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Kaman (NYSE:KAMN)
Q1 2020 Earnings Call
May 12, 2020, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Kaman Corporation first-quarter 2020 earnings conference call. [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, Mr. James Coogan.

Please go ahead.

James Coogan -- Vice President, Investor Relations and Business Development

Good morning. I'd like to welcome everyone to Kaman's first-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 first-quarter 2020 results included on Form 10-Q and 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 the 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.

Neal Keating -- Chairman, President, and Chief Executive Officer

Thank you, Jamie. Good morning, everyone, and thank you for joining our first-quarter 2020 earnings call. A lot has changed since our last call, so I will start my remarks with a short summary of the quarter before providing an update on the impact COVID-19 has had on our operations and the steps we are taking as a company to mitigate its effect. We had very strong results for the first quarter.

Net sales increased 24.6% to $207.3 million, with organic sales from continuing operations increasing 10.5% due to growth across all of our major product offerings. Additionally, Bal Seal, which we acquired at the beginning of the year, contributed $23.4 million in sales, in line with our expectations. Even with the significant growth in sales, backlog at the end of the quarter of $802 million was relatively flat with year end as we added backlog from Bal Seal, and saw nice order activity for our bearing products and the Sikorsky BLACK HAWK and combat rescue helicopters. Diluted loss per share from continuing operations was $0.01, compared to diluted earnings per share in the prior period of $0.20.

The loss per share was driven by a number of significant discrete nonrecurring items, including approximately $8.5 million in Bal Seal acquisition costs, $6.9 million of purchase accounting costs for Bal Seal, $1.8 million of costs associated with our corporate development activities and $1.8 million of restructuring and severance expense. When adjusted, diluted earnings per share from continuing operations more than doubled to $0.48 from the prior-year adjusted result of $0.21. Our first-quarter performance speaks to the ability of the new Kaman to generate strong operating results and the ability of our team to execute despite the challenges they faced as the quarter progressed. With the addition of Bal Seal, we've strengthened our portfolio of highly engineered proprietary solutions, serving defense, commercial, medical and industrial end markets, positioning us for long-term growth and allowing us to navigate the near-term challenges ahead.

As I mentioned in my opening remarks, the global backdrop has changed substantially since we spoke in February. The effects of COVID-19 have affected our employees, customers, and the way we conduct business. We share in the grief and tragic loss experienced across our global society, and our primary focus during this difficult time is on the support and safety of our employees, customers, suppliers, and communities. Substantially all of our production facilities are deemed essential, and we have adopted comprehensive strategies to ensure safe and continuous production.

These actions include implementing social distancing, enhanced cleaning and sanitizing practices at our facilities, use of appropriate personal protective equipment, instituting temperature screenings at all locations, segregating workgroups to enable more effective contact tracing while limiting interactions within the facility, and transitioning to a work-from-home strategy for our office and nonmanufacturing employees. We are seeing the benefits from our cross-training efforts for our production employees as we work to minimize the impact from lower staffing levels. Despite this, we have experienced and continue to expect some level of inefficiency as a result of the steps we have taken to respond to COVID-19 and to address the needs of our employees as they and their families navigate through these challenges. We are also taking a number of steps to mitigate the potential financial impact on our business, including our production levels to meet changing demand requirements, reducing our discretionary spend, reducing salaries across our senior management team and our board of directors have temporarily reduced their quarterly cash retainer payments.

Additionally, recognizing the speed at which the situation changes, we have increased the cadence at which our senior management team meets to review the status of our operations, including the health and safety of our employees, the impact of COVID-19 on our customers, suppliers, and communities, and we are providing frequent updates to our board of directors and our response. Due to the volatility of current market conditions, primarily across commercial aerospace, we have made the decision to withdraw our full-year guidance. However, we believe our first-quarter performance highlights the benefits of our efforts to diversify our products and end markets. Our defense programs contribute approximately 50% of our sales, and are expected to remain strong with opportunities emerging for additional growth over the remainder of the year.

Commercial aerospace, at approximately 30% of sales, presents the biggest risk to our performance. In this end market, our sales split is approximately 80% OEM and 20% aftermarket. We are adjusting our manufacturing plans to meet the expected decline in new commercial aircraft production rates. However, the impact to our aftermarket business is more difficult to predict.

