Ducommun Inc (DCO) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to 2011 Ducommun earnings conference call. My name is Carmen, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. (Operator Instructions). Later we will conduct a question-and-answer session. I would now like to turn the call over to the moderator. Please proceed.

Thank you, and welcome to Ducommun's first quarter conference call. With me is Tony Reardon, President and CEO and Joe Bellino, Vice President and CFO. 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 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. Foreign 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, 2010 and Form 10-Q for the fiscal period April 2, 2011. All subsequent written and oral forward-looking statements attributable to the Company or the 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 would 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 thank you, everyone, for joining us today. I would like to give you an overview of the market as we see it and then discuss the quarter and other recent activities, after which I will turn the call over to Joe Bellino to go over the financial results in detail. Let me start off with some comments about the overall market conditions.

In our opinion, the heavy -- the healthy backlogs at Boeing and Airbus, driven by the need for fuel efficient aircraft will continue to support higher commercial aircraft build rates over the next few years. Global passenger traffic trends appear to be returning to a more normalized historical growth rate of between 4% and 6%, following above average growth in the second half of 2010, which was led primarily by the Asia Pacific region. Now, while we were seeing some near term schedule slides in the Boeing 787 with a 2011 run rate now at about two and a half -- two to two and a half ship sets per month as opposed to three or four aircraft per month originally forecast, we do see a pickup on that program in 2012 and beyond supporting the growth in the commercial side of the business. The regional and general aviation markets have also stabilized at lower levels with a slight pick up in demand for the larger aircraft in this market. We expect this market to grow gradually over the next two to three years.

On the military side, following the compromise of the fiscal 2011 defense budget that called for relatively flat year over year spending, Congress will soon shift its attention to fiscal 2012, where we suspect some down side exists the President's request for a $553 billion budget, again, representing flat spending year over year. While out year budget forecast calls for low single digit growth within the core defense budget, we expect the spending to remain flat over this period. We believe that we are well positioned on key platforms, which will remain funded going forward.

Now, let me review the operating results in Q1. Last quarter, we discussed how 2011 would be a year of strengthening financial results in the second half, driven by increasing commercial demand and stabilization across our legacy military programs. As we had forecasted, the first quarter was flat relative to the last two quarters, characterized by lower C-17 sales and a softness within our engineering services area and also reflected delays in orders for the F-15 and the F-18 spares. With regard to the C-17, we have not yet finalized the follow on contract with Boeing but believe this will happen in the very near future, which should lead to a more predictable revenue on this platform going forward.

Overall, we are seeing our legacy military program stabilizing in the second quarter, thus removing the headwinds from our second half results. Apache shipments were actually flat year over year in Q1, and we expected delayed in the F-15 and the F-18 radar production products to be made up during the second -- or the remainder of 2011. We posted another good quarter on the Black Hawk and our Chinook follow on contract was finalized earlier this year allowing for shipments to commence on this program. In addition, the Carson helicopter deliveries resumed at the end of the first quarter, and we are seeing this business operating at normal -- at more normal production rates going forward.

With regard to the Ducommun Technologies, we are pleased by the passage of the budget in the Congress ,and we believe the remainder of 2011 should see stable revenue over our engineering Services Division. However, for this quarter, weakness within the engineering services helped drive the Ducommun Technologies to post a $6 million drop in revenue versus 2010, although DTI was also impacted by the decline on the F-15 and the F-18 sales. But even with these issues affecting the top line, DTI operating margins improved from 7-point -- or improved to 7.8% from 7.1% last year. Within our commercial platforms, we saw regional and business jet demand improve year over year and revenue from the Boeing 737, 747 and 777 platforms was strong. We expect to benefit from increased demand to support the higher build rates for Boeing, along with Airbus A330, A340 and A380 in the quarters to come. Gross margins in total remained at 18.5% versus last year, as did operating margins when including expenses related to LaBarge transaction which Joe will review in a moment.

I'm pleased to say that our backlog improved sequentially to $359 million from $328 million, reflecting a number of new awards and follow on orders. These cut across a variety of commercial and military platforms, both domestically and abroad, encompassing such projects as fuselage skins, wing tape assemblies and rotor blade components. In fact, we won new and follow on business in worth in aggregate approximately $130 million over the next several years, and we're seeing a strengthening in our order flow across the board.

