KAMN (2021 - Q2)

Good day, and thank you for standing by. Welcome to the Kaman Corporation Second Quarter 2021 Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Rebecca Stath, Vice President of Accounting. Please go ahead. Rebecca

Good morning. I'd like to welcome everyone to Kaman's second quarter 2021 earnings call. Conducting the call today are Ian Walsh, Chairman, President and Chief Executive Officer; and Jamie Coogan, Senior Vice President and Chief Financial Officer. Before we begin, I'd like to note that some of the information discussed during today's call will consist of forward-looking statements setting forth our current expectations with respect to the future of our business, the economy, and other future events. These include projections of revenue, earnings, and other financial items, statements 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 2021 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. With that, I'll turn the call over to Ian Walsh.

Good morning, everyone, and thank you for joining our second quarter 2021 earnings call. I would like to begin today's call with a brief summary of the quarter and our revised guidance, which reflects improved profitability for the year, followed by updates on operations and several of our key R&D growth initiatives. I will then turn the call over to Jamie for a more detailed discussion of our financial results. Before jumping in, I'd like to first congratulate Jamie Coogan on his recent promotion to Chief Financial Officer. Since joining Kaman, I've had the opportunity to get to know Jamie quite well and work closely with him on key initiatives. I believe his strong knowledge of our company and relationships with our external stakeholders, coupled with his training and financial skill sets will prove invaluable as we move Kaman forward and execute on our strategic priorities. Jamie has a great work ethic and strategic mindset, as well as a strong reputation and history with Kaman. I'm excited to have him on our leadership team and he's already hit the ground running. Turning to our results, halfway through the year, we are running ahead of our internal projections, which gives us confidence in raising our full year outlook for adjusted EBITDA and diluted earnings per share. Our quarter was driven by performance across most of our product lines, primarily our Engineered Products portfolio, as we continue to position ourselves for the recovery of the commercial aerospace market. Sales in the second quarter were $182.4 million, which was up 2.5% or 5.4% organically compared to the prior year. Adjusted earnings per diluted share of $0.56 was also higher than the prior year, and we continue to see sequential improvement as business conditions start to normalize in many of our end markets. Our second quarter adjusted EBITDA was $26.9 million or 14.8% of sales up 480 basis points sequentially and up 140 basis points from the prior year period. Our stronger profitability was mostly related to better volume for high margin products, more specifically, strength in our springs, seals and contacts, a favorable mix weighted toward DCS and our Fuze business and improved leverage as a function of our new operations excellence model across the company. We saw sequential improvement for total bearings demand in the quarter. This improved volume stems from very strong performance from our miniature medical bearings, which ran above pre-pandemic levels in the quarter and solid order rates of our traditional bearings in engine aftermarket solutions. These improvements were partially offset by the timing of the recovery this year of our self-lubricating bearings in the commercial aerospace end market. As commercial airline traffic continues to rebound, we anticipate a significant ramp in sales for our commercial bearings products in the second half of the year. Turning to springs, seals and contacts, volume and performance continued to improve sharply in the second quarter. I am pleased to report that we are now running ahead of pre-pandemic levels. These results speak to the resiliency of our portfolio of highly engineered products within the medical and industrial end markets. With higher volume, we also posted improved margins and profit, and this performance was one of the primary drivers of our improved results against the prior year sequentially and our internal plan. Absent any further impact from the COVID variants, we expect growth