Ducommun Inc (DCO) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ducommun Second Quarter 2008 Earnings Conference Call. My name is Silvana. I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of this conference.

(OPERATOR INSTRUCTIONS)

I will now like to turn the presentation over to your host for today's call, Mr. Joseph Berenato, Chairman and Chief Executive Officer. You may proceed sir.

Thank you, Silvana. Good morning. I'm Joe Berenato, CEO of Ducommun, and I want to welcome you to Ducommun's second quarter 2008 conference call. Actually we had two press releases today. The first being the second quarter earnings release and the second was a press release initiating a quarterly cash dividend. I will cover the earnings report first, then the new quarterly dividend, and then take questions on both.

As reported earlier today, Ducommun had sales in the second quarter of 2008 of $102.9 million, up 13% from the $91.1 million the year-ago quarter. Gross profit margin was 21.1% in '08 versus 21.7% in the second quarter of '07, which was a slight drop of 0.6%.

Operating income was $9.6 million versus 7.7 million in '07, an increase of 25%. Net income was $5.8 million versus $4.6 million in the year ago quarter, or an increase of 28%. And EPS came in at $0.55 per diluted share versus $0.44 per diluted share a year ago or an increase of 25%.

As a side note, we've talked previously about our goal to try to get operating income as a percentage of sales back to double digits over the next several years. In the second quarter of '08, our operating income as a percentage of sales was 9.4% versus 8.5% from the year ago period.

In terms of mix, we see us continuing a slow shift to Commercial, so that our mix was 58% Military, 40% Commercial and 2% Space, versus the year ago quarter of 61% Military, 37% Commercial and 2% Space.

Sales in both Military and Commercial were up but Commercial is growing at a faster rate than Military sales. And our tax rate for the second quarter was 36.8% versus 33.7% in the second quarter of 2007.

For the six month period sales were $201.5 million versus $179.2 million, an increase of 12%. Gross profit margin for the half was 21.1%, steady with the first quarter and compared to a year-ago's first half of 21.4%, down slightly 0.3%. Operating income at $18.1 million was 30% higher than the $13.9 million last year, and net income of $11.1 million was 32% higher than the $8.4 million for last year's first half.

Diluted EPS was $1.04 versus $0.80 for the prior period, which is an increase of 30%. And operating income as a percentage of sales for the first half was 9% even versus 7.8% for the first half of last year.

The mix exactly the same as for the half as it was for the second quarter, 58% Military, 40% Commercial, 2% Space versus again 61% Military, 37% Commercial and 2% Space. The tax rate for the first half was 36.8% versus 33% for the first half of '07.

I should note that Congress has not yet passed the R&D tax credit for 2008 which was also the case a year ago. So, a year ago the R&D tax credit was passed in the fourth quarter and we saw the benefit I the fourth quarter of that, and we hope that we'll see the R&D tax credit passed again this year, but we are not counting on that in any of our financials.

So, we continue our solid performance in 2008. As we look forward, commercial markets continue to look strong to us, build rates remain high and occasionally growing. Our own backlog at the end of second quarter was $382 million versus $353 million at yearend. So, we continue to see our backlog increasing and we expect to see it to continue to gradually increase as we go forward.

Military is at a high level of activity but as I've talked before there is program risk within the budget, but we expect the Military budget to stay in the $500 billion range going forward with winners and losers with respect to particular programs.

Our internal reorganization has now had six months of life to it and we believe it's going very well, well received by our people. We really do believe it has unleashed a lot of creativity and effort and we look forward to continuing benefits from that reorganization as we go forward.

So we continue to drive our three major goals of operational excellence, which is Six Sigma and Lean for us, and we've already conducted over a hundred [Chijan] events in the first half of this year. Our second goal of profitable growth, where we try to grow internally from capital expenditures and R&D expenditures, and externally from acquisitions.

Over the last 18 months, the acquisition landscape has been pretty tough. In '07, the prices in the first half of the year were very high and we wouldn't go there. In the second half of the year, not much was available for sale. In the first half of '08, we've gradually seen better acquisition candidates at least for us starting to become available.

So, for the first time really in 18 months, I think we're starting to see some things that could be a good fit for us. Now of course you always have the issue of whether you can find a deal acceptable to both sides.

