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Kaman Corp (KAMN)
Q4 2020 Earnings Call
Feb 26, 2021, 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 and welcome to the Kaman Corporation Q4 2020 conference call. [Operator instructions]
I would I would now like to turn the call over to the today's conference call to Mr. James Coogan, you may begin.
James Coogan -- Vice President, Investor Relations and Business Development
Good morning. I'd like to welcome everyone to Kaman's fourth Quarter 2020 earnings call. Conducting the call today are Ian Walsh, President and Chief Executive Officer and Rob Starr, Executive Vice President and Chief Financial Officer. Before we begin, I'd like to note that some of the information discussed during today's call will consist of forward-looking statements setting forth our current expectations with respect to the future of 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 it's business. The company's actual results could differ materially from those indicated in any forward-looking statements due to many factors. The most important of which are described in the company's latest filings with the Securities and Exchange Commission, including the Company's fourth Quarter 2020 results included on Form 10-K and the current report on Form 8-K filed yesterday 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 our outlook for 2021. You can find this presentation at www.kaman.com/investors/presentations.
With that, I'll turn the call over to Ian Walsh.
Ian K. Walsh -- President and Chief Executive Officer
Thank you, Jamie. Good morning everyone and thank you for joining our fourth quarter 2020 earnings call. I'll start this morning by providing some highlights on the quarter and full year, followed by an operational and business update before passing the call over to Rob for a more detailed discussion of our financial results for the quarter and our expectations for 2021. We closed our fiscal year on solid footing, and through our teams dedicated efforts we successfully navigated a difficult set of events in 2020. The pressure in some of our critical and mortgage notwithstanding, we delivered sales in 2020 $784.5 million, which was up 3% compared to the prior year. Our higher sales were attributable to the acquisition of Bal Seal and higher volume for our Joint Programmable Fuze,
Partially offset by decline in sales in a more pandemic-sensitive end markets of commercial aviation, medical and to a lesser extent, industrial.
Turning to profitability, our adjusted EBITDA margin for the full year was 13.1%, which was on par with the prior year despite the sharp decline in sales for higher margin commercial aviation medical markets. The ability to maintain our adjusted EBITDA margin was a result of strong profitability of our Joint Programmable Fuze program and the quick and decisive actions we took to reduce our cost structure during the course of the year, combined with our G&A reduction efforts we begin in 2019, the sale of our distribution segment.
The GAAP diluted loss per share from continuing operations of $2.54 for the year was impacted by significant non-cash impairment charges. Our full year adjusted diluted earnings per share was $2.11, an increase of nearly 30% when compared to the prior year of $1.63. The command team accomplished a lot in 2020, and I would like to spend a few moments highlighting some of these items in detail. First and foremost, we kept the safety of our global workforce as a priority through our ongoing pandemic. We found new ways to work in this environment and continue to deliver essential products to our customers, both on time and the consistent high-quality that is expected from Kaman.
Second we integrated the acquisition of Bal Seal achieving the cost targets we expected early in 2020. This transaction represents the largest acquisition in the history of our company and we are proud of the team's efforts while largely working on the integration remotely in the midst of this pandemic. The team worked hard to identify new product opportunities that will provide our customers differentiated integrated solutions. As previously disclosed Bal Seal was impacted by a ransom attack in December. I'm pleased to report that our team reacted quickly and effectively restoring normal operations by mid-January without paying a ransom. While we do not anticipate any meaningful lost volume some shipments were delayed at the end of 2020 in the first few weeks of 2021, which we are confident we will fully recover over the course of the year. Looking forward, we remain enthusiastic about the prospects for Bal Seal as part of our portfolio. The products and capabilities are right in line with our objectives for the future command, which is to focus on highly engineered solutions that are critical to our customers. While the pandemic delayed the visibility of its contribution in 2020 we are confident that it will be a core part of the command story going forward.
Third, subsequent to year-end, we made significant progress in our portfolio reshaping with the divestiture of our UK composite operations. After thoughtful analysis we determined that our UK operations have historically underperformed and we'd be more appropriately suited with another owner. The divestiture will allow us to redeploy capital, resources and management time back to our core operations while improving our overall margin profile.
Lastly, we architected and deployed a new operations excellence model across all our businesses focused on margin expansion, improved cash generation and driving better ROIC is over time. We are exiting the year in strong financial health, leaner and ready to grow as the market begins to recover. During the year, we continued our focus on our G&A reduction efforts, which began in 2019, and we acted decisively implementing additional cost reductions as the effects of the pandemic materialized in the first quarter. As we move into 2021 we have a strong balance sheet and available capacity under our revolving credit agreement. This provides ample flexibility to continue our portfolio reshaping and make investments in new technologies, which will enable us to continue to build command.
Turning to our product offerings and beginning with our Specialty Bearings products, as anticipated sales were under pressure in the fourth quarter due to the continued impact of COVID-19 and commercial aviation. As we enter 2021 we are seeing an increase in order rates for our medical and industrial products, and we remain very optimistic on the long-term outlook for our bearings business and view it as critical to our long-term success. We benefit from the innovative nature of these products as they are some of the strongest performing product offerings in our portfolio.