to continue through the balance of the year into 2022. For our Joint Programmable Fuze program, we delivered 8,202 fuzes during the quarter. Our financial performance for all fuze and precision products was roughly in line with the prior year, as a higher mix of DCS orders offset volume. For the full year, we are on track to deliver 30,000 to 35,000 fuzes consistent with historical delivery levels for this product. Looking at our K-MAX program, we have shifted the delivery of our second K-MAX in the second half as a function of end customer timing and financing of their fleet. We continue to expect to sell four aircraft within the year, as we see strong interest and we remain optimistic about the prospects for both the manned and unmanned K-MAX. During the quarter, we continued the development of our commercial unmanned system, and we were working closely with the Marine Corps on the retrofit of their unmanned K-MAX aircraft. Finally, in our Structures programs, sales were pressured in the quarter as a result of lower commercial aerospace demand and some challenges related to workforce levels in some of our facilities. We continue to focus on employee training and retention as a function of our talent strategy to support our businesses. We anticipate these challenges will ease as we progress the second half of the year. Before turning the call over to Jamie, I would also like to provide an update of some of our important R&D initiatives that we discussed last quarter. I am very pleased to announce that during the period we completed the design, fabrication and assembly of a half scale, purpose-built, medium lift, autonomous aerial vehicle and achieved several successful test flights. We expect to demonstrate this half scale aerial vehicle in the upcoming quarter and are excited to share this innovative product with customers, investors, and stakeholders. This new platform leverages the technology developed on our unmanned autonomous K-MAX TITAN and broadens its missions in addressable market to medium lift requirements in both defense and commercial applications. As we noted last quarter to support this effort in coordination with our customers, we have committed additional R&D spend in 2021. On our proprietary titanium diffuse hardening process, or TDH, we continue to work with target customers on this application and assess the total addressable market for this solution. In addition to winning new positions on commercial aircraft in the second quarter, the TDH technology was utilized in a successful human space travel mission in July. The lightweight, high-performance, low friction bearing system solutions provided by TDH are a great fit for this mission. In addition to commercial space travel, this technology is perfectly suited for new land, sea and air platforms as well as our traditional commercial business and general aviation market. We're also eager to expand its capabilities into the medical industrial end markets. As we work closely with our customers to provide creative solutions, we believe this type of innovation will prove to be a meaningful driver and strong differentiator for command in the future. In addition to costs associated with our R&D, we incurred modest expenses in the quarter for efforts on several specific acquisition targets. We have a meaningful and strategic pipeline of targets that we will continue to assess that align with our strategy and our new vision, which is to propel our customers forward by imagining and delivering highly engineered solutions. Furthermore, we have recently been approached by multiple leading eVTOL companies, who are seeking manufacturers like Kaman to industrialize their manufacturing process and assist in the complex certification process for these types of aircraft. We believe our legacy as a precision designer, builder and certifier or vertical lift solutions positions us well to capture market share in this space. Overall, we are very pleased with our financial results and the progress we have made year to date against our strategic goals. Most of our end markets are recovering from the lows of the pandemic, and we're beginning to see the underlying earnings power of our business at higher volumes and the power of our new operations excellence model taking root. As we look to the back half of the year, we are well-positioned to deliver on our commitments. Now I will turn the call over to Jamie for a closer look at the numbers. Jamie?

