KAMN (2020 - Q2)

Ladies and gentlemen, thank you for standing by, and welcome to the Kaman Corporation Q2 2020 Conference Call. [Operator Instructions]. I would now like to transfer this conference call to Jamie Coogan. You may begin. James Co

Good morning. I'd like to welcome everyone to Kaman's Second Quarter 2020 Earnings Call. Conducting the call today are Neal Keating, Chairman, 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 our business, the economy and other future events. These include projections of revenue, earnings and other financial items, statements on plans and objectives of the company or its management, statements of future economic performance and assumptions underlying these statements regarding the company and its business. The company's actual results could differ materially from those indicated in any forward-looking statements due to many factors, the most important of which are described in the company's latest filings with the Securities and Exchange Commission, including the company's second quarter 2020 results included on Form 10-Q and the current report on Form 8-K filed yesterday evening together with our earnings release. We also expect to discuss certain financial measures and information that are non-GAAP measures as defined in applicable SEC rules and regulations. Reconciliations to the company's GAAP measures are included in the earnings release filed with yesterday's 8-K. Finally, we posted an earnings call supplement to our website that we will reference in this call, and 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 steps we have taken as a result of the COVID-19 outbreak. You can find this presentation at www.kaman.com/investors/presentations. With that, I'll turn the call over to Neal Keating.