And out third goal of organizational development, our CFO search continues. We've seen a number of good candidates, but we haven't been ready to close the deal yet. We much prefer to wait to get the right person for us as opposed to trying to do something quickly. And as a side light, between myself and our General Counsel Jim Heiser, we've got the CFO for the last 16 of 18 years in-house.

So, while we want to find our CFO and move forward, we want to make sure it's a good fit, and we don't feel pressured to do something super quickly. We are also looking to fill some other positions, and we are seeing good candidates and we continue to make offers where we think it's a good fit for us.

In terms of the decision to initiate a quarterly cash dividend, as I've said before, we always look at five uses of cash for us; working capital, capital expenditures, pay down of debt, acquisitions, and return to shareholders. And we're always looking at our cash and trying to apply it most efficiently and effectively in these areas.

Over the last 10 years, we've averaged $16 million a year of free cash flow. Now it varies year to year but over the last 10 years which would encompass a couple of cycles, we've averaged 16 million of free cash flow.

The dividend at $0.30 a year or $0.075 per quarter will be about $3 million of cash to us. So, less than 20% of our free cash flow over the last 10 years and certainly less than 20% of our net income as we go forward.

So, we think the ratios are reasonable. We believe the future is very solid and we have the resources, when we look at how we use our cash. So we thought this was a good time to provide some return to shareholders. At $0.30, it's roughly 1% dividend which is inline with most aerospace companies that do pay dividend.

So, we're confident in the future and I think the initiation of the dividend is a tangible example of that. And so with that, Silvana, I'm ready to take any questions that people might have.

(OPERATOR INSTRUCTIONS) Our first question comes from the line of Troy Lahr of Stifel Nicolaus. You may proceed.

Thanks. I'm wondering if you could kind of walk through what's been going at the technologies business. Sales were down again, margin slowly starting to recover, but can you just kind of walk through what you're seeing at that business and should we start seeing some revenue growth out of technologies soon?

When you look at our technologies business, it really falls into three buckets. We've got design engineered product and enlightened product and microwave. We've got a [build-to-print] segments where we do integrated electronic assemblies. And we have our Miltec business where we do engineering services for the government.

And our sense is that on the design engineered product, which has got a substantial piece of aftermarket in it, the growth there is slow because the Military budge isn't growing but there is significant aftermarket. So, it's at a high level for them but not a lot of growth for them in terms of the Military budget growing.

On the integrated assemblies side, we think we will see growth going forward in that piece of the business. Again it's mostly military but they do have some Commercial applications, and I expect over the next year we will see some growth.

In Miltec, we've seen some good growth over the two years that we've owned it, but as you know with respect to the Military budget there has been some shifting of funds around. We still view that as a growth business and think we will see it pick up in growth over the next year there.

So generally speaking, I think we'll see growth out of the technologies side, but it is predominantly military, and Military is growing at a slower rate than Commercial, both in our company and also in terms of the larger markets. So, I would expect to see the AeroStructures side of the business grow faster than the technologies side.

Okay. And then just Apache backlog looks like it was down pretty significantly quarter over quarter. I mean is that just a lumpiness and do you expect some orders to come through to kind of get that back up or?

Yes, it's true with any of our major programs, whether it's Apache C-17 or in the Commercial side 737, but typically happens as we get a significant order. And then you're just constantly working at them, and you get toward the end of that order and then you signed a renewal, and then the backlog jumps up.

So, the backlog there for Apache C-17 and 737 are all step functions up and then gradual slide down until the next step function up. And we would expect it will be a step function up for Apache some time this year.

Okay, is that third quarter or fourth quarter, or just not sure?

It depends when all the documentation is done.

Okay. And then just one last question and I'll kind of jump back again in the queue. Can you maybe again just kind of walkthrough the rationale for paying a dividend? A company of your size generally you don't see dividends.

I mean I would think that there were a lot of program opportunities out there where you could put that $3 million to work rather than kind of returning it back to shareholders? Was this just a function of acquisitions and things, and then do you think you're kind of putting yourself in a box here that if you do make a sizeable acquisition you might be to rethink that dividend?