Thank you, Ian, and good morning, everyone. Today, I will walk you through our second quarter results, before turning to our outlook for the remainder of 2021. We perform well through the first half of the year and are running ahead of our forecast as Ian noted. Volume has largely recovered across most of our product categories, which includes growth in our medical and industrial business. As expected, sales into our commercial aerospace channels were soft, as we continue to position ourselves for the recovery. Consolidated second quarter sales from continuing operations were $182.4 million, up 2.5% from the prior year period, and up 6.3% sequentially. Organic sales, which excludes sales associated with our former U.K operation increased 5.4% year-over-year and 7.3% sequentially. The improvement in organic sales was primarily driven by growth in our medical and industrial and other commercial products, partially offset by the softer volume in commercial business and general aviation. Turning to our end markets, defense sales were down slightly 1.4% in the second quarter of 2021 compared to the year ago period, due to the sale of our U.K. Composites business. Organically, defense sales were up 2.3% year-over-year and 16.2% sequentially driven by our precision products as a result of higher overall deliveries of our joint programmable fuze to DCS customers. As expected, sales for our commercial business and general aviation products were down slightly more than 14% relative to the year ago period and the prior quarter, largely due to lower volume of our commercial bearings, particularly with OEM customers. Compared to the year ago period, the second quarter was also impacted by the absence of the U.K. Composites business volume. We continue to forecast a strong second half of 2021 as airline traffic continues to recover. However, we are monitoring COVID related developments, which make it difficult to predict the exact timing and magnitude of this recovery. Sales for our medical end markets increased 54.8% and 11.1% when compared to the year ago period and prior quarter respectively. The increase was the result of higher volume of miniature bearing products and growth in products used in medical implantables and analytical devices. We anticipate the ongoing recovery to continue in this market over the balance of this year. And we are encouraged by the order rates we have seen through the first half. Finally, sales for our industrial end markets increased 28.2% from the year ago period and 15.3% sequentially as demand improved for our miniature bearings and industrial seals and springs. We continue to benefit from the ongoing economic recovery and expect to see strong order rates for these products through the balance of the fiscal year and into 2022. Gross margin for the quarter was 34%, compared to 31.9% in the prior year period and 30.8% in the prior quarter. The year-over-year sequential increase in gross margin was driven by the DCS mix of our JPF products, strong performance from our springs, seals and contacts, our FH2 spares program and solid operational performance by many of our businesses. During the quarter, we reclassified our research and development costs and intangible asset amortization expense out of SG&A to a discrete line item on the face of the income statement. This reclassification provides greater visibility to our underlying G&A, absent the cost of these investments that we are making to drive both organic and inorganic growth. When looking at our results, SG&A as a percentage of sales for the period was 21.2% down 40 basis points from the prior year period, driven by efficiencies as part of our cost reduction efforts. On a consolidated basis, our operating income was 14.8% compared to an operating loss of $2.8 million in the second quarter of the prior year, higher operating profitability stemmed from lower TSA costs, the absence of non-recurring costs associated with our Bal Seal acquisition and the benefit from our cost reduction and mitigation efforts. We substantially completed the TSA activities during the second quarter of 2021 and expect final closeout of this agreement in the near term. Adjusted EBITDA from continuing operations in the second quarter was $26.9 million or 14.8% of sales, compared to $23.9 million or 13.4% of sales in the prior year period and $17.1 million or 10% of sales in the previous quarter. We believe that the sequential and year-over-year increase of 480 basis points and 140 basis points respectively in our adjusted EBITDA margin is a testament to our ability to closely manage our cost structure and remain agile in a dynamic environment. We continue to aggressively target our efforts at maximizing gross margin and controlling SG&A, while making smart R&D investments to drive future growth. Diluted earnings per share from continuing operations were $0.42 on a GAAP basis compared to $0.00 in the second quarter of 2020. On an adjusted basis, diluted earnings per share from continuing operations increased 56% to $0.56 from the $0.36 we earned in the prior year period. The adjustments in the current quarter include a discrete tax charge associated with the sale of the U.K. Composites business, restructuring and severance costs expenses associated with corporate development activities and the net cost related to the TSA activities. During the quarter, we had free cash flow usage of $15.7 million compared to $28 million in the prior year period. Cash usage reflects the effects of higher working capital partially offset by additional receipts on outstanding JPF, DCS receivables. Moving to the outlook, we are revising our full year guidance for 2021. We now expect full year revenue in the range of $715 million to $735 million due to lower expected sales from our Structures programs. However, we are raising our guidance for adjusted EBITDA to $87.5 million to $97.5 million and adjusted earnings per diluted share to $1.70 to $1.95. This reflects the continued strong performance expected in our medical and industrial end markets and the anticipated recovery of our commercial, business and general aviation products in the second half. It's important to note that we remain mindful of the potential impact from COVID variants to the timing of the recovery in the commercial aerospace market. With that, I'll turn the call back over to Ian for closing remarks.