The remaining 20% of our sales is primarily focused on the medical and industrial end markets, which we anticipate to have pockets of strength and weakness, particularly given the range of customer applications. While the depth and duration of a downturn in these end markets is difficult to predict, we expect them to be less impacted and to recover more quickly than commercial aerospace. For example, the deferral of elective procedures is a near-term headwind for our medical device offerings. However, as pressures at hospitals ease, we expect a quicker recovery in the demand for these products.

Looking at the impact of the downturn by product and beginning with our specialty bearings and engineered products. We note that our first quarter volume for these products was very strong with a contribution of high single-digit organic growth. During the quarter, we also won new content on a number of new applications, including the Apache Helicopter, and we are seeing increased orders on a number of defense platforms, including the Virginia-class submarine, Joint Strike Fighter, F-18, and Typhoon Aircraft. As we look forward, assuming minimal disruption to our supply chain and the ability of our customers to accept the product, the strength of our defense business should partially offset the expected pressure from the lower commercial aerospace volume.

Turning to our JPF program, we shipped 10,150 fuses during the first quarter and continue to expect to deliver 45,000 to 50,000 fuses for the full year. Demand for the JPF has remained robust, and we closed the quarter with a total backlog of over $300 million. Looking forward, our fuse production may experience some modest challenges from COVID-related disruptions. However, we do not currently anticipate a meaningful impact on our facilities or to our fuse delivery schedules.

Previously, we expected to deliver four new K-MAX in 2020, and we continue to make inroads with a number of customers looking to add capabilities of the K-MAX to their fleet. While we remain optimistic, we are reducing our expectations for 2020 deliveries to two aircraft due to the current economic conditions. The first quarter marks our first report with Bal Seal, and the first-quarter results for the business were in line with our expectations, and we worked diligently in the first quarter on our integration efforts. On the cost side, we've taken actions that will allow us to exceed the cost synergies we expected at the time we announced the transaction.

To achieve these results, we incurred approximately $500,000 in restructuring costs associated with a workforce reduction, which is expected to yield approximately $1.2 million in annualized savings. More importantly, our teams continue to work collaboratively and have identified a number of meaningful opportunities to drive future sales growth. I'm proud of the Kaman team members around the globe and thankful for their efforts and continued execution through this challenging time. As Rob will detail in our financials, we are fortunate to be supported by a strong balance sheet, and we believe we have ample liquidity to face challenges that may lie ahead.

Through continued innovation, which is core to the Kaman team, we will continue to find new ways to work safely and to support our customers through this unprecedented time. Now I will turn the call over to Rob for a closer look at the numbers. Rob?

Rob Starr -- Executive Vice President and Chief Financial Officer

Thank you, Neil, and good morning, everyone. Net sales from continuing operations for the first quarter increased to $207.3 million, an increase of 24.6% when compared to the prior year, resulting from a 10.5% increase in organic sales and the contribution of $23.4 million of sales resulting from our acquisition of Bal Seal. Gross margin for the quarter was 32.7%, relatively flat with the prior-year period. This included $1.2 million of inventory step-up costs resulting from the Bal Seal acquisition.

Adjusting for this item, gross margin for the period would have increased by approximately 40 basis points. This performance was driven in part by the addition of the higher-margin product portfolio at Bal Seal and the mix of JPF sales in the quarter, offset by higher volumes of sales from our lower-margin structures programs. SG&A as a percentage of sales increased to 29.4% for the quarter from 25.2% in the prior year. The increase in SG&A was primarily due to the inclusion of $1.8 million in nonrecurring third-party costs associated with our efforts to reduce general and administrative expenses, $8.5 million in nonrecurring costs associated with the acquisition of Bal Seal and $8.6 million in additional SG&A from the Bal Seal acquisition, which includes $1.7 million of intangible asset amortization expense.

Absent these costs, SG&A as a percentage of organic sales was 23%, an over 200 basis point decrease from the adjusted performance in the prior-year period. This improved performance is largely due to our G&A reduction efforts, which continued in the first quarter of 2020. The additional actions we took during the quarter will generate $4 million of annualized savings and is another step in driving improved efficiency across our organization. With these actions, total annualized savings is $9 million, and we will continue to prioritize these initiatives through the remainder of the year.

