Earnings Transcript for KAMN - Q4 Fiscal Year 2021

Kary Bare: Good morning. I’d like to welcome everyone to Kaman’s fourth quarter 2021 earnings call. Conducting the call today are Ian Walsh, Chairman, President and Chief Executive Officer; and Jamie Coogan, Senior Vice President and Chief Financial Officer. Before we begin, I’d like to 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 future events. These include projections of revenue, earnings and other financial items, statements and plans and objectives of the Company or its management, statements of future economic performance and assumptions underlying those 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 2021 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 8-K. Finally, we posted an earnings call supplement on our website which provides additional context on our financial performance and our outlook for 2022. You can find this presentation at www.kaman.com/investors/presentations. Now, I’ll turn the call over to Ian Walsh.

Ian Walsh: Thank you, Kary, and welcome aboard to Kaman team as our new Head of Investor Relations. We are very glad you are here with us at this exciting time in our journey, and good morning, everyone, and thank you for joining our fourth quarter 2021 earnings call. I’ll start by providing some highlights on the quarter and full year, share some operational and business updates on each of our new segments, and then discuss some important innovations before passing the call over to Jamie for more detailed discussion of our financial results and our expectations for 2022. During 2021, sales declined. However, we achieved the financial targets for our adjusted metrics of EBITDA, EBITDA margin and earnings per share, while delivering significantly more free cash flow. Gross margin increased more than 200 basis points to 33.4%, driven by improved performance in several of our businesses, primarily in our seals, springs and contacts products. In the first half of 2021, the pandemic continued to present economic challenges. However, in the fourth quarter, we saw meaningful order increases across commercial, business and general aviation markets, led by strong order intake for our bearings, springs, seals and contacts products. In fact, sales to Boeing and Airbus increased the second quarter in a row. This is a promising indicator that airline demand is rebounding. These order increases have contributed to an improvement in our order backlog for the Company, which increased 11% compared to the same time last year. 2021 was a year focused on building a new leadership team as well as building a foundation for future growth that will allow us to achieve top quartile performance in each of our segments. I am pleased to say that we also made notable progress on the implementation of our new operations excellence model. We’ve taken a number of steps, including the deployment of many new tools and systems to drive improved performance and more formal training across all our businesses. We are beginning to see the benefits of these actions as we eliminate waste and reduce variation in our processes. As part of our overarching strategy, we reported our results under a new segment structure. This reinforces Kaman’s commitment to provide transparency and support of our growth strategy and portfolio management. Our three segments are Engineered Products, Precision Products, and Structures. The new segments align well with our product capabilities and our new brand architecture. Over the coming months, you will see the rollout of the new brand strategy, which is rooted in the Company’s aim to simplify complexities for our customers and focus on innovation. Let me highlight the high level strategy for each of our segments. Engineered Products segment displayed tremendous resiliency in 2021. We saw increased order rates for our products, and the team worked diligently to position the business to meet market demand. The strength in the medical and industrial end markets is expectedly to continue in 2022, and we have increasing confidence in incremental recovery in commercial aviation. We will continue to provide innovative solutions that push the boundaries of application engineering and material science to meet the needs of our customers across all of the end markets we serve. Our KAron technology, which supports our proprietary self-lubricating bearings for example, was selected to support NASA’s historic launch of the James Webb Space Telescope. Our Precision Products segment is in state of positive transition as we continue to streamline the organization, improve our business and advance new product development efforts. We have recently completed two successful