For our Joint Programmable Fuze program 2020 was a record year for production and delivery. Our team worked tirelessly to deliver 48,749 JPFs up more than 17% percent when compared to 2019. These deliveries were weighted toward our higher profit DCS customers leading to record profit contribution from this product during the year. We expect to deliver 32,000 to 35,000 JPFs in 2021, and while this is below 2020 peek deliveries the volume is in line with historic delivery levels. We continue to see demand for this product, albeit lower levels than we have seen in the past. The recent change in administration has led to uncertainty in the timing of delivery for one of our key customers as the new administration has indicated its desire to review the sale of defense products to two Middle Eastern countries. The outcome of this review remains uncertain, and therefore, we have elected to temporal remove a previously anticipated order from a current guidance, which will impact our full year outlook for 2021 as Rob will detail shortly.
Our K-MAX program, we continue to see strong demand with the sale of an additional aircraft during the fourth quarter and the receipt of a new order in January for our aircraft delivery in the first quarter of 2021. For the full year, we expect to sell four aircrafts, and we continue to believe the K-MAX represent a unique value proposition to both commercial and military customers. We are enthusiastic about the product pipeline and very excited about the K-MAX unmanned development program, which continues on schedule to Unites States Marine Corps when expect a demonstration of the upgraded US capability later this year.
We have made a lot of progress over the past couple of years to reshape our business beginning with the divestiture of distribution, the subsequent acquisition of Bal Seal and the continuing with the recent divestiture of our UK composite structures business. As we exit 2020 the strong balance sheet and little borrowing capacity, we expected to pursue additions to our portfolio. While challenges clearly remain ahead is a dynamic continues to affect our business and in incoming administration lays out our strategic objectives, we are very well positioned to emerge stronger, more profitable and more resilient.
Now I will turn the call over to Rob for a closer look at the numbers. Rob?
Robert D. Starr -- Executive Vice President and Chief Financial Officer
Thank you, Ian, and good morning everyone. Today I will walk you through our fourth quarter results, before turning to our outlook for 2021.
During the fourth quarter net sales from continuing operations were $185.3 million down 22% when compared to $237.8 million in the prior year. As expected, our fourth quarter results were affected by the adverse effects of COVID-19 on our commercial aerospace and medical businesses. We also had a difficult comparison for our Joint Programmable Fuze program that was partially offset by contributions from Bal Seal. Despite the lower deliveries of JPF in the fourth quarter, 2020 was a record year for the JPF program.
Turning to our end markets, defense, which has historically contributed about 50% of our sales mix was down 23.6% in the fourth quarter of 2020 compared with the year ago period and down 25.2% sequentially. The sequential decrease was driven by fewer deliveries of our joint Programmable Fuze.
Sales in our commercial business in general aviation markets, which historically contributed 30% of our sales mix, we're 40% lower compared to the year-ago period as expected, but increased 6.4% sequentially. The sequential increase was driven by 13.7% increase in sales to Boeing and Airbus and a 2.7% increase in sales for our general and business aviation products, which included the sale of 1 K-MAX aircraft. While we continue to expect sales of our commercial aviation products to be under pressure through the first quarter and we expect a more meaningful recovery in the back half of the 2021, the diversity of our product offering in a broad range of platforms we support in general and business aviation is expected to partially offset these declines.
In our medical end market, which accounts for about 10% of our historical sales mix, organic sales increased to 1.3% from the year ago period. The second quarter performance for these products with the lowest point for the year, and while we've seen improvement the rate recovery has been uneven. We continue to expect that this market will rebound and that we will have the ability to recapture of much of the missed volume during the course of the year, which will drive improved performance for these products in 2021.
Finally, sales in our industrial end markets, which comprised about 10% of our historical sales mix were up 37% from the year ago period as a result of the Bal Seal acquisition. Sequentially sales were up 5.8%. We are seeing relatively better performance in this end market, given the improvements in overall global economic conditions.
Gross margin for the quarter was 29.3% compared to the 30.5% in the prior year period, the 120 basis point decline over the fourth quarter of 2019 was primarily driven by mix and reduced volumes for our commercial bearings. Investments continue to be a primary focus for us as we look to drive future organic growth.
Spending in 2020 on IR&D and BNP. which is included in our SG&A line on the income statement. Increased 11% over 2019 to $21.7 million. While SG&A as a percentage of sales increase in the fourth quarter and full year, the increase was largely due to the costs related to our acquisition of Bal Seal. SG&A as a percentage of organic sales was 23.1% for the full year in line with 2019 despite the reduction in organic sales.
Restructuring and severance expense in the period was $0.5 million compared to $1 million in the fourth quarter of 2019. In connection with the sale of and distribution in 2019 we committed to reduce our G&A expense by $15 million to $20 million on a run rate basis as we exited 2020, and our activities since then have allowed us to reach the high end of this range. Additionally, in response to the volume declines we have experience due to COVID-19 we've been actively reducing out costs. In total, our activities in 2020 reduce cost by approximately $15 million on a run rate basis and demonstrates our ability to flex our cost structure. These actions resulted in approximately $26 million realized savings in 2020.
Cost control remains a focus and is a primary driver for our ability to hold adjusted EBITDA margins in 2021 despite the lower sales volumes and product mix we expect for the year. On a consolidated basis against the backdrop of lower sales we recorded an operating loss of $38.2 million compared to the operating income of $14.8 million in the fourth quarter of the prior year. On an adjusted basis, operating profit was $5.6 million or 3% of sales compared to the 30.2% or 12.7% of sales in the prior year period.
