Ducommun Inc (DCO) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to third quarter 2010 Ducommun earnings conference call. My name is Lameta and I'll be your operator for today.

(Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to Mr. Chris Witty, who handles Ducommun's investor relations. Please proceed, sir.

Thank you, and welcome to Ducommun's third 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 disclosed in this conference call and in the Company's annual report on 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, future events or otherwise, after the date of this conference call.

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

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

In the third quarter, a variety of market dynamics were in play that impacted our revenue. he global economic forces driving both the military and commercial aerospace markets have influenced the build rates and funding dynamics for all aspects of the industry. The DOD continues to face budget pressures while trying to meet current requirements. And as a result, Ducommun has seen a drop in production of some military programs, such as the C-17, de-funding of NASA and the insourcing of government services. At the same time, we are participating in the growth of programs such as the JSF, and providing the original equipment manufacturers with increased support for foreign military sales.

Shipments for the C-17, the Chinook helicopter and Apache helicopter were delayed this quarter, with schedules pushed out into Q4 and possibly early into next year. Please note that I said schedule slides, not cancellations. Ducommun does anticipate delivering these requirements in the next two quarters. We also experienced a 32% decline in engineering services revenues, as a result of reduced government spending, and for order delays on a couple of current contracts. In addition, one item to note on a year-over-year revenue comparison, is that the third quarter of 2009 included $5.4 million of revenue related to the UCAS development program, which was not anticipated to repeat this year. However, we do anticipate follow-on orders on this program in the future.

Meanwhile our commercial business was stronger quarter-over-quarter with higher Boeing 747, 777 and 787 sales, as well as some signs of improvements in the regional jet market. The continued growth in the world air travel, despite a moderating economy, supports the increased build rate projections we're seeing in the large commercial transport market. Ducommun's participation on the Boeing 737, 747, 777 and 787 aircraft, as well as the Airbus A330, A340 and A380 aircraft will help our growth in the quarters to come.

However, the higher commercial sales were not enough to offset the drop in the military sales for this quarter and negatively impacted the operating margins. Contributing to the lower margins were slightly higher SG&A costs, as well as investments in R&D programs. We view the third quarter as marking the low point, in terms of revenue, for this economic cycle, with sequential gains going forward. Specifically, we see the commercial markets strengthening at a faster pace than before, and in 2011, we expect to benefit from the increased shipments to support the higher build rates for the Boeing and Airbus programs. While business jet demands remain soft , the regional jet market has stabilized and we forecast this will lead to slightly higher revenues in the quarters to come.

On the military side, while the C-17 and the Apache rates are at lower levels, the rest of our programs remain solid. Specifically, we expect the JSF to continue to be funded, we see strong demands on the Blackhawk and the CH-47 helicopters, and we anticipate demands for the F-18 and F-15 spares to continue. In addition, we are analyzing the recently announced Saudi order to Boeing and Raytheon to see how it will impact the shipments going forward. The order includes 84 new F-15 aircraft, plus 70 upgrades to the F-15s, along with 72 Blackhawks and 70 Apache helicopters.

Within our engineering services division, we see room for improvement in the quarters to come. We believe that our current growth strategy is taking hold, and we have refocused on several markets. Once the Federal budget is released, we will be in a very solid position to support ongoing and future development programs, and we continue to bid on new opportunities, and we anticipate gradual increases in revenues going forward.

Our backlog grew to $320,900,000 from $305,600,000 last quarter, reflecting both new business and long-term follow-on contract awards. Due to our strengthening position as a tier two supplier, we see further increases in backlog in the quarters to come, particularly given the higher commercial build rates expected next year. Ducommun's investments are paying off in terms of our OEM relationships, with increased value added content, which is why we feel confident in saying that Ducommun is on the right path to improve operating results.

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

Thank you, Tony, and good afternoon, everyone.

Yesterday, we reported results for the third quarter of $0.55 per fully diluted share compared to $0.59 per fully diluted share a year ago. The third quarter 2010 results reflect the benefit of a $0.19 per diluted share for a change in provisions for unrecognized tax benefits. Third quarter sales of $99 million were 9.5% below last year's, but as we look at the segments, we saw our commercial business increase 16%, but it was not enough to offset the 21% decline in our military business.