No, the Board has talked about all those issues a lot. When you look over our 10-year period, again we've thrown off a lot of cash over the ten year period. It pops around a little bit, but on average it's been $16 million a year free cash after CapEx, after R&D.

And so, when you look at that and you look our balance sheet, and again you look at it for the last 10 years, we've been under levered. And the only time the leverage pops up is when we make an acquisition and then the cash pays it down. So we don't think we're limiting ourselves in any way.

In fact, I'd rather see a little bit more competition for cash internally. We've been able to fund any and everything that we thought was appropriate, and it's never been a question of; jeez, do we have the cash for it.

So given our history of under leverage, given our history of free cash flow, given the fact that we've been able to support all of our activities from internally generate cash and bank line of credit. We've -- when you look over the last 10 years, we've never done a placement of debt, we've never done the secondary of stock because we haven't needed the money.

So for all these reasons and the fact that we think the future looks solid and strong, we felt it was appropriate to reward the shareholders a little bit with some of the cash flow, and we don't think it diminishes our ability to go forward in any way.

And would you ever contemplate doing more of a share repurchase program rather than a dividend?

We look at that all the time and of course from 1998 to 2000, we thought that was the right time to do a share repurchase and we bought back 15% of the company 1.9 million shares over that two-year period for an average price of $13.18.

So, it made sense to us at that time to do a share repurchase and at that time the tax rates were such that it was more advantageous to shareholders to get money back in a share repurchase than it was to give it back in the form of a dividend.

Today, the tax rate is such that the dividend or share repurchase are tax neutral. That may change in the future, but today it's tax neutral. And we felt that the dividend was making a statement about what we've thought our long-term prospects were. And again, we don't think it's putting us in a box at all.

Okay, great. Thank you.

And the next question comes from the line of Michael Lewis from BB&T Capital Markets. You may proceed.

Hi, good morning Joe. How are you?

Good morning Mike.

Okay. Is Guaymas up and running right now? How is everything going down there in Mexico at this point?

In the month of July we shipped our first chipset to the customer and it was put on the aircraft and now we're going into low rate production where we will ramp up to full rate production over the second half of the year.

So, I'd say, frankly, we're probably a month behind where we wanted to be when we started this whole process, but that's not really that much, and it had more to do with the shedding the tooling in place and certified than anything else. So, we're building the build rate there and we will through the second half of the year, and we think things are looking really good there.

All right. And let me -- and just with regard to DTIs, come back to Troy's question, in the second quarter, was that within your plan, your internal plan? Was it below or above your plan, just --

We really don't talk about against our plan for especially for segments. I'll just say that Ducommun is ahead of plan for 2008 but I wouldn't want to start going down and nit picking individual locations or segments.

Okay. Can I ask you, if I look back at the K looking back into February, you had identified that 14% of sales would be allocated to CapEx. It looks like -- I'm sorry -- about $14 million would be allocated to CapEx and now we're down to $11 million based on what I read this morning. What's different there? What has kind of come out of the expectation or the plan with regard to CapEx over the last few months?

When you take a look at us historically, you go back five, seven or even 10 years and read that same paragraph every year you will see that it gradually comes down during the year.

And the reason is that we start the year with a plan which includes winning a variety of programs, so the CapEx number is a kind of catch-all which would include not only maintenance CapEx but CapEx required to put in place new programs. So, as you go through the year, if programs either a, are not won, or b gets pushed out a little bit, the CapEx starts to slide down.

And so we started off with a purely theoretical number if everything happens the way we put it in the plan, here is what we'll spend for CapEx. As we go through the year, that number comes down because either as I said, we didn't win it or we won it but we're not spending the CapEx as fast as we thought we would.

And so, it is a natural trend for us, and you will see it every year. I think last year this number may not be right but I think we started in $18 million, and I think we actually spent $10 million. So, it is a trend that we always have.

Okay. So, with regard to $3 million delta, would that infer that possibly -- what's the correct statement? There were more contract opportunities pushed to the right or there were more contracts that you lost in the bid?

Actually, in this case it was a third thing which is we had anticipated the need to put more capital equipment in place sooner, but because of Lean Six Sigma activities, we were able to increase the productivity with our existing equipments.