demonstrations with an overseas customer for our FireBurst, height of burst sensor technology, leading to opportunities for commercial deliveries in the near-term. Regarding JPF, we are laser-focused on continuing to fulfill our DCS funnel. Although we expect lower JPF sales over time, we are pursuing several meaningful DCS opportunities that are expected to increase our backlog and extend the life of the program. Ultimately, however, we anticipate offsetting the reduced volume with organic growth in other areas of our business. In addition, we continue to make substantial progress on our autonomous logistics technologies, KARGO UAV, unmanned aerial system and K-MAX TITAN aerial system in partnership with Near Earth Autonomy. Moving to our Structures segment. We have made meaningful progress improving the financial performance of the business in this segment. We have accomplished this through strong deployment of our operations excellence model and believe there is significant opportunity for further enhancement. Our teams in Jacksonville, Wichita and Vermont have embraced our model and are seeking opportunities to drive improved performance. In Jacksonville, for example, they are in the process of consolidating from four manufacturing plants to down to two, in order to eliminate excess capacity and optimize manufacturing for space and flow. In addition, they have focused their efforts on driving lean principles through their programs that has led to significant improvements in quality and on-time delivery. The results of these efforts were important enough to be recognized by Sikorsky, which increased the quantities from those originally planned in our follow-on multiyear contract, for Black Hawk cockpits production awarded in December. Now, let me highlight several exciting innovations underway as a result of listening to our customers and helping them solve their toughest problems. In our Engineered Products segment, we began manufacturing products in the first quarter, utilizing our proprietary titanium diffused hardening process, which provides the benefits of titanium alloys, while extending service and improving hardness, durability and wear characteristics for a wide range of end markets outside of aerospace and defense. Our team is actively exploring a variety of medical applications, including those in orthopedics, while fielding requests for applications from Formula 1 racing teams and weapons accessory manufacturers. In our Precision Products segment, we are extremely excited to unveil our new KARGO UAV unmanned aerial system in the third quarter. This is a purpose-built, fully-autonomous, medium lift logistics vehicle designed to be easily deployed and provide cost-effective cargo hauling up to 800 pounds and up to 523 nautical miles, when empty. Our initial addressable market is the U.S. Military and Special Operations Commands, and longer-term, the platform capabilities lend themselves to a wide range of commercial applications, such as servicing oil platforms, search and rescue, and middle-mile delivery for logistics companies. We’ve had several companies looking to partner with us to help provide value-added capabilities, which could expand the used applications for this vehicle. In addition, we have received direct inquiries from U.S. international military customers, and we are working to secure initial orders for the program. Finally, we are proud to announce that KARGO UAV unmanned aerial system was asked to participate in Phase 2 of the U.S. Air Force Agility Prime Program, a significant accomplishments of the team and validation as to the interest of the U.S. military. These are just some of our exciting growth opportunities that our Kaman team will continue to execute against. Looking ahead, we feel confident that the commercial aerospace market is rebounding as the economy continues to recover. We are seeing stronger demand in key end markets, especially in aviation, medical and industrial, which are expected to benefit our very profitable Engineered Products segment. Precision Products will continue to transform, advancing applications of Kaman’s core competencies and precision manufacturing, sophisticated measuring equipment and fully autonomous flight. Our Structures segment will continue to get operationally healthier and focus on advanced composite applications. We are extremely excited for what’s on the horizon, with several of our new innovations as we position the Company for best-in-class performance. Lastly, we will also continue to take a disciplined approach in identifying and pursuing the right strategic acquisitions. Now, I will turn the call over to Jamie for a more detailed discussion of our financial results.

