Ducommun Inc (DCO) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2009 Ducommun Earnings Conference Call. My name is Fab, and I'll be your coordinator for today. At this time all participants are in a listen-only mode. We will conduct a question and answer session towards the end of this conference.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Joseph Berenato, Chairman and CEO. Please proceed.

Thank you, Fab. Good morning. I'm Joe Berenato, CEO of Ducommun, and I would like to welcome you to Ducommun's second quarter earnings conference call. Joining me today will be Tony Reardon, our President and Chief Operating Officer, and Joe Bellino, our Vice President and Chief Financial Officer.

So with that, I'd like to turn the call over to Tony to discuss the market environment, and then he will be followed by Joe Bellino, who will take you through the financials. Tony?

Thank you, Joe, and good morning. I wanted to give you a brief market overview and discuss its impact on Ducommun for Q2 and year-to-date. In the commercial airline -- jetliner industry, the revenue passenger miles are down about 8% to 10% year-over-year, with most airlines still consolidating routes and retiring older aircraft. We're monitoring the financial health of the airlines, as well as the financial leasing markets, as indicators of market recovery.

The commercial jetliner original equipment is holding steady with any announced schedule adjustments coming late in the fourth quarter this year and the second quarter of next year. We attribute this steadiness to the robust backlog at Boeing and Airbus. The regional jet and general aviation markets have been more volatile, and we've seen several schedule slides in this market, resulting in lower build rates for the remainder of the year.

General aviation market for the fixed wings has been hit the hardest and is at a virtual standstill for the next several months. The military defense market for both the rotary and fixed wings looks solid for FY '09 procurement. The FY '10 budget is still under debate, but looks slightly higher in dollars with changes, in particular, program funding.

The impact of these markets on Ducommun's Q2 performance is a follows. We had solid sales performance on the commercial jetliner OEM business for the quarter and year-to-date. The regional jet and general aviation markets for fixed wing aircraft represent 10% of Ducommun's revenue base, and as a result, we saw a deterioration in revenue for Dassault, Cessna, Bombardier, Embraer all during this quarter. Net effect was a drop in a revenue, but despite our various cost reduction efforts, impacted our sales mix and as -- and also our ability to overcome and absorb all the associated fixed overhead costs for this quarter. Most of these impacts were felt in the AeroStructures business, with a smaller impact on the Technologies business.

DCO's military and defense revenue base was solid, but as anticipated sales were down on the Apache AeroStructures impact overall -- impacting AeroStructures' overall gross profit, q-over-q. We've had a shortfall in the F-18 radar program sales in the technology business, due to a delay in the supplier long lead items, which we expect to recover in the second half of this year. Other than the Apache and the F-18 programs, our Military business remained very strong in Q2.

Our second quarter performance overview; the Company backlog is at $399.5 million as of July 4, compared to $475.8 million on December 31. Backlog is -- in our Services business is down year-over-year, as a result of the funding from the omnibus bill, but the business looks solid through the remainder of the year. The drop in the non-services backlog is attributed to the fact that most of our major bookings for follow-on major contracts, such as the C-17, F-15 radar, Phalanx, and Apache blades will occur in the second half of the year.

AeroStructures division, despite the drop in the same store sales for the quarter and year-to-date, the performance of our newly acquired DAS New York facility has been excellent. Integration is on plan, and the unit has assimilated well into the Company. The Ruag and Embraer new programs made significant progress in the second quarter, and we expect to deliver our first Ruag assemblies late in Q3 or early Q4.

We captured another new business program award on the Embraer legacy program in the second quarter for the tailcone assemblies and the fuselage doors valued at over $100 million, and these programs will begin deliveries in late 2010 and 2011. This win adds additional business to multiple business facilities on the aerostructure side of the business.

In the technologies, despite the shortfall in our sales, the technology business outperformed on -- quarter over quarter and year-to-date performance on the operating income. The operating income improvement is attributed to the use of our Lean/Six Sigma tools, coupled with the removal of loss leaders from our backlog and a solid follow-on negotiations performance. Our Engineering Services business had solid first half performance, and we expect that to continue through the remainder of the year. We expect the sales to recover in the second half and continue on our improvements in operating income on the Technology business.

Today that -- we announced the addition of Mike Stanfield as the new President of our Miltec engineering services. Mike will be replacing Don Miller, who has retired. Don was the original owner of Miltec and agreed to stay on after the sale to help with the transition. Mike joins us from Dynetics Corporation, an engineering services company located in Huntsville, and we believe that he is an outstanding leader and will be a great addition to our Miltec operation. We look to continue to improve our cost base in the second half, and we're working on some new exciting new business efforts that will hope -- that we hope to capture in the second half as well.