Internal research and development expenditures are expected to increase in 2020 over 2019. During the quarter, we incurred $4.9 million to support these programs, compared to $2.8 million in the prior-year period. On a consolidated basis, we recorded an operating loss of $4.4 million, compared to the operating income of $12.4 million in the first quarter of the prior year. This result was driven by higher corporate development costs, costs associated with the acquisition of Bal Seal, costs related to the TSA, an increase in restructuring costs and $6.9 million in costs associated with the purchase accounting for the Bal Seal acquisition, which includes $5.7 million in expense in the quarter related to the acquired employee retention program.

Adjusting for these items, operating income increased approximately 32% to $16.7 million from $12.6 million in the prior-year period. Adjusted EBITDA margin from continuing operations in the first quarter was $26.2 million or 12.6% of sales, compared to $18.8 million or 11.3% of sales in the first quarter of 2019. During the period, we had a diluted loss per share from continuing operations of $0.01, a $0.21 decrease over the prior-year period diluted earnings per share of $0.20. This was due to the lower GAAP operating income we recorded in the period.

Adjusted diluted earnings per share of $0.48 increased $0.27 from the $0.21 we earned in the first quarter of 2019. You will also note that for 2020, we will add a temporary line item to our income statement for the Bal Seal employee retention program. This is part of the $330 million purchase price paid for Bal Seal and is related to an employee retention plan that is scheduled to be paid out 12 months after the close of the transaction. As a result of the retention component of the plan, this portion of the purchase price is required to be recorded as an expense.

The total expense related to this item will be approximately $23 million in 2020 and is treated as a reduction in our purchase price for Bal Seal. Additionally, the inventory step-up costs for Bal Seal are now expected to be $2.4 million and will be fully expensed by the end of the second quarter of 2020. In total, we expect these nonrecurring costs related to the Bal Seal purchase accounting to total $25.2 million in 2020. As a reminder, 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.

While most of these activities have already been transitioned, we expect to complete the IT services transition during 2020, and we will continue to report both the costs and income on a quarterly basis. We incurred $4.1 million in costs associated with the TSA in the three-month fiscal period ended April 3, 2020. These costs are partially offset by $3 million in income earned from the provision of these services, which is below operating income on our income statement. Free cash flow usage in the quarter was driven by an increase in receivables due to lower collections in the quarter, increased working capital as we prepare for deliveries over the course of 2020 and employee-related cash payments such as the $10 million pension contribution made in February.

Given the uncertainty in the markets as a result of COVID-19, we wanted to take a moment to touch on our balance sheet and liquidity position. At the end of the first quarter, we held $271 million of unrestricted cash on our balance sheet and had significant capacity under our existing $800 million revolving credit facility, and we have no maturities on our debt until 2024. All of these metrics give us considerable financial flexibility as we progress through the ongoing challenges related to COVID-19. In addition, we have reduced discretionary spending and capital expenditures across the organization.

However, as Neal mentioned, Kaman was built on innovation, and in this vein, we will continue to execute on our growth investments, including R&D projects and growth capital expenditures. Moving to our outlook for 2020. Given the demand uncertainties, primarily in the commercial aerospace markets we serve, we have elected to withdraw our full-year guidance. In lieu of full-year guidance, we wanted to provide some metrics and data points to help frame business conditions for the remainder of the year.

Please note the percentages referenced are in relation to the midpoint of our previous sales outlook for 2020. Our defense business, including safe and armed devices, accounts for approximately 50% of our sales, and our expectation for these programs remains largely unchanged with opportunities for increased performance relative to our prior outlook. For JPF, we continue to expect shipments of 45,000 to 50,000 fuses in the current year, with the majority of these deliveries to our DCS customers, also unchanged from our prior forecast. Our commercial aerospace OEM business, reflecting the anticipated production rate declines recently announced by Boeing, Airbus and other OEMs, will drive lower sales volume in 2020.

In our commercial aftermarket business, we currently do not have enough visibility to provide a reliable forecast. In total, our commercial aerospace business accounted for approximately 30% of revenue, and our mix of OEM to the aftermarket in this space is approximately 80-20. With the information we have to date, we expect adjusted EBITDA margins in 2020 to be negatively impacted by lower overall volume, unfavorable mix, and inefficiencies related to social distancing and reduced staffing levels. Despite these headwinds, our adjusted EBITDA margin should hold up reasonably well due to the diversity of our product portfolio, the cost actions we've implemented to date, and the efforts of our operations team to mitigate the financial impact while meeting customer requirements.