In our Ducommun AeroStructures business, or DAS, we experienced a 9% decrease in sales. It was primarily from softer sales in military helicopter products and military fixed winged programs, that were partially offset by the continued growth in large commercial aircraft programs.

Turning to the technology segment, or DTI, we saw a 10% decrease in revenues. This was primarily as a result of a 32% decrease in engineering services revenues as a result of reduced government funding. Our manufactured technology products posted a 5% increase in shipments, as a result of increases in replacement radar racks and electronic components.

Turning to operating income by the business segments, DAS' operating income for the quarter was -- margin was 6.3%, compared to 9% a year ago. This was primarily driven by lower operating income in our DAS segment, while our DTI segment continued to show improvement year-over-year. During the quarter, we absorbed about $800,000, or one percentage point, in start-up and development costs for new programs, which we had begun earlier in the year. We expect these costs to be reduced sequentially in the fourth quarter and into 2011.

We look at DAS' operating income, we had operating income margins of 9.9% and that compares to 13.6% of revenue a year ago. I want to add some further qualifications there, though. The lower operating income reflects a more unfavorable product mix year-over-year, driven by decreases in the military fixed wing products and military helicopter programs. The bulk of the development costs I mentioned earlier and the $800,000 charge was attributable to the DAS segment. And if we adjusted that, the operating margins for the quarter would have approximated 11.5%, which compares to the 13.6% operating margin from a year ago.

Ducommun Technology, or DTI's, operating income increased slightly, and the operating margin percentages were 9.8%, compared to 8.5%. That's 130 basis points year-over-year, as a result from increased shipments of radar racks products, increases in technology products, and continuing efficiencies that were gained from the lean manufacturing process.

Selling general and administrative expenses increased to 13.8% of sales in the third quarter, compared to 11.5% a year ago. The increases this year were the result of higher accrued compensation expenses, and continuing increased investment in product development programs.

Turning to our business mix and backlog, during the quarter, the growth in commercial segments and the decline in military revenues has shifted our mix a bit. At quarter end, our business comprised of 57% military, 42% commercial, and 1% space. That compares to a year ago's numbers where military was 65%, commercial 33%, and space was 2%. We were pleased to see the backlogs increase sequentially to $321 million, from $306 million at the end of the second quarter.

We have had no major program losses, and while we have picked up firm purchase orders during the quarter for the 737, Blackhawk helicopter, Apache helicopter, and F-18, we still have experienced delays in follow-on orders for the F-15, C-17, and the Carson helicopter programs. We expect follow-on orders for those programs to be booked in the fourth quarter or if delayed, in the first quarter in 2011. We are also optimistic with regard to additional new program wins, with recent new programs ramping up in 2010. We expect increased backlogs going forward.

Turning to the nine month 2010 results. We -- our earnings for the year, year-over-year, are up 17%, as our fully diluted earnings per share are $1.47, compared to $1.27 per fully diluted share a year ago. Our first nine months' sales, up $307 million, are a decrease of 6% from last year's nine-month results, and this is primarily attributable to a 32% decrease in engineering services and lower military helicopter programs. All of this, of which has been partially offset by continued growth in the large commercial aircraft sector. Year-over-year commercial sales have increased 6%, and our sales to the military segment have decreased 13%.

If we look at some of the business segment sales, in the DAS unit, the sales year-over-year have decreased 5%, as the solid growth in the large commercial aircraft was not enough to offset the lower revenues from the military helicopter programs. On the DTI side, the first nine month's revenues were down about 7%. They reflect the shortfalls in our aftermarket sales and engineering services revenues, despite significant growth in radar rack product shipments.

Turning to our operating income by business segment, our operating income overall margin was 7.2% and compares favorably to 6.8% from the previous year. For the first nine months, the results include a favorable inventory adjustment in prior periods of $1.2 million, and these have been offset by approximately a total of $3.6 million in start-up and development costs through the first nine months, which have generated $8 million in sales. Just noting from last year, the first nine months of 2009, the results were negatively impacted by $5.1 million, or 1.6 percentage points, due to an inventory reserve related to the Eclipse bankruptcy, and an inventory valuation adjustment.