I'd like to thank you, and now I'll turn this meeting over to Joe Bellino for our financial overview.

Thanks, Tony. Earlier today we reported second fiscal quarter net income of $4.6 million, or $0.44 per diluted share, compared to $5.8 million, or $0.55 per diluted share, in last year's second quarter. I will be quantifying some of the points that Tony made and touched upon. Our second quarter sales of $104 million were up slightly from the $103 million a year ago, as the aerostructure, or DAS, grew 6% while the technology segment had 8% less sales year-over-year. I'll touch upon those technology sales later as a follow-on to Tony's comments.

DAS sales growth was aided by our fourth quarter 2008 acquisition of our DAS New York operations, as this business added $10 million in sales during the quarter. We had solid growth on the large commercial jetliner business. During the quarter we supported Boeing's full production ramp up for the 737, however we saw a decline in business in regional aircraft.

On the military side, sales increased slightly overall, including an increase of $6 million for the Blackhawk program, which helped offset a $5 million decrease, year-over-year, in the Apache helicopter shipments, which we had been expecting. While the DTI, or Technologies business, realized an 8% decline, part of it was to -- a portion of this was planned as we have exited certain product lines which were unprofitable a year ago. In addition, some F-18 radar rack deliveries have been delayed to the second half of the year, but our outlook -- it looks very good there.

In taking a look at operating income, overall, corporate operating income, which includes both business segments income and corporate SG&A, it was $7.6 million compared to $9.6 million a year ago. DAS's operating income was $7 million compared to $9.6 million a year ago, as a result of a variety of things; there's fixed overhead expenses spread over lower level of sales, the reduction in the Apache helicopter deliveries in business and regional jets, an inventory valuation adjustment of $782,000, and the write-off of the DAS New York inventory step-up of $760,000 for the quarter.

DTI's operating increase -- income increased to $2.9 million versus $2.6 million, as a result of this improved product mix resulting in higher operating margins. Selling, general, and administrative expenses were held in check at the operating segment and corporate levels, as they were about the same as last year. They reflect actions we have taken to defer management salary increases, reduce bonus accruals, and lower other administrative costs.

Turning to the year-to-date results, for the first six months we reported net income of $7.2 million, or $0.69 per diluted share, versus $11 million, or $1.04 per share, a year ago. Our year-to-date sales of $215 million were up nearly 7%, with gains in both segments. DAS sales increased to $142 million from $129 million, and they were aided by DAS New York's business as it added $21 million in first half sales. DTI's sales through the first six months were up slightly and reflected, as I mentioned earlier, the elimination of some unprofitable lines compared to a year ago.

We look at overall corporate income for the first six months -- it was $12 million, compared to $18 million a year ago. Keep in mind that the first half results reflect a total of $5.2 million in the combination of the Eclipse reserve bankruptcy we recorded in the first quarter and the inventory valuation adjustments I touched upon earlier in the second quarter, as well as the write-off of the DAS New York inventory step-up adjustments, which totaled, for the first half of the year, $1.5 million.

We look into the segment -- DAS's reported operating income was $11 million compared to $20.1 million a year ago, but on an adjusted basis, the 2009 first half results would have been approximately $16.7 million. The reduction in Apache helicopter deliveries, business jets and regional jets, and the higher levels of unabsorbed operating costs were the primary factors which impacted this decline in adjusted DAS operating profit.

DTI's operating income for the six months increased to $6.3 million from $3.8 million, as a result of its improved product mix, elimination of product lines, and Lean/Six Sigma activities, including other operating improvements. Our overall selling, general, and administrative expenses are running only slightly higher in 2009 and reflect the additional expenses incurred with the DAS New York acquisition.

Taking a look at our business mix and backlog, we have seen our -- this year we have seen our business mix shift to a slight increase in military sales, and on a year-to-date basis, our business is now comprised of 60% military, 38% commercial, and 2% space. As of July 4, company backlog stood at nearly $400 million. There is a natural ebb and flow of backlogs. In the second half of 2009, we expect to include in our backlog follow-on purchase orders, new program wins, and new programs coming online, all of which will favorably impact our backlog levels.

Another important area in our overall -- the financial area is our liquidity in capital resources. We were pleased to report on June 26 that we had entered into a new, expanded five year $120 million unsecured revolving credit arrangement with a syndicate of banks, which will allow us to continue to execute our growth plans. This new revolving credit facility replaces a $75 million unsecured credit facility, which was scheduled to mature next April of 2010. The new facility will mature in June, 2014.

We are very pleased to have expanded this credit facility well ahead of schedule, as it underscores our strong relationship with our banking group and reflects their confidence in the sound financial discipline with which we have employed to run our business. We expect to use this credit facility to continue to grow profitably, both through acquisitions and organically.