Finally, we will remain focused on maintaining our ample liquidity and strong balance sheet as we move through the year. And as we look ahead, free cash flow is expected to show improvement through the balance of the year as we begin to convert our working capital build in the first half to cash over the remainder of the year. Before I turn the call back to Neal, I wanted to note that the framework we just provided assumes minimal disruption to our production facilities and supply chain, as well as the ability and willingness of our customers to accept the product. With that, I will turn the call back over to Neal.

Neal Keating -- Chairman, President, and Chief Executive Officer

Thanks, Rob. In closing, I want to thank our employees for their dedication during this difficult time, and reemphasize our commitment to their safety and well-being. We are proud of the results that we've achieved thus far, and we are committed to delivering for our customers that rely on our critical parts and services. Kaman's business portfolio has evolved significantly in the past 12 months, and as a result, the new Kaman is more focused and better positioned to navigate through this time period and deliver consistent growth in the long term.

Jamie?

James Coogan -- Vice President, Investor Relations and Business Development

Operator, may we have the first question, please?

Questions & Answers:


Operator

[Operator instructions] Our first question comes from the line Steve Barger with KeyBanc Capital Markets. Your line is now open.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Hey. Good morning guys. Rob, I hear you when you said you can't offer a reliable forecast for commercial aftermarket. But can you just broadly talk to the magnitude of what you expect, just to help us frame up the model a little bit? Are you thinking that OE or aftermarket could be down 30%, 50%? Just any broad numbers.

Rob Starr -- Executive Vice President and Chief Financial Officer

Yes. No. Steve, I appreciate that. And clearly, that is an area where our visibility is constrained, just given market conditions.

But I think if you were to kind of put a broad handle around it, if you're looking at 30% to 50% declines, that's not unreasonable. We certainly are aware that the aftermarket is going to get softer as the year progresses, just based upon market conditions on commercial airframes.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Yes. And I was trying to write the numbers down, but I think you said there will be about $25 million of nonrecurring costs related to Bal Seal. How much of that was 1Q? And what is the cadence for the rest of the year?

Rob Starr -- Executive Vice President and Chief Financial Officer

Yes. Sure. I mean, for the first quarter, as it relates to the purchase accounting, that was about $7 million, $6.9 million. I would expect a similar amount in the second quarter, Steve.

Then for the balance of the year, it will be about $5.7 million a quarter relating to the retention agreement. Because the inventory step-up, which is $2.4 million, that rolls off after the second quarter.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Got it. And so I guess, how should we be thinking about recurring SG&A on a dollar basis in 2Q, given all the cost actions that you've taken?

Rob Starr -- Executive Vice President and Chief Financial Officer

Yes. So if you take a look at our first quarter, if you kind of look at the base business, if you kind of adjust for some of the items, we were running around in the low 40s in terms of dollars for the base business. So you can kind of plug for the rest and figure out roughly where Bal Seal came in, in the first quarter. We do have a number of initiatives, as you can imagine, Steve, to manage our costs through the balance of the year.

But I don't think that's necessarily a very bad run rate to go with.

Steve Barger -- KeyBanc Capital Markets -- Analyst

OK. One more, and I'll jump back in line. Free cash flow was negative $61 million for the quarter, and I know there's a lot of moving parts around that. But do you expect to generate positive free cash flow for the full year? Or is this first quarter too big of a headwind to overcome when you annualize?

Rob Starr -- Executive Vice President and Chief Financial Officer

Sure. No. Good question, Steve. And no, our current expectation remains that we will generate positive cash flow for the balance of the year for a net basis for the full year.

Steve Barger -- KeyBanc Capital Markets -- Analyst

OK. Thanks.

Rob Starr -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Pete Skibitski with Alembic Global. Your line is now open.

Pete Skibitski -- Alembic Global Advisors -- Analyst

Good morning, guys. Rob, on the large use of working capital in the first quarter, I think in some of the text, you called out the JPF DCS contract. Was that a pretty meaningful driver? It sounds like maybe it's starting to reverse already in the second quarter.

Rob Starr -- Executive Vice President and Chief Financial Officer

Yes. A couple of things. Yes. The increase as it relates to both our inventory, as well as the AR, our DCS program is definitely a significant contributor to that.