On an adjusted basis, taking into consideration those points that I made, our operating income for the first nine months of 2010 would have been $24.5 million, or 8.2% of revenues, compared to $27 million or 8.3% of revenues in the prior year. Selling general and administration is running at about 12.9% year-to-date, compared to 11.6% for the comparable period last year. This was primarily a result of a couple factors. Higher expenses related to the amortization of intangible assets, a slightly higher compensation accruals, and finally the additional investment in product development programs. Cost controls remain in effect.

Turning to liquidity and capital resources. As a normal reflection of our cash flow and business cycle, we generated nearly $7 million in positive cash flow from operations during the quarter, bringing our year-to-date cash flow from operations to a negative $3 million, but that's $6 million improvement over the prior -- comparable period in 2009. In addressing those issues, we continue to focus on effective working capital management, primarily by working to improve inventory turns and increasing our accounts receivable collections efforts. We continue to maintain a low leverage position. At quarter end, our net debt to capital ratio was 7%. We expect CapEx for this year to be in the range of $9 million, and that compares to slightly less than $8 million last year. The increase primarily reflects new program growth.

Now with that, I'd like to ask Tony Reardon to make some additional remarks. Tony?

Thank you, Joe.

Before turning the call over to questions, let me just again state that while this quarter reflected delays in some military shipments, we were -- we are actually more confident than last quarter regarding our outlook for Ducommun, and believe the necessary growth drivers are in place to see improvement in our business going forward. Some military headwinds remain. Particularly with our sunset programs, we continue to take a disciplined approach to managing our operations. As stated earlier, we see a strong commercial rebound and new product development programs fueling top line growth in 2011. We've always been conservative in assessing the market landscape, but we are experiencing greater traction with regard to the commercial demand trends and believe the company's lean initiatives will result in improved bottom line results. We also continue to look for prudent acquisitions, and have been actively engaged with several companies over this earlier part of this year. Our goal is to enhance and diversify our product offerings and strengthen our role as a leading tier two aerospace provider.

With that, I would now like to open the call up for questions, so Zulmera, please?

(Operator Instructions).

And your first question comes from the line of Edward Marshall from Sidoti & Company. Please proceed, sir.

Good afternoon. I guess you're on the west coast, good morning, and thanks for taking my call.

The military push out that you're discussing on, I guess it goes on the C-17, the Chinook, and I believe you said the Apache, did you quantify the total amount of sales that were pushed out to coming quarters,and if not, could you do so?

Good morning, or good afternoon, Ed, this is Tony.

We had not quantified it, but you know if you take a look at the average revenue over the last three quarters, I think you can get a pretty good idea of what that looks like. I will give you some color as to what the issues were on the Chinook program. Boeing's actually retooling on that program, and has been over the last quarter. We anticipated that we would pick up revenue at the end of the third quarter, and their tooling program has been, you know, pushed out a little bit, so we would look to, you know, pick some of that up in the fourth quarter. The Apache was engineering change driven initiatives, which have subsequently been cleared. And then on the C-17, it's, they're putting a new system, SAP, I believe, is what they're putting in there, so that has some delays in their ability to receive and we're sort of working through that right now with them, so we'll see how that manifests itself in the fourth quarter.

So if I could just clarify, looks like the average would be about $3.5 million to $4.5 million or so in sales, is that about accurate?

That's close enough. Little bit higher maybe.

Okay.

The Apache, you mentioned that -- they're retooling that blade to be a composite blade, can I, are you guys capable of doing a composite blade? My understanding is maybe the Carson helicopter blade is a carbon fiber blade. Can you kind of talk about that?

Yes, I will.

We're fully capable of manufacturing a composite blade, and we're participating on this blade right now with Boeing. So they're in their initial production releases. They've developed the blade and actually flown it. And so they're in their initial production releases. They just got, I believe it was block three released, which included the blade and we're in full support on that. Unlike in the past, they have decided to make the blade themselves from a, you know, a full blade, so we are actively supporting that, and we look for an increased role as they get into higher production rates. So I would anticipate that, as we go down the path or as they go down the path to higher rate production, we'll have a, hopefully a greater role in manufacturing some support for that blade.

