Ducommun Inc (DCO) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ducommun First Quarter 2010 Earnings Conference Call. My name is Maria and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to Mr. Chris Witty, Investor Relations. Please proceed.

Thank you and welcome to Ducommun's first quarter conference call. With me today is Tony Reardon, President and CEO, and Joe Bellino, Vice President and CFO.

I would now like to provide a brief Safe Harbor statement. This conference call may include forward-looking statements that represent the company's expectations and beliefs concerning future events that involve risks and uncertainties and may cause the Company's actual performance to be materially different from the performance indicated or implied by such statements. All statements other than statements of historical facts included in this conference call are forward-looking statements.

Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the company's expectations are enclosed in this conference call and in the company's annual report and Form 10-K for the fiscal year ended December 31, 2009.

All subsequent written and oral forward-looking statements attributable to the company or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements. Unless otherwise required by law, the company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, the future events or otherwise after the date of this conference call.

I'd now like to turn it over to Ducommun's President and CEO, Tony Reardon for a review of the operating results. Tony?

Thank you, Chris. And good morning everybody and thank you for joining us today. I'd like to give you a brief overview of this quarter, after which I'll turn the call over to Joe Bellino to discuss our financial results in detail.

Let me start out by saying that this quarter, the first quarter of 2010, included a fair amount of positive developments internally that underscored our commitment to the company's future through a continued investment in new program. Ducommun along with the rest of the aerospace and defense industry faced a good deal of headwinds over the past year, but we are now seeing signs of stabilization.

In the military market, our fixed and rotary wing business remains solid as we expect it to be throughout the year. And particularly we see continued strong demand for the Blackhawk and the Chinook helicopter programs due to the US activity in Afghanistan, which is clearly suited to their mission profiles.

In the commercial market, we see the overall environment improving with global passenger traffic expected to rebound somewhere between 2% and 4% this year. Recent announcements like Boeing and Airbus have been favorable and commercial end markets appear to be strengthening.

As the global economy improves and assuming fuel prices remain relatively stable, we expect to see a recovery in new order bookings for the aircraft manufacturers. That said, we conservatively plan for the major program, such as the Boeing 737 and Airbus A320, to continue their current rate of production through the end of 2010 with increased rates on the Boeing 777 and 747 in 2011 and 2012 respectively.

For the Boeing 787 Dreamliner, recent developments make us feel more comfortable that things are moving in the right direction. We believe the de-stocking of inventory for the Dreamliner is progressing and we expect to get begin shipping products once again late in the third or fourth quarter after nearly a two-year hiatus.

During the quarter, we experienced only modest recovery in demand for the aftermarket spares which impacted our DTI bookings, sales, margins and backlog. However we've seen a slight uptick in March and would expect that the aftermarket recovery will accelerate in the second half of 2010.

We are also cautiously optimistic about the recovery in the regional jet market, but not until later this year or possibly running into 2011. With the exception of the large executive jet class market, we expect the general aviation market to remain soft for the foreseeable future. The regional jet and general aviation markets have historically represented between 10% and 15% of our business; however, we are lower than that this year.

Let me briefly give you some color to our revenue and margins this quarter versus last year. Our AeroStructures business was off nearly 3% in the first quarter 2010 versus 2009 due to lower Apache and regional jet sales, partially offset by higher sales RUAG on the Bombardier 700 and 900 series aircraft and on higher commercial fixed wings product.

Our margins within this segment were impacted as expected by startup investment costs associated with several new products. This margin compression reflects a short-term impact of new applications and programs, which are considered to be key to drive future growth. We expect better operating performance as we ramp-up production on new sub-assemblies while focusing on productivity improvements. Our lean initiatives will help improve our operating leverages, production volume increases in the second half of 2010.

In terms of specific new business development initiatives—I'm speaking of the RUAG Bombardier fuselage assembly program--the engineering design and development of wing mobiles for the Embraer new 450 and 550 series aircraft and a V-22 contract with Bell Helicopter, as well as some other previously announced and unannounced new business development programs. While we continue to be driving operating performance improvements across the existing business, we recognize the importance of investing in these programs to position the company for future profitable growth.

As you probably know, there is sometimes a lag between the time that Ducommun wins an award and when it is announced following customer approval. For example, we do currently have several unannounced new program wins in-house. We continue to work diligently on new program growth as we execute our internal growth strategy and are optimistic about the new business opportunity.

