Q4 2020 Kaman Corp Earnings Call
Hello, Ladies and gentlemen, thank you for standing borrowing books of the Command Corp, Q4, 2020 conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session, who asked the question during the special needs of press Star one on your telephone if you require any further.
Of the assistance. Please press Star Zero I would now like duty Associates Conference call. Mr. Jamie Coogan, you may begin.
Good morning, I'd like to welcome everyone to commands fourth quarter 2020 earnings call conducting the call today are Ian Walsh, President and Chief Executive Officer, and Rob Starr Executive.
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 of our business the economy and other future events. These include projections of revenue earnings and other financial items statements on plans and objectives.
<unk> of the company or its management statements of future economic performance and assumptions underlying these statements regarding the company and its business.
The company's actual results could differ materially from those indicated in any forward looking statements due to many factors. The most important of which are described in the company's latest filings with the Securities and Exchange Commission, including the company's fourth quarter 2020 results included on form 10-K, and the current report on form 8-K filed yesterday.
Turning 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 to our website that is designed to provide additional context on our financial performance key events for the period additional information on the makeup of our sales and cost savings actions and our outlook for 2021.
You can find this presentation www Dot command dot com slash investors slash presentations with that I'll turn the call over to Ian Walsh.
Thank you Jamie good morning, everyone and thank you for joining our fourth quarter 2020 earnings call.
I'll start this morning by providing some highlights on the quarter and full year, followed by an operational and business update before passing the call over to Rob for a more detailed discussion of our financial results for the quarter and our expectations for 2021.
The closure of fiscal year on solid footing and through our teams dedicated efforts we successfully navigated the typical set of events in 2020.
The pressure in some of our critical end markets. Notwithstanding we delivered sales in 2020, $784 5 million, which was up 3% compared to the prior year.
Our higher sales were attributable to the acquisition of ball seal and higher volume for our joint programmable fuze, partially offset by decline in sales of more pandemic sensitive end markets of commercial aviation medical and to a lesser extent industrial.
Turning to our profitability, our adjusted EBITDA margin for the full year was 13, 1%, which was on par for the with the prior year. Despite the sharp decline in sales for higher margin commercial aviation medical markets.
The ability to maintain our adjusted EBITDA margin was the result of strong profitability of our joint programmable fuze program and the quick and decisive actions, we took to reduce our cost structure. During the course of the year combined with our G&A reduction efforts. We began in 2019 the sale of our distribution segment.
The GAAP diluted loss per share from continuing operations of $2.
54 cents for the year was impacted by significant noncash impairment charges, our full year adjusted diluted earnings per share was $2 11, an increase of nearly 30% when compared to the prior year of $1 63.
The command team accomplished a lot in 2020 and I'd like to spend a few moments highlighting some of these items in detail.
First and foremost we kept the safety of our global workforce is a priority to our ongoing pandemic, we found new ways to work in this environment and continue to deliver of central products for our customers. Both on time and the consistent high quality that is expected from command.
Second we integrated the acquisition of <unk>, achieving the cost targets. We expected early in 2020. This transaction represents the largest acquisition of the history of our company and we are proud of the team's efforts while largely working on the integration remotely in the midst of this pandemic the <unk>.
Team worked hard to identify new product opportunities that will provide our customers differentiate integrated solutions.
As previously disclosed all of <unk> was impacted by a random attack in December I am pleased to report that our team reacted quickly and effectively restoring normal operations by mid January without paying of ransom, while we.
We do not anticipate any meaningful lost volume some shipments were delayed at the end of 2020 and the first few weeks of 2021, which we are confident we will fully recover over the course of the year.
Looking forward, we remain enthusiastic about the prospects for <unk> as part of our portfolio the <unk>.
Alex and capabilities of right in line with the objectives for the future command, which is to focus on highly engineered solutions that are critical to our customers.
While the pandemic the lead the visibility of its contribution in 2020, we are confident that it will be a core part of the command story going forward.
Third subsequent to year end, we made significant progress in our portfolio reshaping of the divestiture of our UK composites operations.
After thoughtful analysis, we determined that our UK operations have historically underperformed and would be more appropriately suited with another owner.
The divestiture will allow us to redeploy capital resources and management time back to our core operations, while improving our overall margin profile.
Lastly, we architected and deployed a new operations excellence model across all of our businesses focused on margin expansion improved cash generation and driving better ric's overtime.
We are exiting the year and strong financial health leaner and ready to grow as the market begins to recover.
During the year, we continued our focus on our G&A reduction efforts, which began in 2019 and we acted decisively implementing additional cost reductions as the effects of the pandemic materialized in the first quarter.
As we move into 2021, we have a strong balance sheet and available capacity under our revolving credit agreement. This provides ample flexibility to continue our portfolio reshaping and make investments in new product technologies, which will enable us to continue to build command.
Turning to our product offerings, and beginning with our specialty bearings products as anticipated sales were under pressure in the fourth quarter due to the continued impact of COVID-19 of commercial aviation.