As we have mentioned previously with the sale of distribution, we agreed to provide certain services such as tax, treasury, human resources and IT during the transition period. We plan to complete these activities during the first quarter of 2021.
Adjusted EBITDA from continuing operations in the fourth quarter was $17.3 million or 9.2% of sales compared to the $36.7 million or 15.5% of sales in the fourth quarter of 2019. We recorded a diluted loss per share from continuing operations of $1.13 compared to diluted earnings per share of $1.22 in the prior year. Adjusted diluted earnings per share 41% in the quarter compared to the $0.80, adjusted diluted earnings per share in the fourth quarter of 2019. The primary adjustments in the current quarter included the impairment loss on the sale of the UK assets held for sale and Bal Seal acquisition related expenses.
During the quarter, we generated free cash flow of $65.3 million reducing our free cash flow usage for the year to $1.3 million. Cash flow performance for 2020 was impacted by delay in the collection of a significant Programmable Fuze DCS receivable.
Moving to our outlook for 2021, we expect sales in the range of $725 to $745 million and we expect to deliver adjusted EBITDA margin at the consolidated level in the range of 11.7% to 13%. This anticipated moderation in adjusted EBITDA compared to 2020 is due to the expected sales mix in the year, the continued impact of COVID-19 and the decision to remove and expected JPF DCS order from our 2021 outlook.
For the full year 2021, we currently expect earnings per diluted share to be in the range of $1.55 to $1.87. It is important to note that we have removed a previously expected JPF DCS order from all of our guidance ranges as the new administration and the Department of State assess foreign military sales. This volume was in our original plan and a favorable outcome in 2021 would increase our expected sales and diluted earnings per share above 2020.
We expect GAAP cash flow from operating activities from continuing operations in 2021 to be in the range of $25 million to 35 million, leading to adjusted free cash flow of $30.1 million to $40.1 million, and includes a $10 million discretionary pension contribution. GAAP operating cash flow for 2021 will include a $25.1 million payment to Bal Seal employees and has been accounted for as compensation expense to command under ASC 805 in 2020. This amount represents a portion of the purchase price we pay for Bal Seal and we will adjust this out of our cash flow results for 2021. Additionally, we will see net periodic pension benefit of approximately $26.3 million, expect interest expense for the year of approximately $16.4 million and estimate our annualized tax rate at approximately 24%.
Finally, and consistent with prior years we expect the cadence of earnings to be weighted toward the second half of 2021 with approximately 30% of earnings in the first half and approximately 70% of our earnings in the second half of 2020. In conclusion, we are well positioned to continue to execute on our strategy and manage the business throughout this rapidly changing operating environment.
With that I will turn the call back over to Ian.
Ian K. Walsh -- President and Chief Executive Officer
Thanks, Rob. 2020 was a challenging year and I'm very proud of the work the team put forward to support each other and our customers. We see positive signs as market stabilize and begin to recover ad we are excited about the work we have done to position the business for growth in the near future. Before we open the lines for questions, I wanted to share two pieces of exciting news, first three of our business units had the honor provide technologies that contributed to the successful landing of NASA's perseverance Rover engine Ingenuity helicopter on Mars. We are proud to have participated in the program and our solutions are playing a part of this historic mission.
And second, we were recently recognized by Forbes as one of America's best midsize employers. Forbes ranked 500 midsized employers by surveying 50,000 Americans working for businesses with at least 1,000 employees. Kaman ranked 127 out of 500. This is a testament to the strength of Kaman into our core values of respect, excellence accountability creativity and honor that we strive to achieve every day.
With that, I'll now turn the call back to Jamie.
James Coogan -- Vice President, Investor Relations and Business Development
Thanks, Ian. Operator, may we have the first question please.
Questions and Answers:
Operator
[Operator Instructions] Our first question comes from Steve Barger with KeyBanc Capital Markets.
Steve Barger -- KeyBanc Capital Markets -- Analyst
Hey, good morning guys. Good morning guys.
Ian K. Walsh -- President and Chief Executive Officer
Good Morning Steve. Good morning Steve.
Steve Barger -- KeyBanc Capital Markets -- Analyst
Ian, given the revenue guidance, I just want to start on how command goes forward from here. On the last call you talked about three focus items, organic growth, executing M&A, deploying a focused operating system, can you talk about what you intend to do to drive organic growth from here.
Ian K. Walsh -- President and Chief Executive Officer
Yeah, sure. Steve, I think that's a fair question and and something that I'm excited to talk a little bit about. On the first kind of objective, if you will, an organic growth, I mean I'll start by saying, this was a challenging year for everybody. All our markets, end markets were down technically, is like it was for a lot of folks, but what I am you know when I came aboard here and worked hard in the last quarter with our teams is really trying to understand where opportunities were, and so know we agree that with the best time to really double down if you will, on product development is when you're in a down cycle, and that's exactly what we're doing. So, we've increased our [Indecipherable] BNP this year in from there we're doing a lot of work to accelerate our new product development processes at each of the BUs, we're strengthening our engineering capability, just talked about this with our board recently. All of that to me is designed to kind of position us for this accelerated kind of core profitable growth when the markets do return. And I'll just give you a couple examples, Bal Seal for example great business probably two nicest plants I've ever seen. Really high-end technology, they're doing a lot of automation with their processes right now to drive cost out. They've got some really exciting new product developments on the brain in neuro transmitter side of things, shifting over to where we're going with UAS and K-MAX with the Marine Corps and some spiral opportunities, very exciting, to include some work we're doing for example height-of-burst and KPP. We've talked in the past, we just certified our first sale or I sell at Kamatics around Titanium Diffused Hardening Xchecks, which is a small part a business with extremely profitable business, just got a PMA within Canada authorization. So, there is a lot of things going on and we're really trying to fuel that that kind of that innovation side of things and doubling down, like I said on the engineering side, and really thinking about our front-end part of the business, which is again goes back to the operating, I'll talk about in a second.