Are you the only production, are you the only one that's supporting the project or is there other --

No. There's other companies in there.

How many? Do you know?

Well, on the composite side, I think there's one other.

Okay.

SG&A was higher than normal in the quarter. Typically I see that as a fourth quarter event with you guys. You did mention that R&D costs were up slightly, but can you kind of talk to, are you trending above goal for the year? Catching up on your accruals, or what happened in the third quarter here?

Well, Ed, we're right on plan with our accruals as it relates to, we talked about three components, the accrued, compensation, expenses. It's based on what we projected at the beginning of the year for our ALP goals, our annual goals, net income and cash flow. But the other expenses have been, we continue to invest, really on the technology side in research and development programs because we feel it's essential to continue to fund and invest in the pipeline of future technology products. And then just one other one, it would be really more year-to-date than for the quarter, we still have some higher levels of intangible assets, amortizing those that show up in our financial numbers.

Are we trending higher? A little bit higher. We have -- we're very, very, I'd say frugal and really watch our discretionary expenses and so we're really pleased with, that we've been able to keep a lid on them.

So are you saying the largest incremental change, on a quarter to quarter basis progressing throughout 2010, is really due to research and development cost? I mean, looking back, looking back to last year, I mean, it seems like it was pretty much even through the first three quarters. Looking at this year, it looks like you stepped up incrementally despite the fact that revenues came down, it looks like you're outpacing --

We stepped up, when we saw the difficult economic environments in 2009, we put a freeze on all management salaries, and then we lifted those freeze with nominal increases this year, starting in March. So some of that is flowing through. But I think we have, we're continuing to spend a little bit more year-over-year, quarter-over-quarter on research and development costs.

Okay.

And that shows up in the third quarter numbers as well as the full year-to-date numbers.

So looking at the book of business that you guys have right now, the new programs that you've won. I guess what is, you know, obviously everything moving in one direction, which is up, would be great. But what is the key cog, as you see it, to kind of improving your business model going forward? Is it the narrow body aircraft, because the volume? Is it the military side of the business, or is that new program growth that you saw with the regional aircraft that's really going to move that needle as we progress into the outer years?

I think it's a little bit of all it.

You know we -- let me start with the military side. We do see some opportunities in the foreign military sales and we see that market strengthening. I think that, for example, on the C-17 what we're seeing is, you know, a little leveling of the production rate to anticipate more foreign military sales than in the past, so we've been out supporting that. But also the JSF program, it looks like that will continue to grow and we have some open opportunities to look at there.

And then what we're seeing, Ed, on the commercial side is that, as the rate increases and the projections on the rates increases and in particular on the narrow body, that the tier ones are looking for support in order to be able to meet the rates, and so we see some growth opportunities there. And as a result of what we've done with regards to higher level assemblies, we're getting pulsed for higher level assemblies to support, you know, the larger build rates. So we're optimistic on some of the programs. I think we've had some recent wins that you saw, in the 777, for example, that bode well for us, and I think that there's some other opportunities that will be coming out of Boeing in Seattle that we're looking at as well.

I guess finally, you know, follow-up to what you just said, on the commercial side of the business is your stress, as you know the supply train starts to get stressed out, or stressed rather, as the production schedule fills up, are there share potential gains that you guys see, you know, as capacities come down in some of your competitors, or how do you think about that? Or what could you add to that?

Yes, I think more what we're seeing is that the opportunity is with the tier ones and the OEMs, as their capacity shrinks, as they try to get to the higher rates, I think there's opportunities there. And then I think that, you know, from a competitive standpoint, I think we're moving into an arena that, you know, we can be more competitive with some of the foreign competition that's been in there for higher level assemblies. So I think we're putting ourselves in a pretty good position to go forward.

That having said that, I think we've got more work to do, and we'll continue to do that, but I, you know, we're comfortable that we're seeing a lot of good opportunities, and we're working a lot of different programs across the board.

Okay. Thank you very much.

Thank you.