We announced on April 4 an agreement to purchase the outstanding stock of LaBarge Incorporated, a leading manufacturer of electronic assemblies and hosted a call that day to review the strategic merits of this important transaction. We are excited about what we see as the very attractive addition to Ducommun, one that will strengthen our Company and expand our growth profile going forward. We will combine LaBarge with our Ducommun Technologies unit to create Ducommun and LaBarge Technologies. The business will be one of the premier electronics manufacturing providers dedicated to the aerospace and defense market, focused on low volume and high mix applications. LaBarge will broaden our existing A&D platforms and add access to new high growth markets allowing for substantial cross-selling opportunities in current customers as well as new ones. As I said on April 4, both companies have a metric driven business approach and a common corporate culture. The name LaBarge is well known and well respected across the industrial landscape. We'll be combining two excellent management teams and an outstanding workforce. Overall, the acquisition will increase our addressable market and add to the technological capabilities improving Ducommun's long-term margin profile and result in broader customer base. We believe it should be consummated by the end of June, and Joe will go over this in further details in a moment.

Before I return the call over to Joe, let me reiterate two things. First, we remain focused on providing a strong 2011 preparing the way for a solid 2012. As I noted earlier, our legacy military programs are stabilizing, and we're once again shipping on both the Chinook and the Carson platforms. We also anticipate a pickup of orders on the F-15 and the F-18, making up for the delays we experienced last quarter. With the commercial demand continuing to strengthen for the rest of the year, the entire year looks promising. Second, we are excited about the acquisition of LaBarge. We see this company and its people as being an excellent fit for Ducommun, and we are looking forward to building a stronger, broader based technology focused tier two aerospace leader in the months to come. Now, I would like to turn the call over to Joe Bellino to review the financials.

Thanks, Tony, and good day, everyone. Yesterday we reported our results for the first quarter posting a net income of $0.27 per diluted share compared to $0.40 per diluted share a year ago. The first quarter 2011 results were adversely affected by the program delays and also by the LaBarge merger-related transaction expenses which I will detail in a moment. In terms of sales, our first quarter sales of approximately $100 million were down 4.5% from a year ago. It was largely the result of lower revenues from our engineering services division and delays in release for orders for certain military aircraft programs which Tony has spoken about. We did see continuing growth in the sales of regional jet aircraft programs which partially offset these declines. Look at our manufactured product sales, they were down just slightly, 1% versus a year ago, and engineering services revenues declined 31%. And this decline was primarily the result of reduced government funding and the continuing resolution issues which existed at quarter end.

Looking at revenues by business segment, first Ducommun Aero Structures, DAS, our sales increased 2%, primarily from stronger sales to regional jet programs. It was partially offset by delayed orders for both the Chinook and the Carson helicopters, as well as the C-17. In the large commercial sales area, we had flat , but we expect increased commercial build rates in the latter half of 2011 to favorably impact our revenues. In the technology segment, DTI, we saw a nearly 18% decrease in revenues, primarily related to the engineering services that I mentioned, but also our manufactured technology products posted a 12% year over year decline. This was primarily driven by substantially less sales during the quarter to replacement radar racks and some after market electronic components. While our DTI manufactured product revenues were down, we do expect stronger shipments here in the second quarter, and it's more related to timing of purchase orders than underlying demand which is very robust and strong, and we expect to see the next three quarters benefiting from those.

Looking at operating income by business segment, our operating income declined to $4.3 million, or 4.3% of revenue from $6.9 million, or 6.6% of revenue. This was driven by slightly lower operating income in both segments, DAS and DTI, but more significantly by increases in SG&A expenses of approximately $1.4 million. These expenses were attributable to the merger related expenses related to the LaBarge transaction. If we factored those out, our operating margins would have been about 5.7%. Breaking it down by business segment, DAS's operating income of a little over $7 million was slightly less than 10% of sales and that compares to $7.5 million, or 10.6% of sales a year ago. The slightly lower margin percentages reflect the impact of lower Carson and Chinook helicopter sales as well as about $2 million less of C-17 sales. We look at the DTI operating income, it was $2.1 million, or 7.8%. It compares favorably to the 7.5% margin -- or excuse me, 7.1% margin a year ago.

