KAMN (2020 - Q3)

Ladies and gentlemen, thank you for standing by, and welcome to the Kaman Third Quarter 2020 Earnings Call. [Operator Instructions]. I will now hand the conference over to your speaker today, James Coogan, Vice President, Investor Relations and Business Development. James Co

Good morning. I'd like to welcome everyone to Kaman's Third Quarter 2020 Earnings Call. Conducting the call today are Neal Keating, Executive Chairman; 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 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 third 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 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've 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 us today for our third quarter 2020 earnings call. As we announced in August, I have transitioned to Executive Chairman and will retire from the company following our 2021 Annual Shareholders Meeting. It's been a privilege to lead Kaman for the last 13 years, and I am very proud of what the company has accomplished in that time. The past 12 months have marked some of the most transformational times for the company, driven by our portfolio reshaping amid a very challenging backdrop. Despite the disruptions and uncertainties, the entire Kaman team pulled together to mitigate the impacts while continuing to execute to our strategy and position the company for growth. I want to thank all our stakeholders, including customers, suppliers, investors, employees and our Board of Directors for their dedication and their support during this time and throughout my tenure. Leading Kaman has been the highlight of my career, and I'm confident that Ian is the right person to lead the company into our next chapter. Ian is a talented executive with experience that is well suited to the needs of Kaman. We've come to know each other very well over the last 2 months, and I know that he is laser-focused on delivering for our employees, our customers and our shareholders. Now I will pass the call over to Ian for some of his initial observations. Ian?

Thanks, Neal, and good morning, everyone. I am very honored to have been selected by the Board to lead Kaman, and I'm thrilled to be here. Today, I would like to share a few thoughts on what attracted me to Kaman before moving to some initial observations. But first, let me give you a brief summary of my background. I started my career after college in the United States Marine Corps as an officer and naval aviator. Afterward, I attended grad school and then joined Textron in 1999 at Bell Helicopter and worked in a number of positions across Textron, including Senior Vice President and General Manager of Lycoming Engines, and Senior Vice President and General Manager of weapons and sensors, and then COO of Textron Systems. I concluded my time at Textron as President and CEO of TRU Simulation and Training before becoming the Chief Operating Officer at REV Group, a leading designer, manufacturer and distributor of specialty vehicles and related aftermarkets, services and parts. For those whom I have not yet met, I look forward to the opportunity to meet you and hear your perspectives on the company. Moving to what attracted me to Kaman. First, Neal and team have established Kaman as a market leader, offering highly engineered aerospace, defense and medical technologies and solutions. They have put the company in a strong financial position, ending the third quarter with over $150 million in cash. Subsequent to quarter end, we paid down an additional $50 million on our revolving credit agreement. And I believe the strength of our balance sheet is a foundation that will give us the ability to drive growth over the coming years. Second, I was impressed by the company's history of innovation. Kaman is demonstrating ability to bring new solutions to its customers, which I strongly believe is the key to our future. This includes consistent innovation in our bearings business, the continued development of our Unmanned K-MAX helicopter program and the additions of GRW and Bal Seal, a meaningful expansion into the medical and industrial markets with industry-leading technologies and advanced manufacturing processes. This innovation mindset is core to Kaman's culture and will be critical as we look to grow organically and through acquisitions. As I knew the completion of my second month with Kaman, I've had the opportunity to visit all of our domestic sites in person, meet with our overseas teams virtually and talk with some of our customers and suppliers. This has allowed me to learn more about the company and connect with our employees around the globe. More importantly, these visits have demonstrated the energy of our team and their commitment to the success of Kaman. Through these interactions and my initial review of the business, I see significant room for growth and an opportunity to drive improved efficiency by leveraging our existing platforms. Given my background in operational excellence, I believe we can enhance our operating model, and I'm excited about executing on our previously communicated strategic priorities and working with the team on developing new ideas and initiatives to further accelerate our transformation. I want to reinforce our commitment to lean principles and practices, which help improve the consistency of our cash flows while increasing our return on invested capital. I'm looking forward to leveraging my prior operational experiences as the team and I work together to continue Kaman's transformation for being a best-in-class provider of highly engineered technologies and solutions. Looking to the remainder of the year, I am focused on continuing to execute in this challenging environment. We have remained keenly focused on the health and safety of our employees, ensuring continuous production in order to meet our customer requirements. The team has been working diligently and yet carefully to minimize the impact of COVID-19 disruptions on the business and customers. The strong results we posted in the third quarter demonstrate the underlying strength of the business. The diversity of our product offering has been a key driver of the organic sales growth we have seen in both the quarter and year-to-date periods. This sales growth, coupled with our strong gross margin performance and cost reduction and mitigation efforts resulted in improved financial performance with adjusted EBITDA margin of 190 basis points over the third quarter of last year. Our positive free cash flow in the quarter and receivable collections that have occurred in October put us in a position to achieve positive free cash flow for the year. Now I will turn the call over to Rob to bring you through the details of our financial performance. Rob?