As we enter 2021, we're seeing an increase in order rates for of medical and industrial products and we remained very optimistic on the long term outlook for our bearings business and view. It is of critical is critical to our long term success.
We benefit from the innovative nature of these products is there some of the strongest performing product offerings in our portfolio.
For a joint programmable fuze program 2020 was a record year for production and delivery of our team worked tirelessly tirelessly to deliver 40749, GPS up more than 17% when compared to 2019.
These deliveries were weighted toward our higher profit Dcs customers, leading to record profit contribution from the spike during the year, we expect to deliver 30% to 35000 GPS in 2021 and while this is below 2020 peak deliveries. The volume is in line with historic delivery levels.
We continue to see demand for this product, albeit at lower levels than we've seen in the past. The recent change in administration has led to uncertainty on the timing of delivery for one of our key customers as the New administration has indicated its desire to review the sale of defense products to two Mile's turn countries.
The outcome of this review remains uncertain and therefore, we've elected to temporarily remove the previously anticipated order from our current guidance, which will impact our full year outlook for 2021, as Rob will detail shortly.
Our <unk> program, we continue to see strong demand for the sale of an additional aircraft during the fourth quarter and the receipt of a new order in January from the aircraft delivery in the first quarter of 2021 for.
For the full year, we expect to sell for new aircraft and we continue to believe the came ex represent a unique value proposition to both commercial and military customers.
We are enthusiastic about the product pipeline and very excited about the came ex unmanned deployment.
The development program, which continues on schedule for the United States Marine Corps, when the expected demonstration of the upgrade of U S capability later this year.
We have made a lot of progress over the past couple of years to reshape our business beginning with the divestiture of distribution. The subsequent acquisition of both <unk> and the continued continuing with the recent divestiture of the UK composite structures business as we exit 2020, the strong balance sheet and available borrowing capacity expected to pursue additions.
For our portfolio.
While challenges clearly remain ahead of the pandemic continues to affect our business and the incoming administration lays out the strategic objectives, we are very well positioned to emerge stronger and more profitable and more resilient now I'll turn the call over to Rob for a closer look of the numbers Rob.
Thank you Ian and good morning, everyone. Today, I will walk you through our fourth quarter results.
Before turning to our outlook for 2021.
During the fourth quarter net sales from continuing operations for $185 3 million down, 22% when compared to $237 8 million in the prior year.
As expected our fourth quarter results for.
The effective by the adverse effects of COVID-19 on our commercial aerospace and medical businesses.
We also had a difficult comparison for our joint programmable fuze program that was partially offset by contributions from ball sale.
Despite the lower deliveries of J P. F. In the fourth quarter 2020 was a record year for the <unk> program.
Turning to our end markets defense, which has historically contributed about 50% of our sales mix was down 23, 6% in the fourth quarter of 2020, compared with the year ago period, and down 25, 3% sequentially the sequential.
The decrease was driven by fewer deliveries of our joint programmable fuze.
Sales in our commercial business and general aviation markets, which historically contributed 30% of our sales mix.
We're 40% lower compared to the year ago period as expected, but increased six 4% sequentially.
The sequential increase was driven by a 13, 7% increase in sales to Boeing and Airbus and the three 7% increase in sales for our general and business aviation products, which included the sale of one K Max aircraft.
While we continue to expect sales of our commercial aviation products can be under pressure through the first quarter and we expect a more meaningful recovery in the back half of the 21.
The diversity of our product offering and the broad range of platforms, we support in general and business Aviation is expected to partially offset these declines.
In our medical end market, which accounts for about 10% of our historical sales mix organic sales increased one 3% from the year ago period.
The second quarter performance for these products was the lowest point for the year and while we've seen improvement the rate of recovery has been uneven. We continue to expect that this market will rebound and that we will have the ability to recapture of much of the Miss volume during the course of the year, which will drive improved performance for these products in 2021.
Finally sales in our industrial end markets, which comprised of about 10% of our historical sales mix were up 37% from the year ago period. As a result of the <unk> acquisition sequentially sales were up five 8%.
We are seeing relatively better performance in this end market given the improvements in overall global economic conditions.
Gross margin for the quarter was 29, 3% compared to the 35.
35% in the prior year period, the 120 basis point decline over the fourth quarter 2019 was primarily driven by mix and reduced volumes for our commercial bearings.
Investments continued to be of primary focus for us as we look to drive future organic growth.
Spending in 2020 on IR Indy and BMP, which is included in our SG&A line on the income statement increased 11% over 2019 to $21 7 million.
While SG&A as a percentage of sales increased in the fourth quarter and full year. The increase was largely due to the costs related to our acquisition of fall sealed.
SG&A as a percentage of organic sales was 23, 1% for the full year in line with 2019, despite the reduction in organic sales.
Restructuring and severance expense in the period was half of million compared to $1 million in the fourth quarter of 2019.