During the quarter we generated positive cash flow from operations, in that while year-to-date, we're a net user of cash; this is a normal trend we have seen in the past several years. A portion of this usage is a result of our planned investments in new programs, such as the Ruag and Embraer programs, which required additional tooling costs, and these are carried on our books as inventory.

We continue to see a restrictive credit environment, which has a short-term impact on some of our customers' credit availability. As a result, we have seen an increase in the number of days in receivables outstanding. We are managing this aggressively and are taking actions to reverse this trend.

Along with the new credit facility, we continue to maintain a low leverage position, and our debt-to-cap was 18% at quarter-end. Our leverage ratio is still below our targeted debt-to-cap of 30%, and we feel that, given the economic environment and uncertainty in the credit markets, this is an excellent position for us to be in. We expect CapEx for fiscal year 2009 to be approximately $12 million, which compares to about $12 million a year ago, and it is primarily the result of new program acquisitions.

We feel confident that as we navigate through the balance of 2009, our strong financial position will allow us to take advantage to several market opportunities and enable us to benefit from our strong credit risk profile.

Now, I would like to ask Joe Berenato to make some concluding remarks.

Thank you, Joe. I'd just like to make four comments before we get to the question and answer period. The first is, we were obviously disappointed at the sales shortfall for the quarter, but we believe sales will be higher in the second half of the year. Secondly, we're pleased at having closed our expanded revolving credit in this credit environment, which will help us carry out our growth initiatives going forward.

Thirdly, we're also pleased with DAS New York's performance as we integrate them into the Ducommun family. And finally, we are optimistic about the number of new business development opportunities we are pursuing, even in this market environment.

And Fab, with that, Tony, Joe, and I are prepared to answer any questions.

Thank you.

(Operator Instructions)

And our first question will come from the line of Michael Lewis from BB&T. Please proceed.

Good morning. Thanks for taking my questions. Joe, if I could just go back to the initial commentary, did you -- did Tony say that the regional jet market made up about 10% of total revenue at the firm?

Yes, that's right, Mike.

Okay, and Tony, where are you seeing the largest deviation coming from? Is it the small or mid regional jet providers, and specifically, who are they? Where are you seeing the biggest weakness? I guess that's the question.

Okay, on the regional jet side, we're seeing reductions in both Embraer and Bombardier. On the Bombardier program, we support both Bombardier and Shorts, and so, on their programs, they -- usually, the applications that we have will serve multiple models, so it's difficult to pick the particular model that they're running on the shortfall.

On the general aviation side, Dassault was a big drop. We provide the winglets on that program for the 2000, and that -- they've cut back quite a bit. That goes on both the [DOEN] -- the aftermarket has not actually kicked in, and we just received the -- API has just received the SCC on that market so --. And then, we do some work for Cessna, direct, and some work to other manufacturers for Cessna products, and that's at a virtual standstill, so that's really been shut down. But on the regional side, Mike, it's just been a general slowdown.

Okay. That's helpful. With regard to some of the other companies operating in that regional jet market, there was commentary by a competitor -- actually, I guess, a supplier of yours, I believe, that indicated that they felt that we were almost at the bottom of the market, and we should start to see it round back up here in the near term. Would you hold the same conclusion with regard to what you're seeing, and should we expect to see that right now the business is in a trough, and we should expect to see a reacceleration moving into the end of 2009 and into the earlier part of 2010?

Yes, here's what I see, Mike. In terms of the regional jet market, I see it stabilized, so I agree with that 100%. Now the up cycle, obviously, is going to depend on then the financial capabilities of the airlines. So I think that's why I indicated earlier that we really watch that market, and we try to understand what is happening with the leasing companies and -- as well as the manufacturers getting into the leasing of aircraft.

So, it's difficult to say at this time. We're pleased that it's somewhat stabilized. We've talked to all of our major customers, and we're working through the reduction and build rate for the remainder of the year. But it looks like -- my guess is that we'll stay stable for the rest of the year at the rates that we're at.

Okay, that's helpful. And then, Joe Bellino, I was wondering -- can you provide us with your funded backlog over the next -- what you have in there for the next 12 months?

Well, our backlog, as I mentioned, is $400,000 -- excuse me, $400 million, and I believe our -- that we have -- for the balance of the year, let me put it that way, we have $156 million of backlog of that, which is expected to be delivered in the balance of 2009.

Okay. Yes, I knew that was disclosed in the Q that I just read before the call, but if we were to look out a little bit further, do you have an estimate? Is it closer to $200 million, $215 million that you have actually contractual agreements on over the next 12 months?

