you just give us an update on the timeline for the initial full-scale test flight?

Yeah, sure. So, you know, we, the team, continues to do a lot of work on the testing side of things as we get to first flight, which we're very, very close to. So, for example, you know, there's been a lot of static and dynamic testing. We've had the whole full rotor system now fully tested. We just recently received FAA authorization to fly. Propulsion system and the autonomy package have all been tested. So, You know, we were hoping, obviously, as we talked about, to have a first flight earlier in the year, but breaking ground is a big deal, big milestone. So we are very, very close. We'll share that once we do. And once we do break ground from a timeline, then it's really, you know, full speed ahead to get to next year, which is the final flyoff for the Mosaic competition with the Marine Corps, which is the program of record that we're working with right now. And we've also got, like we said, orders from PHI. They're very excited about it. So You know, that's the timeline. This is a big year for us. This is first flight for this year, and we're very, very close.

Okay, got it. That actually leads sort of into my second question here, which is what's the competitive environment look like in that MOSA program? I'm really trying to get a sense for the amount of effort and dollars you'll have to commit to continue being competitive for the next few years.

Well, the MOSA program right now is us and one other competitor. Um, the, the market space, there are others in the space, um, mostly on the say commercial side, some on the early development side, a lot of it kind of an electric mode. Um, you know, we're traditional turbine mode and power plant. So on the command dynamic, you know, we anticipate the Marine Corps. And again, this is fluid relative to when we do a fly off next year. And when they down select, and we honestly don't know if they're going to down select to just one or they actually may select both, depending on how they want to go and what the competitor shows up with. So that's good news for us. We feel like we're in a very strong position to win that relative to the maturity of our model and the approach we've taken with more off-the-shelf and proven parts and technology and things like that.

Okay, got it. Thank you very much for taking my questions. That's all I have this morning.

Great. Thanks, Jacob. Thanks, Jacob.

Again, that is star 11 to ask a question. All right. Well, I see no further questions at this time. I will turn the call back over to Jamie right now.

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

This concludes today's conference call. Thank you for your participation. You may now disconnect. Thank you. Thank you. Thank you. you Thank you. Thank you. you Good day and thank you for standing by. Welcome to the Command Corporation Q2 2023 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 the session, you will need to press star 1 1 on your telephone. 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. I would now like to hand the conference over to your speaker today, Jamie Renau, Assistant Comptroller. Please go ahead.

Good morning. Welcome to Command's second quarter 2023 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. Additionally, the company revised its prior period results due to errors identified related to inventory, which were determined not material to our previously issued financial statements. These items are described more fully in the company's latest filings with the Securities and Exchange Commission, including the company's second quarter 2023 results included on Form 10-Q, and the current report on Form 8K filed yesterday evening together with our earnings release. We also expect to discuss certain financial measures and information that are non-GAP measures as defined in applicable SEC rules and regulations. Reconciliations to the company's GAP 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.