Thanks, Jamie. We are pleased with the pace of the recovery demonstrated in the second quarter and remain intently focused on executing our strategic plan, which is first to invest in the organic growth of a highly engineered and precision product offerings. Second, to acquire accretive businesses that will improve shareholder value. And third, to drive best-in-class operational excellence across our company. Investments made over the past few years are beginning to drive our profitability and return to shareholders. And we are excited about the strength of R&D pipeline to drive future growth. Our future is dependent on our talent and I am thankful to our workforce of more than 3,000 dedicated employees, whose commitment has been instrumental in our success. With that, I'd like to open the lines for questions. May we have the first question, please?

Good morning guys, and congratulations Jamie. Ian, I have to start with JPF. Reading through the 10-Q, it seems like the Fuze business could extend to 2023 assuming Option 16 comes through. But it looks like the program revenue will be decelerating. Can you talk about new product development efforts to make an electronic fuze? Or just anything that you have on the outlook there?

Yes. No, sure, Steve. First of all, late-breaking positive news, since you mentioned it. Literally last night, we just signed our Option 16 deal, which is very exciting. So that has come through nicely, and that brings us into 2022. We've got line of sight I think very strongly in 2022 and 2023. Relative to electronic fuze and what's going on there, we're actually looking at a lot of different types of fusing technologies on different types of weapon systems. Not to go into specific things, I think the focus right now, we've talked about height of burst and some other programs that we've got in the works which are awesome, working with the Army and the Air Force a little bit on some of their new weapon systems. So I think there's some upside there down the road. In terms of electronic fuze to replace JPF, we've got electronic technology, but we're not really going down that path. We're really looking at what the future holds for future programs there.

Okay. Gross margin was the highest in several years. Was that all driven by mix with medical and industrial being strong? And is that sustainable? Or what do you expect for the back half?

Yes, I'll start, and Jamie can also weigh in here. Very exciting to see that gross margin come through. Obviously, a little bit of mix, which is nice. But I also say, and we'll talk more about it if you want to, but we're really seeing the operations excellence model take root across all of our businesses. There's been a lot of effort. This is something we architected late last year, kicked it off this year. Russ and the team and the GMs and the folks are really pushing hard and driving through a lot of new training and new tools and new applications. So that's also helping tremendously. In terms of the back half of the year, we absolutely intend to maintain that margin. This is what it's all about, which I mentioned, is just about becoming operationally excellent in all of our businesses. And it's a journey, and we've just really kind of accelerated that path, but I'm excited to see a full run rate of where we're going next year, which will be very exciting.

Yes. And just to add to that, a lot of the actions we've taken, Steve, over the last year through the pandemic as well as the first part of this year, are really designed for us to try to maintain that margin rate as we move forward. We do see an acceleration of sales opportunities in the back half related to our commercial aerospace as well. And so as that starts to pick up, the leverage that we'll get from the actions we've taken will start to meaningfully come through both through cost of sales as well as G&A.

Got it. And Jamie, I know you've only had the seat for a minute, and you've got a ton to do, but what is your vision for what reporting will look like going forward? Will we get back to quarterly slides? Can we expect segment margins along the lines of the revenue breakdown you provide?

I think the answer to all those questions at some point, yes. In terms of quarterly slides and others, we'll make sure we get those up there for you guys for sure. That's something we can do right out of the gate. We'll make sure we have that up there. As it relates to sort of some of the other reporting, one of the things that's important for us is that structurally we're set up in a way to support the reporting that we put out there. And I know as Ian kind of comes through his first year here and his evaluation of the organization, what it needs, I know that that is part of the consideration here is to determine structurally how we want to have the management of the business set up. That will then ultimately feed in. As you know, the accounting on this is pretty clear in terms of how we need to report. And so we want to make sure we don't get ahead of that with what Ian has underway. But that is something that is currently in the works.

Yes. And Steve, just to add to that, I mean, to your point, we're very comfortable with the structure that we've got today. We are discussing it. There's a lot of elements to consider. So as we evaluate it, we'll keep you posted.

Our next question comes from Seth Seifman with JPMorgan. Your line is open.

Thanks very much, and good morning, everyone, and congratulations, Jamie. I guess I wonder if you could talk a little about the mix that you expect in the second half on the Safe and Arm for DCS versus domestic and kind of how helpful that was in the quarter?