In connection with the sale of distribution in 2019, we committed to reduce our G&A expense by 15 million to $20 million on a run rate basis, as we exited 2020 and our activity. Since then have allowed us to reach the high end of this range.
Additionally, in response to the volume declines we have experienced due to COVID-19, we've been actively reducing our costs and.
In total our activities in 2020 and reduce costs by approximately $50 million on a run rate basis and demonstrates our ability to flex our cost structure.
These actions resulted in approximately $26 million realized savings in 2020.
Cost control remains a focus and is a primary driver for our ability to hold adjusted EBITDA margins in 2021, despite the lower sales volumes and product mix, we expect for the year.
On a consolidated basis against the backdrop of lower sales, we recorded an operating loss of $38 2 million compared to the operating income of $14 eight in the fourth quarter of the prior of here.
On an adjusted basis operating profit was $5 6 million or 3% of sales compared to the 32 or 12, 7% of sales in the prior year period.
As we have mentioned previously with the sale of distribution, we agreed to provide certain services such as tax treasury of human resources and it during the transition period, we plan to complete these activities during the first quarter of 2021.
Adjusted EBITDA from continuing operations in the fourth quarter was $17 3 million or nine 2% of sales compared to the $36 7 million of 15, 5% of sales in the fourth quarter of 2019.
We recorded a diluted loss per share from continuing operations of $1 13 compared to diluted earnings per share of $1 22 in the prior year adjusted diluted earnings per share was <unk> 41 in the quarter compared to the 80 adjusted diluted earnings per share in the fourth quarter of 2019.
The primary adjustments in the current quarter included the impairment loss on the sale of the UK assets held for sale and ball sale of acquisition related expenses.
During the quarter, we generated free cash flow of $65 3 million, reducing our free cash flow usage for the year to $1 3 million cash.
Cash flow performance for 2020 was impacted by delay in the collection of a significant chunk programmable fuse Dcs receivable.
Moving to our outlook for 2021.
We expect sales in the range of $725 million to $745 million and we expect to deliver adjusted EBITDA margin at the consolidated level in the range of 11, 7% to 13%.
This anticipated moderation in adjusted EBITDA compared to 2020 is due to the expected sales mix in the year. The continued impact of COVID-19, and the decision to remove an expected J P. F. Dcs order from our 2021 outlook.
For the full year 2021, we currently expect earnings per diluted share to be in the range of $1 55 to $1 87.
It is important to note that we have removed the previously expected J P. F. Tcs order from all of our guidance ranges as the New administration and the department of state of SaaS Foreign military sales.
This volume was in our original plan and a favorable outcome in 2021 with.
The increase our expected sales and diluted earnings per share above 2020.
We expect GAAP cash flow from operating activities from continuing operations in 2021 to be in the range of $25 million to $35 million, leading to adjusted free cash flow of $30 1 million to $40 1 million and includes a $10 million discretionary pension contribution.
GAAP operating cash flow for 2021 will include a $25 1 million payment to ball sales employees and has been accounted for as compensation expense to command under ASC 805 and 2020.
This amount represents a portion of the purchase price we pay for ball seal and we will the justice out of our cash flow results for 2021.
Additionally, we will see net periodic pension benefit of approximately $26 3 million expect interest expense for the year of approximately $16 4 million and estimate our annualized tax rate at approximately 24%.
Finally, and consistent with prior years, we expect the cadence of earnings to be weighted towards the second half of 2021 with approximately 30% of earnings in the first half and approximately 70% of our earnings in the second half of 2021.
In conclusion, we are well positioned to continue to execute on our strategy and manage the business throughout this rapidly changing operating environment.
With that I will turn the call back over to Ian.
Thanks, Rob.
2020 was a challenging year and I'm very proud of the work the team put forward to support each other and our customers, we see positive signs as markets stabilize and begin to recover and we are excited about the work we've done to position the business for growth in the near future.
Before we open the lines for questions I wanted to share two pieces of the exciting news first three of our businesses business units had the honor provide technologies that contributed to the successful landing of Nasa's Perseverance Rover engine ingenuity helicopter on Mars.
We are proud to have the participated in the program and their solutions are playing a part of the historic mission and second we were recently recognized by Forbes as one of America's Best Midsize employers Forbes ranked 500 mid sized employers by surveying 50000 Americans working for businesses that lease of 1000 employees demand ranked 120 <unk>.
One of the 500. This is a testament to the strength of command into our core values of respect excellence countability creativity and honor that we strive to achieve every day.
With that I'll now turn the call back to Jamie.
Thanks, Ian Operator May we have the first question. Please.
Ladies and gentlemen, this sort of a question or comment at this time. Please press. The Star then the one key on your Touchtone telephone.
And that has been answered you wished remove yourself from the queue. Please press the pound key.
Our first question comes from Steve Barger with Keybanc capital markets.
Hey, good morning, guys.