So, that equipment is in fact we just approved it at the last Board meeting the capital expenditure for that equipment and we'll put it in service, you know, probably it will come in service next year, but we'll spend some of the money this year. So, when we did our plan we thought to spend all of the money and put that equipment in place this year.

Interesting. Okay and then just a final question, I'll get the other way here. With regard to some of the bids outstanding on new contract opportunities, a few contracts -- a few opportunities in Commercial and Military, where do these stand? Do you think that you are close to possibly getting some word on whether you're successful here?

What you find is that even when you "win a contract," you've got to negotiate all the terms and conditions and at some times that can really drag out and it's really a function of when the customer meets the product, because the customer will continue to negotiate with you as long as he can before actually closing the deal depending on lead times and material availability and what his internal capacity to produce the product is before bringing you on line.

So we're pretty happy right now with the flow of opportunities that we're seeing, and we're seeing an increasing amount of opportunity coming from overseas, probably related to the fact that the U.S. dollar is not strong right now. And so, we're seeing a good flow of activity, we're working them all and you know we're closing them as we can, but we're pretty pleased with the flow.

Alright, thank you.

And the next question comes from the line of Alex Hamilton from Jesup & Lamont. You may proceed.

Hi Joe, how are you?

Good, Alex, how are you?

Good. Two quick questions. I think one thing that keeps surprising me quarter after quarter is kind of the benefits of the Lean Six Sigma efforts. Can you somehow quantify that? I mean margins certainly did well. Where do we see margins going potentially this year or next year?

Well, what we said about margins was just the statement that I've been making for over a year now which is that we're trying to get operating income as a percentage of sales into double digits. And you know we've never been more specific that that.

The Lean Six Sigma, the improvement in margins is really a by-product of the activity which is designed to raise quality and enhance efficiency. Lean takes waste out of your activities, Six Sigma enhances repeatability, so you get the quality pickup.

And believe me, both of these things are helped by rising sales, so in the declining sales environment your benefit from Lean Six Sigma could be swamped from a financial sense just by the fact that your volumes are down and your overheads being spread over a fewer products. So the fact that our margins are improving is a combination of our Lean Six Sigma activities, our pricing activities on contracts, and the fact that we're seeing riseing sales.

And then just lastly you talked about Commercial and if you mentioned it, I apologise, you did talked about the Commercial business seems to be growing faster than the other businesses? Was there any particular program that surprise you to be upside during the quarter?

Nothing had surprised us but not only are we seeing strong build rates from Boeing, but we've been successful in winning businesses -- business, I'm sorry, on regional aircraft and very light jet type aircraft.

So, the Commercial side right now is just growing faster than the Military. The Military side of the business is kind of like a 3% to 5% long-term growth rate and it's kind of doing that now. And the Commercial side, we're in that part of the cycle where we're seeing 10% or more growth.

Okay. Thanks Joe.

And the next question comes from the line of Edward Marshall from Sidoti & Company. You may proceed.

Hey, Joe.

Hi Ed, how are you doing?

Not bad. Not bad. Was there any benefit in SG&A this quarter? I'm seeing that it was pretty much $300,000 less than this year and $100,000 less than last year.

Yes. There's nothing really specific about that. You know when you see an SG&A number, there's a lot of stuff that goes on underneath the surface of SG&A. So, There's never a typical quarter, you always have ups and downs for a variety of reasons, but this quarter was no more croppy than usual.

The only thing that you could point to and it doesn't make much difference to the number is we have a few SG&A slots like the CFO which are vacant right now. And so, we're spending a little less on salaries and benefits than if we were fully staffed.

But you know you have to say that that always exists. It's just that we've got a couple of high profile jobs that are open right now. Then when you go and look at other elements of SG&A, don't really see anything that jumps right out to say, oh, this is unusually high or unusually low.

You just always have a lot of stuff going on and sometimes in the given quarter it hits you all at once and sometimes just for timing it slides into another quarter. But there's nothing by itself that stands out.

Okay. The Carson Helicopter revenue in this quarter, was there any benefit last year or that was a zero revenue in Q2 of '07? Do you know?

I don't think there was any revenue last year for Carson because when you're building to deliver first articles --

Right.