Good morning, everyone, and thank you for joining our second quarter 2023 earnings call. Performance in the quarter was very strong, and we're delivering on our commitments to drive improved profitability and cash flow performance. Based on this performance, we are revising our guidance for the full year and now expect higher adjusted EBITDA in the range of $97.5 million to $107.5 million on sales volumes consistent with our prior expectations. Net sales grew 21.4% over the prior year period to $195.2 million, benefiting from the contribution of aircraft wheel and brake and organic growth of 8.2%. Results in the quarter demonstrate the continued strength we are seeing across our engineered product segment, which posted top-line growth of 48.7% or 25.1% organically over the prior year. We are pleased to report that all of our end markets have performed well during the first half of the year, led by commercial, business, and general aviation, where we benefited from the aircraft wheel and brake acquisition and organic growth, which was particularly strong across our engineer products portfolio, with the most meaningful growth coming from our engine aftermarket products. We see momentum in the defense end market with double digit growth in both the quarter and first half of the year. This success is primarily attributed to the strength of our core defense portfolio, which helped to offset softness in our safe and armed devices related to the wind down of the JPF program. In the medical end market, we remain in a positive trajectory with growth in the first half exceeding 10%. Stronger medical sales were attributed to higher volume on our miniature bearings and springs, seals, and contacts used in medical implantables and devices. Lastly, our industrial end market sales remained steady, with modest organic growth in the period. We also continued to work diligently to reduce our costs and improve efficiency, and I am pleased to report that these efforts led to an improvement in our net earnings for the period and a meaningful improvement in both adjusted EBITDA dollars and margin. We achieved adjusted EBITDA of $32 million, or 16.4% of sales in the second quarter of 2023, compared to 16.1 million or 10% of sales in 2022. We've outlined and continue to execute on our strategic initiatives aimed at improving our profitability and streamline operations to reduce variability. First, we disclosed our plan to consolidate our JPF operations into a single facility. This will enable us to maintain operational readiness while significantly cutting down program costs as the volumes wind down. We remain on track to our plan for the facility closure and have begun to realize cost savings for these actions. We continue to deliver on a remaining JPF backlog and have recognized approximately $7 million in EBITDA related to this program in the first half of the year, which is not expected to repeat in the second half. We continue to pursue direct commercial sales of our JPF to allied countries and will provide further information when we receive these orders. As we've disclosed previously, we have made the hard decision to discontinue production of our K-Max aircraft. We successfully sold one aircraft during the second quarter, and we are actively pursuing a sale of the two remaining helicopters, which could provide incremental cash flow for the year. Our air vehicles team continues to work to pivot to higher margin growth opportunities going forward. Delivering our cost reduction commitment remains an important focus for the team. To date, the actions we have taken are expected to provide annual savings between $22 million and $25 million by 2024, and through the second quarter, we are on track to deliver these savings. Additionally, we are working to identify additional cost savings and margin enhancement opportunities that could provide benefits in excess of our previously announced programs. Turning to our segments and beginning with engineered products, we are extremely pleased with a strong segment performance that continued through the first half, leading to overall sales growth of 48.7% or 25.1% organically. We saw growth across our engineered products portfolio in the second quarter as we are recovering back to pre-COVID levels for our commercial aerospace and defense products and are benefiting from our additional market share wins. Higher sales led to improved profitability with operating margins of 23% adjusted EBITDA margin in excess of 30%. Organic growth in the quarter was primarily driven by higher demand for our self-lubricating bearings and engine aftermarket products. Our segment-level backlog remains robust as a result of strong demand and addition of aircraft wheel and brake. We expect to see continued strong performance for this segment in the second half of the year, given the year-to-date strength and the continued demand for our products. Over the long run, we expect this segment to grow in the high single-digit to low double-digit range. In our precision product segment, sales declined 32%, which is almost entirely due to the anticipated wind-down of the JPF program. Segment operating income and adjusted EBITDA were negative 1.9 million and negative 1.1 million, respectively, as we continue to make investments in next-generation technologies. The segment continues to be an area of focus for us to improve costs through the footprint consolidation project and working capital improvements with the succession of K-Max production, which we anticipate will drive improved operating results in the coming quarters. In our structure segment, sales of 33.6 million improved both sequentially and year-over-year by 1% and 13% respectively. Segment-level profitability continued to be pressured as we reported a small operating loss of $106,000 and adjusted EBITDA of $675,000. Segment performance in the quarter benefited from the receipt of an insurance claim settlement for costs incurred in the prior year related to a fire at one of our suppliers. As we move into the second half of 2023, we are pleased with the progress we have made so far this year. The positive outcomes can be attributed to our transformational strategy to reduce the variation in our business and improve our quality of earnings, free cash flow, the strong growth momentum in our engineer product segment, and the successful execution of planned actions initiated in 2022. As we look ahead, we remain focused on several key objectives. Our first objective is to ensure ample capital resources are allocated to capitalize on the most promising growth opportunities within our engineered product segment. We continue to foster innovation and strategic partnerships with customers to drive robust year-over-year organic growth, high margins, and strong cash flow generation. We are dedicated to transitioning our precision product segment by making thoughtful and targeted investments in next generation products. The JPF facility reduction plans and the conclusion of KMAX production were all strategic moves to improve our operating performance. These actions will reposition the segment for more profitable growth in our remaining programs as we seek to benefit from the investments we are making in future autonomous components and the unmanned cargo UAV platform. In our structure segment, we are diligently implementing best practices aiming for all three of our structure's businesses to operate in a healthy, consistent manner. Our focus also includes reducing our leverage and interest expense after the acquisition of aircraft wheel and brake. In the quarter, we successfully refinanced our credit facility. I am proud of the hard work the team put forward in securing the $740 million commitment with the amendment of our revolving credit agreement, extending the maturity to 2028 while providing sufficient access to capital to repay our 2024 convertible notes and meet our or working capital requirements, which Jamie will detail later. Our company has successfully navigated some difficult challenges over the past few years, and I am proud of the progress our team has achieved in a short time span. Our employees' dedication, resilience, and ingenuity have been instrumental to supporting the transformation of command. Now, we'll turn the call over to Jamie for a detailed analysis of the numbers. Jamie?