Thank you, Jamie. Good morning, everyone, and thank you for joining our second quarter 2020 earnings call. The past 3 months continued to be difficult as the global community response to the unprecedented COVID-19 pandemic. And today, our focus remains on ensuring the safety of our workforce while continuing to deliver critical products to our customers. I am pleased to report that our team acted decisively and responded well to these challenges. In the second quarter, our sales of $177.9 million were up 1.8% compared to the prior year, driven by the contribution of Bal Seal Engineering, partially offset by lower volume related to the impact of COVID-19 on a number of our end markets. As expected, our defense markets remain strong, led by our Joint Programmable Fuze program, while sales in our commercial, business and general aviation and medical end markets were down across the board. For comparative purposes, it's important to note that sales in the second quarter of 2019 included SH-2 sales from Peru as we finalized our contract and the sale of one K-MAX aircraft, impacting our year-over-year organic comparison by approximately $9 million. A number of expenses related to our acquisition of Bal Seal Engineering, restructuring and severance costs expense associated with our Distribution Transition Services Agreement contributed to a $100,000 net loss from continuing operations for the quarter and masked the underlying improvements we have seen in the profitability of the business. After adjusting for these and other items, adjusted EBITDA increased 40.5% over the prior year to $23.9 million, with adjusted EBITDA margin increasing 370 basis points to 13.4%. GAAP diluted earnings per share from continuing operations were breakeven. However, when adjusted for the items I previously mentioned, diluted earnings per share was $0.36, a 125% increase over the $0.16 we achieved in the prior year period. These results underscore the ability of our team to execute in this challenging environment, the strength of our business portfolio and the effectiveness of our new organization. Our production facilities have been deemed essential, and our priority from day one has been on the health and safety of our team. We continue to adhere to our operating disciplines designed to ensure safe and continuous production. These include the implementing of social distancing, enhanced cleaning and sanitizing practices at our facilities, the use of appropriate personal protective equipment, instituting temperature screenings at all locations, segregating work groups to enable effective contact tracing while limiting interactions within the facility and maintaining a work-from-home strategy for our office and nonmanufacturing employees. Turning to our end markets and near-term expectations. Defense continues to be an area of consistent strength, which continued into the second quarter. As we noted at the end of the first quarter, defense is approximately 50% of our historical end market mix, and we do not anticipate a meaningful impact from COVID-related disruptions. Moving forward, we've redesignated our commercial aerospace sales as commercial, business and general aviation. This decision was made after careful consideration of the broad range of products we offer, the number of customers we serve and the underlying trends impacting each market segment. We believe that this change increases transparency and will help investors better understand this portion of our business. Sales in our commercial business and general aviation markets, which account for around 30% of our historical sales mix, declined 24% from the first quarter of 2020. The decrease was due to the conditions in our commercial aviation market, which remain under pressure as airline capacity and traffic remain at significantly reduced levels when compared to the prior year, which led to a 36% decline in sales to our large commercial airliner customers, in line with our previously estimated reduction of 30% to 40%, and we expect sales to continue to be under pressure through at least the balance of the year. Sales to our business and general aviation markets were down significantly less at 15%. The diversity of our customers and our broad range of platforms will benefit us as we expect modest growth in business and general aviation in the back half of 2020, which will help to offset declines in commercial airliners. In our medical end market, which accounts for approximately 10% of our historical sales mix, we saw a significant decrease in sales from the first quarter of 30%, as these markets were impacted by the deferral of elective procedures during the quarter. This is particularly true in the United States with elective procedures slowing substantially as COVID-19 case counts began to rise. While we expect a rebound in this market and an ability to recapture much of the loss volume, the timing remains uncertain. Finally, in our industrial end markets, which also account for approximately 10% of our historical sales mix, performance held up nicely, and we've seen an uptick in order rates, providing an opportunity for improvement in the second half of the year. Looking at our performance by product line and beginning with our Specialty Bearings products. The most significant sales decline for our bearing products was to our large commercial airliner customers as volumes decreased significantly in the quarter, while volume declines for our business in general aviation and medical bearing products were less significant. These declines were partially offset by increased defense volumes. Looking ahead, we continue to expect sales of our bearing products to large commercial airliner customers to be pressured, but anticipate this to be partially offset by increases for our business in general aviation, defense, industrial and medical bearing products through the remainder of the year. In our JPF program, we continue to deliver at a high-volume in the second quarter with just over 12,000 Fuzes delivered. And through the first half, we are on pace to deliver to our full year expectations of 45,000 to 50,000 Fuzes in 2020. Backlog for this product remains strong with -- at $266.8 million at quarter end. We continue to see strong demand for JPF and with the quantities anticipated under Options 15 and 16 of our U.S. government contract and potential DCS opportunities, we could add more than $100 million in new orders to backlog in the coming months. In our structures business, sales were down compared to the prior year with large commercial volume down consistent with OEM production rates, while defense programs continued to perform well, excluding the absence of sales on the Peru SH-2 program. Looking ahead, we continue to expect improved performance in our structures business. And last week, we made 2 announcements, which illustrate the progress we have made to date. First, we were selected as an elite supplier by Sikorsky for the work we performed on the design and development of the MH-60R radome program. And second, we entered into a new long-term agreement with a potential value of more than $118 million with a major engine OEM to manufacture composite components for both existing production and newly developed engine programs. These are significant achievements for our team and underscores their hard work and dedication. We remain optimistic about the prospects for both our manned and unmanned K-MAX programs, and we believe it offers a competitive value proposition to commercial operators, the U.S. military and governments around the world. We've made progress towards the sale of a number of commercial K-MAX in the second quarter, and are happy to announce that we have secured a deposit for an additional aircraft from an existing customer. We are awaiting final contract approvals and expect to deliver this aircraft in the second half of the year. With this order and the progress we've made with several potential customers over the quarter, we remain confident in our ability to deliver 2 aircraft by year-end. Moving to Bal Seal Engineering. We are on track with our integration activities and achieved the cost savings we had anticipated at the time of the acquisition. Operationally, volume at Bal Seal was significantly impacted by COVID-19-related disruptions in their medical end markets. In total, Bal Seal sales were down around 23% on a sequential basis, which was driven by sharply lower medical sales as health care facilities paused elective and nonessential procedures, and to a lesser extent, lower sales into aerospace and general industrial applications. As we look forward, we expect medical volumes will recover as schedules for medical visits and elective procedures return to normal levels. However, we are seeing an increasing likelihood that a sustained recovery will not take place until 2021. We have navigated through the unprecedented pandemic in the second quarter supported by a more resilient business portfolio and strong balance sheet. When adjusted, we delivered improved year-over-year performance and appreciate the support of Kaman employees around the globe who executed through a difficult time period and remained committed to safely delivering products to our customers. Now I'll turn the call over to Rob for a closer look at the numbers. Rob?