-- everything else kind of sits in inventory until the first article is delivered.

Okay. And then looking at gross margins here, you know, seasonality would speak that the second and third quarter usually are strongest from a gross margin standpoint, and I was surprised to see it ticked down as a percent of sales this quarter. One of my questions is the Carson Helicopter as it's kind of new to the learning curve here kind of eroding your margin or your gross margin slightly, as you tick up in sales?

Well, that's not in particular but new programs generally have lower margins and we have several new programs coming on line. You know 21.1% isn't great for us and I'm glad to be able to say that. 21.7%, which was last year's quarter, was also the highest for the year last year.

So, from my sense, I'd like to see the gross profit margin higher but the percentage we really focus on is operating income as a percentage of sales. That's the one that we put in target at one and from our prospective, you know all costs are important whether they're in cost of goods sold or in SG&A. So, we're trying to drive that operating income as a percent of sales presently.

And the 737, when that gets up and running in Guaymas, are we expected to see that be neutral to the gross margins or should we see a benefit?

I think it will be pretty neutral. I mean, we were able to get an eight-year contract from Boeing and their commitment to help us certify the plan because we gave them pricing benefits. And so what we'll see is that pricing on that contract will slide gradually down over the life of the contract.

So, we're sharing the benefit that we're getting out of Guaymas with Boeing. And having said that, we've put a facility in place which we're marketing to other bids and other proposals, and so we would expect to put additional work down there as we win new programs.

And as always on the build-to-print side we'll share some of the benefits with our customers as we do that. So, we view it as a competitive weapon to get new business, but I don't think we would say that we would expect it to have a materially positive effect on margins in terms of pricing per unit.

Okay, and I missed what you said about tax rate. I understand you know outside of -- the tax rate benefit from the government on the R&D tax credit. Outside of that, currently I'm modelling 36%. It looks like the last two quarters, you were nearing 37%. Is that kind of what we should be modelling going forward or?

Well, you know it depends what Congress does with the R&D tax credit.

Sure.

And it also depends on the timing of when other years' tax credits either expire or there's being an audit and we finish the audit. Because what happens is when we do our tax return, we take credit in our tax return for a variety of R&D tax credits.

And it's not just money that you spend to develop a new product. Some of our Lean Six Sigma activities qualify for R&D tax credits because of the definition of where an R&D tax credit is. I mean the government is encouraging you to develop new techniques and processes to make you more efficient.

So we spend the money in the cost of goods sold line. The government is giving you some of that back as an inducement to go after those activities. But they don't give it back to you in the cost of goods sold line. They give it back to you in the tax line.

So, in the sense programs like these are a little bit of a depressant up front on the gross profit margin but you're getting kind of a partial rebate but it comes in through the tax line. And when you fill it out your tax return, let's say you decide that there's a dollar of tax credit that you should get. Well, you have to make a decision as to how much of that is reasonable to expect that you'll actually collect from the government.

So, in a sense that you have a deferred tax credit that you put on your balance sheet because you're not sure that you're going to get credit for it. If you never get examined by the government, then all the whole dollar is yours.

If you get examined then you come to a resolution with the government and let's say is at $0.90, but you only took only $0.50 in the income earlier, then you're going to get another $0.40 benefit. So when either a tax year ends, or when an audit is completed, you can get an adjustment to tax rates because of this [truing] up, if you will, of how much of the tax credit was actually taken.

We like to believe that we're pretty conservative when we booked these things in the sense that we don't apply for a tax credit unless we've really earned it. So, we have a very good success rate in what we get to keep.

And so, you know in the third and fourth quarter of the year we could have a tax benefit because either a year closes out or an audit has been completed. But an audit could be completed in any part of the year. That could happen in Q1 or Q2. We didn't have any of those this year in Q1 or Q2 but we could in Q3 or Q4.

So all this is to say that, that we've tried to make the best estimate of what the tax rate is going to be for the year but there are some things that can happen which would modestly change it, not but lot, anywhere from 2 to 4 percentage points depending on the timing of the tax benefits.

I see. And not to jump back to my earlier question but I think I need to. The Carson Helicopter, when did you guys start shipping that program? Do you have an idea?