Moving to Ducommun Technology, we saw sales slide 13% year-over-year primarily reflecting a decline in our engineering service businesses. This has been due to lower levels of funding on the RDT&E projects, delays in order releases of new projects and more government in-sourcing. Our manufactured technology product sales were up slightly as we fared better with increased deliveries of radar rack products, somewhat offset by the lower military and commercial spare sales for electronic components.

While margins within DTI reflect overall lower sales on spares, they were also impacted by investments made during the quarter in product development in particular for a new radar assembly. As with the AeroStructures unit, we are investing in new programs that will lead to the higher growth and improvement of operating performance in the future.

Now I'd like to turn the call over to Joe Bellino for our financial review.

Thanks, Tony, and good morning everyone.

As Tony just discussed, we reported solid results for the quarter, posting net income of $4.2 million or $0.40 per diluted share versus $2.6 million or $0.25 per diluted share a year ago. Now, I'd like to provide some more color.

Sales, sales in the quarter were $104 million and they were down 6% year-over-year. As Tony noted earlier, we experienced a 3% decrease in our AeroStructures or DAS segment primarily from softer sales in business and regional jet and lower delivery for the Apache helicopter program. While on the positive side, our large aircraft programs and our commercial helicopter products showed solid growth.

In the Technology segment, DTI, we saw a 13% decline in sales a large portion of which was primarily attributed to a 32% decrease in our engineering services revenues. We commented upon this in our fourth quarter earnings call, and it was a result of the reduced funding in military markets.

Our technologies manufactured products did show a slight increase in higher shipments in radar rack products, which more than offset the continuing softness that we've seen through last several months in aftermarket products.

Turning to our operating income, overall it rose to $6.8 million or 6.6% of revenue from $4.5 million or 4% of revenue a year ago. We estimated that our startup costs associated with several new programs, which generated $3.1 million in revenues during the quarter, affected our operating income by $1.8 million or 240 basis points. To note, last year's operating income included a $4.4 million inventory reserve charge for the Eclipse Aviation bankruptcy filing in March of 2009. Otherwise, if we add that back in on an adjusted basis, operating income last year would have been 8.9% or 8% of our revenues.

I'll address the decline in this year's first quarter to last year's adjusted operating income in my segment breakdown. First segment breakdown is in DAS, Ducommun AeroStructures. The operating income improved to $7.5 million or 10.6% of revenues compared to $4 million or 5.5% of revenues a year ago.

On an adjusted operating income basis, excluding the inventory reserve that I just mentioned earlier, the income last year was $8.3 million or 11.5% of revenues. So this year's operating income was off 90 basis points from the adjusted results a year ago. These were primarily result of lower volumes and startup costs related to development of new business on several programs including RUAG Bombardier fuselage assembly, engineering work on the Embraer, the V-22 contract with the Bell Helicopter and a few other programs. We expect these startup costs to continue to the balance of the year although at a lower impact level going forward than we experienced and noted in the first quarter.

Further margin declines from lower sales in other areas were somewhat offset by productivity gains that we continue to realize from our lean manufacturing initiatives.

Looking at the Ducommun Technology operating income, that decreased to $2.4 million or 7.1% of sales versus last year's numbers of $3.3 million or 8.5% operating margins, a drop of 140 basis points. The drop was primarily result of investments we made during the quarter in product development related to our new radar rack assembly. Otherwise, we saw declining margins from the lower revenues at our engineering services business and reduced sales of aftermarket products. We offset a large portion of these items through increased shipments of radar rack product and continuing efficiencies from lean manufacturing initiatives.

Our selling, general and administrative expenses were about 3% lower than last year despite a $600,000 increase in expenses related to amortization of intangible assets. We continue to manage the cost environment very effectively.

Turning to our business mix and backlog, in the current economic environment, we saw our business mix shift to a greater increase in commercial sales, and for the quarter our business was comprised of 58% military, 40% commercial and 2% space compared to where we were a year ago, which was 61% military, 37% commercial and 2% space in last year's first quarter.

At quarter-end, the company's backlog stood at $332 million. We have had no major program losses, but we have experienced delays from our customers in follow-on orders for a variety of programs including the F-18, the Apache and C-17 programs. We expect follow-on orders for these programs and others to be booked in the second quarter and/or in the third quarter. We are optimistic with regard to additional new program wins, and with recent new programs ramping up in 2010, we expect increased backlog levels going forward.