Thank you, Neal, and good morning, everyone. Net sales from continuing operations for the second quarter increased 1.8% and to $177.9 million, primarily due to sales from our Bal Seal acquisition, partially offset by lower organic sales of 8.5%. Gross margin for the quarter was 31.9% compared to the 30.1% in the prior year period. The 180 basis point improvement over the second quarter of 2019 included a 66 basis point impact from the $1.2 million of inventory step-up costs resulting from the Bal Seal acquisition. Without the inventory step-up, we would have seen an almost 250 basis point improvement in gross margin. As a reminder, the second quarter will be the last quarter we will see an impact from the Bal Seal inventory step-up. The increase in gross margin was driven in part by higher direct commercial sales in our JPF programs, an increase in gross profit on defense bearing products and contributions from Bal Seal. SG&A, as a percentage of sales, increased to 25.2% for the quarter from 23.9% in the prior year. This was primarily driven by $8.3 million in additional SG&A from the ball sale acquisition, which includes $2.5 million of intangible amortization expense associated with the purchase accounting for the acquisition and approximately $700,000 of costs related to corporate development activities. Adjusting for these items, SG&A as a percentage of organic sales decreased 150 basis points to 22.4% or a 14% reduction when compared to the comparable period in the prior year. We remain focused on mitigating the risk of COVID-19 and have incurred approximately $1 million in expenses during the second quarter supporting these efforts. Internal research and development continues to be a primary focus for us, and we are committed to investing in these programs through the downturn. Spending in 2020 on these programs has increased over 2019. In the quarter, we spent $2.8 million. And through the first 6 months, we have spent $7.7 million, a 30% increase over the comparable 6-month period in the prior year. Restructuring and severance expense in the period was $4.5 million compared to $0.2 million in the second quarter of 2019. In the second quarter, we recorded $1.8 million in costs related to our G&A reduction initiatives and $2.7 million to adjust our headcount to the lower volumes resulting from the impact of COVID-19 on our operations and the end markets we serve. In connection with the sales distribution in 2019, we've taken a number of steps to reduce our G&A expenses by $15 million to $20 million on a run rate basis as we exit 2020. Through the second quarter, we have achieved more than $10 million in total annualized savings, and we have clear line of sight toward $20 million of annualized savings. In addition to our G&A reduction efforts, we have been actively reducing costs in light of the volume declines we have seen due to COVID-19. In the first quarter, we moved quickly to adjust our cost structure, and during the second quarter, took a number of additional actions that included workforce reductions, managed attrition and employee furloughs. We expect these actions to generate $11 million of savings in 2020 or approximately $21 million annualized. Looking at the total impact from all of our cost actions, including the benefit from reduced discretionary spending, we expect these cost reduction efforts to result in approximately $22 million of savings in 2020, which represents an annualized run rate of approximately $50 million. While the majority of the $50 million in savings is structural, we expect a portion to reverse when sales volumes return to pre-crisis levels. On a consolidated basis, we recorded an operating loss of $2.8 million compared to the operating income of $10.6 million in the second quarter of the prior year. Our results included a number of one-time expenses, including the costs incurred related to the Distribution Transition Services Agreement, a $4.3 million increase in restructuring and severance expense and $6.9 million in costs associated with the purchased accounting for the Bal Seal acquisition. Adjusting for these items, operating income increased approximately 26.3% to $13.6 million from $10.8 million in the prior year period. Pursuant to the terms of the distribution sale, we have agreed to provide certain services, such as tax, treasury, human resources and IT during the transition period. The cost impacting operating income in the second quarter totaled $4.4 million. Income earned from these services totaled $3.1 million and is recorded below operating income on the consolidated income statement. Adjusted EBITDA margin from continuing operations in the second quarter was $23.9 million or 13.4% of sales compared to the $17 million or 9.7% of sales in the second quarter of 2019. During the period, we had diluted earnings per share from continuing operations of $0, a $0.23 decrease over the prior year diluted earnings per share of $0.23 due to the lower GAAP operating income we recorded in the period. When adjusted, we saw an increase in diluted earnings per share of 125%, earning $0.36 per share in the second quarter of 2020 compared to the $0.16 adjusted diluted earnings per share we earned in the second quarter of 2019. Free cash flow usage for the year was driven by an increase in receivables due to the timing of payments from JPF DCS customers, near-term working capital build on K-MAX and employee-related cash payments, such as the $10 million pension contribution made in the first quarter. For the quarter, our cash usage declined to $28 million, and we remain confident in our ability to generate positive cash flow for the full year. We withdrew our full year guidance on our first quarter call. And based on the visibility we have today, we do not plan to reinstate guidance for the full year. In lieu of guidance and similar to our first quarter discussion, we wanted to provide our view on end market performance for the back half of the year. In our defense business, including safe and armed devices, which historically accounted for approximately 50% of our sales, we expect second half performance to remain strong with an opportunity for growth in the second half over the first. For the JPF program, we continue to expect shipments of 45,000 to 50,000 Fuzes in the current year, with the majority of these deliveries to our DCS customers, also unchanged from our previous forecast. For our commercial, business and general aviation markets, while it's difficult for us to predict that the back half of the year will play out, we continue to expect commercial aviation to remain challenged. In business and general aviation, we expect to see top line growth in the back half of the year and provide offsets to the decreases expected in commercial aviation. We expect our sales for the medical end market that continues to see pressure from the deferral of elective procedures. However, the speed at which those markets are impacted by COVID-19 case levels makes it difficult for us to predict whether a meaningful recovery will occur in 2020. Our industrial end markets held up well from the first quarter to the second, and we anticipate level demand for these products in the back half of the year. In summary, as we enter the second half of the year, we are well positioned despite the continued pressure we expect in a number of our end markets. We have made meaningful progress on our G&A reduction efforts, and have moved quickly to adjust our cost structures to the reduced volumes that we've experienced. We entered the third quarter with ample liquidity and a strong balance sheet, which, coupled with the strength of our business, allowed us to repay $100 million of the $200 million we had outstanding on our revolving credit agreement subsequent to quarter end. With that, I will turn the call back over to Neal.