Despite lower operating income in dollars, we continue to see our operating margins improve year over year. We are benefiting from a couple of things. Improved product mix and also continued efficiencies from our lean manufacturing initiatives. As I mentioned before, our SG&A expenses were higher as a result of the LaBarge transaction, and they increased to 14.2%. If we excluded the $1.4 million in those expenses from our overall SG&A, it would have been 12.8%, which is just slightly higher than our 12% in last year's first quarter. Our net income for the quarter benefited from a favorable tax rate compared to the 2010 period, and our effective tax rate was approximately 27% as a result of recognizing various research and development tax credits. The prior period, the effective tax rate was 33%, and it reflected no research and development tax credits. Our backlog, as Tony mentioned, has increased and we were very pleased to see that it has gone over the last couple of quarters since the September 2010 period of $302 million to now $359 million. We've had no program losses, and while our backlog increased during the quarter for the Black Hawk, the Apache and the 777, it was still impacted by delays in follow-on orders from the Chinook and C-17. As Tony mentioned, we expect the momentum for backlogs to increase during the latter part of 2011.

We are also optimistic with regard to additional recent wins and with new programs ramping up in the latter half of 2011. We increase -- we do expect those backlogs to continue to show strength. Our business has changed a little bit. We are now 54% military and 46% commercial. A year ago, it was 60% military and space and 40% commercial. Liquidity and capital resources, as a normal reflection of our cash flow cycle that we have seen for the past several years, we are primarily a user of cash from operations in the first quarter of 2011. It reflects an inventory build and increase in receivables slightly. The inventory build is to support future sales, and they're primarily in the raw material and work in process components. We continue to focus on effective capital -- working capital management, and we'll continue to work on improving our inventory returns as well as increasing our accounts receivable collection efforts. In terms of CapEx, we are forecasting approximately $10 million in CapEx this year compared to $7 million a year ago. It's all related to new program growth and equipment investment to expand our product capabilities organically.

Speaking about the LaBarge transaction, which Tony commented upon, we were pleased to announce on April 4 the proposed merger agreement with LaBarge. The overall transaction is valued at approximately $340 million and is expected to close by the end of June once we receive the regulatory approvals and any vote by LaBarge shareholders. The transaction itself implies an EBITDA multiple of approximately 8.7 times, and this excludes any potential synergies we expect to gain and in 2012, we expect the acquisition to be accretive excluding the impact of the transaction expenses and assuming that the debt markets remain -- and conditions remain at the current levels. We are planning to raise $390 million of debt, consisting of a new term loan B secured portion of approximately $190 million and $200 million of new senior unsecured notes to complete the acquisition. In addition, at closing we will have a $40 million revolver in place. We have received committed financing from UBS and Credit Suisse for the acquisition. Pro forma for the transaction, our net debt to adjusted LTM EBITDA, including investments in new programs as of -- on a pro forma basis of 12/31/10 and reflecting our first year synergies, will be approximately 4 to 4.2 times. We will focus our efforts in the future on reducing our leverage once the transaction closes. And with, that I would like to ask Tony Reardon to make some additional

Thank you, Joe. Before turning the call over to questions, let me just take a moment to say that we are confident Ducommun has taken the right steps to position the Company for improved financial performance in the quarter and the years to come. The acquisition of LaBarge will strengthen our growth prospects and open up new markets and transform Ducommun into a leading Tier 2 supplier of electronics and structural aerospace systems and assemblies. The transaction will nearly double the size of the Company, but it's not really about the size alone. Rather, it's the strategic and sound investment in our portfolio that will make us a more critical supplier to our customers across the board. As I said before, we're not only impressed with LaBarge's technology. We are impressed with their people, with their operations and their culture. LaBarge is a long-standing well respected company with deep roots supplying quality products to a large number of diverse OEMs, and we look forward to taking the next steps in our growth together.