Thank you, Ed

Your next question comes from the line of Troy Lahr from Stifel Nicolaus. Please proceed.

Thanks, yes.

I'm wondering with the margins at the AeroStructure segment, if you can talk a little bit about how you view margins, kind of longer term. What is a sustainable level, excluding some of the these investment costs, and maybe once some of the military revenue starts flowing back?

I talked to you a little bit earlier in my prepared remarks, Troy, that on an adjusted basis we're running at about 8.2%, 8.3%, which is comparable to last year. I think, until we see in the latter half of 2011, a more dramatic expansion of the large commercial aircraft cycle, we're probably operating in that range right now. And that depends really on the cycles and the level of sales that we have from quarter to quarter. As you heard Tony's remarks about schedule slides, that's certainly we and several of others in the industry participants and supply chain are seeing those. So we have stronger sales than this quarter. Certainly we would expect those to nominally expand, and then those margins to be somewhat affected on lower levels of sales.

So the 8.2% to 8.3%, you did that this quarter you're saying, excluding --

Correct. Yes. That, yes.

That's EBIT margin, excluding the $800 million in investment costs?

My remarks, Troy, were related to adjusted year to date. When we smooth all this quarter to quarter variability out, and we look at next year, we think we're in that 8.2% to, 8.2% to 8.5% operating margin percentage. And when we break that down, we really look at it by business segment too, our DTI segment is, continues to expand and it's running about 9.5%, and certainly we'd like to get it at the upper range of the single digit nine or even get it to ten.

And on the AeroStructure side as you know, historically, we, compared to where we were, we're at lower levels now, but we're running ino the, on that, we're running year to date at about 11.5% to 12% on an adjusted basis. And so we would see, we would see those kind of parameters by business segment going forward until there's a significant and dramatic change in our sales, which we would expect more so in the second half of next year.

Okay. Thanks.

And at DTI, could you maybe talk about how much of the revenue shortfall was kind of budget timing issues, customer releasing orders, and then how much maybe was kind of insourcing or just reduced demand? I don't know if you can quantify that, but maybe just put some color around that a little bit?

Sure.

I think that what we saw, you know, if you, first of all, I think we projected that in the beginning of the year that we would have a lower demand there just because of the insourcing, but you know what really impacted us, I would say by about, maybe, I wouldn't say close to a third of the drop was from NASA defunding, which happened, you know in the beginning of the quarter, and some moves around constellations, so we were heavily engaged in that . And then some delays in just releasing, because obviously the budget hasn't been approved, so we're on a month-to-month, some of that hit us in the quarter. And we anticipate picking up some of that in the fourth quarter as they move out and fund the

Okay.

And then the I guess it was close to, almost $1 million, I guess $800,000 for investment cost this quarter. How, is that pretty much, it seems like that's tracking to your plan. You're not really seeing any cost growth on these new programs. You're pretty comfortable with where you're tracking.

Yes. And if we go back. I talked about it for the, for the nine months year to date, we have $3.1 million worth of development costs that hit our cost of goods sold and affected our margins on $8 million of sales, but when we look at it, we look at it by quarter, it started out the first quarter at $1.8 million, second quarter $1.1 million, now down to $800,000 we would expect those costs to continue to abate, sequentially.

Do you think any of those costs flow through to 2011, or are you pretty much wrapping it up in the fourth quarter?

I think probably the first quarter. Some of it.

Okay.

Some of them will flow, but at lower rates.

And then last question, and I can jump back in queue.

Can you give us the sales for Boeing commercial aircraft? I think in the Q you just give us the 737 number?

Yes. We have -- it is in the Q, and for the quarter our sales, well our sales to Boeing overall were $26.5 million.

And that's military, isn't it?

Right. That's military. I was just trying to get the commercial aircraft component. So 737, triple seven. Some of your 747 work. In the past I think you've broken that out, but you've stopped putting that in the Q.

Yes. That was approximately, I would say, the number is about $20 million for the quarter.

Okay.

Was our sales to Boeing commercial aircraft.

Great. Perfect.

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

Your next question comes from the line of Jonathan Richmond from Imperial Capital. Please proceed, sir.