We have a couple of items we're working through with one of our customers that we expect to resolve without an issue that's driving part of that on the AR side. So really, when we look at the customers where there's not a contractual or, how would you want to say, an administrative manner, they're paying very much on schedule. So we have a great relationship with these customers. And we'd certainly have them kept current on our recent shipments and expect this issue to resolve as we work through the balance of the year.

Pete Skibitski -- Alembic Global Advisors -- Analyst

OK. And the inventory is just building for deliveries the balance of the year?

Rob Starr -- Executive Vice President and Chief Financial Officer

Yes. So when you look at the inventory, JPF, once again, an important contributor to that. But also a lot of our overtime programs, which are in largely defense, we are getting ahead of the curve because there is increased demand. So when you look at a program such as UH-60, the BLACK HAWK, and combat rescue helicopter and others, we're expecting to have increased shipments year over year.

And so we're getting a good head start on that.

Pete Skibitski -- Alembic Global Advisors -- Analyst

OK. OK. That sounds great. Maybe one last one for me.

I guess the revenue was a little surprising because I feel like typically, you guys are a little light in the first quarter and things build more in the second half of the year. And anything different this year with a strong first quarter?

Rob Starr -- Executive Vice President and Chief Financial Officer

Well, yes, I would say this, we've been working very hard with our units to try to more level load. I mean, as everyone on the call is aware, usually, our fourth quarter, we outperformed quite a bit. So our business units have made a lot of progress. Really, we saw increased sales across, really, virtually all of our businesses in the first quarter.

So a very good result. Generally speaking, our structures programs were up 15%, 20% across the board. And bearings, our bearings franchise had a tremendous quarter, up 10% year over year. So it was just overall really good execution on the part of the team in light of the issues they were working through as the COVID-19 crisis began to unfold.

Neal Keating -- Chairman, President, and Chief Executive Officer

And Pete, I would just add that, I would reinforce what Rob said about the team really doing an excellent job. The other thing is that, as you'll remember, through 2019, we talked about strong incoming order rates. So we've had very, very strong backlog, and we actually had very strong orders in the first quarter. On an organic basis, our orders were up 24%, and when you add in Bal Seal, orders were up 46%.

So we were really pleased with what the team was able to achieve. But we were also really pleased with the incoming order rates in the third and fourth quarter of last year and continued very strong orders in the first quarter of this year. Now granted, we expect that to tail off some in the second quarter but starting from a strong position.

Pete Skibitski -- Alembic Global Advisors -- Analyst

Thank you for the color, guys.

Rob Starr -- Executive Vice President and Chief Financial Officer

Yeah. Thank you.

Operator

Thank you. Our next question comes from the line of Seth Seifman with JP Morgan. Your line is now open.

Seth Seifman -- J.P. Morgan -- Analyst

Thanks very much, and good morning.

Rob Starr -- Executive Vice President and Chief Financial Officer

How are you?

Seth Seifman -- J.P. Morgan -- Analyst

Good. Thanks. So the good performance in the defense area, is there some share gain that you guys have experienced on UH-60 over the past year or so that's helping to drive it? Or is it just kind of the overall volumes on the program?

Rob Starr -- Executive Vice President and Chief Financial Officer

Yes. Seth, this is Rob. Yes. Based on the market intelligence we have, yes, we've seen an increase in the market share as it relates to the UH-60 program.

Neal Keating -- Chairman, President, and Chief Executive Officer

And also, Seth, on the combat rescue helicopter, we have more content on the combat rescue helicopter. So a little bit of a volume mix shifts to that, it's positive as well.

Seth Seifman -- J.P. Morgan -- Analyst

OK. OK. Great. And then so in the slides, you talked about --

Neal Keating -- Chairman, President, and Chief Executive Officer

Seth, I'm sorry. The other thing that we probably should have talked about, and I'm glad you asked the question, is that we have very good content on the P-8. And that continues to do very well for Boeing for both U.S. and FMS sales.

So we actually have a really nice content on that aircraft. So that helps us as well from a military perspective.

Rob Starr -- Executive Vice President and Chief Financial Officer

Seth, are you there? OK. OK. Seth, are you on mute maybe?

Neal Keating -- Chairman, President, and Chief Executive Officer

Do we have our operator still?

James Coogan -- Vice President, Investor Relations and Business Development

Yeah. Operator?