2011 will be shaping up to be a pivotal year for Ducommun in many respects. Along with the LaBarge transaction, we are steadfast in our belief that many of our legacy platforms are stabilizing. In addition, our commercial order book is showing a strength that will bolster our growth in this year and then next year. Ducommun assemblies are on many of the most important platforms in the industry, from the Black Hawk to the Joint Strike Fighter to the Boeing 787. We continue to focus on winning new business and increasing long-term margins, all while generating strong cash flow. Now, Carmen, I would like to turn it over for questions, please.

(Operator instructions). The first question comes from the line of Edward Marshall with Sidoti & Company. Please proceed.

Hey, guys.

Good morning, Ed.

Hey, Ed.

So what -- you mentioned a few things in your prepared comments about the second half of this year, about the F-15 and the F-18, commercial build rates, LaBarge, but what else -- what makes you kind of optimistic on the second half of this year as we progress into next year as well?

Well, I think there's two things that we need to focus on, and we will leave LaBarge to stand alone. But with regards to the Ducommun business, the stabilization of the legacy programs, in particular the Apache and the C-17, will help us level out and then obviously, we're going to be picking up on the F-18, and then we expect the order on the F-15 to be placed in the second quarter so that we can move out on that.

So, that stabilization is great, but what we are seeing across the board on the commercial side is increased pickup, and we're also seeing an increase in the request for quotes. The bid cycle has picked up dramatically on that side of the equation as well. So as Boeing and Airbus are moving into higher build rates, we are seeing more opportunities from an off-load manufacturing standpoint, and I think that those bolster well for the remainder of this year and for next year. We've got in the first quarter a number of new programs that we are bringing online, in particular the Boeing 777, tip assemblies for the empennage, we have the Embry Air, we are going through our first articles in CH-53 program> Those are three to just mention a few, but we've had a number of wins that I think will be coming through in the second half of the year.

You mentioned the C-17 and the legacy programs, but in particular the C-17, the expectations this for a contract renewal. And then you mentioned kind of in the prepared remarks and in the press release about how that will give you some predictable revenue going forward. I thought -- what does that mean? Because I thought that it was predictable, that this program was going to slow down anyway. What are you trying to reference?

Well, we are just trying to stabilize the rates so that we have two things going on there. One is the normal production rate that we'll see out of the C-17 as well as from a military build rate, and then we have the foreign market that's also in there. In our negotiations, we are working with Boeing to support multiple market applications and as soon as we finalize that, then we should have a stable rate production going forward, albeit lower than last year.

Yes, is it referencing pricing or anything? Are you getting any kind of pricing squeeze or is there something else that you are maybe you're referencing, or is it just the overall?

Yes, the pricing is not finalized, and so I wouldn't characterize it as a squeeze other than just normal negotiations.

Okay. Switching over to LaBarge, if I could. Have you -- I know that the deal is not done yet, but are you working on any new business with them at this point as a combined company yet, or are you still kind of working independently?

Yes, I think it's a little early yet for that. We'll broach that as we move forward in the integration.

And Joe, are there going to be additional expenses that you had like the $1.4 million here as we -- other than the write-up in inventories, we'd move into the second half of the year once the deal is closed but prior to with some of the other expenses that may be considered with an acquisition?

Yes. There are expenses that we're incurring, really pay-as-you-go, if you will, for our legal work and our accounting work to -- related to the financing and even the legal work we did, even in parts of April to get the merger agreement signed. So, yes, we will incur those during the quarter, and they will probably be higher than the $1.4 million that we incurred in this period.

Okay. And you are working on the debt agreements right now. You mentioned the last time we spoke, blended 7%. Is that about right?

Excuse me?

You are working on the debt financing. I said that you mentioned in the last -- on the last conference call that we had, when you announced LaBarge, about a blended rate of around 7% on the debt. Is that about right?

Yes, that's about right. 7% to 7.25%, yes. Market conditions can change pretty quickly, but that's generally what we've been modeling.

Okay. And then you mentioned --

The blended rate of what we feel the senior unsecured notes would be and then the term loan B notes.