Jamie Coogan: Thank you, Ian. Good morning, everyone. Today, I will discuss our fourth quarter and full year results before providing an outlook for 2022. On a consolidated basis, our net sales in the fourth quarter were $175 million compared to $180 million in the third quarter of 2021. We recognized lower sales on both, our JPF program, as well as products, serving the medical and industrial markets. Sales increased in the commercial business and general aviation markets, partially offsetting these declines. Net sales for the year were $709 million compared to $784 million in 2020. The decline of 9.6% was largely due to an anticipated reduction in JPF sales and the sale of our UK composites business. Adjusted EBITDA in the fourth quarter was $23.6 million or a margin of 13.5% compared to $27.8 million or a margin of 15.5% in the third quarter of 2021. For the full year 2021, adjusted EBITDA declined 7% to $95 million. However, adjusted EBITDA margin improved 40 basis points from 13.1% in 2020 to 13.5% in 2021, as a result of our focus on operations excellence. Now, I’d like to walk through each of segments, beginning with Engineered Products. Compared to the third quarter, volumes declined in the fourth quarter, primarily for products serving the medical markets. Adjusted EBITDA for the fourth quarter was $19.4 million with a margin of 23.5%. Despite the small decline during the quarter, annual results improved with higher demand in medical and industrial markets. And looking ahead, we expect continued strength in these markets into 2022. Annual sales and gross profit increased on seals, springs and contacts for medical implantables, medical devices, and analytical instruments. This was partially offset by lower sales volume of commercial bearing products driven by the impacts of COVID 19 on commercial aerospace end markets, primarily in the first half of the year. Adjusted EBIDA for this segment for the full year 2021 was $69 million with a margin of 21.8%. The demand for our springs, seals, and contacts, as well as for our bearings products has prove significantly against the backdrop of ongoing economic recovery. We end the year with a backlog of $169 million in our Engineered Products segment, a 26% increase over the prior year. And we expect to see strong order rates for these products in 2022. In fact, to date, we are encouraged by the significant year-over-year order rate increases we have seen thus far in the year. Now, moving to our Precision Products segment. Compared to the third quarter, gross profit declined in the fourth quarter due to lower sales of K-MAX aircraft and spares. Additionally, we increased R&D investments in new technologies, such as the KARGO UAV unmanned aerial system. Adjusted EBIDA for the fourth quarter was $9.7 million with a margin of 16%. Annual results for this segment declined, driven by a decrease in JPF DCS sales and associated gross profit, combined with lower gross profit on our legacy fuze programs. This was partially offset by higher sales and gross profit on our JPF USG program and higher sales and gross profit on our SH-2 program with New Zealand. Adjusted EBITDA for the full year 2021 for this segment was $60 million, with a margin of 23.2%. We are managing our current JPF pipeline and we are looking to secure additional DCS orders in the near term. We continue to make progress in R&D efforts with our patented height of burst sensors, and we are developing new sensor and fuzing technologies for UAV platforms, counter UAV ammunition, and hypersonics that bring in all new capabilities to our existing family of safe and arm devices. Now moving to our third segment, Structures. Compared to the third quarter, results were relatively unchanged with lower gross profit due to changes in profit estimates for some of our long-term contracts. This was offset set by higher sales volume on our AH-1Z program. Adjusted EBITDA for the fourth quarter was $1.2 million with a margin of 3.6%. Annual results improved significantly, driven by the absence of losses from our former UK composites business, higher sales and gross profit on the A-10 program and traction with our overall operations excellence deployment. Adjusted EBITDA for the full year was $3 million with a margin of 2.3% compared to a loss of $3.7 million and a negative margin of 2.2% in 2020. We continue to identify opportunities for further operational improvement in our Structures segment, which is expected to be healthier in 2022. We will continue to leverage our longstanding aerospace customer relationships with Sikorsky and Boeing, as well as utilize our technologies for additional medical imaging solutions in order to drive improvements in the financial performance for this segment. On a consolidated basis, gross margin increased in 2021 to 33.4%. We benefited from higher profitability for our seals, springs and contacts, and we will continue to focus on driving improved performance through the deployment of our operations excellence model. SG&A as a percentage of net sales for 2021 was 21.5%. As we discussed on the prior quarter call, we will continue to manage cost and seek opportunities to increase efficiencies across our organization. One example of these activities is the facilities rationalization plan at our Structures manufacturing sites that Ian mentioned earlier, which is expected to result in cost saving beginning in the first half of 2022 with total realization of approximately $4 million by 2024. Diluted earnings per share from continuing operations were $0.33 for the quarter compared to $0.53 in the third quarter of 2021. On an adjusted basis, diluted earnings per share from continuing operations were $0.48 compared to the $0.60 in the third quarter. For the full-year, diluted earnings per share from continuing operations were $1.57 compared to a loss per share of $2.54 in 2020. On an adjusted basis, diluted earnings per share from continuing operations were $1.93 compared to $2.11 in 2020. Recall, in 2020, adjustments were largely driven by non-cash non-tax goodwill impairment charge, an asset impairment charge on our former UK business and cost associated with the Bal Seal acquisition. During the quarter, we generated adjusted free cash flow of $28 million, driven by strong cash collections and improved working capital management as a function of our focus on operations excellence. For the year, adjusted free cash flow generation was $56 million compared to a usage of $1 million in 2020. Now, I’ll provide you with our outlook for 2022. We expect sales in the range of $720 million to $740 million, and we expect to deliver adjusted EBITDA of $93.7 million to $99 million with an adjusted EBITDA margin on a consolidated level in the range of 13% to 13.4%. For the full-year 2022, we currently expect earnings per diluted share to be in the range of $1.75 to $1.90. We expect cash from flow operating activities to be in the range of $65 million to $75 million, leading to an adjusted free cash flow of $40 million to $50 million. We expect the cadence of earnings to be weighted towards the second half of 2022 with our first quarter results being the lowest period of performance. Our results for 2022 reflect the continued strong performance expected in the medical and industrial end markets, and the anticipated incremental recovery of commercial business and general aviation and products through the of the year. With that, I’ll turn the call back over to Ian for closing remarks.