Well, actually, we don't look at it on a rolling 12 month basis, but the 150 that Joe referred to is about what it should be at this time of the year. So the backlog number will support our forecast for sales going through the remainder of the year. As we go into 2010, as we've talked about, we're adding -- we believe we'll add new business and the follow-ons on our existing business, so we don't see any dramatic shift in 2010 at this point.

Okay, that's fair. And I think that it's a very strong base that you have over the next six months.

Yes.

For the -- per the document and the -- [taking Q]. I'm going to ask one more question and get out of the way for the other analysts to ask questions. Joe Berenato, I was wondering if you think the Board will reauthorize a new share repurchase, considering the stock is down pretty much to a very low multiple -- almost a historically low multiple here, and it might be a good use of funds going forward.

One thing I've learned is to never assume what the Board of Directors will decide. They will look at this. We still have money available under our existing buyback, and they will look at this and decide if and when we need to do additional work. We have five uses of cash, and we're constantly looking at the environment and our opportunities to decide the best way to use those five uses of cash.

And one of the five ways is to return money to shareholders, either through a dividend or a stock buyback. We have money available for a stock buyback, and, as you know, a little over -- about a year ago, we initiated the dividend. So we're keeping our eye on the ball in terms of returning funds to shareholders, but I wouldn't hazard a guess as to when or if the Board would authorize another -- additional money for buyback. We haven't used what we have yet.

Got you. Okay, thank you very much.

Our next question will come from the line of Troy Lahr with Stifel Nicolaus.

Thanks. Can you guys just help me understand the margins at DAS a little bit? I think even adjusting for the inventory, I think you did 11.3, which is kind of well down from where you were last year, and you had even at higher volumes this year versus, kind of, the first three quarters of last year. So I'm just trying to reconcile, kind of, the margin level and maybe what we should expect, kind of, for the remainder of the year, just directionally.

Yes. This is Joe Bellino, Troy. Thanks. The -- we did quantify in our Q and in my comments that there was the inventory valuation of adjustments about $780,000 and the expensing of true cost of goods sold, the final portion of the inventory step up, which is about -- which was also about $780,000 for the quarter, which affected that.

But the bigger picture and the storyline is that the impact of losing some of the -- the impact of the reduction of the Apache sales of $5 million, year-over-year, certainly, with that well established program, helped our -- excuse me, it impacted upon our margins, as well as lower levels of volume in our same store sales DAS operations, and it -- the lower level of sales -- despite the fact that we reduced costs within our operations, it wasn't enough to offset those -- the inventory absorption related to that.

Okay. So what was the inventory adjustment then? I mean, was it just the $782,000, or was there more than that? Am I missing something?

Well, there were two things. There was -- the inventory valuation adjustment was just with -- just something internally one of our DAS operations related to tooling and those things, and we just -- we recorded that in the quarter. But the other one was since we stepped up the total of the inventory at DAS New York of $1.6 million, of which we've taken about $780,000 of that through cost of goods sold through -- in the second quarter.

We took the balance of it in the first quarter. That's going to stop, so by itself, we -- if nothing else changes, we would see an improvement in margins from both those two, which I'd consider them nonrecurring, if you will.

Okay. So, I mean, if we're looking at this business, I mean, is this -- I think we're adjusting for some of this -- I mean, I guess it's maybe 12% margins. I mean, it -- do we get back to 15%, or are those days kind of long gone, and it's going to take a while as these new programs ramp up or --? I mean, how should we think about margins at DAS going forward?

I think that's -- the challenge facing us is, what are we going to do to replace the lost sales and intended gross margins from Apache and some of these other business jets in the short term? The Blackhawk program certainly and the 777 that we picked up at New York -- we have an opportunity to expand our margins there through lean initiatives that we're in the process of going through, and we still have a lot of opportunities there that hasn't been fully reflected. That's really one of the reasons why we're so excited to align that entity with our jets operations.

Then, as I think we've spoken about before, as the Ruag and the two new Embraer air programs come on, we go through the development phase and the initial deliveries. We start out those at slightly lower margins, so we come down the learning curve, if you will, in the entire process. And over time, as we have seen in our past legacy programs, we've seen margins improve, and that's a normal trend that we would expect.

Joe -- Troy, just to follow on. I'd say that the margins at DAS will get better as we go through the rest of the year, and as we build back sales, we'll be spreading the overhead over more sales, so I don't think the historic margins that you mentioned are long gone. It's just going to take a while to rebuild.

Okay. A while, as in a couple quarters or a couple years?

Hopefully, a couple quarters.

Okay. And then, again, on DAS, you talked about the impact of the Apache program winding down. I mean, we really still haven't even seen, kind of, the big step down in Apache revenues, if you're still on track to cut the revenues, year-over-year, in half. I mean, that would look like you did $8.5 million in Apache in the second quarter. I think you have to run it, maybe, $3 million a quarter to get to, kind of, that $26 million, $27 million. If that's still accurate, I mean, how is that not even a much more meaningful drag in the back part of the year?