Thank you, Rob. As we close, I wanted to take a look back at what is perhaps the most volatile 6-month period we have all faced in our careers. We started 2020 with a new business focused on engineered products after the sale of distribution and acquisition of Bal Seal Engineering. And despite the early impacts of COVID-19 on our first quarter results, with 24% consolidated revenue growth, over 10% organic growth and adjusted earnings per share more than doubling over the first quarter of 2019 demonstrated the potential of the new Kaman. While we never could have predicted the impact of COVID-19 on the world economy and our business, I believe that our second quarter results underscore the many strengths of Kaman today. These include the strength of our product portfolio and the diversity of applications platforms and markets we serve across defense, aerospace, medical and industrial; the strong team that has enabled us to maintain operations while taking decisive actions to reduce cost and set the foundation for future success; and our employees across the globe that have come together under the most difficult of circumstances to support one another, our communities and our customers. Today, we move forward with a dramatically improved business model focused on proprietary and critical engineered solutions, a well-earned reputation for innovation and a balance sheet to both protect and grow our business. All of these factors position us well to navigate the challenges ahead and demonstrate the full potential of the new command. Thank you. Jamie?

Operator, may we have the first question, please?

[Operator Instructions]. Our first question comes from Pete Kubicki with Alembic Global.

Just wanted to start on the structures programs, I guess, mainly commercial structures. Can you help us understand the margin pressure on those programs as volumes come down, right? We've got kind of updated forecast from Boeing and Airbus. So I'm just curious how much margin pressure you'll get on those lower production rates. And then kind of as a corollary, can you talk about the impact from the expected shutdown of the 747 line?