And then you mentioned that there's some synergies that you expect from the acquisition, but I'm not sure we quantified those yet. When you factor in, I think you said it was 8.4% or 8.4 times EBITDA, what are you assuming for synergies between the two?

Well, specifically on synergies in the call, we said that we expected over the business cycle the next four years to receive -- to achieve synergies of approximately 2% of the level of LaBarge revenues. And as we see that as an upward slope from the southwest to the northeast, it takes -- to get the momentum, the synergies from supply chain, from operations, from some administrative costs of only having one publicly held company and the public costs related to that, we'll gain traction really more so in '12 than immediately in '11. And then we expect that to increase over time too, Ed.

Okay, was there any 787 business in the quarter?

Yes. We are still building ship sets, albeit at a lower rate.

It's down a little bit year over year.

Down a little bit?

Up a little bit, slightly.

Up, okay. And then finally on the engineering services and we look at that business. I just kind of -- if we can kind of dig in and maybe get a little bit more guidance on what we should expect over the coming quarters, is it plateauing? Are there a series of lower plateaus, or is it going specifically down? I know that there's insourcing at the government level, but how should I think about that business?

Okay, I think that -- I think we should be leveled out right where we are at right now, so going forward. Now, the biggest issue that we had in the first quarter, of course, was no budget and so we were working off the continuing resolution month over month, if you will. The other issue that we had there, obviously is -- you mentioned the insourcing, that's actually stopped. So, that's a positive aspect. And the government is slower in releasing their contracts. It's a -- it's not indifferent to what we are seeing, let's say, on the F-15 program where it's just coming out of the government slower. The funding profile is not as robust as it had been in the past.

Having said, that, Huntsville was hit by the tornadoes, and so we'll have a little headwind there for the next week or so, and then we'll be up and running. The facility is down now. It's been down for a couple of days. We'll see a little headwind in this month, and then it will pick up in the next quarter. But as you look forward for the rest of the year, we expect it to be at about the run rate we were in the first quarter.

But we also, once the continuing resolution issue has provided our group in engineering services more visibility, there's been some fairly significant awards for 2012 which we stand to benefit from. We are very excited about that.

Was there any damage dollar-wise in Huntsville?

No. No damage to the facilities.

Yes.

Just power. And then obviously the individuals, we had some homes damaged.

It's unfortunate.

Yes.

Okay. All right. Thank you guys very much.

Thank you, Ed.

You're welcome.

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

Thanks. I'm wondering if you can talk about the investment costs in the quarter versus where they were trending to their expectations on the February 22 call.

We -- Troy, when we commented really in the last year that they were trending down on a couple of the programs we worked on, we're improving that cost structure. But as we look at it, we have additional programs that we had announced and we're feeling the impact of those also, like the CH-53 and the 777 and soon some Embry Air, but we -- on the fundamental, the RUAG and the racer progress which were costs last year, we are bringing those down, and we're addressing those with the high level of priority. And we do expect those sequentially to go down and to be pretty much gone by the fourth quarter. That's later than we originally had thought, but as we realign our supply chain there with some of these programs and are sourcing to -- resourcing to some quality suppliers, as we go through that transition, it's taking us a little bit, and that's really the excess costs we are incurring that we should see those things abate significantly in the second half.

So, all of the investment costs or just the ones on those specific programs that you mentioned?

Well, I think there will be some residual ones because some of these other programs we have first articles and some other work, but it won't be to the magnitude of this $1.5 million.

I don't think you will see the spike, Troy, and generally you have normal courses of businesses on the start-up of new programs, and we will run through that. We have a number of programs that are online right now that are performing well and then we have some that are in the embryonic stage, if you will, that are -- as you know, we talked about before as we go through the high part of the learning curve and drop yourself down. We are in that portion of the learning curve and we will stabilize. We have a couple more programs coming on this quarter and -- but normally, we would -- we should stabilize at a normal level in development.

Does that $1.4 million continue and then it's just kind of a fall off in the third and the fourth quarter, or does it gradually decline throughout the rest of the year.

Gradually decline. Note in our 10-Q last year, and those are reported quarter, those costs were almost $5 million and certainly, we are looking for a significant improvement over that, but at the same time, bringing on more programs.