I'm sorry, what was the $3 million that you mentioned?

Well, are you still on track with Apache to cut that in half, year-over-year?

Yes. Troy, this is Tony Reardon. The Apache -- actually, what you saw in the last quarter, in terms of the revenue on the Apache, was exactly what we anticipated to see through the remainder of the year. So, quarter-over-quarter, we dropped about $5 million in revenue, so you'll see that drop in the next couple of quarters. Basically, we've stabilized in that level, and we'll move out from there.

So, there are a number of other things that we're doing in terms of gross margin initiatives. Joe mentioned a couple things that actually go away from a nonrecurring side, but the other side is that we got a couple other programs that we're working on to improve the margin base. So we're not out of the woods in terms of the impact of the Apache, but we think that we're going to stabilize. We've got some cost reduction initiatives that we're putting in place or had put in place, actually, in the beginning of the quarter that will take more effect as we go forward. So I think you'll see the Apache stabilize at the level it's at, quarter-over-quarter, and we'll move forward from there.

Okay. Then, just so I'm clear, Apache is not down 50%, year-over-year? If you run at 8.5% the following couple quarters, that puts you on track for, maybe, $38 million, which is down --.

The first quarter -- if you take a look at the first quarter, that's up significantly from the second quarter on the Apache sales, so don't average the year. Just -- you're going to have to look at the second quarter revenue base. I think that's taken care of in the 10-Q.

Another way to look at it, Troy, is that the build rate isn't 100% of the explanation of revenue on Apache, because you have, as in any program, other revenues that you get, whether it's for spares, so they're not part of the build rate, tooling, et cetera. So you just can't take last year's revenue, divide it in half, and say, well, that's the maximum revenue that they can get the coming year. The build rate is down -- in half, and that was fully reflected in the second quarter, but it doesn't follow that the sales will go exactly in half.

And not to beat this into the ground, the sales -- the revenue base that went in half is the main rotor. The tail rotor is still at -- at least three-quarters of what the original build was.

Okay. I'm just looking at your Q, though. I mean, your Q says that the Company sales for the Apache helicopter program are expected to be reduced by one-half, though, but you're saying it's not going to be that much.

Right. It'll be one-half for the main rotors.

Okay. I see. All right, I'll --.

And, Troy, in terms of numbers, the first quarter, for all the Apache related programs and product lines, we sold about $12 million worth of product. As Joe said, we -- in the second quarter, we went to -- really, at the beginning of the quarter, the current stabilized run rate, if you will, and there's some plus and minuses, but it was $8.5 million in the second quarter. And so, as we look at this, $8 million to $9 million should be a normalized quarter that we should see until there's any changes or announcements in the program.

Okay. Thanks, guys. I'll jump back in queue.

Our next question will come from the line of David Cohen from Midwood Capital.

Hi, gentlemen.

Hi, David.

Good morning.

The -- just reading other commentary within your industry there, there seems to be a certain amount of skepticism about Boeing's likelihood of maintaining their narrow-body build rates. And so, as it applies to you, what is your -- what are your expectations on 737 build rates and your subsequent revenue?

David, this is Tony Reardon. On the 737, what we can say is that we've had two rate readiness reviews from Boeing, to make sure that we could hit the 31 shipsets a month, within the last 60 days at two different facilities, and they're poised to put us at 31. We're actually running at that rate of close to 30 right now. So, for the remainder of the year, we would anticipate that that rate would stay at that level. And then, the other announced drops on the 777 and the 747 programs impact later in the year, and 777, I believe, drops to five in 2010.

Is that -- these rate readiness reviews -- is this sort of normal course for them, or is there something unusual about these reviews and the frequency of them?

It's normal course when they want to make sure that we get back to the right build rate. They're still working through the supply base on the residuals of the strike, and so what they want to do is make sure that the key suppliers are ready to support the 31 shipsets a month.

David, another way to get to your -- I guess, the root of your question is that typically, on a wide-body aircraft, we'll get nine months notice if the build rate is going to change, and on the narrow-body, we get at least six months notice. And so we've seen the notice on the 777, and that'll impact us early next year probably. And so far, the indications are that the 737 is going to maintain the build rate.

Okay. And then, in regard to the Blackhawk program, what is sort of -- I mean, there was some decline, quarter versus quarter, on the revenue there. I mean, a very strong first quarter -- obviously, good year-over-year comparison in the second quarter, but down -- still down almost $1.3 million.

Right.

What is sort of your expectation on subsequent quarters' output related to Blackhawk?

Yes. On the Blackhawk, David, that was primarily a timing issue, so we anticipate the revenue base to be back up close to where we were in the first quarter.