Operator

Our next question comes from the line of Chris Dankert with Longbow Research. Your line is now open.

Rob Starr -- Executive Vice President and Chief Financial Officer

Chris?

Operator

Thank you. [Operator instructions] Our next question comes from the line of Steve Barger with KeyBanc Capital Markets. Your line is now open.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Can you guys hear me?

Neal Keating -- Chairman, President, and Chief Executive Officer

Yes.

Rob Starr -- Executive Vice President and Chief Financial Officer

Yes.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Neal, in your prepared remarks, you mentioned new opportunities you've identified to drive future sales growth at Bal Seal. Can you talk more about that?

Neal Keating -- Chairman, President, and Chief Executive Officer

Sure. It's been interesting because we're very excited, as we said from the outset, about the opportunity for some of the synergies across Bal Seal. And we knew that working at common customers, both in the medical and aerospace industries, that it would enable us to gain some synergies there, we thought, from a sales perspective, although we don't work those into our economic models because we're too old for that. But I think that the steps that we took early on and actually, the team lead that we have for the integration program was our Head of Business Development, so sales and marketing for our Specialty Bearings group.

And he, in conjunction with a number of -- Gary and Brent and Rick and the team at Bal Seal have really gelled around taking full advantage of these opportunities. And it's not just medical where we expected it, but some of the technologies that they have that are in the aerospace and defense area. About 18% to 20% of their area was -- their business was aerospace and defense before. When we acquired GRW, we were able to ramp that up pretty quickly because of just the context and application knowledge we have, and we're seeing that on the aerospace side as well.

So we couldn't be more pleased. And I think a lot of it goes down to the people that we have done that work in the trenches day to day.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Yes. If I go back to the original Bal Seal slides, there was something in industrial that specifically cited food-grade seals and food-grade detachable tools. Does that make the industrial business for Bal Seal a little more defensive? Or how big is the defensive side of industrial for them?

Neal Keating -- Chairman, President, and Chief Executive Officer

I think if we look at the profile of their business, they don't have very much in commercial aerospace. We think we can help them with that and maybe gain some share there in this downturn. But more than 50% of their business was medical. Now we expect that we will have some impact from their implantables business being down in the near term because of the deferral of elective procedures, but we think that that will certainly rebound quickly.

And also, I think your point about the industrial market being defensible is a good one because they are predominantly in the food and beverage industry, at least to date in industrial. So everybody's got to eat, and so we like that market exposure as well.

Steve Barger -- KeyBanc Capital Markets -- Analyst

All right. Great. In the past, I know you've talked about having some lights-out manufacturing capacity. Does all this get you to invest more in automation and robotics across the platform?

Neal Keating -- Chairman, President, and Chief Executive Officer

It's a good question, Steve. I think that we have had a track record of investing in automation, and it's one of the things that we've talked about on a lot of our calls. Will it cause us to do some things differently? It probably will. But I just want to make sure that everybody recognizes that we've got a great workforce that they are able to manage the automation that we bring in extraordinarily well, and we have had a great track record of increased output with relatively flat headcount for years.

So will we do more? Probably, but a lot of that will be because of the advancements in whether it's robotics, flexible automation or other advancements in machine tools. But I think we do pretty good today.

Steve Barger -- KeyBanc Capital Markets -- Analyst

A second point, and then we'll see if those other guys are back in line. How much inventory visibility do you have for commercial OE? I guess with just lower build rates coming, do you expect a lag before the supply chain or the customers start pulling product through again? Or how are you thinking about kind of the work-in-progress inventory in the system?

Neal Keating -- Chairman, President, and Chief Executive Officer

That's one of the questions, to be perfectly honest, we struggle with, too, is trying to assess how much inventory there is in the pipeline and where it is. Because as we commented, I think on the fourth-quarter call, we have something between 23 and 26 different customers that we ship to on the 737 MAX, and we were still shipping in the fourth quarter and indeed, shipped in the first quarter of this year. But across the board, we have customers at all different levels, at all different setbacks from final production. So it's hard to say.

Do we expect that we will see some orders tail off here in the near term? Without question. And I think on the next couple of calls is when we'll be able to report back a little bit more on what we're seeing from incoming order rates and what the requested delivery time is for those orders. And from that, we'll be able to triangulate somewhat on the inventory. But I wish we had a better answer for you today because it would mean we had a better answer for ourselves.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Yeah. Understood. Thanks for your time.