Pete, if we take a step back, the structures programs for the 767, the 777 and the 747 are predominantly made in our Jacksonville facilities. And as you know, they have a really broad range of defense programs there as well. So it's going to obviously impact the overhead absorption somewhat, but I wouldn't see a significant impact on those programs because it's just not that big a part of the business there today. As you know, and over the last 7 or 8 years, we really haven't added much in the way of commercial aero-structures programs across the businesses. That was a significant shift in strategy for us about 8 years ago because of the lower margins that were in that business, we maintained, as I said, some of the 767 and 777 and 747, but it was a relatively small part of our business.

Okay. That's great color. I appreciate it. I'll just do one follow-up and get back in queue. As you're going through this downturn that everybody is, if we think about commercial bearings, are you guys seeing any kind of distressed players out there? And do you think maybe you have an opportunity to actually maybe gain some share on -- in bearings during the downturn from weaker players?

Pete, it's something that Rick and Rob Patterson and the team talk about every day. And we've got a very strong bearings business, and we have a very strong balance sheet to support either growth, organic growth, if it comes in because those customers would shift demand to us or if there is a player where we think it makes sense for us to acquire them. So we would -- we certainly see that as an opportunity. I think we're still early enough in this downturn where it's not become apparent to us. But certainly, through the course of the next 6 months, we would expect that there should be some opportunities for us in either that organic growth as we take over programs as a more capable, reliable, long-term supplier or there may be an appropriate acquisition that would make sense for us as well.

Our next question comes from Steve Barger with KeyBanc Capital Markets.

Rob, when you talked about expecting second half growth for defense, can you just talk about magnitude? Are you thinking high single digit growth sequentially or low double digit? How are you thinking about that?

Yes. When we kind of look at overall second half first half on defense, I mean, it's going to be in the range of around plus/minus 10% growth is kind of a rough range of what we're expecting.

Okay. And would you expect similar magnitude for both defense and safe and armed? Or will one grow faster than the other?

I mean, we're not running a lot of detailed guidance here, Steve, but certainly, our precision products and the safe and armed devices are going to be a meaningful contributor to that. But we do see opportunities elsewhere in the defense portfolio. So it's not just a story around our safe and armed devices.

Okay. Does the growth in business in general aviation mean the 31% year-over-year decline for that segment is trough contraction for the year in 2 quarter -- in 2Q?

Yes. So what you're seeing, I mean, if you look at the broader commercial market, which includes our, what we call, large commercial aviation, and then our general business in aviation, certainly, the reduction in large commercial played a very significant impact. And in the back half of the year, we do expect to see, in particular, opportunities we talked around K-MAX that will certainly help the general business. But there are other programs as well, we're expecting to see some recovery in the second half of the year.

Yes. We have some new programs for long-range business jets that are going to accelerate or begin production and deliveries in the second half of the year, Steve.

Right. Okay. So just to be clear, that 31% year-over-year decline probably is the worst of it for the year, given some of the acceleration in general aviation. Is that fair? Or the commercial is still going to be a bigger drag?

Commercial is still going to be a drag, Steve. You're right, but we've looked at it, and we believe that the statement that the second quarter would be the trough would be appropriate from what we know right now.

Okay. And then just one more, and I'll hop back in line. Just free cash flow, obviously, another use in the second quarter press release or in your comments, you said you expect to be cash flow positive, but can you talk about magnitude? Negative $90 million for the first half is a pretty big hurdle. So just how are you thinking about free cash flow for the year?

Yes. No, Steve, very good question. There really are kind of kind of primary drivers that are going to drive the positive cash flow for the year. The first is -- and we've touched on it in our printed materials on the outstanding receivables to some of our DCS customers. We really expect to see that resolve itself as we work through the balance of the year. You will also see that we're expecting to deliver, hopefully, about 2 K-MAX. That's also -- we've been building working capital in support of that program based upon the sales leads that we have. And then the third item, which doesn't get a lot of play, but you'll notice on our cash flow statement that we've had a more significant use of cash on accounts payable. We would expect to see that normalize as we go through the balance of the year. In terms of overall magnitude, while not providing formal guidance, we would expect to see the full year cash flow in the range of what we produced last year.

Our next question comes from Chris Dankert with Longbow.