Thank you, Ian, and good morning, everyone. Our third quarter results were very strong despite the negative effects from COVID-19 on our commercial aerospace business. Net sales from continuing operations for the third quarter increased 17.1% to $214 million driven by a 6.7% increase in organic sales and the contribution of $19 million in sales from Bal Seal. The increase in organic sales was driven by higher JPF volume in the quarter and the sale of 1 K-MAX aircraft in the period, partially offset by lower volume to Boeing and Airbus for our bearing products. Turning to our end markets. Defense, which has historically contributed about 50% of our sales mix, continued to be an area of strength in the quarter, up 24% compared with the third quarter last year and 29% sequentially. This was driven by increased sales for our Safe and Arm Devices, led in large part by a Joint Programmable Fuze program. During the period, we secured 2 new fuze contracts, a $57 million order under Option 15 of our JPF contract with the U.S. government; and an $11 million missile fuze award under our JASSM program. With these new awards, combined with our existing backlog, we expect our defense end market exposure to continue to help offset the declines we were seeing in our commercial aviation business. Sales in our commercial business and general aviation markets, which historically contributed 30% of our sales mix, increased 10.5% sequentially. This sequential increase was largely due to a 34.1% increase in our sales for our general and business aviation products, which included the delivery of 1 K-MAX aircraft. As expected, this increase was offset by the continued sales decline for our commercial aviation products, which decreased 25.8% from the second quarter of '20. We continue to expect sales of our commercial aviation products to be under pressure at least through the fourth quarter. However, the diversity of our product offering and broad range of platforms we support in general and business aviation products is expected to partially offset these declines. In our medical end market, which accounts for about 10% of our historical sales mix, sales increased 18.6% sequentially from the second quarter. And it appears the second quarter performance for these products may represent a low point for the year. We are continuing to monitor the resurgence of COVID-19, which may lead to the additional deferral of elective procedures and push out a recovery in sales for these products. We continue to believe that this market will rebound and that we have the ability to recapture much of the missed volume, but timing remains uncertain. Finally, in our industrial end markets, comprising about 10% of our historical sales mix, sequential sales were relatively flat with the second quarter of 2020. We have seen relatively better performance in this end market, given the overall global economic conditions. Looking at our performance by product and beginning with Specialty Bearings, the most significant sales decline for the bearings products continues to be sales to our large commercial airline customers, while volumes for our defense, business and general aviation and medical bearing products improved versus the second quarter of 2020. Turning to our JPF program. We delivered over 14,250 fuzes in the quarter. Year-to-date, we have delivered over 36,500 fuzes and are on pace to deliver to our full year expectations of between 45,000 to 50,000 fuzes in 2020. Based upon our deliveries to date, we expect to deliver approximately 11,000 fuzes at the midpoint of this range in the fourth quarter, which would result in lower sales contribution from JPF in the fourth quarter. Moving to Bal Seal Engineering. We are on track with our integration activities and have achieved the cost savings we had anticipated at the time of the acquisition. Operationally, sales at Bal Seal increased 5% over the second quarter of 2020, driven by improved volume for our medical products. Backlog at Bal Seal rose 7% sequentially. We are encouraged by the increase we saw in backlog, however, we expect headwinds in the fourth quarter primarily related to the industrial portion of the business. Gross margin for the quarter was 31.3% compared to the 33.5% in the prior year period. The 220 basis point decline over the third quarter of 2019 was driven by mix and reduced volume for our commercial bearings. Internal research and development continues to be a primary focus for us as we look to drive future organic growth. Spending in 2020 on these programs, which is included in our SG&A line item on the income statement, has increased over 2019. In the quarter, we spent approximately $5.5 million and through the first 9 months, we have spent $17 million, an 18% increase over the comparable 9-month period in the prior year. SG&A as a percentage of sales declined to 21.1% for the quarter from 24% in the prior year. Adjusting for onetime costs, including costs relating to our acquisition of Bal Seal, SG&A as a percentage of organic sales was 17.4%, a decrease of 510 basis points from the second quarter of 2020 and a decrease of 500 basis points when compared to the comparable period in the prior year. Restructuring and severance expense in the period was $1.5 million compared to $0.1 million in the third quarter of 2019. In the third quarter, we recorded $0.7 million in costs relating to our G&A reduction initiatives and $0.5 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 