During the quarter, as a normal reflection of our cash flow and business cycle, we used $21 million in cash from operations. It is $2 million improvement over last year. And this is a consistent pattern we have experienced over the last several years. Typically, we are a cash user in the first six months of the year and in the second half of the year, we are a significant cash generator.

We continue to focus on effective working capital management by improving inventory turns and increasing our efforts and success in accounts receivable collection. We continued to maintain a low leverage position regarding our debt, and at quarter-end, our net debt to cap ratio was 12%. We feel that given the current economic environment, which still is improving, but it is an environment that still has certain amount of uncertainty in the credit market, but we're in an excellent position to be in to weather this environment.

We expect our CapEx for the year to be about $11 million. That compares to slightly less than $8 million a year ago and the increase reflects primarily as new program growth.

Before turning the call back over to Tony, let me just say this, as we enter the second quarter of 2010, we believe our strong financial position and our credit profile allows to take advantage of several market opportunities, positioning the company for future growth, improving operating performance and allowing us to make successful acquisitions.

With that, I'd like to ask Tony Reardon to make some additional remarks.

Thank you, Joe. Before turning to call over to questions, let me summarize a few key points about the state of our business. As Joe mentioned, we ended the first quarter of 2010 with the backlog of $332 million, down slightly from year-end. We have a number follow-on contracts which Joe discussed, which we anticipate booking in the second and third quarters of this year. In addition, we're currently bidding on a strong pipeline of opportunities on multiple high-profile platforms which will enhance our future growth. We're also actively pursuing appropriate acquisition candidates to compliment our current product offering and in line with our strategic growth objectives.

Going forward, we're very optimistic about the commercial aerospace outlook, including the Boeing 787. This program is likely to be a solid contributor to our internal growth heading into next year. We're becoming more positive about 2010 and 2011 as the overall market improvement gains traction. The company will continue to focus on the fundamentals so that we're favorably positioned for profitable growth as the market turns. We're winning new awards and expanding the breadth and depth of our applications, while still managing costs and continuing to focus on operational excellence and effective working capital management. These steps are expected to lead to improvement in our operational performance, particularly as the commercial markets rebound. Management at Ducommun is very much in line with its shareholders as we take all the steps necessary to strengthen the company as a leading aerospace supplier on key programs that stand a benefit from a stronger global economy.

And now, Maria, I'd like to turn the call over for questions please.

(Operator Instructions). Your first question comes from the line of Troy Lahr with Stifel Nicolaus. Please proceed.

Thanks. Couple of questions, when looking at the orders that you're expecting to come through either the second or the third quarter, do you think you can surge production quickly enough to capture the full-year revenues or do you think some of the revenues now in 2010 are going to slip out into 2011?

Troy, this is Tony. The question was, are we going to be able to catch new orders coming through. We don't see a lag, Troy, in terms of the order receipts from existing backlog orders. So we have sufficient backlog and particularly on the aerospace side to cover existing production runs. There are some new orders that are coming in that are new applications that will requires us to ship in 2010, and we're expecting to do that. With regard to the DTI aftermarket, we anticipate that if we have orders by the -- say the end of the third quarter, we'll be able to support production requirements on those fair sales for the fourth quarter.

Okay. But if you look at Apache, I mean I thought Apache would be more than $5 million a quarter, is that kind of the run rate that we should expect now at least maybe into the second and the third quarter for Apache, C-17 and F-18s?

On the Apache, Troy, I think in the first quarter what we saw was a slight dip because we had some engineering changes that were incorporated. And we would expect the run rate on the Apache to be close to $6.5 million to $7 million in the quarter. And we should see a pick-up in the second quarter that shows some of the delay in the first quarter. So I'm not sure exactly how much that's going to be, but we'll see an increase in the second quarter over the normal.

Okay. And then I just wanted to lastly drill down on technologies a little bit. I think last quarter we had talked about if that was -- if those margins were sustainable. I kind of got the impression that they were sustainable in that 12% range, may be giving some back even to some margin mix, but I'm kind of surprised that margins were down; even kind of excluding some of the one-time investments, I think margins were 8.5%. Manufacturing had technologies in the service mix, really didn't change that much sequentially from the fourth quarter. So can you tell me how margins go from say 12% in the fourth quarter with a similar mix down to say 8.5% adjusted at technologies?

Well I think -- Troy, with regards to the margin dropping on the technology side, I think that there were two primary causes, one of course we invested in a program for a radar assembly--

Well I'm backing that out, but okay, that's how I got the 8.6%, from 7% back up to 8.5% but go ahead.