Neal Keating -- Chairman, President, and Chief Executive Officer

Yeah. Thank you.

Rob Starr -- Executive Vice President and Chief Financial Officer

Thanks, Steve.

Operator

Thank you. Our next question comes from the line of Seth Seifman with J.P. Morgan. Your line is now open.

Seth Seifman -- J.P. Morgan -- Analyst

Hey, guys. Thanks very much.

Rob Starr -- Executive Vice President and Chief Financial Officer

Hey, Seth.

Seth Seifman -- J.P. Morgan -- Analyst

I must have got -- I must have dropped off. Thanks for getting me back. So just a couple of quick follow-ups. The OEM aftermarket split that you gave in the slides, the Boeing and Airbus split, I guess, the implication is that half of the OEM sales are not for Boeing and Airbus platforms.

Is that correct? And if so, what are they for?

Neal Keating -- Chairman, President, and Chief Executive Officer

I think that that would be correct, Seth. And one of the things that we talk about is the diversity of products and platforms. And the balance goes across the rotorcraft industry. We do a lot of business with Sikorsky.

We do a lot of business with Bell. We do a lot of business with Airbus helicopter. We certainly have all the regional and business jet platforms in there as well. And actually, we had very, very strong incoming order rates in the first quarter for both business and regional aircraft.

And also in there, well, the driveshaft business for helicopters as well, which, again, as you go back to prior earnings calls, you would see that we had been investing quite a bit in our flexible driveshaft business. And now we've done quite well on new platforms for helicopters with that and have gained share. And also, we do a fair amount of work with Rolls-Royce. So in some of the other engine folks.

So that's really the balance of that business.

Seth Seifman -- J.P. Morgan -- Analyst

OK. OK. Great. And then maybe as a follow-up.

In terms of the OE aftermarket split, if we put that onto the bearings business, would that be a little bit more -- that would be more even? Or would it still be predominantly OEM, but maybe not 80-20, maybe more like a 60-40 or something like that?

Rob Starr -- Executive Vice President and Chief Financial Officer

Yes. So Seth, I mean, I think if you were to look at the bearings business, then I think you're right, I mean it would tilt a little more toward the aftermarket relative, but not a lot. I wouldn't say I wouldn't take it any lower than like a 70-30 split. And that can shift quarter to quarter depending on their order book.

Seth Seifman -- J.P. Morgan -- Analyst

OK. OK. Very good. That takes care of all the questions I had.

Thank you very much.

Neal Keating -- Chairman, President, and Chief Executive Officer

Thanks very much, Seth.

Rob Starr -- Executive Vice President and Chief Financial Officer

Thanks very much, Seth.

Operator

Thank you. Our next question comes from the line of Chris Dankert with Longbow Research. Your line is now open.

Chris Dankert -- Longbow Research -- Analyst

Hey. Good morning, guys. Sorry. I dropped off there for a second.

Rob Starr -- Executive Vice President and Chief Financial Officer

Good to have you back. Yeah. No worries.

Chris Dankert -- Longbow Research -- Analyst

Sorry if I missed it, thinking about K-MAX, just wanted to circle back there. I guess we're now looking for two airframes for the year. I guess was that cancellation-driven? Were those just -- were slowing production down? And then I guess, if you could also comment on, are we delivering those five unmanned kits still this year? Just any commentary there would be great.

Neal Keating -- Chairman, President, and Chief Executive Officer

Yes. A couple of things. We just looked at the economic conditions, and that's really what's driving us to reduce our expectation for sales from four to two for the year. We'd like to get a surprise and be able to restore that to four.

The pipeline that the air vehicles team is working on is very strong right now, and we feel good about that. And in fact, even just this morning, the Department of Forestry issued their emergency use contracts, and the number of K-MAX went up year over year, from eight to 11. So we actually have 40% of the fleet that the Department of Forestry has this year under contract for emergency use. And the kit is on schedule for flight in 2020, but we would probably not deliver that to customers until 2021.

Chris Dankert -- Longbow Research -- Analyst

Got it. Got it. That's good news. And then just if you could circle back to structures for a moment.

Obviously, we touched on the BLACK HAWK wins there. I guess, is the A-10 rewing program, is that fully ramped at this point? Or are we still going to see the production rates keep growing through the year?