Ian Walsh: Thanks, Jamie. 2021 was a foundation building year for Kaman in terms of people, processes and performance. We will never be satisfied with our profitability, until we are achieving top quartile performance. The improvements in the end markets we serve are encouraging, and we will capitalize on that opportunity by continuing to win more profitable programs, expand our market share, shut unprofitable work and improve our year-over-year organic growth. Together with new leadership, we’ve developed a solid strategy and we are well-positioned to deliver on our priorities. As a quick recap of our overarching strategy, we continue to focus on three strategic pillars

Operator: Thank you. [Operator Instructions] And our first question comes from the line of Steve Barger with KeyBanc Capital Markets. Your line is open. Please go ahead.

Steve Barger: Hi. Good morning, everyone. I wanted to start with the bridge on slide 14, specifically the $0.86 headwind from JPF. That program was a bigger contributor last year than I would’ve guessed. Just directionally, how much will that business be down this year? And is it still a significant contributor and to the extent that you can talk about that, is that a further headwind in ‘23?

Jamie Coogan: Yes. So, we talked about this program for some time now, right? We’ve been trying to be transparent in our disclosures here. And we wanted to demonstrate here the importance really, Steve, again, yes, JPF is a headwind. But we really like the growth that we’re seeing in the rest of the business. And we think about the contribution of Engineered Products, the remaining Precision Products and Structures businesses, there is good contribution there. In terms of costs, we are going to continue to work through our backlog in JPF, as we have that now. As we mentioned in our prepared remarks, we do have additional line of sight to additional DCS opportunities. But our focus really is on growing the remaining portion of the business.

Ian Walsh: Yes. And Steve, this is Ian. Just to build on that, we do have a good pipeline. We’ve got a lot of prospects out there. But, we wanted to show this, purposely to kind of demonstrate that we know what that program has been as it kind of runs its course. And we are super focused, like Jamie said, on really offsetting as much as we can with organic growth across the rest of our businesses, which we feel very strongly about relative to the upcoming years. And that’s by way -- inclusive of some strategic acquisitions.

Steve Barger: Yes, understandable. Just given the size of the contribution last year, can you just give us a directional idea of how much that is down for ‘22 versus ‘21?

Jamie Coogan: Yes. I mean, we’ve got a $100 million worth of backlog right now for that program. And we have that inside the 10-K there, the disclosures there related to 10-K. We’ve not typically disclosed forward looking profitability on those specific programs, just given customer mix, as we negotiate contracts. But, that is has been a very profitable program for us in the past.

Steve Barger: Yes. The biggest -- go ahead.

Jamie Coogan: Sorry. The mix this year is weighted a little bit more towards USG, right? So, we are having lower profitability year-over-year just on mix, given the pricing of the units that are expected to go out this year.