Thank you, Ian. Good morning, everyone. Today, I will walk you through our second quarter results before turning to our outlook for 2023. Second quarter sales were $195.2 million, up 21.4% from $160.8 million in net sales from the prior year. Higher sales in the quarter were attributable to organic growth of 8.2%, primarily in our engineered product segment, and the $21.2 million of contribution from our aircraft wheel and brake acquisition. Aircraft wheel and brake revenue was a little stronger in the second quarter as we pulled forward some volume to make way for their ERP go-live in the third quarter. which was well executed. This was partially offset by the expected lower JPF volume. Operating income in the second quarter was $17.6 million compared to $1.9 million in the prior year. Adjusted EBITDA in the second quarter was $32 million compared to just $16.1 million in the prior year. This improved performance reflects the benefit of strong organic growth, cost-out measures we have taken to improve margin, and better leveling of our quarterly performance. EBITDA margin increased to 16.4% from 10% in the prior year. We continue to execute on our cost savings initiatives and continue to expect total savings of 20 to 25 million in 2024, with around 12 to 15 million to be realized in 2023. Turning back to our results, gross margin was 37%, which increased 480 basis points compared to the prior year. This was attributable to the addition of aircraft wheel and brake, higher organic volume in our engineer product segment, and benefits from our cost savings initiatives. Selling general and administrative expenses were $41.6 million or 21.3% of sales compared to $39.3 million or 24.4% 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 due to the leverage on higher volume, the benefit from our cost control efforts, and lower corporate development costs. Interest expense in the quarter was $10.3 million compared to $2 million in the prior year as a result of higher interest rates and the added debt from aircraft wheel and brake. During the period, we refinanced our debt and extended the maturity to 2028, providing us ample visibility to execute on our deleveraging plans. Re-cash flow during the period was $17.4 million, which benefited from the sale of a K-Max aircraft in the quarter. Our convertible notes went current this quarter. We're continuing to evaluate our options for the refinancing of this instrument. And with the amendment to our credit facility, we maintain sufficient capacity to use proceeds from the facility to repay the convertible notes and satisfy our future working capital requirements. We intend to capture the benefits of the lower coupon rate on the convertible notes until we come to a refinancing decision on this instrument. During the second quarter, we reported GAAP net income of $5.3 million, or $0.19 per diluted share, compared to $3.8 million, or $0.13 per diluted share in the year-ago period. Adjusted net income during the period was $6.2 million, or $0.22 per diluted share, compared to $8.5 million, or $0.30 per diluted share in the prior year period. Lower earnings per diluted share in 2023 was attributable to the higher interest expense and lower pension income, partially offset by the stronger operating results we've seen in the year-to-date and quarter periods. For a full reconciliation of our GAAP to non-GAAP earnings, please review our earnings press release. Now turning to our outlook. We are revising our full year 2023 guidance. As Ian highlighted, our end markets are demonstrating strong performance. We are successfully increasing our market share and engineered product segment, and our overall backlog remains robust. Our primary focus remains on expanding our highest growth businesses, enabling us to generate more substantial returns. At the same time, we are diligently optimizing our cost structure to align it with the size and requirements of our business. Our results in the first half ran ahead of our plan with a portion of our performance attributable to $7.2 million of EBITDA from our JPF program as we delivered against our commitments and a modest pull forward in volume from aircraft wheel and brake ahead of their Q3 ERP go live. Looking at the back half of the year, we do not expect the JPF volume from the first six months to recur in the second half. As a result, we continued to target top-line growth in 2023 with total revenue in the range of $730 million to $750 million, consistent with our prior expectations. We have lowered our expectations for net earnings to $3.7 million to $11.3 million and diluted EPS to $0.13 per share to $0.40 per share or $0.29 per share to $0.56 per share adjusted Due to the higher expectations for interest expense this increase in our interest expenses offsetting the increase we expect an operating income from our engineer product segment. Which is driving our higher expected adjusted EBITDA now in the range of 97 and a half million dollars to $107.5 million. Our expectations for operating cash flows of $60 million to $70 million and free cash flow of $35 million to $45 million remain consistent with our prior guidance as the higher interest expense is offset by the cash benefit of improved performance and the cash collection on the sale of one KMAX aircraft. As a reminder, to improve the reliability of our guidance and improve transparency, we continue to exclude discrete items which have historically been high sources of variation Specifically, these include unawarded or uncertain JPF DCS orders and the sale of the two remaining KMAX aircraft held in inventory. We also continue to assume no margin contribution from our structure segment, despite the approximately $800,000 of EBITDA we earned in the year-to-date period. We expect to achieve success in these areas, but they are not incorporated in our guidance for 2023. With that, I'll turn the call back over to Ian for closing remarks.