That’s a great question. As we think about JPF over the back half, and again, we haven't given specifics on this in the past. But as it relates sort of generally speaking, DCS orders will be weighted a little bit more towards the first half than they are towards the back half. And overall, for the full year, we do expect there to be a slight weighting advantage to DCS for the full year relative to USG deliveries. So in the period, we did deliver more JPF DCS in the quarter than we did during Q1 of last -- of this year.

Okay, cool. And then I guess maybe if you could talk a little bit more, Ian, about the M&A environment and kind of how coming out of the pandemic, how you think about when it makes sense to go ahead and maybe pull the trigger on some M&A, how you think about evaluating valuations on what might be normalized numbers and kind of putting the company company's recent results into context, given all the noise we've had in terms of compares and different bottlenecks and all these different things. Is it kind of necessary to see things settle out a little bit more? Or can you go ahead in the more near term?

Yes. No, it's a big question, Seth. I'll start by saying it is exciting to see the level of activity that's out there. And we are absolutely very active. We've refined our filters. We know exactly the types of companies that we're looking for, that are accretive, that fit our strategy and where we're headed, which is that kind of highly engineered precision products businesses. We've assessed a bunch of deals so far. We'll continue to do that. We fully intend to move as aggressively as we can. And if you look at the activity that's out there, it's interesting. It is very aggressive. Pricing and multiples and all that stuff, but I think, quite frankly, we've got to put our balance sheet to work. We're very excited about the opportunities we have in our pipeline. We'll continue to assess those opportunities, and we'll keep you guys posted. When we know more, we'll share more.

Great. Thanks very much. I’ll stop for now and get back in the queue.

[Operator Instructions] Our next question comes from Pete Skibitski with Alembic Global. Your line is open.

Good morning, Ian and Jamie. I'll echo Steve and Seth, Jamie. Congrats and best of luck in the new role. Maybe just start with a couple of top-level questions, Ian. I think back in May, you guys were scheduled to have kind of your deep dive strategic reviews. Can you maybe touch on kind of what came out of that, just kind of how you're thinking top level?

Yes. No, I love that. Good memory. We went through our first what we call our Kaman Business System Cycle, which was our strategic business reviews. And what's really exciting, the team here did a marvelous job, A, putting together a template that really allowed each of the business units to map out their five-year trajectories. And the beauty of what we just rolled out was not just a trajectory that they based on their own assessments. It's really about achieving top quartile performance in each of our segments over that time period. Some of our businesses, depending on the dimension of the metric are actually already there. Others, we have a gap to fill. And the beauty of that is that now each of the businesses, general managers and their teams, working in concert with us and our support, have a real understanding, deep understanding of what it takes to get to that point over that five-year period. So those have all been mapped out. And honestly, I think this was a really, again, first time opportunity to sit with each of the businesses and walk through that process and understand the ins and outs and the competitive dynamic and the resources required to get there. So that was a very powerful exercise. And then in complement to that, we just finished a whole round of talent reviews, which is the second cycle of that business system. And then at the end of the year, we'll be rolling into our annual operating plans and really understanding and refining the targets for next year.

Okay. A lot going on. Another top level one, Steve mentioned the fuze outlook. The other program that gets me a little concerned is the Black Hawk outlook. I mean, just as recently as yesterday, Lockheed was talking about kind of the midterm Black Hawk decline, and it's obviously been a pretty big program for you guys. So are we all thinking that midterm for Kaman, we've got some fuze headwind, we've got Black Hawk headwind, and so it's important to utilize the balance sheet M&A wise to reshape the company and kind of offset those kind of -- the headwinds from some of the legacy platforms? Is that -- am I in the same page as the way you guys are thinking?