The Carson Helicopter blade, the original blade, we actually started delivering a couple of years ago.

Okay.

At very low rate.

Right.

But the development money we're spending today is because we're developing a blade for the Presidential Helicopter, it's not exactly the same blade.

Right.

And so we're having development and start-up costs and first article costs for that blade. And so --

Well, you booked 3.3 million in the quarter and I'm curious -- for the Carson Helicopter blade, I'm curious to when that comp begins? I mean is this the first quarter of the new shipments of the new blades or did it start somewhere on the third and fourth quarter last year?

Well, if it started earlier it would have been inconsequential. So it would really -- of the new blade, it would really started up this quarter and again low rate and it will build from here.

My understanding is kind of six months to a year out, we should see that somewhat accelerate or?

Oh, yes, probably sooner than that.

Okay. Thank you very much.

And the next question comes from the line of Troy Lahr from Stifel Nicholas. You may proceed.

Thanks. Could you just kind of run through the C-17 program? Was there any pull forward in the quarter here? I guess 24% growth on that program?

You know a lot of that has to do with if we've been asked to build the tooling and you could just because of the way the calendar works get some additional shipments inside a calendar quarter which really don't represent a pull forward. It's just the timing of when things fall.

As we've talked about the C-17 program in the past, it's a great program for us. Our expectation is that it will end somewhere between 2010 and 2012. Boeing has come forward now and said they're going to build 30 white tails. Boeing of course if smarter -- and white tail is an aircraft for which they have no committed buyer.

Boeing of course is smarter than that. They're not just building these things in the hope that somebody will come. I'm sure they've identified who the buyer of each of these aircraft ought to be. And so you know the contracts just haven't firmed up, but it's a question of keeping the line running as long as you have a reasonable expectation that you're going to sell it.

There is a transportation study being done inside the Defence Department which will come out next year and I think C-17 advocates believe that it's going to show that the air force needs to buy more C-17s. There are other people of course who think it will reaffirm that they don't need more. But as things stand right now it would seem like the shutdown will be close to the 2012 than 2010, but again contracts haven't been absolutely firmed up.

We continue to run at that roughly 15 aircraft a year rate. I just noticed that Boeing just sold two more C-17s to outside the United States which is always good news. So, we like the program. Obviously we'd love to see it continue forever.

I spoke at a C-17 supplier conference a couple of years earlier, and I made the comment that I was looking forward to see C-17s produced until my kids graduated college. And so, everybody looked at me and said, "Well, gees, when is that, next year?", and at that time I had a kindergartner.

So, I'm hoping for a long run for the program but we planned for 2010 to 2012 shutdown, and what we've said is we need to find three material programs which for us means $10 million a year in sales or more.

And we feel we got two of those under our belt in terms of the Eclipse very light jet and the Carson Helicopter blade, and we're pursuing several other programs, any one of which would be the third program that we're looking for. And hopefully we'll get all three of them.

And when do you think you might come to -- when do you think you might find that third program? Is that like a 2008 or early 2009 timeframe?

Well, it has to happen in 2009 if it's going to be up and running in that 2010-2012 time period at you know $10 million a year run rate. So, we have got to get it between now and the end of '09.

Are you pretty confident in that that you'll get that?

Yes.

Okay. And then, the Commercial aftermarket business was strong. What percentage of your 40%, 39% that's Commercial, how much of that is OE versus aftermarket?

On the build-to-print side, it's almost all OE. On the design product side, we have some aftermarket Commercial microwaves switches, [stepper horsepower motors and resolvers]. So, there is some of that, but we are not a company yet with a strong aftermarket presence.

And one of the things that we look at, when we look at acquisitions is can we get some design engineer product that has significant aftermarket exposure to it. So, it's an area that we would like to increase, but you're not going to see it out of the build-to-print side and that's where a lot of our Commercial sales are today.

But in the quarter, I mean Commercial aftermarket was one of the reasons for the high growth on the Commercial business. Is that right? Did I read that correctly?

Yes, I mean there were some, but it's not a big piece of the pie. It just happened in the quarter to have a nice increase.

Okay. But so there's no way of framing the Commercial aerospace, you know, it's 20% of your Commercial business, Commercial businesses aftermarket maybe?