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. Through the third quarter, we have achieved more than $17 million in total annualized savings, and we have clear line of sight to our target of $20 million of annualized savings. In response to COVID-19, we have been actively reducing costs in light of the volume declines. During the third quarter, we took additional actions to adjust our cost structure to the lower anticipated sales volumes. In total, the actions we have taken to reduce our cost in 2020, including the benefit from reduced discretionary spending, we are expected to generate $25.7 million in savings for the year. In addition, we have identified actions, which have not yet been fully implemented that, when coupled with the actions we've taken to date, will generate approximately $50 million in annualized savings. We expect 80% of the $50 million in savings to be structural as we anticipate a portion to return when conditions improve. During the quarter, we recorded a $50.3 million noncash, nontax impairment charge related to the goodwill associated with our aerosystems reporting unit. This reporting unit is made up of our air vehicles and metallic and composite structures businesses. As a result of the impact of COVID-19 on the end markets this reporting unit serves, we have been closely monitoring its expected future performance. During the first two quarters of the year, we tested the goodwill for impairment. And in each of those periods, the amount by which the fair value of the reporting unit has exceeded the carrying value has decreased. During the third quarter, we undertook our strategic deployment process for the year. And due to the performance of this reporting unit in the third quarter, combined with the anticipated impact on its future performance, the analysis we conducted in the third quarter indicated that the goodwill for this reporting unit was impaired. On a consolidated basis, we recorded an operating loss of $38.9 million compared to the operating income of $15.6 million in the third quarter of the prior year. Our results included a number of onetime expenses, including the $50.3 million noncash, nontax goodwill impairment charge. However, adjusted operating income increased 16.6% and to $23.2 million from the $19.9 million in the prior year period. With the sale of Distribution, 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 third quarter totaled $3 million. We are nearing completion of these activities and expect to bring our obligation under the transition services agreement to a close in the fourth quarter. Adjusted EBITDA from continuing operations in the quarter was $35.5 million or 16.6% of sales compared to the $26.8 million or 14.7% of sales in the third quarter of 2019. During the period, we recorded a diluted loss per share from continuing operations of a negative $1.39 compared to a diluted earnings per share of $0.36 in the prior year. When adjusted, we saw an increase in the adjusted diluted earnings per share of 52%, earning $0.70 per share in the third quarter of 2020 compared to the $0.46 adjusted diluted earnings per share in the third quarter of 2019. During the quarter, we generated free cash flow of $22.4 million, reducing our free cash flow usage for the year to $66.6 million. This usage was driven by an increase in receivables due to the timing of payments from JPF DCS customers, near-term working capital build for K-MAX and employee-related cash payments, such as the $10 million pension contribution made in the first quarter. For the full year, we continue to expect positive free cash flow in line with our full year 2019 free cash flow performance. However, our ability to meet this target will be dependent on the sale of an additional K-MAX and the timing of JPF receivable collections during the fourth quarter. During the month of October, we collected a portion of our outstanding JPF receivable balance and repaid $50 million on our revolving credit agreement. These actions strengthen our balance sheet and leave us with ample liquidity as we close out the 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 and second quarter discussions, we wanted to provide our view on end market performance for the final quarter of the year. In our defense business, including Safe and Arm Devices, we expect performance to remain strong with incremental growth year-over-year. 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. As I mentioned previously, we expect sales in the fourth quarter for our JPF program to be lower than the third quarter of 2020. For our commercial business and general aviation markets, we continue to expect commercial aviation to remain challenged. In business and general aviation, we expect to see top line growth in the quarter ahead, due in part to the expected delivery of a K-MAX aircraft. For our medical end markets, it appears the second quarter performance for these products may represent the low for the year. However, the resurgence of COVID-19 in parts of the U.S. may lead to the additional deferral of electric procedures and push out a recovery in sales for these products. Our industrial end markets held up well through the first 9 months. But as we look ahead, we expect sales to be modestly lower than the third quarter. In conclusion, we are well positioned to continue to execute on our strategy and manage the business through this rapidly changing operating environment. With that, I will turn the call back over to Ian.