Hey, good morning statements Dave.
Ian given the revenue guidance. So I just wanted to start on how command goes forward from here on the last call you talked about three focus items organic growth executing M&A deploy deploying of focused operating system can you talk about what you intend to do to drive organic growth from here.
Yeah sure, Steve I think Thats a fair question.
And something that I'm excited to talk a little bit about.
On the first kind of objective if you will on organic growth I mean, I'll start out by saying.
This was the challenging year for everybody.
We all are markets end markets were down technically is like it was for a lot of folks but.
I am when I came aboard here and worked hard in the last quarter.
With our teams is really trying to understand where our opportunities were and so.
We agreed that the the best time to really.
Double down if you will on product development is when youre in a down cycle and that's exactly what we're doing so we've increased our IRA and BNP this year.
And from there we're doing a lot of work to accelerate our new product development processes at each of the be used for strengthening our engineering capability of just talked about this with our board recently.
All of that to me is designed to kind of position us for this accelerated kind of profitable growth when the markets do return.
And I'll just give you a couple of examples.
Ball seal for example of great business.
Probably two of the nitrogen plants I've ever seen really high end technology Theyre doing a lot of automation with the processes right now.
Drive cost out and they've got some really exciting new product developments from the brain of neuro tech transmitter side of things.
Shifting over debt, where we're going with UAS and K Max of the Marine Corps, and some spiral of opportunities they're very exciting.
To include some work we're doing for example, the height of burst and keep EEP, we've talked in the past.
Just certified our first sale, our first cell kinetics around titanium diffusion hardening.
Ex <unk>, which is a small part of our business the extremely profitable business.
Just got a PMA Pratt <unk> Whitney Canada authorization. So there's a lot of things going on and we're really trying to fuel that they kind of the innovation side of things and doubling down like I said on the engineering side and really thinking about of front end part of the business, which is again goes back to the operating model to talk about here in the second so the organic piece to me.
Is so critical for us and we're all kind of living through this pandemic and we can talk more about the end markets and what we're seeing here, but the organic growth piece is huge because it's.
You guys. All know we've got a really solid chunk of our business.
That has tremendous contribution margins and it hurts us when the markets go down, but it's true it's just fantastic when those markets recover and that's what we're prepared to do and really even chip away more at the total cost structure.
On the inorganic side real quick.
No question about it we've got a bunch of things to think about where we want to go and leveraging our balance sheet. So for example, we've created the standard.
Every week.
We now start to cycle through and look at what those M&A opportunities we should.
It should be out of reach we're adding resources to our M&A team, we talked about that last time, and we've actually gone back and revamped some of the criteria by which we're looking at certain M&A and that's in line with an effort that we started last year to really understand the drivers of this business and we want to make sure that debt next acquisition.
Of which we're very excited to make is the right one and drives the right results.
And the last one which again is in play right. Now is just operating ex our Opex model and Russ <unk> here now in the teams.
Fleet is actually down working with our businesses. This week, we've rolled that out.
Deployed it we've got five pillars around it we've got new operating reviews around it month to month to really drive.
The margin expansion.
From across the entire value stream for each business and just on top of that to put a fine point that all of that I just talked about certainly that the operating model is designed to understand where each of our businesses sits today.
And where they need to be in the short period of time to hit top quartile performance and Thats, what that operating models designed to do.
Really appreciate the comprehensive answer when you when you think about the organic opportunities you talked about in the M&A strategy and you just think longer term how do you envision the mix here does it make sense to be so heavy to defense or what direction do you want to push the company yes.
We are absolutely aligned with the strategy that we had which was to leverage.
The capital we have to go after businesses that fit in the highly engineered side of the house now what that means then which is interesting and I'm sure you guys know this again.
The last six months I feel very comfortable I've got my arm of heads around this business.
We have a lot of end customers, but fundamentally.
It's driving towards the higher end higher highly engineered parts that then play a role in a lot of those end markets defense.
Arguably I think is probably going to shift down a little bit just by the nature of what we're trying to do in the commercial side medical industrial those are businesses that we think are going to have some nice upside for us.
I.
Thanks.
Yeah Youre welcome.
Next question comes from Pete's Kubacki with Alembic Global.
Hey, good morning, guys.
Hey, guys just wanted to understand 2021 of the revenue guidance a little bit better.
On the sale of the UK composites business I guess, that's the Brookhouse holdings units and.
So that's about a $20 million headwind to revenue guidance for 2021 is that correct. That's correct about yes about $22 million.
Okay.
The loss that you talked about is that of normal operating losses that does not include the impairment.
Yes, yes that is correct that that excludes the asset impairment as a result of the asset held for sale accounting treatment.
Okay.
The impairment.
No no. It does not does not include the impairment.
For the $7 million.
Right yes.
Yes.
That is an operating loss.
Okay. Okay, and then on the 7000 fuses is that part of the of the large order from back in early 2018 of $324 million order.