Thanks, Jamie. As we progress through 2023, we are pleased to see that our strategic plans are yielding strong results just as we anticipated. Our team remains aligned, steadfast, and dedicated to executing our long-term strategy to improve total shareholder returns as we turn the corner on our transformational journey. The outstanding performance of our engineer product segment in this quarter demonstrates its earning power and growth potential and remains a focal point for our continued investment. As we continue to make improvements in our precision products and structure segments, we are confident that we will be well positioned to achieve substantial earnings growth and steadily reduce our debt. We are actively building a culture of enhanced internal discipline, controls, and leadership. Our future success will always depend on the talent and dedication of our workforce, and we are immensely grateful for their contributions and teamwork. With that, I'd like to open the line for questions. May we have the first question, please?

In order to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we'll compile the Q&A roster. And our first question comes from the line of Steve Barger with KeyBank Capital Markets. Your line is now open.

Hi, good morning. This is Jacob Moore. I'm for Steve. Thanks for taking the questions. Yeah, of course. Uh, based on your updated, but mostly maintained for your guide, I think that implies a slightly worse second half than first. So my first question is, is there something unusual in engineer products to key performance that drove this outcome? That's not going to continue in the back half. Was that all pulled forward from three Q and then a close second to that is on precision products. Should we expect similar performance on the operating income line? with JPF essentially out of the picture at this point?

Yeah, so, you know, I'll start, Jacob, with an engineer products, right? First half results did benefit from the increase in sales we saw on our higher margin engine aftermarket components. You know, those were a strong contributor for us in the first half of the year and specifically in the second quarter. And, you know, we do have the opportunity to repeat the performance in that product offering in the back half of the year. However, we're currently forecasting that at a slightly lower volume for the product. In addition, and as we mentioned in our prepared remarks, we did pull in a little bit of sales associated with aircraft wheel and brake into Q2 from Q3 in order to kind of de-risk the ERP go-live as we continue the integration efforts of that. One of the big components there was getting their new ERP up and running, and that was well executed by the team here in the third quarter. And then finally, sales of our spring seals and contacts, and these are typically for our medical implantable devices. Those typically have a very strong first half of the year with a little bit of softness in the back half. All in all, though, we are working really hard to balance our performance front half to back half, and this requires some form of change in organizational mindset as we work through our forecasting planning processes. We believe that the strength in the first half of the year does de-risk our expected performance in the second half. And at this point, kind of halfway through the year, we are comfortable with where we are, but it's fair to say that there's a disproportionate opportunity relative to the guide on the upside versus the downside. However, we do want to remain disciplined in the approach to guide for the full year, given the lessons learned.

Okay. Yeah, that's helpful, Jamie. Thank you. And then maybe if I could, on precision products, should we expect similar performance on the operating income line in the back half?

Yeah. So on the JPF perspective, right, that did include $7 million in the first half of the year related to JPF. And as we go through the back half of the year, we do expect performance. The underlying performance of the business had some EAC retro adjustments and other items in the first half, which drove away some of the benefit we expected from JPF. So, you know, it's probably fair to think that on a net basis, it would be largely in line front half to back half for that segment.

Okay, got it. Thank you. And then for a 2nd, 1, just on the balance sheet, I appreciate the color and the convertible notes. So, just with the understanding that you want to pay down that this year and improve your leverage. Can you comment on the sustainability of the cash flow? You generated into Q, given the sale of that and how you expect the back half to look from that perspective.

Yeah, absent the KMAX, we kind of were largely in line with our expected cash flow performance in the first half. You know, we've historically been a user of cash in the first half of the year. A lot of that has come down, though, to the parts of the business that we are currently in the process of, you know, working our way through, whether that be KMAX production, JPF production. You may recall historically those were significant users of cash as we built up inventory, typically for deliveries in the back half of the year. That decision we made in the front half, we had some cash commitments that were already on the hook. We believe that the actions we've taken will improve the kind of cadence of cash earnings in future periods. And when we look at our engineered products businesses largely, their conversion metrics are significantly greater than what command has historically seen for cash conversion on an annualized basis. So, you know, we feel good. We think that that cash flow is sustainable, you know, in future periods. And we are looking to the back half of the year for, you know, continued cash generation, which we will use to continue to de-lever.