Thanks, Rob. Before we open the line for questions, I wanted to share one last observation during my initial time here at Kaman. Throughout the interview and onboarding process, the team shared stories about how special Kaman was. How the culture is present through the work that is performed every day and how this culture permeates its talented and dedicated employees. In my brief time here, I could not agree more. The values of Kaman come through loud and clear, and I am very proud to be a part of this company, to be a part of this team and have the opportunity to lead the more than 3,000 employees of our organization. With that, I turn the call over to Jamie, who will open the line for questions.

Thanks, Ian. Operator, may we have the first question, please?

[Operator Instructions]. Our first question comes from the line of Steve Barger with KeyBanc Capital Markets.

Ian, welcome aboard, and Neal, congratulations on transitioning to an easier life, a better life. Ian, just want to start with a big picture. Just early days action plan. You talked about going to all the domestic plants and having the virtual interactions with international. Where do you think you can make the biggest impact for growth or margin in the near term? And where are you in the process of communicating that and actually pushing that -- those processes?

Thanks, Steve. If I may, I just wanted to just make a quick few comments before I answer that question. I wanted to just publicly thank Neal for your 13 years of incredible leadership of this company. The team has done a marvelous job in the transformation and repositioning the portfolio. I will also say that my transition working with Neal and the executive team and the Board has been best-in-class. So I feel incredibly fortunate to be here with Neal and the team. I'm 2 months into the role. And as I mentioned in my prepared remarks, there's a steep observation and learning and listening mode going on. I do feel it's incredibly important to understand things before being understood. But to answer your question more directly, at a high level, I just -- I'll tell you, I see incredible potential intrinsic value that we can unlock in this company as a function of where it is today. If I think about the kind of near term, there are 3 things that I feel incredibly excited about: number one, to drive the organic growth by continued focus on our history and track record of innovation. That's what sets us apart. I think strategically, we are designed into many platforms and products. That's where we need to be. That's what generates really nice returns and cash flow. Number two, I think we've got to continue moving forward with our acquisition strategy. We're well positioned for that. I think those acquisitions have to be accretive in nature, focused on our highly engineered products -- offerings as we continue to build that diverse set of customers. I think that's something that really has allowed us to weather this storm in a strong position. And number three, to make both of those first 2 highly -- with a high degree of success, I am excited to leverage my operational experience and deploy what I would consider a robust and proven operating system, and that's really focused on margin expansion, that free cash flow generation and conversion and really zeroing in our net working capital management. That's kind of high level and where I see the near-term opportunities.

That's a great overview. As you think about the different product lines, what are your thoughts on commercial aero right now? It's obviously been challenged for well over a year, given 737 MAX last year, pandemic this year. Does any of this change the way you think about long-term exposure to aero or where you may want to pivot the company from an M&A standpoint?