I guess kind of dig it in, first off, congrats on the new LTA, with the engine manufacturer. I guess -- and I know you're limited on what you can say, but maybe any details you could provide, just maybe scope of the time period covered with that contract? Maybe any -- is it military commercial? Just any details you are able to provide would be very helpful.

Yes, sure, Chris. You know the drill. When customers for -- maybe even different reasons today than in the past, prefer that we not refer to them or to the specific program. It's, as we said in the press release, about $118 million. That's about a 5-year period of time. And it is for a range of long range, ultra-long range business jets.

Got it. Got it. That's very helpful. And then again, kind of building off of the cash flow question, just inventory specifically, obviously, the business has kind of changed a lot. How are you thinking about current inventories? Are we still kind of working things down into the back half of the year with the addition of Bal? Just any comments on inventory specifically would be great?

Yes. No, Chris, happy to address that. I would say we've seen a build on inventory, in particular, more so on our structures programs as we are building inventory for delivery in the second half of the year. So we're certainly seeing a usage there. In terms of our overall inventory performance, our teams are paying very close attention to inventory given the changing demand patterns. So there's a lot of focus across the business on managing inventory prudently. It's a challenge because a lot of our products are very specific to the end use. So there's not always as much common material. I mean, a lot of times, I call for a very specified materials. So it is bit of a challenge for us as we get used to the new demand environment, but the team has done a really nice job at laying a plan forward for the back half of the year on inventory.

Yes. Chris, as Rob's kind of outlined a few times, we knew that we were building inventory in a number of areas as we entered the year to support second half sales, whether it was JPF or whether it was K-MAX. So that was anticipated. And we like to think that we're pretty good at inventory management. But when we have as much of a discontinuity and end market demand as we have here in such a short period of time, we know that we're -- clearly, we've got a little bit of time here, certainly through the second half of the year to work our inventories down to the normalized levels that we would expect for current production levels. So as Rob said, the team has demonstrated the ability to manage inventory very effectively, and we're confident they'll be able to do it in this instance as well.

Got it. That's great color, guys. And if you just allow me one last follow-up here. I guess on the new K-MAX deposit, is that a current operating customer? Or is it a brand new operator that's place a deposit?

Yes, Chris, that is an existing operator. That particular deposit relates to a current customer.

And Chris, I'm sorry. I need to backtrack. The contract -- the OGV contract that we referenced for $118 million, it's actually over 10 years, not over 5. I was thinking of a different contract, so I apologize for that.

[Operator Instructions]. Our next question comes from Seth Seifman with JPMorgan.

I wanted to ask, so on the Fuzes, given what's been delivered in the first half and what's kind of left to go relative to the guidance, to see growth in the second half of the year off the first half, it seems like maybe it should be coming in towards the upper end of that delivery guidance range.

Yes. Chris -- I'm sorry, Seth, this is Rob. Yes. So when we look at our full year range of expectations, we've delivered to this point, around 22,000 Fuzes halfway through the year. So certainly, that would imply, if you look at the mid-range of the guidance, roughly 25,000 units in the back half of the year. And I would just once again emphasize the majority of our shipments, as we touched earlier in the year, will be to our DCS customers as we close out the balance of 2020.

Right. Okay.

Seth, a couple of years ago, as we were talking with you and others, we talked about developing the capability to be able to produce essentially 1,000 Fuzes a week or 50,000 a year. And so that is the upper end of our guide for this year. And that's where we anticipate being in that 45,000 to 50,000 unit range. But I think what's interesting is that the team, without any additional bricks-and-mortar, has been able to not only ramp up to those levels successfully and demonstrate it now for a couple of years, but also have done it with some extraordinarily consistent in-service quality levels as well. So they've maintained that 99-plus in-service quality for the JPF, while ramping up and not having any disruptions in supply. So I think that we intend and we're confident in getting to that range for the year. But I think that team has really done a great job in being able to consistently deliver as well.

Yes. Excellent. And then just thinking about that mix going forward, I guess, how -- thinking about the mix in 2020 and weighting toward DCS, when we think about how high that mix of DCS is relative to what like a normal mix might be going forward beyond 2020. How would you think about that?