The multiyear order or is that something separate yeah now for you that.
That is a separate order.
Okay, Okay unrelated to the $324 million the other.
Okay, the losing 7000 fuses on of Dcs ballpark I am guessing thats about I don't know 40.
The $40 million of headwind something like that yes.
Yes, just a couple of things I mean, I wouldn't say we're we.
We took it out of guidance I wouldn't say, we're losing it I think really what we're what we're saying is just given the current environment.
Uncertain as to when.
We will be able to fully booked that into backlog.
Given the granting of the export licenses.
But yes, we said think of it we did take it out of the guide, but what it shows is that there is continued demand.
For our unit and as you can appreciate no different than the Raytheon or others were just working.
We're working as best we can to understand the environment in Washington, The one thing to keep in mind. When you think about the 'twenty One guide and.
And I think we alluded to it is that had we been in a slightly different environment and we're able to include that just business as usual.
Both our top line and our bottom line would've been.
Higher year over year.
No question, yes, it has.
Temporary meaningful impact on where we are.
But.
We're certainly going to do our best to get that sell through.
Got it Okay and just a couple of more from me are those particular fuses. The 7000 are they already in work in process are they kind of sitting there in inventory right now.
Yes, yes.
Yes, Peter I would say that certainly is part of our production plan, we want to make sure of that should we receive an export license and that goes quicker than we think that we're able to support the customer yes.
Yeah, Let me just shed some color too just because this is such an important part of what's going on at first of all I Hope you saw we did receive.
The $52 million cash payment literally just yesterday.
And we send an 8-K out on that so that was very exciting to get in.
The relative to this order to your point that that contract is in work, we literally work and the final Ts and CS.
And pricing is all done we're just at that point, where with what's happening with the state Department and what <unk> said and if you look at the news. This morning that they need the help me push things along but we'll see but the idea is to say that that the March timeframe is kind of what we were trying to get get done by we'll see if that gets pushed through if it doesn't then from a production perspective.
We kind of work our way through the you know the <unk>.
Remainder of this year to see if it doesn't come now it will come later.
And they pushed to 2022 that comes in the near term and Theres some upside for us this year.
Okay, Okay, and just if I could squeeze one last one of the $25 million for <unk> is that the last ball steel payment.
Yes, Pete that that just represents our contractual obligation. This is all part of their retention program that was in place when we bought them.
So moving forward, you'll see a lot less purchase accounting adjustments as it relates to the ball seal.
Okay. Okay got it thanks guys.
Thanks Pete.
Our next question comes from satisfy some of them with J P. Morgan.
Hey, Thanks, very much and good morning, guys.
Hey, good morning, Seth.
So just wanted to ask a little more about the fuses and.
And sort of thinking about where.
As we think out.
Maybe two to three years beyond the delivery guidance that you've given now where that.
Where that might fit and we see where the backlog is for for fuses for.
J P F versus two years ago kind of down significantly and we can look at the sales contribution back in like the middle of the decade and where the.
That was.
And I guess, even if you add in the 7000.
We'll down year on year, I guess, it would be more to like maybe the 2019 level in terms of deliveries. So what's kind of of sustained what do you think of it as kind of a sustainable level.
Of Hughes deliveries going forward.
Yeah, Hey, Seth I'll start and let Rob chime in.
It's an important question for sure.
A couple of things one is.
Of the GPS has just been.
Again coming in and looking at the history just in the tremendous program for us.
The second part is.
It's really exciting to know what the team did last year and hitting that kind of record level.
It's hard when you have a record level to sustain that quite frankly, but what is I think important to understand is when you look at the kind of opportunity we had this year.
The orders that we've got in the orders that we know for next year.
The 35 it sits at kind of the historic level and what we're seeing right now and there's a lot of <unk>.
Scatter and were doing our due diligence to know.
We're the 152 stacks up in what's going on with 139, and all of that could stuff, but the bottom line is the on the U S. Government side, there is still work to be done.
And what that means for US is there's plenty of opportunities still with our Dcs and even F. N. That's from the $1 52, and so without having solid orders necessarily we just know the opportunity of there are still very real there.
No.
Im relatively optimistic now is it going the last forever and we're working hard right now of our strategic plans and our investments in thinking about where we're taking the business to really fill that gap over time, but I do feel we've got a nice window right now with with what we're looking at.
Okay.
Great.
And then I guess.
Thinking about some of the margin guidance and kind of where it came in for 'twenty one.
And kind of the the work that you guys have done.
And getting the margins up through the sequential improvement in Q2 sequential improvement in Q3.
Is it kind of the is there a way to think about just sort of maybe of back of the envelope way that that having.
Wherever you kind of thought the EBITDA margin of what that trajectory was headed.
Around the middle of the year on a lower base of a few.
Sales just for mixed reasons that take things down by.
Some level of.
The basis points.
Yes.
Just to make sure I understand youre, referring to our to our guide for next year, yes.
That's sort of.