Couple of quick thoughts on that. Having been in this industry a long time, looking at all the same reports and reading as much as I can and obviously, talking to some of our customers. A, I think the recovery -- the commercial aerospace market has been always very resilient. It does come back. It's going to take a little bit of time, different than some of our other markets, perhaps in medical, which we anticipate coming like back sooner. In terms of how to position the company, I feel -- again, from what I understand right now, and quite frankly, seeing the businesses and how we operate and what we do, I'm really trying to get deeper into those end customers and understand the diversity of our portfolio, which is tremendous. I think that we've got very solid positions on many of those platforms. I think there's more work to be done in how to expand our footprint on those platforms and working with the customers. I think the aerospace and defense is core to what we are and what we do. But at the same time, I do feel, whether it's through acquisitions or building on, like I said, the focus on engineering and highly precision parts and those kinds of things that we're going to continue to kind of move in that direction. I think that's where we'll find, I think, really strong returns.

Understood. And you said in your opening remarks, the strength of the balance sheet sets the foundation for growth. What's the upper range of what you would stretch to in terms of debt to EBITDA? And philosophically, do you believe in a stable debt-to-cap kind of profile? Are you more inclined to lever up for a deal and then focus free cash flow towards debt reduction until the next thing comes along?

It's a great question. And actually, it's a -- like you said, it's philosophically a really important one because I think we're in a good position to leverage our balance sheet, to go after the right type of acquisition. We're spending a lot of time with the leadership team right now, refining a little bit the criteria by which we look at those acquisitions. Some really good work going on with our finance team, leadership team here to really kind of, again, think about our strategy and what opportunities exist out in that space. By definition, I think one of the critical elements of that is how we generate free cash flow and how we leverage that free cash flow as a result of that type of acquisition over time. I can't predict the timing by which we would cycle through that kind of exercise. Fundamentally, I'd like to see us being a consistent cadence kind of year-to-year in terms of targeting certain things. And I think managing that, I'm not a big kind of bet-the-company kind of person. I really think that we're thoughtful and strategical -- and strategic in the things that we go after. I think if we do that in the right way, as we've demonstrated, I think, with Bal Seal and other things, that will play out nicely for us.

Great. And one clarification to that, and I'll jump back in line. Do you have a range of what you think is an appropriate kind of debt-to-EBITDA as you go into the M&A strategy?

Yes, Steve, this is Rob. I mean over the past, we've talked around 2 to 3x kind of being over the business cycle with our willingness to stretch above 3x when there's a very clear path to deleverage. I think -- and certainly, in our conversations, I don't see that changing. I think the strength of the business is largely predicated on having balance sheet and liquidity. I think what we've been through in the last 12 months has proven that out, right? I mean a lot of companies that didn't have a strong balance sheet have found themselves strategically compromised. We're not in that position. So I think with Ian's leadership and all the work that was done by Neal and the executive team and absolutely a lot of people across the company, we're in great shape. I mean we're in a really good footing, and we're going to be very judicious.

And let me add to that. I've looked at the history of the leverage. And I think it's been really consistent, as Rob said. And under Neal, I don't anticipate deviating from that. I think we find ourselves in the right spectrum. I think the critical element, which I mentioned, and what I'm really super excited about is in the spirit of true continuous improvement, how do we generate better performance. One thing I'll say -- and for the benefit of everybody, and I thought about this in preparation for day, one of the things that I feel very strong about is whatever we own, whatever we acquire, we want to be the best at managing it. And that's really where we want to drive. And I think we've got some of those examples here for sure. There's clearly other room for opportunity for an improvement, which is great. But that's where I see that kind of that falling in place with the history and how we performed before.

Great. And again, congratulations to both you and Neal.

Our next question comes from the line of Pete Skibitski with Alembic Global.

Guys, sorry if I missed it, but let me ask for a little more color on the goodwill impairment. I think it was largely at the aero structures unit. And I'm just wondering now about the outlook there. Are we booking that unit essentially at 0 margin now going forward for a while? And I guess the implication will be that revenues are expected to be at a much lower level for a long time now as well in that unit? Just maybe some additional color there.