I think it's -- yes, I think you're thinking of it the way we are. Although I'd just make one refinement, which is on the fuze headwind, to me it's not a headwind. We're kind of still in a very strong position relative to future prospects. DCS Option 16 just came in. I think we've got a nice window here. And then other technologies we're developing. The Black Hawk program, we know they're shifting. We're seeing that with some of the other OEMs, but the beauty of that is there's a whole bunch of, as you know, future programs that are coming up that we're well positioned on. So that will replace that, I think, in a meaningful way. And that's just a natural, I think, evolution of both those programs. And then the third part is, yes, we know inorganically there's a lot of stuff that we feel that would be really attractive and accretive that will fill that gap in the future for us.

Great. Let me sneak in one more. This eVTOL thing, Ian, fascinates me. There is -- obviously, it's early days, there's a ton of players out there, you almost lose track. How do you ensure you guys, as you think about business opportunities, how do you ensure that you get an adequate return on that type of a program, being that it's so hard to get a feel for the winners and losers? And just structures historically has been a lower margin program for you guys just to start out. So how are you thinking about that whole area and how it can be lucrative for Kaman?

Yes. I'll start, Pete, with its evolving. And I know this industry, and I've been in it and around it, studying it for so long. And we've got a lot of folks out there, some of whom who we know are getting phone calls like I just mentioned. I think there's several ways that it can go. I think fundamentally, for us, we are not in the business of signing up for something that we don't feel is aligned with our strategy. We make precision things. We're moving towards higher-margin businesses. And so when you think about that type of level of manufacturing, whether it's providing parts to those eVTOL folks or it's actually having levels of manufacturing or assembly, I think that that can be a very robust part of our business. And because it's such, I think, in the next quite frankly 20 years or so, you're going to see this eVTOL take real life and real form. As you said, there's a lot of players out there. We're actually talking to some of the ones that we feel are going to be the winners. But it's still early to say. And I think it's important to make sure that whatever we do, it fits nicely in our strategy and where we're trying to go as a company. And I think not to bridge into it, eVTOL is a very unique application, but it's really got the urban mobility movement that then kind of bridges in towards this autonomous capability, which is something that we are absolutely directly investing in and involved in, and we feel really strongly that we've got some future there.

Yes. And just to add on to that a little bit, Pete, as we think about the opportunity, yes, by all means, the first thing that comes to mind is potentially supporting the structures aspect of that. But investments we've made in our bearings technology, specifically TDH, our self-lubricating bearings and others, I mean that's about lightweight, reducing weight. And we know that that's very important for the eVTOL community as they try to get a little bit extra distance, get a little bit extra out of that battery life. And we're able to support them through some of our bearings technologies. But then ultimately, with Bal Seal and their springs and contacts, we have very efficient means by which to maintain electrical contacts for them, which are also very lightweight, very, very small, which are really supportive of these types of technologies. So we bring a broad range of capabilities to these folks, more than just our structures expertise.

Our next question is a follow-up, Steve Barger with KeyBanc Capital Markets. Your line is open.

Thanks. Just a clarification. On the Fuze business, you said you've got a nice revenue window through 2023, which I agree with. And there are other technologies you're working on, but an electronic fuze isn't one of them. Did I get that right?

Well, yes, I mean, we're not trying to replace, right? Yes, we're actually -- the current fuze with the 139, we're not really competing necessarily there. That contract and where over LTK is and those things, we know that, that's very clear. Where we're trying to go is the next gen. And those are future things. Small munitions, more precision munitions. There's technology there that we're working on that we can't talk about, but there's some exciting opportunities there. We're just being realistic about where the 139 is, where we know our 152 is, and we know the current contracts, which, like we said earlier, the DCS contracts, there's still plenty of opportunities out there that we continue to work on. It's a proven technology, proven fuze, very extremely reliable. And again, Option 16 just came in. We'll see what happens. TK is still coming online with their fuzes. So we'll see.

Anyway for the next generation stuff, any way to think about the time frame? I understand you can't talk about the technology, but just trying to gauge what, how you bridge from one program to the other?