Okay. And then we were certainly impacted by aftermarket revenue, which typically those margins run between let's say above 45%. And so that had an impact on it even though the revenue base was slightly off, and then we did have some engineering impact with regards to design and development of some new programs.

Beyond the $400,000 that you spent, or that is the engineering money you are talking about?

Pretty much, within that range, but slightly higher.

Okay. And may be just to help me understand, can you tell me how much technologies' aftermarket business was off in the quarter?

It was off about $2.5 million to $3 million.

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

Your next question comes from the line of Michael Lewis with BB&T Capital Markets. Please proceed.

Good morning. Thanks for taking my questions.

Hi, Mike.

With regard to backlog, backlog is the lowest level we've witnessed since 2006. I know that you had just discussed that you would expect the backlog to increase. I just want to get a definition. What your definition of the increase, because the way I see it, unless we see a book-to-bill of at least one times, it's going to be the second year in a row that we could potentially witness year-over-year declines in backlog. So I just want to kind of understand the flow of the backlog, what the expectation is by year end, and to get a level of comfort that we will indeed see a book-to-bill north of one times. Could you address that?

Mike, here is what we've seen. We have seen a structural change from some of our customers over the last 12 months, and people like even Sikorsky and Boeing, we are seeing more releases on a quarterly basis than an annual basis. So we're not booking the purchase orders for an entire year necessarily all the time.

In addition, relative to the whole area of bookings, we've talked specifically in our prepared remarks about the F-18, that's related to the radar rack business that we have secured for years when we announced that back in October of '08, and it has helped buoy our sales during the quarter. So it's just been the customer there, Raytheon hasn't issued us the purchase orders, and the way we book them on an accounting basis, they don't show up.

As well as the C-17 Boeing is looking at right now, they are looking at about three years out, with more of the awards on the foreign military sales as opposed to looking at it one year at a time. So that and some other programs, we are very positive and very optimistic about it. We continue to ship and fulfill and improve our customer delivery. Certainly that has the short-term effect of reducing our backlog, but our pipeline looks really quite good in sustainability. And so we feel very positive about it that at some point in time, especially when the commercial aircraft cycle begins to surge up and we start seeing more bookings for the 777 and the 787, that will be a key to seeing our backlogs improve appreciably.

Okay. Let me just ask you a different question -- a different way then, is your current expectation that you can have book-to-bill north of one-times by the end of this year?

Michael, generally we do, but going into the year, let me -- there are lot of programs. There is a lot of business units within the company that don't generally walk into the year with one-times the backlog for the revenue. In other words, for all the spares businesses for example, and some of the other technology businesses, our backlog is booked in and shipped. So if you just take the engineering services business, for example, we'll experience bookings this year that will support the revenue base for this year, same thing on the technology side.

But with regard to the overall bookings, we're expecting in the second and third quarter some pretty significant bookings on the C-17. We've got a multiyear contract and we're working on that. We expect the Apache tail rotors and main rotors to be booked in the second if possible and then possibly the third quarter for a follow-on. And then, the F-18 program will be booked in the second quarter. So, of the major programs that we have in the company, those three will be put into the backlog in the second and third quarter. With regards to the Blackhawk, the way that program is being booked is it's primarily being booked like the 737, quarter-over-quarter. So we continue to see that growth and we are under a long-term contract on that program through 2012 right now.

Okay, yes. And I do understand the book-to-ship work does make it difficult to see in between the quarters and I respect that.

Let me shift gears here real fast, and Joe could you talk a little bit about the margin expectation by quarter by segment. The core business typically has its two weakest quarters are usually the first and fourth quarter, the two strongest quarters are the second and third, but how is this -- how are the specific segments working with regard to the margin that we can expect intra-quarter? Can you help us out with that?

Yes Mike. We see -- if we break it down by the DAS side of it, because of the manufacturing cycle that the AeroStructures business is in, our strongest two quarters are the second and the third. The fourth quarter is typically our weakest quarter because of the holidays and our customers don't pool inventory at the end of the year, and that gets carried over into the following year, and then our first quarter is about our third strongest quarter. And we've had that same cycle through the ends of the year, so the implications are we ought to get operating leverage in the second and third quarter from expansion of our business, and then in the fourth quarter and in the first quarter, we have some margin compression. So, we see variation sequentially during the year.