Neal Keating -- Chairman, President, and Chief Executive Officer

Actually, it's really going to start to ramp much more so next year. So we were very excited and pleased to get that contract, and we're just in the very, very early stages of that.

Rob Starr -- Executive Vice President and Chief Financial Officer

Yes. And Chris, if I could. One of the things you'll see is, from an inventory perspective, there are some long lead items there that we will be starting to acquire toward the second half of the year to make sure that we're ready for production in early 2021.

Chris Dankert -- Longbow Research -- Analyst

OK. Good news.

Neal Keating -- Chairman, President, and Chief Executive Officer

And that's one of the areas where we've seen really nice improvement from year to year. As you know, we completed our manufacturing footprint consolidation across our composites and aerostructures businesses in 2019. And the additional volume that we have running through those facilities, when combined with the new order wins they have, is really driving a nice improvement in their performance from year to year. We were really pleased to see it.

Chris Dankert -- Longbow Research -- Analyst

Got it. Got it. So there's still a lot of runways there, and then that's -- glad to hear that. I think that's really all I had.

I'll turn it back over, but thanks so much for the call this morning, guys.

Rob Starr -- Executive Vice President and Chief Financial Officer

Yeah. Sure. Thank you.

Neal Keating -- Chairman, President, and Chief Executive Officer

Thank you, Chris.

Operator

Thank you. Our next question comes from the line of Pete Skibitski with Alembic Global. Your line is now open.

Pete Skibitski -- Alembic Global Advisors -- Analyst

Hi, guys. Yeah. Just one more kind of broad-brush question. I imagine international business development is pretty challenging right now.

But I just was wondering if you could update us on -- you had wanted to book, I think, an SH-2 support contract in Egypt. Just maybe an update on that. And also kind of JPF, new JPF DCS opportunities, how the market there is going?

Neal Keating -- Chairman, President, and Chief Executive Officer

You're right. International business development face to face is down. But like all of us, they are adapting to the new environment and doing a lot by video and phone. It's not as effective as being there face to face, there's no question.

We continue to make progress and are pleased with the progress that we're making on our JPF DCS opportunities. And the Egypt SH-2 is moving a little bit more slowly than we would like. So I know those are broad-brush characterizations, but that's really all I can provide.

Pete Skibitski -- Alembic Global Advisors -- Analyst

OK. Fair enough. Thanks, guys.

Neal Keating -- Chairman, President, and Chief Executive Officer

OK. Thanks, Pete.

Operator

Thank you. We do have a follow-up question from the line of Seth Seifman with J.P. Morgan. Your line is now open.

Seth Seifman -- J.P. Morgan -- Analyst

Oh, hey. Just really a quick one as I was going through the model here. The final payment for Bal Seal, did you say that would be in the first quarter of 2021?

Rob Starr -- Executive Vice President and Chief Financial Officer

Yes. So the payment for the retention agreement will happen in the first quarter of 2021. But there's -- it's really a noncash flow item. I mean, we have -- I mean, it's in restricted cash on our balance sheet.

So when you look at our balance sheet and you see the restricted cash --

Seth Seifman -- J.P. Morgan -- Analyst

Right. That's the restricted cash. So that's the difference between the 304 on the cash flow statement and the 330 or so purchase price?

Rob Starr -- Executive Vice President and Chief Financial Officer

That's correct.

Seth Seifman -- J.P. Morgan -- Analyst

Right. OK. OK. Got it.

Got it. Cool. Thank you.

Rob Starr -- Executive Vice President and Chief Financial Officer

You're welcome.

Neal Keating -- Chairman, President, and Chief Executive Officer

Thank you.

Operator

Thank you. This concludes today's question-and-answer session. I would now like to turn the call back to James Coogan for closing remarks.

James Coogan -- Vice President, Investor Relations and Business Development

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

Operator

[Operator signoff]

Duration: 49 minutes

Call participants:

James Coogan -- Vice President, Investor Relations and Business Development

Neal Keating -- Chairman, President, and Chief Executive Officer

Rob Starr -- Executive Vice President and Chief Financial Officer

Steve Barger -- KeyBanc Capital Markets -- Analyst

Pete Skibitski -- Alembic Global Advisors -- Analyst

Seth Seifman -- J.P. Morgan -- Analyst

Chris Dankert -- Longbow Research -- Analyst

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