But let me just say this about it, Troy, and I know that we have talked about it in the past, but the bottom line on this is that we stepped up, and I will say that it's higher than we anticipated when we started the program, but we are doing the right thing for the business in terms of investing in programs that are going to -- that have changed the model from a Tier 3 to a Tier 2, and we are moving in the right direction from that standpoint. And some of the new programs that we won within the last quarter and first quarter this year are a result of having that capability in house. So, it's doing exactly what we thought it would do. Albeit the costs are a little bit higher than we anticipated, but we are going to -- we have a program in place that's running down this change in suppliers. It's a big part of that program in terms of restructuring the cost base. We're also moving some of these applications into our Mexico facility. We've got a program that's going to take these costs to a level that is appropriate for this business base. Having said that, we will have programs in the future that have some development costs, but not at this level.

Just so I'm clear then, it sounds like this is more supply chain kind of restructuring some things here and there. You wouldn't classify the extra say $900,000 over what you were previously expecting back in February as cost growth on the program, it's taking you, more investment dollars to design and develop the business that you have won?

No, that's actually coming down the curve, so we're actually -- the cost base is driving down. So, it's not.

Okay. Can you throw out a dollar figure on kind of how you think that should trend in the second quarter? You threw out 55 -- $500,000 to $600,000 last quarter. I'm wondering where you think it is for the second quarter now.

Why don't we get back to you on that, because I'd have to look at the model.

Okay, can you walk me through the volatility in the margins at DTI? I know some of it is -- can you help me understand how much of it is order delays on some of the higher margin defense programs, or is there something else going on? Yes, it's up year over year, but if you look at kind of how it was versus the last three quarters when it was 10%, 12% type margins, it's lower.

Let me visit a little bit with the history again as we -- we restructured the business in '08 when the margins were unsatisfactory in the 5.5% range, and in '09, we enjoyed about -- we improved those to about 8.5%. And then in 2010, we were approaching 10%. And the -- your question specifically of what happened in the quarter where they are 7.8%, it's really a function of we shipped half the normal amount that we do to Raytheon, about 7 million a quarter versus 14 million in the fourth quarter, and that's the radar racks for the F-15 and the F-18. It's lumpy. We have a plan to build level load and maximize our production efficiencies, but partially as a result of the funding delays, they haven't issued us the purchase orders that we normally would expect, and it will be lumpy through the balance of the quarter. All that being said, when we do drive that -- those radar racks and some other electronic components through the system at higher levels, then we see an expansion of margin. We feel really good about that. And in fact, we don't see any deteriorations in our margins, but we have talked before about we expect those technology margins on a sustainable basis to get above 10%.

Okay. And just so then, just to clarify and then I will jump off, you said orders were coming through on the F-15s in the second quarter, do you also expect second quarter orders for the F-18s, or is that one going to be later in the year?

No, we have the F-18 and we should be delivering against that and we expect to pick up --

Yes, the reason I said that, when we study the backlogs for the quarter that we posted as of April 2, our backlogs from December on the F-15 were down. This just reflects we hadn't officially received those purchase orders at that point in time when we closed. And recall, we have long-term agreements on those, and we're the sole source of those replacement radar racks for both those programs and then potentially for the F16, we will get a portion of that. So, the long-term outlook is good, and our -- the issues we get is the lumpiness during the quarters when the customer wants to pull the products. It's a start and stop process that what we try to manage that as having a buffer stock of inventory to be able to supply it when they actually release the orders and they want a quick service delivery on them.

Okay. Thanks, guys. I will jump out and let somebody else ask some questions. Thanks.

Thanks, Troy.

(Operator Instructions). And the next question comes from the line of Michael French from Morgan Joseph. Please proceed.

Good morning, gentlemen.

Michael.

Hi, Michael.

Hi. First, a couple of quickies for the model. Joe, can you quantify the transaction expenses you expect in 2Q?

They are probably going to be a range of $1.5 million to $2 million.

Okay. And D&A for first quarter?

Depreciation and amortization for the first quarter was about $3.5 million, and -- yes. We look at stock-based compensation too when we do that, and that's another $0.6 million.