So the organic piece to me is so critical for us and we're all kind of living through this pandemic and we can talk more about the end markets, and what we're seeing here, but the organic growth piece is huge because if you guys all know we've got a really solid chunk of our business that has tremendous contribution margins and it hurts us when the markets go down, but it's just fantastic when those markets recover, and that's what we prepared to do and really even chip away more at the total cost structure.
On the inorganic side, real quick, no question about it, we've got a bunch of things to think about where we want to go and leveraging our balance sheet. So for example, we've created a standard meeting every week, which we now start to cycle through and look at what those M&A opportunities should be. We've had a recent we're adding resources to our M&A team, we talked about that last time and we've actually gone back and revamp some of the criteria by which we're looking at certain M&A, and that's in line with an effort that we started last year to really understand the drivers of this business and we want to make sure that that next acquisition, which we're very excited to make is the right one and drives the right results.
And the last one, which again is in play right now is opex model, [Indecipherable] here now and in the teams complete is actually down working with our businesses this week. We've rolled that out. We've deployed it. We've got 5 pillars around it, we've got new operating reviews around it month to month to really drive that the margin expansion from across the entire value stream for each business. And just on top of that to put a fine point that all of that I just talked about, but certainly, that the operating model is designed to understand where each of our businesses today and where they need to be in the short period of time to hit top quartile performance, and that's what that operating model is designed to do.
Steve Barger -- KeyBanc Capital Markets -- Analyst
Really appreciate that comprehensive answer. When you think about the organic opportunities, you talked about in the M&A strategy and you just think longer term, how do you envision the mix here? Does it make sense to be so heavy to defense or what direction do you want to push the company?
Ian K. Walsh -- President and Chief Executive Officer
Yeah, it's, we are absolutely aligned with the strategy that we had, which was to leverage, you know the capital we have to go after businesses that sit in the highly engineered side of the house. Now what that means then, which is interesting and I'm sure you guys know this, and the last 6 months, I feel very comfortable got my arm and heads around this business, we have a lot of end customers, but fundamentally it's driving toward that the higher end, higher highly engineered parts that then play a role in a lot of those end markets. Defense? arguably I think is probably going to shift down a little bit just by the nature of what we're trying to do and the commercial side, medical, industrial, those are businesses that we think are going to have some nice upside for us.
Steve Barger -- KeyBanc Capital Markets -- Analyst
Appreciate it, thanks.
Ian K. Walsh -- President and Chief Executive Officer
Yeah. You're welcome.
Operator
The next question comes from Pete Skibitski with Alembic Global.
Pete Skibitski -- Alembic Global Advisors -- Analyst
Hey, good morning guys. Guys just want to understand 2021 revenue guidance a little bit better. On the sale of the UK composites business, I guess, that's the Brookhouse Holdings Unit, and so that's about a $20 million headwind to revenue guidance for 2021, is that correct?
Ian K. Walsh -- President and Chief Executive Officer
That's correct. About, yeah, about $22 million
Pete Skibitski -- Alembic Global Advisors -- Analyst
Okay. And then the loss that you talked about, is that a normal operating loss or that does not include the impairment?
Ian K. Walsh -- President and Chief Executive Officer
Yeah. that is correct that excludes the asset impairment as a result of the asset held for sale accounting treatment.
Pete Skibitski -- Alembic Global Advisors -- Analyst
Okay. It includes the impairment?
Ian K. Walsh -- President and Chief Executive Officer
No, no, it does not, does not include the impairment. I mean, if you're referring for me to the $7 million, yeah, no, that is, that is an operating loss.
Pete Skibitski -- Alembic Global Advisors -- Analyst
Okay. Okay. And then on the 7,000 fuzes. Is that part of the large order from back in early 2018, that $324 million order that was a multi-year order or is that something separate?
Ian K. Walsh -- President and Chief Executive Officer
Yeah, no, Pete, that that is a separate order.
Pete Skibitski -- Alembic Global Advisors -- Analyst
Okay. Okay.
Ian K. Walsh -- President and Chief Executive Officer
Unrelated to the $324 million order.
Pete Skibitski -- Alembic Global Advisors -- Analyst
Okay. But losing 7,000 fuzes on a DCS, I'm ballpark, I'm guessing that's about. I don't know $40 million headwind, something like that.
Ian K. Walsh -- President and Chief Executive Officer
Yeah, just a couple of things, I mean I wouldn't say we took it out of guidance. I wouldn't say we're losing it. I think really what we're saying is, just given the current environment it's uncertain as to when we will be able to fully booked at into backlog given the granting of export licenses, right? We did take it out of the guide, but what it shows is that there is continued demand for our unit, and as you can appreciate, no different than the Raytheon or others we're working as best we can to understand the environment in Washington. The one thing is just keep in mind when you think about the 2021 guide, and I think we alluded to it, is that had we been in a slightly different environment and we're able to include that just business as usual both our topline and our bottom line would have been higher year-over-year. So, no question, it has a temporary meaningful impact on where we are, but we're certainly going to do our best to get that sell-through.