On the DTI side, because a big portion of our products are in the manufactured products, the radar racks and these other products, we generally see a lot stronger growth in the third and fourth quarter with emphasis on the fourth quarter. So, the DTI cycle builds through sequentially from the first quarter through the fourth quarter typically. And that's what we would expect this year. We have programs onboard like for the APG-79, for the F-18 and we also have 63V program for the F-15 and the customer usually pools those in the fourth quarter of the year at a greater rate than the three previous.

Okay. So it's typically along the same lines as the revenue ramp quarter-to-quarter by segments, so essentially matches that on margin basis?

Yes.

Okay. And then just a final question and I'll get out of the way here. Just to talk about the increased investment that we -- or at least, I did not anticipate in the quarter. I guess the question is, when were you aware of the need to have the higher investment, and if you knew about this last quarter, was there a reason why you didn't disclose that we would expect a ramp in cost as a result of this preparation work for the contracts, can you talk about that a little bit?

Yes. Okay. The reason for the increased investment was primarily because we had a couple of pull-ins on the programs. So I think that if you go back Michael, we talked in the third quarter and the fourth quarter last year about investing in new programs and that that was coming forward. But what we had in the first quarter quite frankly was the couple of accelerations on two programs, which caused us to invest higher than we anticipated.

But the investment was part of the process that we've been looking at in terms of growing the business. And I think I've been pretty consistent about talking about our ability or our requirements to invest in programs going forward. I'm very comfortable that we're on target with regards to the type of investments that we're making and that we're in line with our cost expectations, and I believe that we're in a position where these programs will generate future growth going forward for us. So I'm real comfortable that we're doing exactly what we said we will do.

With regards to knowledge of the last quarter, we saw some accelerations, but the impact we didn't fully anticipate as we came down the curve in a couple of programs. So we did have three programs in-house that were accelerated somewhat in the quarter, which caused us to invest higher than we anticipated.

That's very helpful. Now, looking forward, what would be the excess cost that you would expect, would be at $1 million a quarter, or $1.5 million a quarter lower than that, could you......?

We think it'll be lower than that and we think that as you're coming down the curve that we project lower investments and I think we've satisfied the acceleration requirements that the customers had, so I would expect this to be -- not as significant in the first quarter, of course.

Okay. Thank you so much.

Your next question comes from the line of Edward Marshall with Sidoti & Company. Please proceed.

Good morning everyone.

Good morning, Ed.

Good morning.

So my first question is, the build up costs that you had in the quarter, I'm assuming and you may have mentioned it, but I missed it, is it tooling and raw materials that you're building up over here?

It's a combination of everything that you would see in inventory, so it's tooling to some extent, it's some raw material, but it's primarily [within] product out the door coming down a learning curve on new programs.

Okay. Do we know what the matching revenue is for this kind of new programs coming into this year, do you have a kind of an idea as to what would be matched against those cost that you took this year?

Total revenue would be....

On your new programs for 2010.

I'm going to guess, but I'm going to say that it's somewhere north of $10 million.

And so, shifting gears a little bit, the Boeing 777 dropped out of the reportable segments, a reportable -- or top-line, can you give me what the 777 was in the quarter for the commercial segment?

It just dropped slightly in the quarter about.....

Sequentially or year-over-year?

Yes, well quarter-over-quarter and...

I guess it's about the same anyway.

Yes, pretty much, because the rate dropped from $7 million shipped at 4.

Right.

Excuse me, to $5 million. And, it will be at that rate for the rest of the year. Now Boeing affects that rate in June, but we're ahead of that, so about 10% drop in terms of...

Yes. Last year we did $4 million. This year we did $400,000 less on 777. The good news is that it's going to ramp back up to 7 planes a month.

Right. Shouldn't you see them in the back half of the year?

Pardon me?

Shouldn't you see that ramp-up in the back half of the year as you prepare for next year?

Yes. We would expect to see and I think they said June again so we would expect to see that ramp-up like towards the end of December and depending on which business unit--we were effected in different ways, but towards the end of the last quarter and clearly in the first quarter.

Okay. And then, kind of looking strategically, you'd talk about some betting on multiple opportunities. We saw a recent contract win for about $8 million, is that the kind of size we should be thinking about, or is that larger or I know it's probably a mix and that will be your answer, but are there a couple really sizable ones out there that move the needle for you?