I'd say as a company may be 10% to 15% of the company is aftermarket and a lot of that is Military.

Okay, perfect. That's helpful. And then lastly on -- can you kind of walk us through or maybe just update us on 787, where your production is? I mean I assume yourself producing some but has Boeing just told you to stop on other programs, and then are you still bidding on additional work there?

Yes, all of the above. What we see going on -- well, first of all, we do very little for Boeing. Most of our 787 work is for other people like Hamilton Sundstrand or a Nordam or a Fuji, et cetera, et cetera.

So it's all over the lot to other first-tier type guys. And what we see is that most of those guys have us on hold. Some of them have us producing, and it's all a function where they are with their assemblies to Boeing, as to whether they have us producing or whether they are on hold, or whether they are putting us on hold. So, most of our 787 is on hold right now and we're hopeful in the second half of the year that we'll be turned back on.

And other opportunities that you are still -- is there still proposal activity going on in the 787? How's that shaking out?

There is some but I would expect more later because since people are on hold they are not busy putting work out for bid. What they are trying to do is to get their engineering solidified so that when they do put it out they'll have to make fewer changes to it.

One of the things that's true and we've experienced it when you win work early in a program, so some of the 787 stuff we've already won, we are constantly having to make engineering changes to it.

And so that's very disruptive and expensive but it's part of the price that you pay when you hook on to a new program. So, what you try to do is to make sure that if you're getting in early on the new program, it's a program that has size and legs to it because that makes up for the early pain.

Right. Okay, thanks.

And the next question is a follow-up question from the line of Mr. Michael Lewis from BB&T Capital Markets. You may proceed.

Hey, Joe. Just a two quick follow-ups, one on the tax legislation. Have you been able to quantify what you think you could get back in EPS from the past such as R&D tax legislation before the government's fiscal yearend?

You know, I don't know a specific number. Maybe it would impact our tax rate a couple of percent.

Okay.

For the year.

Okay, but it would be beneficial -- I mean based on the numbers I just crunched up seemed like 7 to 9 pennies. I mean does that sound about right, for '08 alone?

You are ahead of me in terms of crunching numbers.

Okay.

I think it would impact the tax rate, you know, maybe a couple of percentage points.

All right and just real fast on Eclipse. Any information there with regard to backlog or can you help us kind of understand whether you have been shipping any of that product out and what the opportunity is looking like near term?

Yeah, I mean they continued to produce; they would like to produce more than they are. They originally said for instance, in '08, they want to deliver over 200 aircraft and that number has been coming down a little bit. I think it's probably because of delays from suppliers. But, you know, if they get to about 180 aircraft this year, that would be good and if they do better than that that would be even better.

And then next year I'm sure they are thinking more like 400 aircraft. So, we continue to produce and you know my sense is that the demand is greater than their ability to deliver, but you know we are watching to see how DayJet in Florida does, because I think it's kind of a harbinger for the air taxi market.

Interesting. What -- okay, that's good. I might circle back with you later. Okay, thank you.

And at this time we don't have any further questions in the queue. I will pass the call over to Mr. Berenato for closing remarks.

Well, I'd like to thank everybody for participating in the call and all the great questions here; you have kept me scrambling all morning. The last thing I would say is we had a good quarter.

We are looking for a good year. Our markets are positive. We continue to look to grow through the implementation of capital expenditure, R&D activities and of course acquisitions, and all of this is driven by our ability to stay true to and drive Lean Six Sigma to achieve operational excellence.

It is the cornerstone and bedrock of everything that we've been doing and we've been using the policy deployment system in order to set our goals and measure ourselves as we go forward. And Tony Reardon, our President, has been driving that aggressively across the entire company.

So, the reorganization is only six months old. As we go along, we think we are going to continue to get benefits from it. And I think as we make acquisitions, we'll find the integration of the acquisitions become -- I don't want to use the word easier but more productive because of our adherence to policy deployment and the Lean Six Sigma effort.

So, with that I'd like to thank everybody for participating and we look forward to talking to you about the third quarter in, golly, in not too distant future. Silvana, thank you very much.

Ladies and gentlemen, this concludes the presentation for today. You may now disconnect.