Pete Skibitski -- Alembic Global Advisors -- Analyst
Got it, OK. Just a couple more from me, are those particular fuzes, those 7,000, are they already in work in process? are they kind of sitting there in inventory right now?
Ian K. Walsh -- President and Chief Executive Officer
Yeah. Yeah Pete, I would say that's certainly a part of our production plan. We want to make sure that should we receive an export license and that goes quicker than we think that we're able to support the customer, yeah,
Robert D. Starr -- Executive Vice President and Chief Financial Officer
Yeah, let me just shed some color to just because this is such as important part of what's going on, And first of all I hope you saw we did receive or $52 million cash payment literally just yesterday and we sent an 8-K out on that. So that was very exciting to get in, but relative to this order, to your point, that contract is in work. We literally work in the final Ts and Cs, pricing is all done, we're just at that point where with what's happening with the State Department and what you said, and if you look at a news this morning that they may to help me push things along, but we'll see. But the idea is to say that that the March timeframe is kind of what we were trying to get done by. We'll see if that gets pushed through if it doesn't, then from a production perspective, we kind of work our way through the remainder of this year to see, A, if it doesn't come now it will come later 2022, it comes in the near term then there is some upside for us this year.
Pete Skibitski -- Alembic Global Advisors -- Analyst
Okay. Okay, and just if I could squeeze one last one. The $25 million for Bal Seal was that the last Bal Seal payment.
Ian K. Walsh -- President and Chief Executive Officer
Yes. That just represents our contractual obligation. This is all part of their retention program that was in place when we bought them. So moving forward, you'll see a lot less purchase accounting adjustments, as it relates to Bal Seal.
Pete Skibitski -- Alembic Global Advisors -- Analyst
Okay. Okay, got it. Thanks guys.
Ian K. Walsh -- President and Chief Executive Officer
Thanks, Pete.
Operator
Our next question comes from Seth Seifman with JP Morgan.
Seth Seifman -- JP Morgan -- Analyst
Hey, thanks very much and good morning, guys.
Ian K. Walsh -- President and Chief Executive Officer
Good morning Seth.
Seth Seifman -- JP Morgan -- Analyst
So, just wanted to ask a little more about the fuzes, and sort of thinking about where as we think out maybe two to three years beyond the delivery guidance that you've given now. Where that might fit and we see where the backlog is for fuses for JPF versus two years ago, kind of down significantly and we can look at the sales contribution back the middle of the decade and where that was? And I guess even if you add in the 7,000 still down year-on-year, I guess it would be more like maybe the 2019 level in terms of deliveries. So, what's kind of a sustained, what do you think of it as kind of a sustainable level of Fuze deliveries going forward.
Ian K. Walsh -- President and Chief Executive Officer
Yeah, hey Seth. I'll start and let Rob chime in. It's an important question for sure. A couple of things, one is the JPF has just been again coming in and looking at the history, just in a tremendous program for us. Second part is, it's really exciting to know what's the team did last year and hitting that kind of record level. It's hard when you have a record level to sustain that quite frankly, but what is I think important to understand is, when you look at the kind of opportunity we have this year, the orders that we've got in, the orders for next year, 30 to 35 it kind of that historic level. And, what we're seeing right now and there's a lot of chatter and we're doing our due diligence to know where the 152 stacks up and what's going on with 139 all that could stuff, but the bottom line is that on the US government side, there is still work to be done, and what that means for us is there is plenty of opportunity still with our DCS and even FMS and the 152. And so without having solid orders necessarily we just know the opportunity are still very real there. So, I'm relatively optimistic, now is it going to last forever? No. And, we're working hard right now our strategic plans and our investments and thinking about where we're taking the business to really fill that gap over time, but I do feel we've got a nice window right now with with what we're looking at.
Seth Seifman -- JP Morgan -- Analyst
Okay. Great. And then, I guess thinking about the margin guidance and kind of where it came in for 2021 and kind of the work that you guys have done and getting the margins up through sequential improvement in Q2, sequential improvement in Q3. Is it kind of the, is there a way to think about just sort of maybe a back of the envelope way that that having wherever you kind of thought the EBITDA margin, what that trajectory was headed around the middle of the year on a lower base of fuze sales just for mixed reasons that takes things down by some level of basis points?
Ian K. Walsh -- President and Chief Executive Officer
Yeah. So that just to make sure I understand you're referring to our guide for next year?
Seth Seifman -- JP Morgan -- Analyst
Yeah, yeah and coming sort of all of this level.
Ian K. Walsh -- President and Chief Executive Officer
Yeah, I mean I think the ways to think about it, if you look at our guide, the midpoint EBITDA margins around 12.5, a little over, compared to 13% in prior years, and that does reflect certainly a considerable reduction in JPF book of business. I mean I think that, and as we've talked about in the past certainly, that is a very profitable program and can move our margin. So, what I would say is when you look at the rest of our business based on the uptick we expect in the back half of the year, most notably in our bearings group of businesses as well as continued focus on cost control, we're looking at roughly $40 million kind of on a run rate basis in 2021 versus 2026 that we realized in 2020. So, we're getting about $14 million of incremental savings year-over-year, which is worth about 200 basis points in margin. So I think, to make a long story short, Seth, most of the reduction that you're seeing in the guide really is kind of a result of lower JPF volumes. Because the rest of the business is going to pick up and improve just based on all the structural changes we've made.