All of this level.
Yes, I mean, I think the way to think about it if you look at our guide the midpoint EBITDA margins around 12, and a half of little over <unk>.
Compared to 13% in prior years and that does reflect.
Certainly a considerable reduction in R and R. J P. F book of business, I mean, I think that.
As we've talked about in the past certainly.
That is a very profitable programming and can move our margin. So what I would say is when you look at the rest of our business based on the uptick we expect in the back half of the year, most notably in our bearings group of businesses.
Well as a continued focus on cost control, we're looking at roughly 40 million the kind of on a run rate basis in 'twenty one versus 'twenty six.
We realize in 'twenty, so we're getting about $14 million of incremental savings year over year, which is worth about 200 basis points of margin.
The.
To make a long story short Seth.
Most of the the reduction that you're seeing in the guide really is kind of a result of lower J P of volumes because of the rest of the business.
All of them to pick up and improve just based on all of the structural changes we've made.
Cool.
That's very helpful. Thanks, and then maybe if I could what was.
Just one last point.
When we talk about the 40 million keep in mind, that's roughly split 50 50 between cost of sales and G&A.
Okay.
Great.
And then maybe if I could just sneak in one last line.
The company has been pretty proactive in recent years in terms of per.
Turning out stuff from the aerospace business.
Isn't profitable took another step in that direction.
With the UK composites the divestiture when we think about the aerospace the commercial aerospace business for 'twenty.
'twenty one.
How much is left that's kind of not sure.
Bearings.
I, probably don't want to give an exact dollar number but is there like I guess the ballpark way to think about the percentages in terms of whatsapp that isn't bearings.
Yes, I mean.
We haven't really provided that level of detail I mean, needless to say certainly.
We're very optimistic, especially as we get to the back half of you on the commercial side within our Barron's group of businesses, but keep in mind, we do have some other programs across.
All of the parts of our business that are commercial base and we've done a lot of work that takes a lot of the cost out so once again.
Those are good sets of business for us with very decent levels of backlog that we're going to continue to execute on it.
This is Neal I'll just also add.
Just to be honest I think.
The plan this year and looking at the decisions, we made relative to that one order we talked about that.
That can be sold U K.
And looking where it would've been had we not.
Pulled that out and things like that we do have some conservatism.
I always believe you're going to have to pass to get to where you need to go and I think the Opex model that we've got going in place right now the work that's getting done.
Right now.
And the reviews and the focus we have on that I'm excited to see that bear some nice fruit this year relative to the overall EBITDA performance.
Just one last thing I mean, certainly.
<unk> is an important program for us.
Most of those sales of as you would imagine right now our focus on commercial opportunities.
And that's kind of also represent the some nice growth expected year over year.
Continue to work the sales of leads on K Max.
Excellent.
Okay. Thanks, very much guys.
Thanks, Ed.
Again, ladies and gentlemen, this do you have a question of our comment at this time. Please press. The Star then the one key on your Touchtone telephone.
Our next question comes from Chris Dankert with Longbow Research.
Hey, good morning, everyone.
Chris I guess to keep it on K Max I mean.
All of the announcement earlier in the quarter I guess, what's the opportunity for for <unk> sales in Brazil, and then kind of the.
<unk> of that is the first of the delivery of the year expected to be in Brazil, and kind of as a result of that approval.
Yes, Chris This is Rob a couple of things certainly the authorization in Brazil is important it is a large untapped market for us for that.
As you can imagine it takes a little time to the work those leads but it's critical to get that the first sale.
It's really domestic based.
Unfortunately, not in Brazil, but we certainly.
We're very optimistic that when we think about expanding our global set of opportunities.
Brazil will play an important role down the road for Us yes.
The <unk> again.
Really dove into that program and looking at the markets I do feel much better this year than when I came in last year, knowing what they were working against we've got for in the plan because of upside there. We've got a fifth that we're building we've got customers lined up for those first for.
Which is exciting and then we've got some exciting news from the U S Force serviced in the program there and what Theyre looking fact for came back. So I feel this year is going to be a decent year for our came ex for sure and then on top of that of course, we've got UAS development, which is also a huge opportunity with us for the Marine Corps.
Had several meetings already of the Pentagon and there's some very positive reactions to the.
The K Max the day with upgraded UAS and the demonstration we got later this year and some other opportunities at the Marine Corps and the Army Youre looking at for for cargo UAS.
Got it got it thanks, so much for for the color there guys.
Thanks, Chris.
And I guess the follow up I mean looking at the guide for the year.
The commercial inflect positively in 'twenty, one and then <unk> I guess can you give us any kind of sense of what level of rebound you're baking in obviously the comps are.
Fairly easy here, but just any sense for for magnitude would be really helpful.
Yeah, No certainly a couple of things there when.
When we think about our broader of commercial business and general aviation or.
Our 'twenty one it's still below 2020, I just wanted to be clear of that.