Okay. And you mentioned that you expect some positive benefits from the past to the continuing resolution for DTI and then also the Chinook, the Carson and the C-17. You already went over the C-17. Perhaps you could provide a little more detail on how you expect the funding measure to impact this other lines of business.

Well, I think that what we saw, Michael, was a delay in order releases, and as you look across the Raytheon business base, it just -- I think that what we are waiting -- the big order on the F-15, for example, is out of Saudi Arabia. So, we are actually in negotiations on that particular program now. That should have been released in January. And so it's just a function of not getting the funding that they need coming through, and that was some of the delay and the negotiations on the C-17, quite frankly. Those are what we are seeing there, an then of course, the engineering services business is dependent on having a solid budget in place.

Have you seen anything so far in April that, since the bill was passed? Or is this something that's still expected to come later in the quarter?

In terms of orders, you mean?

Yes, either for work at DTI or is it like the Chinook or the Carson?

The Chinook is done, in place, and we should see pickups back up to a more normal production rate. Last year on the Chinook, we dropped off in the June timeframe as Boeing retooled, and then we've stabilized that. We just started shipping at the end of the first quarter. We should have a solid second quarter, and that should pick up going forward. From an order base standpoint there, that's locked in. And then on the other programs, I think it's just a matter of getting the funding out. So it's -- I think it's all -- once things are stabilized, I think we are in good shape.

Okay. Very good. Thank you. And the last one on the LaBarge transaction, I think there's some confusion or misunderstanding out there about the impact that might be felt as a result of the problems that one of their customers, American Super Conductor is experiencing. It's, I think it's about an 8% customer for them. Could you go over for us what impact, if any, you expect from this?

Actually, that's really a question for LaBarge at this time. But in our due diligence, we did look into it and we had discussions with them, and I think they believe they have this well under control. So, it's actually not something that we're in a position to comment on.

But from a materiality standpoint, Michael, what we look at and what the combined companies of a pro forma $725 million in sales, its sales will fall under 5%, and it won't be that material to the overall results of the combined companies.

And it's not strategically important, correct?

Well, they are a valued customer, and LaBarge brings a lot of value with their products, applications. And so they came along with -- when laBarge made an acquisition in December of '08 of their Appleton, Wisconsin facility, and they are very customer centric. I think every profitable customer who pays well is a strategic customer (laughter).

True. But in terms -- you main emphasis here is moving to be a Tier 2 supplier in aerospace, where you've got aero structures, wires, harnesses and those kinds of things all fitted together, and this really doesn't play into what was the principle strategy in the acquisition, as I see it. Maybe --

Well, that's correct. In the end, we are going to end up being a 75% A&D customer. Having said that, Michael, all of the -- the nice fit with LaBarge is the fact that they do have a diverse marketplace and if you look at their business, they're more on the industrial, medical, and commercial side of the business than they are on the A&D side. They add a nice A&D package to us, and they have a very nice portfolio that diversifies their base, albeit along the skill sets and the production capabilities that they have so they have a nice fit in their business. When you look at the customers, and I will go back right to what Joe said, the biggest thing that LaBarge brings is they have excellent outstanding customer relationships, all the way across their business base. And so every customer is critical to them, just as it is to us. From an industrial standpoint, look, it's a solid program. It's a nice application for them, and it has some growth as that product line extends. So, I think all of those things are important and yes, it's true that we will be primarily an A&D company and that's going forward for a growth standpoint for legacy Ducommun and how Ducommun looks at it, that's important. But we also see some cross-selling opportunities as we move forward on the other side of that business. It's a -- to me, that's a very attractive fit for us as well.

Okay. Thank you, gentlemen. That was helpful. Good luck.

You're welcome, Michael.

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

Looking at the margin compression that you had in the gross margin level in the first quarter, and I know year over year it was flat and sequentially it was up. But historically, this is lower run rate than you are used to. If I look at that margin compression, and I'm assuming a lot of that is due to the legacy businesses, legacy programs, the fall off in the Apache, the fall off in the C-17. Can you first quantify the impact that came, say, from those businesses and maybe some of the other -- and the difference between that and maybe the compression that you maybe saw from, say, the slow down in the F-15 and things like that?