Hello. Good morning. Thank you for taking my call.

Good morning, Jonathan.

My first question is, I guess is regarding, you know, if you can add additional comments on, you know, the acquisition opportunities as you see it, and in terms of just, you know, kind of how multiples are there being that it seems there's a lot of interest in this sector in general. Just seeing how you guys view yourself in that greater context?

Well, I think that the first thing I think, you know, that I made a statement earlier, Jonathan, that you know, we have been very active in this last 18 months looking at several companies. What we're seeing in the multiples is that they're increasing, and you know, quite frankly what we're seeing is some of the private equity money coming into this sector and driving up multiples across the board. So I think if you did an analysis of the last six to eight acquisitions, you'd see they're running somewhere between, and depending on the business, 7.5 to 10 times in terms of sales. So those are, you know, things that we're looking at. You know that's, those are the types of multiples that have been sold at, so obviously we're looking for something that's more in line with, with where we sit.

All right.

So I guess how's that, you know affecting your thoughts, in terms of your future acquisitions that you guys plan on making? Do you feel like it might be pushing you out a little bit or you're just --

Here's the way we look at it, and I think this is the way we concentrate on the acquisitions. First and foremost, it's the fit for the Company and how well does it take us where we want to do, from our strategic standpoint. Then we -- in the due diligence phase, much like DAS New York, we take a very hard look at where we think we can get synergies out of the business and how we can reduce that multiple over a 12- to 18-month period to make it more in line with what we need to be to be successful from an accretion standpoint. So you know, those two factors, the higher multiples don't really scare us away as long as we see the proper synergy in place in order for us to be successful to make that acquisition accretive over a short period of time.

Okay. Great. Thanks.

And then, in terms of just looking at the F-18 sales were down, you know, year-over-year in the quarter, is that also one affected by timing issues and expected to come back later on? Or can you comment on that?

Yes, we would expect that we would see an increase on the F-18 sales. It is timing, quite frankly.

On the radar rack shipments or overall?

On the radar racks and I think overall, I think the program itself has had pretty steady state production, but it is primarily what you see is the shortfall on the radar racks.

Okay.

And then in terms of, you know, the fourth quarter, would you guys expect that to be a, you know, larger in terms of free cash flow kind of how you're looking at it going forward? Because you know last year you guys were around $20 million, I think this year we're estimating, you're thinking you'll be lower than that obviously, but where are you guys, what's your thought on that?

The fourth quarter is all, is always our, the end of our business cycle, and so our free cash flow in that quarter is by far the largest amount generated. There have been quarters where we've generated anywhere from $25 million to $35 million of cash flow from operations in that fourth quarter. So what we experience, Jonathan, is we get a liquidation of our accounts receivable. We collect on those. We pull in inventories the last six weeks. Try to manage those. And get our, try to reduce our finished goods. And so all those plus the, the depreciation, amortization and net income we can generate all line up pretty well to get those kinds of, those kinds of positive returns in the fourth quarter.

Okay. Great.

And then, just my last question is regarding, you know the SG&A increase. Is that expected to continue at a higher level in the near term through 2011 or you're expecting it to come back down --

Probably. There's some discretionary amounts in there, primary accrued compensation expenses related to our overall performance and the level of investment we do in research and development. Your question is, what is expected. I think where we are now, those are more normalized levels probably in the $13.5 million a quarter for the corporation, as a baseline.

Okay. Great. Thank you very much.

Thank you.

Your next question comes from the line of Mike French from Morgan Joseph. Please proceed.

Hello, guys. This is Jim Moore in for Mike French.

Hi Jim.

Just had a couple questions.

First, can you just add a little more color on these steps you're taking for improved operating performance?

And then the other one is, can you just talk about your opportunities in the engineering services a little more as well?

Thanks.

Okay. Sure.

On the improved performance for the operations, I think first of all, we're heavily involved in lean and, and we've been doing that since 2005 quite frankly, so you know, what we'd like to say around here, the more we know about it, the less we know about it. But I think that's an important part of how we drive our business from an operational standpoint. We also see that , you know, there's opportunities for improvement if you look at the revenue base in the fourth quarter -- in the third quarter, there are some commercial programs that are essentially start-ups, such as like the 787 where we see opportunities to improve performance going forward, and we'll do that through efficiency challenges and lean as we step forward. So I think that's the best analysis that I can give you, but those are the things that we have in front of us.