Steve Barger: Understood. Thanks. And the biggest positive contributor in that bridge is the improvement in Structures. Can you tell us what that margin was in 2019 on an EBIT or EBITDA basis? And just talk about your confidence level in that specific area of improvement. And just what does that segment look like when it is top quartile?

Jamie Coogan: Yes. I’ll -- why don’t I start with the margin in 2019? It was about 3% positive, Steve, in that period of time. And what I’ll do is maybe pass that over to Ian to talk about the longer term vision there for that segment.

Ian Walsh: Yes. Steve, that’s like we talked about. It’s been a major focus for us to get that segment healthy. And we’ve got different sites, different programs, there’s actually a variation around us. So quite frankly, our Vermont business historically has had really nice margins. But, some of the other businesses, we had programs that weren’t the right types of programs. And the nice part is we’ve got incoming work, new programs CH-47 boom for example, really working the A-10, Bell programs, the Black Hawk program for example, very -- really nice follow-on order with much stronger profitability is a function of all the work that we did last year. So, really kudos to the team there. Fundamentally though, where we’re trying to go, and I think that’s the right question, is we feel comfortable. And if you look at improvement just between ‘20 and ‘21, and what we’re shooting for this year, the Structures programs, when you’re doing high end composites, complex composite materials, that should be high single digits, and that’s where we’re trying to get to -- even low double digits. That’s the target.

Steve Barger: And so, just a quick follow-up on that, Jamie. Was that 3% EBIT or EBITDA? And same question for you, Ian.

Ian Walsh: EBITDA.

Steve Barger: EBITDA. And so, you’re saying, Ian, high single digit EBITDA or double digit, if you can get there. And just last one, timeframe for being able to see a high single digit EBITDA margin in Structures?

Ian Walsh: Yes. So -- and by the way, I want to mention, too, Wichita and Jacksonville, Wichita already has Part 145 certification. So, there’s also a little bit of a conscious shift to focus on some aftermarket work, which we are highly capable of doing. And we’ve got work coming in right now that’s -- it’s much more profitable. So, our time line right now, and I think this is true for the other segments, we’ve got effectively a five-year timeline to get there, but we feel very comfortable and confident that probably in a three-year mark, we could be in the high single digits, and in the five-year mark, we could be low double digits.

Operator: Thank you. And our next question comes from the line of Seth Seifman with JP Morgan. Your line is open. Please go ahead.

Seth Seifman: Hey. Thanks very much. So, I guess, I was wondering a little bit in Engineered Products, if we think about kind of getting aircraft build rates back to the 2019 level. And I guess, there could be some back and forth there, maybe there’s never as many 787s, but maybe there’s some more A320s, kind of mid-decade profile, what you guys are thinking about the build rates mid-decade on commercial aircraft? What kind of sales are we looking at? How much recovery is ahead for that Engineered Products business?

Jamie Coogan: Yes. That’s a great question. So, if you look back, we tried to put some disclosures in there to show you exactly where Engineered Products was in 2019. So, you can see the sales bridge back to 2019 at the peak of aerospace. At that point in time, we did not have the Bal Seal business unit at that point. That was about a $270 million business, generating around 28%, 29% EBITDA margins, effectively. So, as we look at the performance today, we believe that there is opportunity for incremental top-line growth as we get back to that recovery. And because -- and this is -- some of our discussions we’ve had over the past year, because of those, the actions that we’ve taken with that business from a cost -- from an investment in automation and new technologies, some new facilities to sort of streamline our processes and operations, we do expect the drop-through on those incremental sales opportunities to come through fairly meaningfully.

Ian Walsh: Yes. I mean, if you look at the historics, they’ve been exceptionally strong, certainly for business, like Kamatics. The content that we have across Airbus and Boeing, whether it’s you the A220s, A320s, we know that the double aisles are going to recover a lot slower. We’ve got -- we’ve expanded content on 737, even 777X. So I think, we’re in a very strong position, as Jamie said, not just from that recovery, which the build rates are all increasing, we know travel’s gone up, but also from an operational perspective, what we’ve done to expand the margins there, and a lot of good work still in work to automate a lot of our processes and get cost out.