You take them in -- we're thinking about how to phrase this to give a proper perspective. Let me put it you this way, we actually have five new programs that are in-house that are unannounced. And as you would imagine a few of them are larger than that $8 million and a couple of them are lower, but not significantly larger on a revenue basis. But they're pretty good contracts, and we're anticipating pushing those announcements out next quarter. And we're very comfortable, I think right now that from a new business standpoint that we're doing exactly what we said we will do in terms of going after some sequential growth across the board.

I sense some excitement when you guys presented at our conference in March about the new order pipeline, has that increased that excitement?

What's happening positively for us is we're picking up some wins that we anticipated and we're still in the hunt on a couple of others that have not been let yet. So we are actively pursuing some significant growth opportunities and our capture rate is improving in a couple of our business units that are putting us in a position to be successful going forward. So we're very optimistic right now about currently what we have in-house and execution against that and then we got a couple of other programs that we're anticipating that went down the final two, and hopefully we bag those.

Okay. To give you an opportunity here, there is nothing unusual about your backlog being lumpy coming from quarter-to-quarter we've seen that kind of jump around historically?

No, not at all and actually it happens every year this way and I think we dip and then we come back. And what's happened, the unusual portion of it is, is kind of the delay that we've seen year-over-year and then the Boeing shift from, going from an annual buy to quarterly buys and the Blackhawk manages that way as well. So we don't see that big spike up in the backlog. What we should see is a comfortable growth going forward and -- but you're absolutely correctly and I appreciate that.

Yes. And then finally, acquisitions, what are your thoughts, what's the market like and do you have kind of the firepower to do it?

Okay. So the question is what are our thoughts, what's the market like, and do we have the firepower to do it. So Joe will answer the firepower issue and not that I can't.

But with regards to the thoughts, what we've done and I think we've explained this a little bit in particular at the conferences, but we put together a strategy on the aerostructure side, for example that fill the gaps. And we're looking at companies that fill gaps that would give us more technology base on the composite side, for example. We're looking at other applications that would take us to higher level assemblies and some more engineering content.

So we're actively pursuing companies that are out there. On the technology side, we have two elements going. We're revaluating the -- how we can grow that side of the business. We're looking for a solid platform to grow from. We have a couple of excellent opportunities that we have in front of us that we're looking to pursue. So I think that we're moving out. It's been a high focus of this management team for the last year and a half. And we haven't pulled the trigger on a couple--we've been very close. But we have some opportunities that we have in front of us that we're pretty focused on right now. Joe, you want to talk about the firepower?

On the sizing side of it, we model it and look at -- we could handle and absorb its demand primarily through debt. Two acquisitions that are in the $75 million to $100 million range, and it would be with our funded debt to EBITDA over three times given our cash flows. And we've been running through those exercises. We tried to scale up -- or the last acquisition we made as you know was $45 million, and we're looking to double the size to create more economic mass as a player in the supply chain.

When you say two acquisitions between $75 million and $100 million, do you mean each or combined?

Each.

Yes, each. We look at either one could be combined or it could be each or it could be -- that's just for modeling purposes. But we've run the analysis on that, and we've looked at our given our current bank capacity now which we have about $95 million on our current lines. We could expand that another $50 million at least and even -- so the debt markets are very robust today -- more leverage loan markets are such and we studied this and visited with Wall Street on these things and the capital availability and the cost of debt financing is very attractive to us that could optimize our capital structure.

Well, I mean that's $145 million in capacity.

Yes.

You tap that line for working capital, especially in the beginning of the year, but doesn't leave you very much to kind of hit two that are about $75 million a piece. So you would extend that, I mean is there a potential that it would be an equity offering, how would....?

No. We wouldn't consider an equity offering.

Did you say would or wouldn't....?

Would not. We would not consider an equity offering.

With our run rates EBITDA of about $44 million, $45 million now assuming we purchased companies that have a significant EBITDA, that would allow us to expand our credit facility we figured to in excess of $200 million, and that with our current debt outstanding would allow us digest all those things.

Okay. Thank you very much.

Thank you.

Your next question comes from the line of David Cohen with Midwood. Please proceed.

Hi, just wanted to go back to understanding the comments about the P&L impact of these program startups. So you say the gross profit was negatively impacted by $51.8 million, so did you have negative margin on these programs in the first quarter? How do you get to that? Is negative -- is $1.8 million, is that the negative gross margin or is that the lowering of the gross margin -- the gross profit?

I think it's the same thing, but for these purposes you can say it was negative gross margin.