In terms of the engineering services business, you know, about a year ago right now, we brought in a new President into that business, and he has done an excellent job of streamlining the operations and refocusing the business around specific markets, one of them in particular would be the nano satellite market,. And so we're seeing some inroads there and some development programs that they're looking at to participate, as well as the you know more focused on their capabilities with regards to the missile defense market. So we see some opportunities out there as the budget comes through and of course, we'll have to wait and see on the elections, and depending on how fast that budget come through, then we'll have a better understanding on how we can improve our capabilities in that

Thanks very much.

You're welcome.

And you have a follow-up question from Troy Lahr. Please proceed.

Yes, with the changes that you're talking about at Boeing on the Apache, do you still expect that to be kind of about a $25 million a year business for you guys or could that dip as more of the production stays in house at Boeing?

Yes, I think that probably over time we'll see a dip in that, Troy. I don't have the, you know, the projections going forward. I think that what we're seeing, obviously, is that the first of all, the new rotor blade's coming on line, and we're participating in that, as I said, so that's an important program for us, and you know we're certainly keen on improving our position on that blade. But we will see,I think, a reduction in the existing blade over time. However, I think there are a number of customers out there, on the foreign military side, which will stay with the existing blade, so we'll see continued production on that.

And then the tail rotors, at this point in time have not been moved to composites, although I think that's in the wind, and we'll be supporting that going forward. So I would look at 2011, and 2012 and probably see some slight reduction in build rates as we go out, but at this time I don't have those numbers. We're actually in the final throes of working with them on rates right now.

Okay. And on the F-35, given some of the production delays that might be coming, what we've already seen, do you think that there's enough F-35 revenue near term to offset some of the F-22 wind down?

Yes. For us, I think that for sure. F-22 for us was not a big program, so you know that's a easy putt for us. But in terms of the JSF growth, I think we have some opportunities on that that we are working on. I think that from a near term standpoint, I'd say that next year, you know, if that's near term, I'm not sure that we have high, very high revenue on this program, but I think out in 2012 and 2013, I think we would have things pick up along those lines.

Okay.

And then on Chinook, should we still think about that as, you know, I don't know, I was thinking that that was kind of a $15 million to $20 million a year program. Is that kind of in the range of how we should still be thinking about that once you kind of ramp up and they see higher build rates or no?

Yes, I think so, Troy.

We're anticipating that they're going to go to, you know, a slightly higher build rate going forward, and that, you know, we've been hampered with their retooling. We actually retooled as well, so that we could help them get the higher rates on the blades, so we're working through that,, So I would anticipate that we would stay pretty close to that level, you know in that range, quite frankly.

Okay.

And than on C-17 I've always kind of viewed that as maybe a $40 million a year program. Does that drop to maybe, $30 million or is it $35 million, how should we think about C-17 as you transition and as they lower production over the next, say, few years?

I would use that $30 million number.

You know, quite frankly, what we haven't settled on next year with Boeing and then that's one of the negotiations that we're sitting through right now, and I think they have some issues that they have to work through with regards to the foreign military sales and how that will impact it. We would look at that in that range, so about that drop, you know. They're going to drop their production rate and they need to get to a steady state volume. They're running at about 15 chip sets right now, they'll be lower than that in 2011 and 2012. And then we'll see how the foreign military sales pick up going forward. So you know, that $30 million range to a little less than that would probably be prudent.

Okay. Perfect .

Okay. I appreciate it. Thanks,

Okay, Troy

And you have a follow-up question from Edward Marshall. Please proceed.

Two follow-up questions from me.

One, you talked about, you know, your collection services, you've also talked about improving it, inventory turns. And I was wondering if you could kind of discuss your goals either -- both this year and kind of the longer term trend as what you expect from both of those metrics?