Seth Seifman -- JP Morgan -- Analyst
Okay that's very helpful. Thanks. And then maybe if I could?
Robert D. Starr -- Executive Vice President and Chief Financial Officer
Just one last point, when we talk about the $40 million keep in mind that's roughly split 50:50 between cost of sales and G&A.
Seth Seifman -- JP Morgan -- Analyst
Okay. Great. And then maybe if I could just sneak in one last one. The company has been pretty proactive in recent years in terms of pruning out stuff from the aerospace business that wasn't profitable, took another step in that direction with the UK composites divestiture. When we think about the aerospace, the commercial aerospace business for 2021, how much is left that's kind of not bearings? I know you probably don't want to give an exact dollar number, but is there like I guess the ballpark way to think about the percentages in terms of what's not that isn't bearings?
Robert D. Starr -- Executive Vice President and Chief Financial Officer
Yeah, I mean, Seth we haven't really provided that level of detail. I mean needless to say, certainly, we're very optimistic, especially as we get to the back up here on the commercial side within our bearings group of businesses, but in mind, we do have some other programs across other parts of our business that are commercial base, and we've done a lot of work to take a lot of the cost out. So, once again, those a good sets of business for us with very decent level of backlogs that we're going to continue to execute on.
Ian K. Walsh -- President and Chief Executive Officer
Yeah, as said this, I'll just also add just to be honest, I think building the plan this year and looking at the decisions we made relative to that one order we talked about that can be sold UK and looking at where it would have been, had we not pulled that out and things like that, we do have some conservatism. I always believe you got to have two pass to get to where we need to go and I think the opex model that we've got going in place right now, the work that's getting done right now and the reviews and the focus we have on that, I'm excited to see that bear some nice fruit this year relative to that overall EBITDA performance.
Robert D. Starr -- Executive Vice President and Chief Financial Officer
Yeah and just one last thing, I mean certainly came is an important program for us and most of those sales as you would imagine right now are focused on commercial opportunities, so that's going to also represent some nice growth expected year-over-year and as we continue to work the sales leads on.
Seth Seifman -- JP Morgan -- Analyst
Excellent. Okay, thanks very much guys.
Ian K. Walsh -- President and Chief Executive Officer
Thanks Seth.
Operator
[Operator Instructions].
Our next question comes from Chris Dankert with Longbow Research.
Chris Dankert -- Longbow Research -- Analyst
Hey good morning, everyone. I guess, to keep it on K-MAX. I mean saw the announcement earlier in the quarter. I guess what's the opportunity for K-MAX sales in Brazil and then kind of a tangential to that, is the first of the delivery of the year expected to be in Brazil and kind of as a result of that approval?
Robert D. Starr -- Executive Vice President and Chief Financial Officer
Yeah, Chris, this is Rob. A couple of things, certainly the authorization in Brazil is important. It is a large untapped market for us, but as you can imagine, it takes a little time to to work those leads, but it's critical to get that. The first sale is really domestic based. Unfortunately not in Brazil, but we certainly are very optimistic that when we think about expanding our global set of opportunities Brazil will play an important role down the road for us
Ian K. Walsh -- President and Chief Executive Officer
Yeah, and the K-MAX it's again a really delve into that program and looking at the markets, I do feel much better this year than when I came in last year, knowing what they were working against, we've got four in the plan. Got upside there. We've got a fifth that we're building, we've got customers lined up for those first four which is exciting, and then we've got some exciting news from the US Forest Service in the program there and what they're looking fact for K-MAX. So I feel this year is going to be a decent year for our K-MAX for sure. And, then on top of that, of course we've got UAS development, which is also a huge opportunity with us the Marine Corps. I've had several meetings already depending on and there are some very positive reactions to the K-MAX today with we upgraded UAS in demonstration we've got later this year and some other opportunities that the Marine Corps and the Army are looking at for cargo UAS.
Chris Dankert -- Longbow Research -- Analyst
Got it. Thanks so much for the color there. Guys. And I guess the follow-up, I mean, looking at the guide for the year seen commercial inflect positively in 2021 and into through 4Q, I guess given any you kind of sense of what level of rebound you're baking it out of the comps are hurt fairly easy here, but any sense for magnitude will be really helpful?
Ian K. Walsh -- President and Chief Executive Officer
Yeah, no, certainly a couple of things there when we think about our broader commercial business and general aviation our 2021 still below 2020. I just want to be clear that we're going to see sequential improvement in particular in the back half of the year, but we are expecting a challenging first half. Where we're going to see some year-over-year improvement relative to the prior year, in particular, are going to be in our medical and industrial markets. We're going to see some considerable growth there and then also even in some of our defense offerings as well as in particular even within our bearings group of businesses, we are we are seeing some nice levels of opportunity. And, just as a way of background, our bearings group of businesses there order rates sequentially fourth quarter over third quarter was up nearly 10%, and we saw some terrific order improvement at our at our P&A business up nearly almost double. So, we are seeing some very positive signs in some of our industrial order rates and our miniature bearings companies are also very solid right now. So, it really gives us some hope and certainly we understand things can change, but based on what we're seeing. We're very confident in seeing a nice back half of the year, next year.