Okay.

So we'll pick that 1.4 [upward].

And my last question, I think, Joe made the comment about expecting revenue to grow in the second half versus the first half. That -- is that accurate? Is that what you said earlier?

Yes.

So -- and, I mean, just -- what are the primary program drivers there, and is some of that revenue growth actually not even reflected in your backlog right now? The backlog that you gave -- sort of, this progress specific backlog that you gave in the Q?

What you see is, of course, that some of our businesses run with a very long lead time on backlog, so that we enter a year where we've got, essentially, the backlog for the whole year in place, and others of our businesses run where the business can be booked and shipped within a quarter. So you can't look at our backlog and say, jeez, that's all there is to ship. As we indicated earlier, the $150 million plus remaining for the rest of the year is a good number for us to get the sales that we anticipate.

In terms of some of the programs we think will be at a higher level of performance in the second half of the year, in terms of revenue. We just talked about picking back up on the Blackhawk revenue.

Yes.

The F-18 radar racks we expect to be substantially stronger in the second half of the year. And we have some programs coming online that will add revenue, like the Ruag program, and we should continue to see some good sales from Carson Helicopter and a number of other programs. So, we feel pretty confident that we'll see higher revenue in the second half.

Right. Thanks a lot. Good luck.

Thank you.

Our next question will come from the line of Edward Marshall from Sidoti & Company.

Morning, everyone.

Hi, Ed.

You mentioned in the press release about cost cuts, two of which look to be short-term cost cuts, but a third looks to be a little bit more longer term. You didn't quantify them. Can you put a number to them, as to what we should be kind of expecting from a cost benefit this year and then again, next year as well?

Well, no, we didn't -- we purposely didn't put numbers to them. The reduction in salaries for the senior management, of course, runs forward, because next year we would anticipate to give salary increases, but it'll be at a lower base. We reduced the amount of salary increase for the pool for all employees, so those benefits will show up in the gross profit margin and the SG&A, but we really haven't specified dollar amounts.

Can you talk to the timing then? I mean, have we seen anything as of yet, or is that more of a -- kind of a second half this year and also into next?

More of a -- it's more of a second half issue, but we -- in terms of the reduction in headcount, since the fourth quarter of last year, we've reduced about 160 people.

Yes.

Now that's not the first place we like to go, so we have at different facilities instituted weeklong shutdowns where appropriate -- where the work volume wasn't there, as a way of preserving jobs. But even so, we've reduced 160 people from the fourth quarter of last year.

And then, I guess, switching gears a little bit, the 737 program. Was there any impact that -- or lingering impact from the delay or rather, the strike that occurred last year in your numbers? And if you're running at, I guess, 30 shipsets, which I think you just said, then you probably saw somewhat of an impact.

The -- I'm not sure, Ed, if -- when you're talking about impact, in terms of uptick.

No, I'm saying are you still seeing some of the effects -- the lingering effects of the actual Boeing strike in the 737 build rates that you're shipping at this point?

Actually, we're just getting back up to the 30 shipsets. So we hit that in March, with a five week month, and then dipped down a little bit in the April and May timeframe, and then we're back up to 30 in June, and we anticipate that we'll be at that level going forward for the rest of the year.

I see. And then, from the -- kind of a macro picture. You touched on in your prepared comments on the military budget and the preliminary comments that we've seen from Congress at the bill next year. The programs that you have -- is there anything that seems to be at risk from what you're seeing flowing through Congress at this point?

The F-22 -- we don't -- we're not a big player on that, so that would not be a major risk for us. The C-17 -- we'll see how that comes out. We're cautiously optimistic that the program will be funded forward, based on, not just the government funding, but also the foreign military sales will pick up there. So, those are the two big issues that we have.

If you look at the budget, there's lots of changes. We think there's some real strength in the rotary wing market, where we're very strong, and we anticipate that to maintain another level. So, I think we'll be fine going forward. If you look at the budget, quite frankly, there's a big uptick. There's about $130 million in supplemental; most of that is war effort initiatives, and -- then that kind of trails down, but the overall budget stays at about $533 billion going forward and increases about 5% a year.

So from a program standpoint, we think we'll be pretty solid and have got lots of things in the fire to try and pick -- take advantage of that as well.

How much -- what's the percentage of sales that goes to the rotary wing market from your business, approximately?

About a third.

About a third? Of the total business, or the DAS?

Yes. Of the total business.

That's military and commercial.

Right. And then, you talked about the F-18. What caused the slowdown? You -- I think you referred to some supplier issues --.

Well, there's two things that happened on the slowdown. One was that the order was released short of lead time, so -- and then, the supplier base is -- most of the issues that we're having are on customer specified suppliers, so their lead times are specified, and we're trying to expedite those deliveries into the facility, so that we can pick up the deliveries as required. So --.