We're going to see sequential improvement in particular in the back half of the year, but we are expecting a challenging first half.
Where are we going to see some year over year improvement relative to the prior year in particular, I'm gonna be at our medical and industrial markets.
To see some considerable growth there.
And then also even even in some of our defense offerings as well as in particular, even within our bearings group of businesses.
We are we are seeing some some nice levels of opportunity and just as way of background.
<unk> group of businesses.
Their order rate sequentially fourth quarter over third quarter was up nearly 10%.
And we saw some terrific.
Order improvement at our at our PMA business up nearly almost double so so we are seeing some very positive signs some of our industrial order rates.
And our miniature bearings companies are also very solid right now so it really gives us some hope.
Certainly we understand things can change, but based on what we're seeing.
We're very confident in seeing a nice back half of the year next year.
Got it got it thanks, so much for that and I guess, just one last one from me if I could.
Speaking of medical I guess can you give us what the organic medical growth was in the quarter and kind of what the order rates would maybe imply as we start out the year here.
Yeah, So actually Chris.
Medical of like flat to slightly down in the fourth quarter.
And kind of looking at that at that market, but as we kind of move.
Into next year, we're going to start seeing some sequential growth in that really especially as we all expect.
As the pandemic starts to ease.
We are seeing some very good order rate.
Out of <unk>, so as well as <unk> on the medical side.
Their January order rates were actually at record levels.
Put a fine point on that.
Got it no that's very helpful. Thanks, so much and best of luck this year guys.
Thank you Chris.
Our next question comes from Robert Kirkpatrick with Cardinal capital.
Good morning could you talk about the ability of command to reroute the 7000 fuses.
A different buyer.
Sure.
Of the Dcs ones are slightly from the USG lunch and then I have a couple of follow ups.
Yes, Rob this is Rob.
Certainly.
The the construction process is largely identical there are of different levels of inspection and the differences in the process.
But really the key is if we start building a fused designated for USG given the milestone payments.
Difficult to reroute those but it's much more easy.
Much easier to go from a DCF to depending on where the stage of the bill, but that's something that we track very carefully Rob we're very careful as were building the inventory to make sure that we don't put ourselves in a position where we have call it trapped inventory relating to a specific sale.
Okay. Thank you.
And then secondly.
Can you maybe give us a little bit more of a.
The potential timeline for trying to get K Max into a program of record.
I know, it's been a long journey.
But it does seem as though there is some traction of these days.
Yes, I can talk to that.
That's clearly the goal that we have and there's some interesting I think opportunities that can come from the path that we're currently on so for example.
The two aircrafts, we have right now again net debt.
We of that we are in the process of upgrading the UAS systems for demonstration with the Marine Corps later this year the.
Meetings I just had.
The just to again give you guys probably more information, but the the Marine Corps and capabilities in the senior leadership on your channel Burger has mapped out and they are actually currently just restructured the whole aviation department. They are mapping out the capabilities map and I would tell you that in my experience having worked these channels for many years.
A there is a solid demand signal the are absolutely going down the path of looking at leveraging UAS capabilities more and more Congress is behind it.
There's going to be money flowing to it.
And what is so exciting for US here at command is that we've got two proven platforms.
And.
They're kind of like the Ford F 150 of the fact that they are heavy.
They've got a heavy useful low of 6000 pounds for the Marine Corps is trying to figure out how does that capability sit in the spectrum of the UAS capabilities. The when it bring to bear, especially in the in the <unk> region. The second part of this which is there is also and they just announced the demonstration yesterday for a small drone the carried 30 pounds, but theres also a bigger opportunity that sits.
In the kind of the it's the 500 800 pound payload.
And having it be shipboard ops and easy to use and really leverage that UAS capability and thats something thats directly in our wheelhouse.
And Theres requirements being worked right now we've got upcoming meetings to talk with senior leaders about those requirements. So.
I get very excited when I, when I think about where this could be for us and quite frankly, where we are today and some some thoughts and designs and things like that.
Okay, Great and then perhaps the navy.
Final question around capital allocation.
And I guess the question is.
With you coming in and has there been a hiatus arm looking at this as you get your arms around the existing businesses and the.
The existing opportunities.
Or how should we think about that thank you.
Yeah no.
I wouldn't say hiatus, but I will tell you that.
As the new CEO of the first things that I think is really important is to understand what's going on before being understood.
The team has done a nice job, helping me get get snapped in and certainly working with Neal and the board getting all of the business is understanding where the capabilities of our today, where the gaps are we've got a very exciting opportunity here in may when we got deep dive strategic reviews coming up which is something I'm excited to do I will tell you that the Theres no question.
We are of higher percent committed to pulling the trigger for example on the right acquisition and the highly engineered parts side of the house with our new criteria aligning with the trajectory we set for each of the businesses.
And it's going to be the right one we won't be thoughtful about it we want to make sure it fits for all of the right reasons.