Chris Dankert -- Longbow Research -- Analyst
Got it, got it. Thanks so much for that. And I guess just one last one from me if I could. Speaking of medical, I guess, can you give us what the organic medical growth was in the quarter and kind of what the order rates would maybe imply as we start out the year here?
Ian K. Walsh -- President and Chief Executive Officer
Yeah. So actually, Chris. Medical is like flat to slightly down in the fourth quarter and kind of looking at that market, but as we kind of move into the next year, we're going to start seeing some sequential growth and that really especially as we all expect as the pandemic starts to ease we are seeing some very good order rates at Bal Seal as well as GRW on the medical side.
Robert D. Starr -- Executive Vice President and Chief Financial Officer
Yeah there January order rates were actually at record levels. Just put a fine point on that.
Chris Dankert -- Longbow Research -- Analyst
Got it. No, that's very helpful. Thanks so much and best of luck with you guys.
Ian K. Walsh -- President and Chief Executive Officer
Thanks you Chris.
Operator
Our next question comes from Robert Kirkpatrick with Cardinal Capital.
Robert B. Kirkpatrick -- Cardinal Capital -- Analyst
Good morning. Could you talk about the ability of command to reroute those 7,000 fuzes to a different buyer, the DCS ones are slightly from the USG ones and then I have a couple of follow-ups.
Robert D. Starr -- Executive Vice President and Chief Financial Officer
Yeah. Rob, this is Rob. Certainly the construction process is largely identical. There are different levels of inspection in a huge differences in the process, but really that the key is, if we start building a fuze that is designated for USG given the milestone payments, it's difficult to reroute those but it's much more easy, it's much easier to go from a DCS depending on where the stage of built, but that's something we track very carefully Rob. We're very careful as we're building the inventory to make sure that we don't put ourselves in a position where we have call it trapped inventory relating to a specific sale.
Robert B. Kirkpatrick -- Cardinal Capital -- Analyst
Okay, thank you. And then secondly, can you maybe give us a little bit more of a potential timeline for trying to get K-MAX into a program of record. I know it's been a long journey, but it does seem as though there is some traction in these days.
Ian K. Walsh -- President and Chief Executive Officer
Yeah, I can talk to that. That's clearly the goal that we have. And there is some interesting I think opportunities that can come from the path that we're currently on. So, for example to two aircraft we have right now, again, that we've, that we are in the process of upgrading the UAS systems for demonstration with the Marine Corps earlier this year. The meetings I just had, just to again give you guys probably more information to help, but the Marine Corps and capabilities in the senior leadership on your general burger has mapped out and actually currently just restructured their whole aviation department. They are mapping out the capabilities map and I would tell you that in my experience having worked these channels for many years, A, there is a solid demand signal. They are absolutely going down the path of looking at leveraging UAS capabilities more and more, Congress is behind it. There's going to be money flowing to it, and what is so exciting for us here at command is that we've got two proven platforms. And, they're kind of like the Ford F150 and the fact that they are heavy, they've got a heavy useful load of 6,000 pounds. The Marine Corps is trying to figure out, how does that capability fit in the spectrum of the UAS capabilities that want to bring to bear, especially in the Paycom region. The second part of this, which is, there is also, and they just announced a demonstration yesterday for a small drill that carry 30 pounds, but there is also a bigger opportunity that sits in the kind of the 500-800 pound payload, and having it be shipboard ops and easy to use, and really leverage that UAS capability and that's something that's directly in our warehouse, and there is requirements being worked right now we've got upcoming meetings to talk with senior leaders about those requirements. So, I get very excited when I think about where this could be for us, and quite frankly, where we are today and some thoughts and designs and things like that.
Robert B. Kirkpatrick -- Cardinal Capital -- Analyst
Okay, great. and then perhaps maybe a final question around capital allocation. And I guess the question is with you coming in, Ian has there have been a hiatus on looking at this as you got your arms around the existing businesses and the existing opportunities or how should we think about that? Thank you.
Ian K. Walsh -- President and Chief Executive Officer
Yeah. No Rob, I wouldn't say hiatus but I will tell you that as a new CEO, when the first things that I think is really important is to understand what's going on before being understood. And I think the team has done a nice job helping me get snapped in and certainly working with Neal in the Board, getting all the businesses, understanding where the capabilities are today, where the gaps are. We've got a very exciting opportunity here in May where we got deep dive strategic reviews coming up, which is something I'm excited to do. I will tell you that there is no question we are 100% committed to pulling the trigger for example, in the right acquisition and how we are using the part side of the house with our new criteria aligned with the trajectory we've set for each of the businesses, and it's going to be the right one. We want to be thoughtful about it. We want to make sure it's fits for all the right reasons, and that will happen. I'm absolutely 100% committed to that. So we're not just going to pull the trigger for bigger sake. We really want to think smartly about that, and we've got like I said said, our banks are energized they're coming to us with opportunities we're screening through those things. So that's going to be a nice opportunity for us and then organically is getting back to what is really important is really driving that growth as the markets recover. We've lowered our break evens, like I said, we've got a great backlog, we're starting to see nice upticks in orders, second half is going to be is going to be I think exciting for us. We've just gotten through a whole bunch of solid actions last year with paying down debt is selling our UK business and flattening out our leadership team and backfilling, and so I just feel really excited about where we are right now in and where we're headed.
Robert B. Kirkpatrick -- Cardinal Capital -- Analyst
Great, thank you.