So it's just a timing issue?

It's a timing issue, late release, and then trying to work with the supply base to shorten our lead times.

Okay. And then, I guess, second half '09, you talked quite a bit already, and we appreciate it, about the sales performance in the second half of this year. Is that relative to the first half, or is that relative to the second half of 2009 when you say you expect stronger performance?

It's relative to the first half.

And then, if I could just get one last question on the inventory valuation -- the $782,000 that we discussed. Is that at the corporate tax rate, or was -- what's the after tax benefit -- or loss there?

Yes, that's at the corporate tax rate of 33%.

Okay. Thank you, guys, very much.

Thank you, Ed.

(Operator Instructions)

And your next question is a follow-up from the line of Troy Lahr.

Thanks. If you look at your development programs, are you seeing any cost growth on any of those? We've seen a supplier this week on a -- on new -- some new business jet programs take a charge. Anything like that, just kind of brewing, challenging programs out there that you're working with?

You know, Troy, actually, we're on budget on the development programs, and we monitor that pretty closely, so that's not to say that there aren't things that we don't know about, but right now, in terms of where we stand with the supply base that's supporting us and the tooling and the development, we look to be in line with what our estimates are.

As you know, like on any new business program, as a -- on a startup, you'll see higher cost incurred on unit one than you will on unit 50. So we have the normal curve of -- coming down the learning curve, but we don't see any major hits in terms of our development costs at this point in time.

Okay. And on the major programs, do you feel like you've kind of hit some of the major milestones, so you feel comfortable with where you are, or is there still a couple major milestones that you need to hit to know that you're out of the woods on the cost side?

Well, I'm not going to make the kind of assertions that Mr. McNerney made right before the air show, but from what we see, we're in pretty good shape.

Okay. And then, a little bit -- could you talk about Miltec? I mean, there's been a lot of changes to the missile defense budgets -- how that business is shaping up, kind of near term and long-term. Any pressures there from budgets getting cut back?

Right now we've seen some pressure, Troy, and what we're doing is working around that. The biggest program that we have -- Midas is coming out with their major programs for FY '10, and we're aggressively teaming on those programs. So there are some impacts on the procurement reform that's looking forward, so we -- when we look at the year, the late release of the omnibus bill impacted us, because they're going month over month, as opposed to just giving us the contract straight out, but it's -- we look pretty solid, I think through the rest of this year into the October timeframe.

We do anticipate some slowing of funding as they sort out things going forward, but we've got quite a few major initiatives that we're working there. We do have issues. It's not -- the services businesses will be viewed differently going forward, and I think we're all aware of those impacts, and we're working that very diligently. But I would say through the rest of the year we look to be on balance, maybe slightly down from what we saw in the first quarter -- or first half of the year, but I think we'll be okay.

Okay. And can you talk about the Embraer tailcone? Is that just on one particular -- the 170s or the 190s, or how should we think about that?

It's actually on the 450 and the 500 Legacy program. So that's on the business jet, and that's -- multiple divisions are operating on that. So that's a big win for the aerostructure side, in terms of using our one new common marketing theme.

Okay. And then, how should we think about the scorecard on trying to win new business to replace some of the old business rolling off? I mean, do you still see, kind of, needing two programs to kind of fully offset the wind down of the Legacy programs that you have?

Yes, I would say that's probably true.

Okay. And any -- you said that there's a lot of programs in the pipeline. I mean, should we get an announcement, kind of, sometime this year on at least maybe one of those?

We're hoping so. Yes. Yes. We're real close on a couple, and we're hoping to bag those. So I would say, yes, there's a couple of very solid programs. We're working multiple platforms across the business, and we have four or five that we're close on, so we need to take one of those home.

Okay. And then, just last question, I mean, can you maybe talk about the markets that you're expanding into? It seems like you've won, and you're winning a lot of work in the business jet general aviation space. I mean, do you feel, or is there any concern that you guys are kind of overemphasizing this one particular area of the market, or is it a little more well rounded with military, large commercial, regionals, things like that?

It's very well rounded, Troy. I mean, we've had these two big wins on the general aviation market, and actually, we've pulled back from that, but it's opened up the door in other areas with Embraer that (inaudible), and we have programs that we're working there. We're looking at applications on the JSF airbus. So it's -- we have multiple opportunities out there, so we're looking across the board at multiple programs, and we're working very hard, both domestically and internationally.

But, Troy, you make a good point. It is true that, having won several awards in certain spaces, we had yet more opportunities on particular platforms that we took our name out of consideration for those remaining opportunities, because we did not want to get overweight in any particular platform. We'd rather spread our platform exposure. And so, where we possibly could have won even more work on a given platform, we've opted to take ourselves out of the running and go concentrate on other things.