No, I think it's too early to really kind of give you any kind of headline on the timing of those things. But I will say, from an investment perspective and knowing our capability with Safe and Arm, we have a very strong capability there. So we're trying to assess, as part of the strategic reviews, where we can go.

Okay. And good to hear your optimism about the back half for commercial aero. As you look at consolidated orders, do you expect the backlog can start to grow again? Or will mix and your just own ability to ramp production keep backlog where it is even as revenue increases?

Yes. Steve, that's a great question. As we look at backlog specifically in those business units that have greater exposure to commercial aero, we think about our Bearings business and others, we actually saw growth in backlog from year-end to where we are today. So we are seeing that backlog portion of the business grow. You recall that that's much more of a short-cycle business, given the lead times that we have for those products. Yes. So we are still well within our lead times for the full year. Our customers know what our lead times are, and so it's a little bit of a double-edged sword because they take advantage of that when placing their orders. But that also advantages us in the need that those customers have something they need urgently, we can provide that to them as well. So we still have a high level of confidence. As we said in our prepared remarks, we're continuing to monitor the more global situation around COVID as you would expect us to do. But overall, we're still pretty bullish on where we think that could be in the back half.

Yes. And from a market perspective, I mean, just to give a little more clarity, and you guys know this too, but it's really for us, industrial medical is really responding nicely. We're well positioned there. General Business aviation is actually up and rising. It's really the commercial market that we're well positioned on. Just want to see those platforms and those sales and those deliveries start to really increase. And then, again, we're going to see that drop-through very nicely.

And as we watch Airbus and Boeing start to ramp production, and I think the MAX is going to -- they're targeting 31 ships per month by January 2022. But I think some of the wide-bodies have actually started to slow down a bit. How does Kaman lead build rates as we watch the OEMs?

Yes. And so as we think about that sort of lead lag, as you recall maybe a little bit from last year, we don't have the best visibility right necessarily into the inventory that Boeing and Airbus have for us. But as we looked at the way our sales trended over the course of last year, that indication. So we had a very strong Q1. We had, again, a very nice Q2, given the global pressures. As we sort of moved through the course of last year, our sales continued to decline, but maybe at a pace that was a little bit behind where everybody else was. And so ultimately, what we're thinking is maybe three to six months is what that sort of lead lag time is going to be. Clearly, as we are seeing orders come up at a higher rate, more so with Airbus, a little bit less with Boeing, but as we look ahead, we think it's likely three to six months. But we don't have, again, perfect clarity into that supply chain or the inventory levels.

Got it. And last one for me. A lot of companies are starting to see and have seen issues around material costs, supply chain disruptions. Ian, I think you talked about some labor challenges. Just any broad comments on what that all looks like for you? Any risk to the back half barring a COVID uptick? Or do you think the supply chain is in decent shape?

Yes, I'll start high level. It's a great question because it's something on everybody's mind for sure. And I was just talking to our general managers, and we just went through a bunch of operating reviews, I think at a high level, we're in a good place right now. We are seeing signs of lead times extending a little bit. It's still within our planning process, so it's not affecting production per se. And we've got little shortages here and there, some small things, sole source stuff, but that's not really a problem for us. So on the material side, whether it's shortage or availability, I think we're in decent shape. On the labor side, honestly, same kind of situation. It's really kind of a case by case, depending on which business we're talking about. I think overall, with the talent reviews we just went through and the things that we've already done, I think we're in relatively good shape. We're going to continue to monitor it because people are going back to work, yet there's this still challenge with the whole stimulation, unemployment and people where they're sitting and when they're going to actually get back to work and things like that. But we're pretty aggressive on that. I think we're feeling very confident that we're doing the right things to retain our people and attract the right types of people. So there's really no, I think, concern at this moment. But again, it's -- we're going to manage it very closely and carefully with what's happening with the COVID, the D variant coming out and things like that.

And I'll just add to that, in those areas where labor might be more of a meaningful contributor to the cost, that's where we have the greatest flexibility relative to pricing as well to kind of help protect some of that as well.

Our next follow-up comes from Pete Skibitski with Alembic Global. Your line is open.