Okay, understood. Thanks for taking the questions. I have some more, but I'll hop back in line.

You got it. Thanks. Thanks, Jacob.

Again, in order to ask a question, please press TAR11 on your telephone. That is star 11 on your telephone. And we have a follow-up question from Steve Barger. Your line is now open.

Yeah, Jacob, we did get word this morning that some of the other analysts were on other calls this morning, and so there were some conflicts relative to timing. So I'm happy to take any follow-up questions you might have.

Understood. Thanks. I appreciate that. So, uh, 1st, 1, just on end markets, specifically an engineer product looks like. Commercial era has been running pretty nicely for command lately. Can you just comment on the sustainability of that above trend growth? And I know you mentioned a high single digit, low, double digit range over the long term. So today, do you have an idea of when we get back down to that sustainable level?

Yeah, I think. When we look at all the reports, there's clearly a very nice recovery that's happening on the commercial side, predominantly Boeing and Airbus for sure. We're seeing that across not just them, but also GA, Rotocraft, and even business aviation. You know, I feel very comfortable with the forecast that we've talked about before, where when you look at those end markets for us on the engineering products business, they're going to continue to be very strong. As Jamie mentioned, as we mentioned last time, we started the year with record backlogs, backlogs that, quite frankly, we achieved way earlier than normal. So really, we're focused on the execution piece for engineering products. We've got, you know, tons of opportunity to drive there across not just the traditional engineering products, but as we mentioned, even the aftermarket side of things.

Jacob, I'll just add to that. I think there's probably still some room to run on above average growth for a period, specifically as Boeing and Airbus start to get their build rates back to those more historical levels. We're still not at those historical build rate levels that we had in 2019. You know, we have talked in the past about some market share wins that we were able to make during the downturn, during COVID, which are not fully reflected in the historical results. And when you look at, you know, traffic miles, we've all been to the airport and airports are crazy busy, but the reality of the situation is we're still kind of below those sort of pre-COVID levels, all things being equal. So, you know, they're running older planes more and more that benefits the kind of aftermarket components of our business. And we still have opportunity to see build rate increases and those market shares come in meaningfully to the top line performance.

Okay, great. That's helpful. Thank you. And then my last couple here are just on cargo UAV. First, can you just give us an update on the timeline for the initial full-scale test flight?

Yeah, sure. So, you know, we, the team, continues to do a lot of work on the testing side of things as we get to first flight, which we're very, very close to. So, for example, you know, there's been a lot of static and dynamic testing. We've had the whole full rotor system now fully tested. We just recently received FAA authorization to fly. Propulsion system and the autonomy package have all been tested. So, You know, we were hoping, obviously, as we talked about, to have a first flight earlier in the year, but breaking ground is a big deal, big milestone. So we are very, very close. We'll share that once we do. And once we do break ground from a timeline, then it's really, you know, full speed ahead to get to next year, which is the final flyoff for the MOSE competition with the Marine Corps, which is the program on record that we're working with right now. And we've also got, like we said, orders from PHI. They're very excited about it. So You know, that's the timeline. This is a big year for us. This is first flight for this year, and we're very, very close.

Okay, got it. That actually leads sort of into my second question here, which is what's the competitive environment look like in that MOSA program? I'm really trying to get a sense for the amount of effort and dollars you'll have to commit to continue being competitive for the next few years.

Well, the MOSA program right now is us and one other competitor, right? Um, the, the market space, there are others in the space, um, mostly on the say commercial side, some on the early development side, a lot of it kind of an electric mode. Um, you know, we're traditional turbine mode and power plant. So on the command dynamic, you know, we anticipate the Marine Corps. And again, this is fluid relative to when we do a fly off next year. And when they down select, and we honestly don't know if they're going to down select to just one or they actually may select both, depending on how they want to go and what the competitor shows up with. So that's good news for us. We feel like we're in a very strong position to win that relative to the maturity of our model and the approach we've taken with more off the shelf and proven parts and technology and things like that.

Okay, got it. Thank you very much for taking my questions. That's all I have this morning.

Great. Thanks, Jacob. Thanks, Jacob.

Again, that is star 11 to ask a question. All right. Well, I see no further questions at this time. I will turn the call back over to Jamie right now.

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

This concludes today's conference call. Thank you for your participation. You may now