That will happen I am absolutely hundred percent committed to that so we're not just going to pull the trigger for for figure safely really wanted us to think smartly about that.
And we've got like I said, our banks for energized, they're coming to us for the opportunities we're screening through those things. So that's going to be a nice opportunity for us and then organically is getting back to what is really important is really driving that growth as the markets recover.
We've lowered our breakeven.
Like I said, we've got a great backlog, we're starting to see nice upticks in orders second half is going to be is going to be I think exciting for us we've just gotten through a whole bunch of of of.
Solid actions last year with paying down debt and selling our U K business and flattening out our leadership team and back filling and so I just feel really excited about where we are right now.
And where we're headed.
Great. Thank you Ian.
Welcome.
Our next question of the follow up question from Steve Barger with Keybanc capital markets.
Hey, thanks.
We've gone through earnings season, we're hearing more about input cost inflation is your pricing strategy and purchasing organization, where they need to be and can you stay on the right side of the price cost in an inflationary environment.
I can start.
Start with the.
But the cost side of the house.
Part of this operating model.
<unk> talked about its operations excellent smaller deploying like I say it looks the entire value stream of the business.
And so there's a there's a front end piece to it which gets right into the value pricing element I do feel that there are opportunities still for us, especially in the on the higher end parts side, where we sit knowing though that it's a delicate balance with the.
The push outs in backlogs and inventory burn down debt. For example, the commercial aviation is kind of go through supply chains are being looked at differently now.
Seeing that some of our structures businesses. So.
I'm trying to be an extension of these Oems versus just being a.
No.
Lowest price kind of competitor is to me is not it's not as meaningful as really being closer to our end customers on that and showing the value that we provide and meeting schedules and quality in all of that good stuff.
So again I think there is some upside for us and we're taking a hard look at it and we're also watching for if youre talking about materials and other things on the demand side.
I've been surprised pleasantly surprised that we haven't had knock on wood any major supply chain disruptions.
But we can continue to look at that very carefully as part of our Opex model and I will say that we have of war going on internally on net working capital. This is a huge part of what I talked about my first got here and in the three primary metrics that really drive the most value creation for US is is that EBITDA margin that cash flow generation and those ROIC.
And having the businesses understand the levers that they have the pole EBITDA I think gets a lot of focus, but it's moving off the oi to the EBITDA side and the.
And getting the business, it's a really interesting the levers they have around cash and that flows right in the networking capital.
The process improvements and that fundamentally drives better ROIC.
And that's what we're trying to get to.
We will.
Great answer thank you and just the last one the bulk of yield ransom of tech didn't sound that material, but how did that happen and what steps have you taken to protect the rest of the company.
Yeah, it's funny.
The full disclosure here. It was random there was a lot of activity as I'm sure you guys saw at the end of the year.
With all of these threat actors out there spamming and doing stuff and we had the classic.
E Mail that came in that was that was compromised in planted and activate it and the good news part was it wasn't even close to what we thought.
In terms of its exploration of any data or things like that team did a marvelous job countering for it with the backups, we had in the out in the in the.
Third parties that we had the came in and helped us.
We learned.
A lot about.
How does that thing happen, how do we react we had plans in place we've adjusted those plans, we debrief them, we've got better security quite frankly in place today at the seal, which matches what we had here at <unk> as part of the integration effort.
But there was some things that I think that debt.
It could have done better.
Relative to just basic training that we do every day I mean, the employees of the last line of defense every business is exposed.
Again, we were lucky in the sense that it really wasn't even close to as bad as we thought it could have been but we took all of the right steps and we're stronger for it based on the protection and detection devices that we have now in place.
Yes.
Steve I would just say one more comment on that whole event.
I really can't say enough for the team.
We had our colleagues of ball steel in here in Connecticut, working around the clock and we did have as you mentioned a very formal plan to react to that I mean, it wasn't that we hadn't heard of that ransomware, but I really think it's a testimonial to the.
Of the effort and the expertise across the staff to get US back so quickly and really with the insurance the financial impact at the end of the day is going to be very minor.
So once again.
When do we think about where <unk> is today they are back to full production.
And a lot of lessons learned as Ian mentioned, so in some respects of will be better for it yeah, and I went out to the site personally.
The SaaS and understand where they were and what was going on and I tell you I was just like.
Rob said, just incredibly impressed with the work effort to recover.
Not just their systems, but production and again again like I said, we're trying to be as realistic as possible, but I do feel extremely confident not just this quarter, but for the year those folks are going to over perform just by the nature of the business. What we've learned in the again, most importantly, having gone through this as it tire company, where we are.
They better prepared.
Remember, Steve just don't click on the link.
So it's true.
Yes.
Yes.
Thanks for the time gentlemen.
Thank you Steve Thanks, Dave.
And I'm not showing any further questions at the start of let's turn the call back to Jamie.
Thank you for joining us on today's conference call. We look forward to speaking with you again, when we report our results for the first quarter.
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.