Well, I mean, if you hit $3.1 million of revenue, so you had $4. million -- would that be $4.9 million of cost, is that the right way to think about it?

Correct. Yes.

And Tony, your comment going forward in response to one caller's question, what would the more -- what would be an expected future level of the P&L impact there?

Well, it'd be lower. As we see sequentially coming down, I think that basically where we are at, David, is we kind of accelerated the learning curve if you will in the first quarter on a couple of programs. And so we would see that investment coming down sequentially and anticipate that it will have lower impacts in the quarter and reduced impact going forward.

And how about on the revenue front?

Revenue front, we would expect to see in that range that we are at, the $3 million to $5 million, somewhere in there and pick up, but it is in the plan.

Okay.

Just to add to that, David, for clarity. We would see those investment costs that we will continue to be making those as we get down the learning curve. But the impact of those will abate sequentially over the year, but we'll have them probably continuing in the second, third and the fourth quarter albeit at lower rates than we did in the first quarter certainly.

Okay. Alright. Thanks.

Thank you.

Thank you.

(Operator Instructions). We have a follow-up from the line of Troy Lahr with Stifel Nicolaus. Please proceed.

Thanks. If Boeing does raise production on the 737s, do you guys need additional tooling or do you have enough capacity to handle that?

No Troy, if Boeing does raise the rates on the 737, we're well positioned to manage that going forward. So we've modeled that and actually been [pulsed] by Boeing to go to a rate of somewhere between 34 and 36 and we don't see any additional tooling requirements or expenses other than inventory to grow.

You could even handle 36 of the current tooling you said?

Yes.

Okay. Also, can you talk a little bit about the A350 win, I mean how material is that, and how should we think about that program and the investments needed going forward?

It's a good win for us and it has two elements to it. Right now it's the skins that we won with some minor assembly on it, and we are looking for participation in the full assembly. So, it's in the early stages. As you know the A350 is in development, so it's the initial contract award. And as we ramp up, I think that aircraft is expected to roll out in 2012 or late '12 or '13. So you know we are in the development phases of that, if you will, but what we see the opportunity there is that that's the inroad into the program, and it's going to give us another opportunity for other applications as we come down the line. So it'd be premature right now to tell you that it's going to be a significantly large program for us, but we are working on that model to do that.

Okay. And have you picked up any additional work on 787s, and can you tell me how many, can you just update us, is it four components I think that you have?

We have picked up a little additional work and it is more than four components. And we are working on another, two other applications right now as we speak. So, we are working through that, but we are pretty well positioned on the 787 right now.

Okay. And then lastly, you said that the tax rate, should that just continue for the next couple of quarters, that 33%, is there an R&D tax credit that if it comes through, you'd see a benefit there?

Yes. I would suggest modeling at 33% until the Federal R&D tax credit is approved by Congress. That may happen in the second quarter, probably more likely the third quarter. And then when it does, we model -- I would you guess model 33% til that occurs.

Right.

And that will drive down to a full year rate that we've enjoyed the last couple of years of about 31%.

Okay. That's helpful. And then, is there a full year CapEx number you can probably give us on kind of what you gave...?

$11 million.

Still $11 million?

Yes.

Okay. Thanks guys.

We have a follow-up from the line of Edward Marshall with Sidoti & Company. Please proceed.

Any chance you guys shift the policy and start looking at full year guidance, either EPS or top-line. I know you gave us general guidance on certain programs, but I think it would be helpful?

Okay, I appreciate the question, Edward. We haven't really broached that, so right now we are not moving out on guidance at this time.

And then, on the 787, I think you've said publicly the contribution that you would see on the top-line once that's up and running at full run rate, can you remind us of that?

We look at the 787 is when it gets to its mature state of being one of our top five programs.

Is that -- but there is no associated number with that, I mean we could look at our...

If we look at our current top five programs, that would put us in the low $20s million to the mid $20 million on an annual rate.

Okay. Thank you very much.

Thank you.

At this time there are no further questions in the queue. I will turn the call over to Tony Reardon for final remarks.

Thank you Maria. To close, I just wanted to say that we appreciate our investors' patience as we faced some headwinds this past year and made investments in new programs. We believe the future looks bright. The company is in excellent financial shape and well positioned for growth and improved performance as we look forward to the global economies' rebound. Thank you very much for joining us today and we appreciate the questions.

Thank you for your participation in today's conference ladies and gentlemen. All parties may now disconnect. Enjoy your day.