Okay. Would -- so, would you never really be kind of more than -- I mean, you're at about 60/40 now. Is that the biggest you want to be, one way or the other, between military and commercial?

We've -- over the last 20 years, we've been as high as 70% military, 30% commercial and as low as 30% military, 70% commercial. It's really been more a function of what kind of cycles we've been in and how deep they've been. So what we like is the ability to have broad exposure over a wide variety of platforms, so that we're pretty well protected, regardless of what is going on in the macro environment. And the regional aviation situation right now is a good example of that.

Right. Okay. Thanks, guys.

Okay.

Your next question is a follow-up from the line of Michael Lewis.

Thanks again for taking my other question. Actually, Troy stole the thunder on two of my last questions, and thank him for that. Let me just ask two housekeeping questions here. If we look at -- Joe Bellino, if we look at free cash flow expectations for the remainder of 2009, we saw a big use of funds in the first quarter, got a little bit better in the second quarter, but do you think that you will -- where do you think you'll end out by the end of this year on a yield -- on a net income yield basis, let's just say?

Let me put some context to that, Michael, in terms of the last couple years. Through September in '07 and '08, we were about a breakeven from net cash used in operating activities, and we wound up '07 with $42 million and then this year at $28 million -- excuse me, in 2008, $28 million. It's a little bit different, because of two factors. One is our commentary on the credit markets and the fact that some of our customers are pressing us to extend terms -- good quality paying customers, but in their desire to hoard cash, they have been leaning on the supply chain to do that.

So that's -- and we talked about our receivables up about five days a year. We're aggressively attacking it, but that lingering effect will probably -- will still be there, so it'll impact it. Also, in the last couple years, we've received significant milestone payments on new contract awards at the end of the year. We haven't had any of those to announce yet this time, and certainly, they could come, or they couldn't come, so that could affect it.

But as we have generated positive cash flow in seven of the last eight years, and the normal ebb and flow of our business cycle and what we see happens in the fourth quarter, our track records have been pretty good about -- of turning positive, come that fourth quarter for our year-to-date numbers.

Okay, got you there. And then, Joe, we -- should we be assuming a tax rate of 33% for the full year?

Well, no, we're going -- we ought to assume -- I think we may have talked -- touched upon it -- 31% for the full year. And the reason is in the fourth quarter we have some statute of limitations on some R&D tax credits at the state level that will have expired, and we're very conservative in our reserves in FIN 48.

And usually, once we have these audits done, and the five year statute of limitations is done, then we record the -- we update our reserves, and they generally result in a lower tax rate. We saw that dramatically in the fourth quarter of last year. But I think right now we're looking at 31% for the year with probably the fourth quarter in the 26% to 28% range. Third quarter we see the same 33% range as we're doing now. They're all activity driven.

Okay, that's helpful. And then, just one final question. I'll get out of the way here. Intangible amortization. Per the Q filed this morning, it looks like we're going to see a ramp in amortization to about $1 million a quarter and looks like you had $433,000 on the P&L in the June quarter. Is that all DAS New York?

Yes, that is. That's a very good observation, too. The schedule in that -- in the amortization will -- as we show -- have shown, it'll be $1 million a quarter in the balance of here in '09, and it relates to that number that you talked about earlier, which $424,000. So we're going to see a pickup, in the next few quarters of amortization of intangibles, about $600,000, and that'll flow through SG&A.

And that's the way we talked about it we -- the accounting for it was -- the way it's handled is we had that step up in basis of inventory, and that $1.6 million was taken, basically, through the first half, and we've run through that. And, of course, that's non-cash, but it is the way the accounting records it. And then, it moves on to the amortization schedule, which you'll see. Again, non-cash.

Got it. Thank you very much.

Thank you.

There are no further questions in the queue. I would now like to turn the call back over to Joseph Berenato for closing comments.

Thank you, Fab. Well, as we've discussed this morning, we're in a challenging environment, but we see the Company doing a number of good things as we go through this environment. We continue to drive Lean/Six Sigma; it's really a mantra of this business. We see, as we've mentioned earlier, a number of good sales opportunities, which we're pursuing across an array of platforms.

We have a new leader coming on board at our Miltec Engineering Services business, and we anticipate great things from his leadership. We are progressing nicely on the integration of DAS New York, and it is performing ahead of our expectations to-date.

And finally, we continue to seek additional acquisitions to continue to grow Ducommun and make us more capable and more important to our key customers, and we are aided in doing that with the enhanced revolving credit, which gives us increased fire power as we look for additional acquisitions. So with that, we look forward to talking with you again to review the third quarter in three months. Thank you very much.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.