Jamie Coogan: Yes. And just to ask you that, as we think about cost this year and CapEx this year, right, we do see some incremental costs as we are investing for growth, right, at both -- sort of all -- across all of our Engineered Products, companies frankly. So that it’s new engineering, it’s new sales and business development talent as well as capital expenditures, right, to continue our trend towards automation and new technologies. There’s a little bit of that’s weighing on our results for 2022 to a certain extent. And that you’ll note our CapEx expectations for the year are a little bit higher than they were last year.

Seth Seifman: Okay, great. And then, following-up on Structures, I guess, just stepping back and thinking about it big picture and looking at the profitability of the different segments, and what you guys have highlighted as kind of the relative strength of the company being an Engineered Products. I mean, just Structures, the strategic -- Structures in the portfolio over time and being a strategic part of Kaman, I guess, how do you think about that?

Ian Walsh: Yes. We consciously wanted segment, as we’ve talked about before for all different reasons and good reasons. And what I want to make sure people understand is that early in the year last year, we were already focused on this, and really trying to understand where the best-in-class, call it top quartile performance is for each of those segments. So early last year, we laid those trajectories. We set those game plans in place, those strategies over five years. So, our focus right now is to get each of our segments to that top quartile performance. As we go year-over-year and again, a lot of effort operationally with, like we talked about the training, that’s underway, consolidation that’s underway, investment we are making on the front end of our business to expand our top-line. If we feel that Structures, for example, can’t get to that top quartile performance, well then we’re going to take a hard look at it, and what it means to the portfolio, because fundamentally, from a consolidated basis, we know exactly where we need to be in five years.

Seth Seifman: Okay, great. And then, just in the M&A market, I guess, how are things looking these days? What’s developed there incrementally, maybe over the past -- probably something we talk about each quarter, but since it’s year-end kind of over the past year in terms of the landscape, the opportunities, the multiples and how you’re thinking about things?

Ian Walsh: Yes. We are and remain very active, as we have talked about before on the acquisition front. We talked last year about how we kind of -- we did a hard look at our filters and really trying to focus on the right type of acquisition that fits into our portfolio. So, last year, it wasn’t for lack of effort. We were pursuing several opportunities. But at the same time, to your point about multiples, small, medium and large didn’t matter, really some almost crazy irrational behavior out there. We want to be very patient. We want to be very conscious and disciplined in the use of capital, and quite frankly, investing in ourselves. We have got plenty of opportunities investing in ourselves, but we remain very active. We’ve got a nice pipeline. We continue to pursue certain strategic acquisitions that we think makes a lot of sense for the business, and we’ll continue to do that. We know that’s a big part of our growth, and also repositioning the Company in terms of getting that top quartile performance. So, we will continue to pursue that very hard.

Operator: [Operator Instructions] And our next question comes from the line of Pete Skibitski with Alembic Global. Your line is open. Please go ahead.

Pete Skibitski: Hey. Good morning, guys. Guys, I wanted to get a better -- just to extend kind of the margin discussion around Engineered Products. I wanted to get a better sense of how to think about kind of the future cycle peak margin in that business. The 24%, almost at the peak in 2019 is a great number, and I think came down after that, obviously on the aerospace down cycle, but I think also then you have the Bal Seal, purchase tangibles flowing through there. So, I was wondering if you could maybe give us a sense of what that amortization looks like in Engineered Products in the next few years. So, we could just get a sense of, what the new kind of peak is likely to be including the amortization.