Ian K. Walsh -- President and Chief Executive Officer
Welcome.
Operator
Our next question is a follow-up question from Steve Barger with KeyBanc Capital Markets.
Steve Barger -- KeyBanc Capital Markets -- Analyst
Hey, thanks. As we've gone through earnings season, we're hearing more about input cost inflation, is your pricing strategy and purchasing organization where they need to be and can you stay on the right side of price cost in an inflationary environment?
Ian K. Walsh -- President and Chief Executive Officer
I can start. Yeah, well, I'll start with the, that the cost side of the house. Part of this operating model that I've talked about this operations excellent smaller deploying, like I said, looks an entire value stream of the business. And so there is a front-end piece to it which gets right in the value pricing element. I do feel that there are opportunities still for us, especially on the higher end, part side where we sit, knowing though that you know it's a delicate balance with the push outs in backlogs and inventory burn down that for example commercial aviation is got to go through, supply chains are being looked at differently now, and we're seeing that's on our structures businesses. So, trying to be an extension of these OEMs versus just being just lowest price kind of competitor is to me is not as meaningful is really being closer to our end customers on that and showing the value that we provide and being schedules and quality and all that good stuff. So again, I think there is some upside for us and we're taking a hard look at it and we're also watching for, if you're talking about materials and other things on the demand side, I've been surprised, I'm pleasantly surprised that we haven't had knock on wood, any major supply chain disruptions, but we can continue to look at that very carefully as part of our opex model and it say that you know we have a war going on internally on that working capital. This is a huge part of what I talked about when I first got here, and then the three primary metrics that really drive the most value creation for us is that EBITDA margin that cash flow generation and those ROICs and having the business is understand the levers that they have the pull. EBITDA I think it's a lot of focus and but it's moving off the OI to the EBITDA side and then getting the business is a real interesting the levers they around cash and that was right in our networking capital, process improvements, and that fundamentally drives better ROICs and that's what we're trying to get to.
Steve Barger -- KeyBanc Capital Markets -- Analyst
Great answer. Thank you. And just a last one, the Bal Seal Ransom attacked in sound that material, but how did that happen and what steps have you taken to protect the rest of the company.
Ian K. Walsh -- President and Chief Executive Officer
Yeah. You know it's funny, again full disclosure here, it was random. There was a lot of activity as I'm sure you guys saw at the end of the year with all these threat actors out there spamming and doing stuff and we had the classic email that came in, that was compromised in planted and activated and the good news part was, it wasn't even close to what we thought in terms of its exploitation of any data or things like that. Team did a marvelous job countering forward with the backups we had and the out and the third parties that we had to came in that helped us. We learned a lot about; A, how does that thing happen, how do we react, we have plans in place, we've adjusted those plans, we debriefed them, we've got better security quite frankly in place today at Bal Seal which matches what we had here at command as part of the integration effort. But, there was some things that I think that that we could have done better, and relatively just basic training that we do every day. I mean employees is the last line of defense, every business is exposed. Again we were lucky in the sense that it really wasn't even close to as bad as we thought it could have been, but we took all the right steps and we're stronger for it based on the protection and detection devices that we have now in place yeah.
Robert D. Starr -- Executive Vice President and Chief Financial Officer
And Steve, I'll just say one more comment on that whole event. I really can't say enough for the team. We had our colleagues of Bal Seal and here in Connecticut working around the clock and we did have as Ian mentioned, a very formal plan to react to that. I mean it wasn't that we hadn't heard that ransomware, but I really think it's a testimonial to the effort in the expertise across the staff to get us back so quickly and really with insurance, the financial impact at the end of the day is going to be very minor. So once again, when we think about where Bal Seal is today, they are back to full production. And a lot of lessons learned as Ian mentioned. So it will in some respects will be better for it.
Ian K. Walsh -- President and Chief Executive Officer
Yeah. I will add to that to say personally to assess and understand where they were and what was going on. I was just like Rob said just incredibly impressed with the work effort to recover, not just their systems but production. And again, like I said, we're trying to be as realistic as possible, but I do feel extremely confident, not just this quarter, but through the year. Those folks are going to over perform just by nature of the business, what we've learned, and again, most importantly, having gone through this as an entire company we are way better prepared.
Robert D. Starr -- Executive Vice President and Chief Financial Officer
Remember, Steve, just on click on the link.
Steve Barger -- KeyBanc Capital Markets -- Analyst
Thanks for the time. Gentlemen.
Robert D. Starr -- Executive Vice President and Chief Financial Officer
Thank you, Steve.
Operator
And I'm not showing any further questions at this time, I'd like to turn the call back to Jamie.
James Coogan -- Vice President, Investor Relations and Business Development
Thank you for joining us on today's conference call. We look forward to speaking with you again when we report our results for the first quarter
Operator
[Operator Closing Remarks]
Duration: 53 minutes
Call participants:
James Coogan -- Vice President, Investor Relations and Business Development
Ian K. Walsh -- President and Chief Executive Officer
Robert D. Starr -- Executive Vice President and Chief Financial Officer
Steve Barger -- KeyBanc Capital Markets -- Analyst
Pete Skibitski -- Alembic Global Advisors -- Analyst
Seth Seifman -- JP Morgan -- Analyst
Chris Dankert -- Longbow Research -- Analyst
Robert B. Kirkpatrick -- Cardinal Capital -- Analyst