Ed, on the collection services, we talked about accounts receivables collection. We have an internal metric that we're holding our organization accountable to. We try to get at least our -- and we look at the aging of our accounts receivable, 85% or more of our receivables should either be current or current plus five days. We fortunately don't have any significant credit risk or credit default situations here because the customer set is pretty financially secure. We go in and look at the inventory, it's a little bit more complex, because we have the composition of a variety of things, raw material and a lot of work in process by nature of our business and some finished goods. But in terms of turns, we look at somewhere between, in excess of 4, 4.2, 4.3 times a year are our goals. And I think traditionally we've run less than four, and so part of our lean manufacturing six sigma and our focus on operations, and working with our supply chain management group, we're all working very hard currently and then next year, despite all these schedule slides to enhance our returns, inventory returns.

All right.

And then I guess, kind of in another direction, in looking at kind of, you talked about acquisitions and multiples going higher and I guess maybe looking at it from another angle. With that -- with multiples increasing, I mean, is that, has it been kind of the Board's decision, you know, maybe and your decision, maybe to look at some maybe of the non-core assets that you guys hold in your portfolio, and maybe take a look at, as multiples start to increase to kind of shed some of those non-core assets that may make sense. Is that kind of in the plans or has that been chopped around a little bit?

Ed, I really can't comment on that. We have not gone down that path, so I just really don't have anything to add to that.

Okay. Thank you.

(Operator Instructions).

And you have a question from the line of Donald Porter from DGHM. Please proceed.

Hello. Good morning, guys.

Morning, Donald.

Hello, Donald.

Hello.

I had a question on the gross profit line. So part of that is the start-up and development costs that you talked about. My first question would be, you know, what are those programs and how does that sort of ramp down over the next following quarters?

Then you also talked about a sales mix and lower volume, is that mostly just utilization, you know plant utilization issues or is it that some programs that have, some of the military programs had better margin profiles with them?

On, Donald, on the multiple question. To start with that, you asked about what kind of programs it is. It is a multitude of programs, and it's both on the DAS side and our technology side. Programs, say for [Rearag], Bombardier, for what we call a racer program for the F-16 for Raytheon with radar racks, there's an new Embraer program we announced where we're in tooling stages. There's a couple other customers, Shenyang Aircraft and others. So, it's a multitude of those and we've been asked the question before, well don't you always have those. We do, but because of our focus on bringing on many new products in line to replace some of our sunset programs that we've commented about, our activity in the last couple of years has been greater, and our success in securing these programs has been greater than we had historically experienced. It's just at a greater rate. And so we're having to, the way the accounting is, to take those expenses as we ramp up these programs. So that's the impact,and it flows through our gross margins.

Just to follow up on that.

Is it, you know, is it, is the R&D that you're spending for current programs that you're on, or is there any R&D that's kind of spec?

I think it's, Donald, it's both. But the, for example, the $800,000 we reference is for programs that we're on. We do have some SG&A funding that, for development programs that we have in house that are, that primarily on our technology side of our business. So one good example of an R&D program that came out as a win, is we announced the capture of the engine start switch on the 737 program on our technology side this year. And that was a pure R&D program that we fund in house and we have programs like that, that we're working on currently. Not necessarily switches but programs that, where we have a selected market, and we have identified the market and we run through what we call a gate system to identify the R&D project, and then as we fund it, make sure that we solidify the marketing base before we proceed.

Got you.

Just again on the last question I asked about the sales mix. Again, is that one of just lower volume and not covering overhead, or one of the programs had different sort of profiles --

A little bit of both.

Yes. And how would you see that going forward?

Well we need to, you know, if we can, well let's put it this way. I think going forward what we see is improved results out of the programs that had some lower margins and we anticipate picking up some of the programs that were moved out. So I think we'll, we should end up recovering our position, as we head going forward and hit an average.

Got you. Thank you.

(Operator Instructions).

There are no questions at this time. I would like to turn the call over to Mr. Tony Reardon for closing remarks. Please proceed, sir.

Thank you very much, Lamera.

And I would just like to thank everyone for their continued interest and support, and we look forward to speaking to you next quarter for the fourth quarter results as well as the year-end results. So, thank you very much for your interest.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation, you may now disconnect. Have a great day.