Ian Walsh: Yes. Jamie will talk amortization. Pete, I’ll kind of talk again targets and kind of where we’re aiming. When you look at the portfolio, the businesses we have in Engineered Products, we actually have a nice -- I mean, they’re all highly -- high performers, but we do have a variation there. We have got some that are well above that consolidated margin and some, a little bit below. And so, I look at where, for example, Bal Seal is, I look at our traditional performance with Kamatics. We’ve got our two German sites, RWG and GRW, tons of potential there. And a real focus of effort to expand those margins from a target perspective, we feel that we should be north of a 25%. And we've got business, like I said, above that. So, we're highly confident that in a three-year window and certainly the five-year mark, that's the top quartile performance we're shooting for and that's where those businesses need to be.

Jamie Coogan: Yes. And again, Pete, we don't specifically break out the depreciation from the amortization for the Engineered Products business unit. But again, as we look at the prior performance in 2019, if you were to look at EBITDA for that business, it would be closer to 28%, 29%. So, there's sort kind of on a run rate basis, 600 basis points, we'll call it the legacy Engineered Products before the acquisition of Bal Seal.

Pete Skibitski: So, Ian, do you think you could be north of 25% at some point, you mean including that amortization? That's an EBIT number, not an EBITDA number?

Ian Walsh: It's EBITDA.

Pete Skibitski: It’s EBITDA. Okay. Then just last one for me. Just to follow up on the JPS conversation. The fuze guidance for 2022, I think it's 25,000 to 30,000. Does that include this 45 million DCS order that you guys have been talking about for a couple quarters, or no?

Ian Walsh: No, that does not. So, that's in work. And again, we've got a high degree of confidence that we'll secure that here at some point. But, it does not include that.

Jamie Coogan: Yes. And to, just to reference, again, we have to remember, our JPF program is unique, and that fuze deliveries do not necessarily always correlate one to one with fuze revenue, right, given the overtime nature of our USG program versus deliveries underneath the DCS programs. So, just kind of make sure that everyone's aware of that.

Pete Skibitski: Yes, understood. I appreciate it. And so there are some DCS opportunities that are out there. You guys still are working that they're just not as mature as the $45 million opportunity, I guess. Is that the way to think about it?

Ian Walsh: Yes. That's the way to think about it. And again, we've got line of sight -- I think, strong line of sight between now and certainly 2023 for those orders.

Operator: Thank you. And we have a follow-up question from the line of Steve Barger with KeyBanc Capital Markets. Your line is open. Please go ahead.

Steve Barger: Hey. Thanks. I hate to harp on Structures. Obviously it's weight on results for a long time. I know you have these target ranges of three to five years. But, can you just tell us in general, how long do the contracts on these programs run? And do you think you'll be able to drive pricing on top of the efficiencies you're looking to get to help accelerate this improvement program?

Jamie Coogan: Yes. No, actually -- absolutely. And credit to our team down in Jacksonville specifically, we use them as an example. They just recently signed their new multi-year contract. The duration on those is typically five years. So, we just turned over the latest multi-year contract. We'll start performing under the new contract this year that does have improved pricing underneath it. And on top of that, again, we're driving costs out of the organization. These are longer term in nature for sure, the nature and types of this work, but -- which is why we are so focused on lean, lean practices and driving cost out of the operations to be more efficient on the current contracts. But that also positions us better to when we win new work that that new work comes in at a more profitable rate than historically it would have. I don’t know if there's anything you want to additional, Ian.

Ian Walsh: Yes. Again, we're consciously also looking the type of work that we're pursuing. When we've got some really nice near-term prospects that we're expecting to land this year that will demonstrate that, much higher margins, much more aligned with our hiring capabilities. So again, we're kind of in that fixed, get healthy stage operationally, which is showing really nice results, which includes that consolidation piece we talked about. Even, like I said, Vermont, and what we're doing with some of our Structures on the medical side, that is much more profitable work, really you have some nice growth there last year with the team up in Vermont, and even with the folks down Jacksonville, like I said, with the Part 145 work that they're doing. So, we feel confident that we're definitely going to get healthier there as we go. And to your point, yes, we were in some work that was not profitable for a period of time, and we've exit some of that work and we've actually gone back and renegotiated some of the pricing on some of that legacy work.