Yes, Pete, this is Rob. A couple of things. We conduct on a -- certainly multi-years with, minus the pandemic, an annual review of any triggering events that would have us review the goodwill, and we do it annually. In this particular case, and we've been pretty transparent, the cushion by which the fair value exceeds the carrying value of that business had declined over the first couple of quarters and then just continued challenges with COVID. And then combined with really what were not significant changes in the long-term outlook, but have a very magnified effect on the value is really what led to the impairment. I mean as you can appreciate, in any DCF analysis, the sensitivity to the terminal year is quite high. So I'm not going to give a specific margin, Pete, but I wouldn't agree with your assumption that you're looking at 0% margin. That's not the case. We do see, and Ian alluded to it, that in certain areas of that business, just due to the impact on commercial aero and some of the challenges there, it probably will take some time to rebound back to the 2019 levels. I think if you look at a lot of the analyses that are out there, whether it be the Boeing report or others, they're looking at a, let's call it, minimum 2 to 3 years before you really start returning to the 2019 levels. But I think what's important is in the long term, we still feel very good about those businesses, and we still see significant opportunities to have margin expansion. It's just -- it's really a mathematical exercise based on what rolls up.

No, that's very helpful. I appreciate all that color. Very helpful. Let me follow up on free cash flow. I think if I look at 2019 free cash flow from continuing ops, it was around $20 million, I believe. Maybe you could validate that. And so as you look at 2020, can you ballpark for us the size of the receivable you're expecting from overseas?

Sure. I'll give you some level of detail there, Pete. But you are correct, 2019 free cash from continuing operations was right around $20 million. We continue to expect to achieve in that range for this year. One of the key is the receivables on our DCS customer, JPF. We have received a good portion of that already in October. So we -- clearly, timing still remains -- we can't perfectly tell exactly when we're going to be paid, but that is really the big chunk of what moves us over the hump into positive free cash. There are some other items. We have a K-MAX sale expected in the fourth quarter, that will also be a meaningful contributor to cash in the quarter. Once again, timing, the team is working very diligently with a number of leads that are very close. So once again, we feel good about the demand profile right now for K-MAX. That remains very much intact in this market. So it's really -- I think, for anyone who's done business in the Middle East, these things just take time. We have 2 very -- a number -- actually, a number of very good customers in that region who've been long-term customers with very deep relationships. So it's just working through process.

Understood. Understood. Last one for me. It's good to see -- I guess, I haven't focused on it enough, but traditionally, I think IR&D, you guys have been around 1%, 1.5%. And year-to-date, it looks like you're over 2% now. So is that going to be the way we think about it going forward, kind of more of a 2% to 3% of sales on IR&D?

Yes. Pete, I was looking at the same numbers when I came aboard and digging in and where we're spending the money and where it's going. I do feel that, that as I mentioned, from an organic growth perspective, is going to be critical. So whether it's 2% or somewhere in that neighborhood. To me, it's -- honestly, it's not so much the percentage. I think it's safe to say that there will be more focus on that and really trying to center strategically on those kind of opportunities to expand our product portfolio in a meaningful way.

Yes. And Pete, just one other comment there. I mean we've talked extensively around a lot of the reductions and savings that we've made over the year. And that just provides us more latitude in which to redirect those expenses into IR&D, into growth opportunities.

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

It's actually Tyler on for Seth. Okay. So I guess, just looking at Q4, looking at your fuzes guide, if we look at it and assume that you guys deliver towards the high end of that range, I mean, the way we're thinking about it is maybe revenues around the mid-60s range for Safe and Arm Devices. Would you guys say this is a fair way to think about this? Or is there a different way to look at it?

Yes. Tyler, I mean, if we achieve towards the high end, I think your assumption is within range. I mean that's not an unreasonable expectation. But I would say that, that largely comes down to the mix. The -- where our DCS is relative to our U.S. government contract, there is a difference there in top line. So it just depends on the mix. And that is something that the team manages based upon demand signals from the U.S. government as well as our other international customers.