Yes. I mean, Seth, that's a somewhat difficult question to answer, but I would say that based on our view of things, DCS is going to remain a very meaningful portion of our deliveries going forward for a number of years. So this year, we said it would be 60% to 65% DCS relative to USG. I don't think you'll necessarily see a very different type of ratio for at least the next couple of years. Beyond that, that's just -- it's just hard to see. We don't -- that's hard to have visibility into.

Sure. Understood. And then I definitely heard the commentary about bearings and sort of where things stand in the BizChat versus Boeing and Airbus portions of the market. I guess on the Boeing and Airbus portions of the market, are there still kind of significant headwinds to overcome as you kind of climb out from the trough year? Or did most of what you expect to hit on the large commercial side happen in the quarter?

Yes. I think, Seth, I mean, when we think about large commercial for the quarter, it was in line with our expectations. We were down between the 30% to 40% we had talked about in large commercial. And I think we would expect in the second half to be under pressure again with large commercial, probably in a similar percent range in terms of second half versus first. But this is -- it's not unexpected. And I think the team is prepared to manage the operations relative to that level of demand. And then certainly, not anyone really has a lot of visibility into what happens in 2021 and 2022. I mean, certainly, I think both Boeing and Airbus, you look at their production rates and what they're expecting, its going to be a slow climb out. And we're certainly hoping, like everybody else, that if there's a development of a vaccine, I think you could see a very rapid return. I mean, this is really going to be somewhat dependent on pent-up demand and available mitigation to COVID is going to play a very meaningful impact in terms of how quickly we recover. But I think what's really important to understand is the long-term thesis behind commercial aerospace remains very much intact. And they still have multiple year backlogs at both Boeing and Airbus, so this is a multiyear play. And if we can accelerate quicker, I think all the firms, including Kaman, will be ready for that. And if we take longer to dig ourselves out, we're -- once again, we've gotten our cost structure in line. So we're prepared to manage in a lower demand environment if need be, but we're also prepared to accelerate.

Great. And then just last one. When you think about some of the order opportunities and orders that you announced, should we think about growth in the backlog in the second half of the year?

We would certainly anticipate some growth in backlog in the second half of the year, Seth. We've got a number of very strong opportunities here in the near-term for K-MAX that hopefully would come into backlog and then come out of backlog. And actually, across a number of our defense programs, we have significant opportunities to be able to conclude contractual negotiations with existing customers on existing programs that would add meaningfully to our backlog.

Yes. And Seth, just one other -- and once again, the timing may be a little difficult to predict is if we do see an uptick in the medical market, we would certainly expect Bal Seal to have some additional backlog there just given their exposure.

And we also commented in our prepared remarks about the near-term potential for adding significant backlog in the JPF product line for both U.S. government as well as DCS customers.

Our next question is a follow-up question from Pete Skibitski with Alembic Global.

Sorry about that. So one thing I wanted to validate, back in May, Boeing got a very large international order for the SLAM-ER missile. You guys did a Fuze for that, correct?

That's correct, Pete.

Correct.

Okay. So that -- I don't know if you got -- if you could say if you got that in backlog already or not? Or is that all in the future?

Peter, it's a good question. I don't know that we do, but I don't know that we don't. I would -- I'm speculating, I'd be a little surprised with the timing of the award to Boeing that we would have that in backlog yet. But you raise a good point. We -- it was just a few quarters ago that we tried to highlight, JPF gets so much visibility, and rightfully so because when you have as unique a product is well positioned as JPF, you want to make sure that people understand what the long-term potential for that is. But we hadn't talked as much about the legacy Fuzing part of our business, all the missile Fuzing programs. And now, you see a number of those programs over the last 1.5 years where they've really ramped up. And I think the SLAM-ER for Boeing is an example of that ongoing situation for our long-range missiles. And we are really -- we have got a really strong position there.