Yes, thanks guys. A couple of quick follow-ups. We were talking, we were kind of alluding to the follow-on to the Black Hawk earlier, the FLRAA and Farr as well. Is there a plan there? Are you guys kind of competing hard to get content on those two programs? And would you like to have both bearings and structures or maybe only bearings? Can you maybe -- I know it's very early, but can you maybe share some thoughts about the strategy there?

Yes. It's -- as we talk to teams, A, they're already positioned on all those platforms. And yes, to bearings and structures. And again, it's early, so it's hard to tell what's going to happen here. But our teams have been relatively, in some cases, very aggressive on getting all those new platforms. So we're, again, depending on what happens here, and that's just early production and LRIP stuff, and future stuff, we're going to be even better positioned, I think, in terms of technology that we're bringing to the table with some of these OEMs.

Is it going to matter to you who wins? Because I know you've worked very closely with both of the main competitors. So will it matter an awful lot? I mean, don't go too deep down that road if you don't want to, but I just thought I'd ask.

I actually -- I can't really talk about certain things, but I think, again, we're on all those platforms. We're in really good shape. We have also very strong relationships with those OEMs and strong track record with OEMs, so that also plays to our advantage.

That’s great. That’s great. Last one for me. The medium lift project seems to be coming along pretty quickly. Just wondering if you have a first customer in mind, whether we should expect a defense customer first or a commercial customer first and maybe kind of timing?

Yes. So like we talked about, we're making, our Board is very supportive. We've got a flying half scale model right now. It's doing very, very well. Our intent right now with the medium lift, is we're going to go live here with the military side first this fall, which will be very exciting. And then obviously, over time, there's no question there's commercial applications for this technology. At this current state form that we're in, there's expansion capabilities in terms of the family of vehicles because you look what's going on out there and our capabilities and the software involved in being fully autonomous, remember, this is purpose built, fully autonomous vehicle. Very different than trying to make something that's currently manned autonomous. K-MAX is doing very well. We've got a demo coming up here in late August, early September with the Marine Corps. But the focus really is where the need is right now and the pull is, which is with our Defense customers. And then we know quite frankly, it's a little different problem set. When you think about just the logistics and point-to-point with autonomous vehicles, small, medium and large, it's different in the commercial space. But that's going to happen. So we're really excited to kind of prove this technology out with the military customer first and then take it from there.

Okay. So on the commercial side, we're thinking about moving beyond kind of firefighting type of applications? Or logging, I should say?

Oh yes, yes, yes. So I mean, we're talking about multi mission sets, multi applications for this type of technology.

Our next follow-up comes from Seth Seifman with JPMorgan. Your line is open.

Thanks for the follow-up. Jamie, just real quick on the guidance, if I look at the midpoint of the sales for the second half, assume you can maintain the second quarter gross margin, assuming the SG&A in dollars can stay at the second quarter level, it seems like it might come in at the high end or slightly above the high end or slightly above the high end for EBITDA. Which is fair, I understand the potential for unforeseen things, want a little bit of cushion. But in all of those assumptions, is there anything that's particularly -- that you'd say is a risk or something you'd highlight that might not be correct about making those assumptions in the second half?

Yes. No, Seth, and thanks for the question. As we look at the back half, we do have 3 K-MAX sales that we are projecting in the back half of the year. We've got good line of sight to the potential customers there for those 3 aircraft. We've got one customer who is actually looking to add two aircraft. And again, we're working that really hard to bring those in. As I think about that, it's -- that to me is a top line risk. That's not necessarily huge profit driver for us. And again, given any unforeseen issues or related matters associated with COVID I don't think your assumptions are necessarily incorrect.

Thank you. And I'm currently showing no further question at this time. I'd like to turn the call back over to Jamie Coogan for closing remarks.

I just want to thank you all for joining us on today’s conference call, and we look forward to speaking with you again when we report our third quarter results.

This concludes today’s conference call. Thank you for participating. You may disconnect.