Well, here's what I can quantify, Ed, particularly on the revenue side for those two military sunset programs in '08, they were $94 million of sales and this year, they will be about $46 million of sales. And they were at least average of our overall margins during that period of time. And so you could -- you could calculate in your models what the impact of that has been, and we have replaced a lot of that business from the manufacturing product side, and that's why we comment about those that -- we break those out in our P&L. We have worked really hard with new products and improving our margins on existing products by pricing and by lean to offset those items. That all being said, I think we've performed pretty well in the interim to take such a significant drop in sales while being positioned to not only grow our sales, but expand our margins from where we have been the last couple of quarters.

But to be fair, the learning curve and lean only takes you so far, right? These longer term programs like the C-17 have been around for a while. I imagine that you have got most of the cost issues out of the way and they run pretty lean.

I'm talking about lean on the other programs, our new programs --

Right. Right. I guess I'm trying to figure out, that takes time for itself to work back to where some of these sunset programs and where you have gotten them to. I'm -- I guess my question and where I'm trying to bring this is, what kind of gets you back to the historic margins of this business, gross margin upwards of 20% plus? Is it new business brings that back that you have pretty good margin on? Is it the mix of business, or help me think about that.

Okay. So, it's all the above, right?

Right.

The mix helps, right? When you come into a quarter like this last quarter, and you can see just in looking at the major programs, the diversification of the mix even quarter over quarter. But then as you look at the new programs coming on and the higher build rates on the commercial side, we see opportunities to drive the margins north, and I think that's what you will see going forward. So, I think we'll -- our opportunities are in front of us. We have talked for a year and a half on the development of the new business and putting things in place. And I have to tell you that, I remember a couple of years ago, we talked just specifically about it when we were looking for five programs to replace the two. Well, we've got about nine. And so they are all run through the shops right now, and I think we're in pretty good shape from a growth standpoint, and there's more opportunities out there. I anticipate the business base to be solid. The margins will improve as we drive through these programs and improve the profitability on them. So --

Just to be clear so that I understand what you are saying, not to put words in your mouth, but the core business as it stands today, assuming that you bleed out a lot of the, say the start-up costs, the learning curve costs, et cetera, et cetera, there's no reason why you can't get to historic margins as the core business is today without winning new business. You could still get to that 20% plus gross margin?

Yes, I would say that's true.

Okay, and then finally, you mentioned something on the C-17 about Saudi Arabia, and I was thinking about all the issues that we've had kind of had in the Middle East region and the impact that it may have on budgets from companies -- from countries abroad. I'm just wondering if you can kind of give me any input to what you are hearing, either in the Boeing channel or so forth that may put some pressures on the timing of those C-17 kind of deliveries or orders for that matter.

Okay. Well, let me back up a second. The Saudi Arabia buy was on the F-15.

Right, sorry. I think India was -- or someone in the Middle East was buying C-17s.

Okay. The C-17 is, the biggest customer they have right now is India.

Right.

That's what they are looking at. On the valued Saudi Arabia buy, that's the one we are in negotiations now, so we look at that as being something that's pretty stable going forward, and I think that's going to be fine. Those are replacement radar for existing aircraft, so it's not new aircraft build at this point in time. Then on the India and on the C-17, right now when you saw the fighter jets get knocked out, those are going to Europe on the India buy, which knocks Boeing out of the box, as well as Lockheed (inaudible). What we see there is a pretty solid opportunity there for transportation, and we have specifically been over there supporting Boeing over the last six months. I think that that buy looks solid, hopefully we pick that up for Boeing.

Great. Thanks, guys.

Okay, thanks, Ed.

Thank you.

(Operator Instructions). We have no questions at this time. I would like to turn the call back over to Mr. Tony Reardon, President and CEO. Please proceed.

Thank you, Carmen. Thanks once again for your continued interest and support, and we look forward to speaking to everyone the next quarter. Thank you very much.

This concludes the presentation for today, ladies and gentlemen. You may now disconnect. Have a wonderful day.