Yes, that's great. Okay. Switching gears, maybe one more so for Rob. Rob, this $50 million cost reduction figure, it's a big number for a company of your size, guys, right? So can you give us any color about where that -- I know you're probably a little bit reluctant to talk about this, but can you give us any sense of where that could take you guys in terms of the mid- to long-term in terms of operating margins? Can this take you -- I mean, aerospace used to be kind of a mid-teens business, even a high-teens business. And I know DCS is a mix issue, but overall, can you become a mid-teens type of margin business when that kind of works its way through now? Or any color that you could add?

I'm just going to say one thing. There's no question, $50 million is significant. And I'm going to give Rob a little time to do some math for you. But I think one thing we would ask everybody to keep in mind is, as we entered the year, we had talked very clearly about our G&A reduction activities as we redesigned our processes and organizations across finance, HR and IT as a result of the sale of the Distribution business. And we talked about a $15 million to $20 million savings there. So today, we talked about the fact that we would be at the high end of that savings range. So $50 million is a big number. But let's keep in mind that 40% of that was due to activities that were underway before the beginning of the year. And with that, I'll turn it to Rob.

Yes. So thank you, Neal. And I think Neal raised a very important point that long before the pandemic arrived, we had a multi-asseted plan in place to take out the $15 million to $20 million, and we're very much on track to do that to the high end of the range. So when you talk about the other $30 million, clearly, we've had a separate with a portion of our workforce as a reduction of the volumes impacted us. We've done furloughs, we've done discretionary spend. And as I said in our prepared commentary, we would expect a portion of those to come back as business hopefully returns to pre-crisis levels. But I think your point is a good one, Pete. If you assume for a moment, and this is really just math, right, that we're able to capitalize, let's say, even on $40 million of the $50 million, right, long-term, that's long-term structural savings. And I'm just using that as -- because the math is simple, and you apply that against, let's call it, roughly an $800 million top line. I mean you're talking 500 basis points of additional operating margin that we would expect to see in the business, which is really important. And I think what's also important to understand around these cost reductions, that is a direct impact also to the operating cash over the forecast period. So what it allows us to do is to have a much stronger foundation to drive better cash flows in the future as well as we move forward.

That's great. Yes. We'll look forward to volumes returning, right?

Yes.

Roger that.

We're not alone, and all of our peers and competitors and customers, absolutely, we'd love to see the volumes return.

The next question comes from Robert Kirkpatrick with Cardinal Capital.

Could you address the M&A environment during these tumultuous times, please?

Sure. Rob, it's actually -- in terms of Jamie's activity within coming calls, it's picked up in the last, let's say, 4 to 6 weeks. It's still a little bit tough to commit to doing on-site diligence, as you can imagine, Rob. But we are at a point now where we can begin to look in a meaningful way and time lines in which we would plan to be able to do diligence, to be able to do some of the upfront work before you would even do plant tours or management presentations. And quite honestly, we can do management -- initial management presentations via video today because everybody is used to doing that. So we've seen an uptick. But I think one of the challenging things still will be how you model the environment in which if you acquire that business, what are the volumes going to look like in those first 2 to 3 years, that's going to be the hard part still.

Are the incoming calls more third-party driven?

I'm sorry, Rob. We lost you there. We got to the incoming calls and then lost you.

Sorry, let me try again. Are the incoming calls more third-party driven?

Okay. Rob, we can't hear you if you can still. If you can still hear us, certainly call back in. We'd be more than happy to answer any follow-up, but you might be struggling with the power failures from the storms, still down in Greenwich. So.

Our next question comes from Steve Barger with KeyBanc Capital Markets.

I was going to ask that M&A question, but I do have one more. I don't think you talked about this, how long is the lead or lag between seeing Boeing or Airbus change production schedules before that affects your business?

Kevin, are we still live on the line?

Yes, sir. Still there.

We can hear you, Kevin. I'm not sure. We can't hear if Steve is on the line asking a question. We cannot hear him, and we missed a part of Mr. Kirkpatrick's call. [Technical Difficulty]. So, Kevin, we're going to officially conclude the call. So I'll just -- for posterity, we'll say the closing remarks. Thank you for joining us on today's conference call, and we look forward to speaking with you again when we report our third quarter results.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.