Okay. Got it. And then just a quick follow-up. I mean, I guess, in this market, we've been given forecast for deceleration for the big defense contractors and just the budget overall. So how should we think about the non fuze portion of your defense business going forward, maybe for the next couple of years?

Yes. We typically -- Tyler, we haven't really provided much of a guide on that, especially like a multiyear guide. I mean certainly, when you think about the size of the overall defense budget and what our portion of that is and where we play, we do have a decent exposure on missiles, obviously, and munitions. That appears to be an area where there's still -- lacking inventory. And I think when you look at some of our other structures programs, whether it be an A-10, AH-1Z, UH-60, those have been very good long-term programs for us. So it's -- looking at an overall defense budget for a company of our size, I mean, it's a little different when you're looking at a Lockheed or like a Northrop Grumman, right? Was there in so many different huge projects that they will feel it more. So for us, it's more program specific, and we overall feel good about the platforms that we're on.

Yes. And just maybe from my perspective, having been in that world on both sides, I agree. What I love about this company is the positions that we have on those current platforms and those future platforms, quite frankly, and there's a lot that we're still pursuing. So I think where we play with our product lines, it's a different dynamic. And I think it's relatively stable, and we'll see how that goes.

Okay. Great. And then just last one for me. I know that you guys gave the breakdown for OEM versus aftermarket revenue exposures just based off that first quarter. Is there any color you guys could provide on how it looks now?

Yes. I think really, when we look at it, there's probably not very significant change in that mix, Tyler, because when you think about passenger miles, flight cycles, those are down, OEM builds are down. I would argue aftermarket is probably down a little bit more just based on the activity that's going on out there, and that's going to be a function of the recovery, which right now is more positive in Asia. But we're on virtually every single platform, in particular, with our bearings business. So the aftermarket there is really going to be impacted by what we're seeing in just general flight miles. The OEM, the build rates are public, right, and we're certainly not immune. But even there, if you look at 737 MAX for a long time, just given the incredible number of companies we sold into and where they were in their various portions of the build, even there, we definitely saw a trend down, but it's not linear. It's not a direct correlation just based on who we sell to. But we're definitely -- I wouldn't say that percentage has moved notably. I just -- it's not -- for your modeling purposes, it's probably not worth adjusting it.

Our next question comes from the line of Chris Dankert with Longbow Research.

Congrats again, Neal. Welcome, Ian. I guess first off, given the high utilization of K-MAX in the quarter, was there any kind of unusual or increased aftermarket sales growth there? Or is it pretty in line with what you guys have been expecting?

Yes. Chris, this is Rob. As it relates to K-MAX, yes, the utilization was good. We can all see the news at West and see the tragic amount of fires. I would say it's been pretty much in line with our expectations, by and large. I mean we have a great customer base, and we've been working with the K-MAX long enough for our ability in terms of aftermarket. It's pretty much in line. I mean I wouldn't say anything unusual there.

Got it. Got it. And then just any update on SH-2? Any motion on that program globally?

Yes. So as it relates to SH-2, we continue to work with NAVAIR on an Egyptian program. We've talked about that in the past. That does move along, but slower than we'd like. I think I would characterize it there. In terms of Peru, we're -- that program is pretty much over and done. So it's fairly quiet on the SH-2 front. I mean, I think there are some opportunities. There's a couple of other fleets that may look for some upgrades over time. But by and large, really the most significant, call it, medium-term opportunity would be an Egyptian retrofit, and we continue to work towards that.

We do have a follow-up question from the line of Pete Skibitski with Alembic Global.

I wasn't sure if you mentioned this, but when you guys report fourth quarter, are you expecting to be able to give guidance for 2021 at that point?

Yes, Pete, great question. Our current expectation is that, yes, when we get on the call in the February time frame, we'll look to provide a guide for 2021.

We have no further questions. I would now like to turn the call back to Mr. James Coogan for closing remarks.

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

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.