Steve Barger: That's great. Sorry if this is in the K. I can find it later. But, how much of that $100 million in JPF will ship this year?

Jamie Coogan: Yes. I mean, again, we're going to continue to work through that. So, I would imagine the expectation would be, we'd sort of work through as much of that as we can over the course of this year, Steve. But again…

Steve Barger: Okay. And there's obviously some unfortunate events in the news this week. What does that mean, if anything, for the fuze business or safe and arm, whether it's from supply chain or inquiries or whatever, how are you just thinking about that?

Ian Walsh: I think, to answer your question, from a supply chain perspective, we don't think there's really any risks there quite frankly, and we've looked at that. I think, our teams already have done a nice job with the situation that's going on there, looking at what that might mean. And specifically for JPF, quite frankly, it is just way too hard to tell. We know exactly as we've disclosed where that program is, it's running its course. We've got our pipeline. We don't expect to have any issues there. So other than that, we really don't have much to comment on.

Steve Barger: Yes. That's I figured, but I just thought I'd ask. For KARGO UAV, you said there's direct inquiries from various customers. What's your estimate from when you can secure orders and kind of same question for when that might ship? Like, what -- is there a timeline that you can talk about?

Ian Walsh: Yes, sure can. So, our timeline right now, and I actually was literally just yesterday down at campus zoom [ph] with our marine special forces teams, talking with them really productive meeting. I would tell you that our timeline from a military perspective, so the military is whether it's Marine Corps, Air Force, like things we've talked about, they want to have these types of capabilities flying before 2025. From a commercial perspective, they would definitely want them earlier but that's a function of how, again, we're ramping up this program. We're going to be flying a full scale prototype this year. We know that getting it to a technology readiness level of six or seven is where we need to be, and we're confident we're going to be there. So, quite frankly, we would expect to have some level of funding from the services, which this year, and some initial orders coming in possibly later this year either -- not from the military because they run it from a programmatic perspective. So, there could be couple of those cargoes that they could be -- we could be building under a kind of T&E or test & evaluation perspective. And from a commercial perspective, we've seen, whether it's airlines, logistics companies, they are very comfortable getting early orders in. So, our teams are -- and that's kind of part of the investment, too, really thinking about, how we approach those markets in the right smart way to get orders starting to come in later this year, with the intent again, delivering orders, delivering product before 2025. And that's doable for us.

Steve Barger: And so, how do you think about the addressable market in 2025 and then maybe longer term as commercial takes off?

Ian Walsh: Well, we are starting to see some initial analysis come in right now. And from a commercial perspective, if you look at unmanned systems, that addressable market is $5 billion to $10 billion. It's a huge market. On the military side, it's less naturally, and very strategic and targeted. So, we’ve got anywhere from ranges of hundreds to several thousands of that's kind of the range we would be talking about for services, certainly the Marine Corps. Army's a little different; Air Force is a little different. So all-in-all, it's a very nice market for us, both in military and the commercial side.

Steve Barger: I know it's hard to know this now, but if you're selling hundreds in 2025, what's the margin profile on that program?

Ian Walsh: Well, let's -- I'll put it this way. It sits under our Precision Products for a reason, because that is a precision product. And if you look at the margins that we are showing, that's the margins that we're shooting for.

Steve Barger: Got it. And then, one final. If you can't find good M&A candidates for whatever reason, or you find some that are small, would you consider a buyback or other avenues of capital allocation, or are you just really content to wait for the right deals?

Ian Walsh: No. We are looking at all those options, and the Board is supportive of that. So, the answer is yes. But at the same time, we are not going to overpay. And we feel there are plenty of really nice targets out there that we are going to continue to look at and go after for sure.

Operator: Thank you. And I'm showing no further questions at this time, and I'd like to turn the conference back over to Kary Bare for any further remarks.

Kary Bare: Thank you, Michelle. And thank you everybody for joining our fourth quarter 2021 conference call today, for our earnings. And we look forward to getting back to you and talking with you when we provide our update on our first quarter 2022 earnings. Have a great day.

Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.