Ducommun Inc (DCO) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2010 Ducommun Incorporated earnings conference call. My name is Nicole, and will be your coordinator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session at the end of today's conference. (Operator Instructions). As a reminder, this call is being recorded, I will now turn the call over to the moderator, Mr. Chris Witty. Please proceed.

Thank you, and welcome to Ducommun's second-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. 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 and Form 10-K for the fiscal year ended December 31, 2010, and Form 10-Q for the fiscal period ended July 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 update on the second quarter with some color on the market and discuss the acquisition of Lafarge, after which I will turn the call over to Joe Bellino to go over the financial results in detail.

I'm pleased to report that Ducommun, in addition to closing the LaBarge acquisition, showed improved operating performance this quarter. Recent program delays are behind us, and increasing commercial demand, along with the new program wins, are starting to drive sustained growth. I'm happy to say that Ducommun, now combined with LaBarge, is in a solid position to post improving financial results going forward. Our commercial business rose nearly 25% for the quarter, and represented approximately 47% of our sales, up from 40% last year. This was driven by strong gains from across the board, on programs such as the Boeing 777, the Airbus A-330 and A-340 program and from Ruag Aerospace in support of Bombardier's CRJ 700 and 900 series aircraft.

Our regional jet business nearly doubled quarter-over-quarter, highlighted by the increased Ruag sales. In addition, we had stronger shipments for Carson Helicopter, and booked another solid quarter for the Black Hawk, where sales rose nearly 30%. Our legacy C-17 and the Apache programs are now running at projected build rates. We are, however, seeing a slowdown on orders for the F-15 replacement parts, which as I explained last quarter, have been impacted by budgetary delays. Our engineering service business was flat, quarter-over-quarter, and has been impacted by slow government release of contracts within the service sector. However, all in all, I would say that our performance is playing out as projected among with legacy programs stable and commercial growth driving improved operating results.

All this has happened even before we had the impact from LaBarge, which I will get to in a moment. Joe will walk-through our operating results in detail, but let me highlight 2 key metrics, cash flow and backlog. Cash flow from operations in the second quarter was a very solid $12.5 million, driven by our improved overall financial performance. In addition, Ducommun ended the quarter with a backlog of $344 million, down slightly from the quarter's $359 million, from last quarter's $359 million, but higher than the $328 million at year-end, providing further evidence of our strengthening order book.

Note that we plan to book the follow on C-17 and F-15 orders early in Q3, along with expected follow-on commercial orders, and that should bolster our backlog for the second half of 2011. We have one additional, unannounced new contract awarded in the second quarter, and are seeing an uptick in demand across the board. Including LaBarge, our combined backlog now stands at $582 million, which puts us in an excellent position for the quarters to come.

Now, let me provide some brief comments about the overall market conditions. First, it's no secret that we, like the rest of the industry, see further turmoil in months to come as political posturing continues. The pressure on the defense budget will remain, but we believe that we are on solid platforms across the board, going forward. Although there are some -- there may be some adjustments in future build rates, we see programs such as the F-18, the Joint Strike Fighter and the Black Hawk helicopter program, along with various missile defense programs continuing to be funded in the foreseeable future.

We are all very well aware of the current economic uncertainty and the potential impact on various market conditions. Having said that, there is encouragement in the overall health of the commercial aerospace market and a strong backlog at Boeing and Airbus, which have been driven by need for fuel-efficient aircraft and growing revenue pass-through miles. And if we remember back into 2008, we had the last downturn, the commercial market stayed pretty steady across the board because of these strong backlogs.

We remain positive about the remainder of 2011, as well as the overall demand in 2012. Even as the outlook for military programs may face budget pressures. Again, it comes down to our platforms. We really believe that we are on the right aircraft in the best markets to fuel growth, going forward.

Now, I would like to discuss the LaBarge acquisition, which we closed on June 28 of this year. We are well underway in our integration of LaBarge and Ducommun, and have combined the technology business to form Ducommun LaBarge Technologies, or DLT, as we call it. We are on track to achieve projected synergies and are moving down the path of identifying further opportunities. We now have 2 solid manufacturing service platforms in the Aero Structures and the DLT, to better serve our customer demands.

Clearly, we have more work to do, but we have a detailed plan in place, and a management and workforce commitment to ensure that we grow the business, generate the cash flow necessary to service our debt, and meet our capital needs going forward. Now, I would like to turn the call over to Joe Bellino for a detailed financial review. Joe?

Thank you, Tony and good morning everyone. We were very pleased to have completed the LaBarge acquisition and related financing during the past quarter. It reflected sound execution by all parties involved, and certainly represented a transformational event for Ducommun. And, one which significantly changed the financial structure of the company and our balance sheet. While we've taken on a substantial amount of debt, relative to our past, we've also gained the opportunity for stronger growth and cash flows to pay for this transaction, to meet our obligations, and to provide significant resources in the future to reinvest in our business. After commenting upon our financial results for the quarter, I'll touch briefly upon an outline some of the transaction-related factors, which are expected to impact financial reporting periods in the month ahead.

For the second quarter, excluding transaction-related expenses, we posted net income of $4.8 million, or $0.45 per fully diluted share, and that compares with $5.7 million, or $0.53 per fully diluted share in last year's second quarter. Last year's second quarter results also included a $1.1 million positive impact from a one-time accrual or about $0.06 per fully diluted share. Our second quarter 2011 results here were adversely impacted by $10.9 million in transaction related costs, and on a GAAP basis, we reported a loss of $0.28 per fully-diluted share.

In terms of sales, we were pleased to see the second quarter revenues increase by 5% to $108 million, that included nearly $1 million worth of a few days of sales of LaBarge, after the transaction closed and before the period ended. During the quarter, we began to experience the positive impact of the overall commercial aircraft expansion, as well as growth in our regional business products. This more than offset the negative impact experienced by the F-15 delays as well as softness within our engineering services businesses. When we look at our manufactured products business, it was up 11% year-over-year, which offset the decline in our service revenues, which were off about 40%, year-over-year, a trend that's persisted for the last 5 quarters, and primarily a result of a lack of government funding.

As we look at operating income by business segment, excluding the transaction expenses, our overall operating income for the quarter was $7.5 million, or about 7% of net revenues. This compares to about $9 million a year ago. That $9 million includes the 1.1 and the reversal of an accrual and so, on a normal run rate basis, it was the $7.5 million, compares just slightly off of the $7.9 million, normal run rate from last year. Despite some slightly reduced operating margins and gross margin, we had good cost controls in the operations that helped us get to the 7% of the revenues number.

We break it down by business segment, Ducommun Aero Structures, or DAS, the revenues were up 13%, as Tony commented upon the growth in the commercial products and also the regional products I just mentioned. And, it drove an increase in our normal run rate operating income to $8.8 million, from $8.1 million last year, excluding that liability accrual adjustment. And, this $8.8 million gave us an operating margin for the DAS sector of 11.5% of revenue.

Looking at the DLT business, the operating income was $2.7 million, it was slightly less than 9% of sales, it compares to $3.4 million last year, which was slightly less than 10% of sales. A portion of the lower operating margins in both dollars and percentages was attributable to consolidation that we did during the quarter. We completed, we folded our HMI product line into our Carson facility, and also we had a negative impact on our sales from lower radar RAC sales to F-15 military aircraft due to the delays that we have previously discussed. We continue to control our corporate SG&A very well, and excluding transaction-related costs, they were 3.7% of sales compared to 3.4% of sales in the comparable period in 2010.

Backlog, as Tony mentioned about the backlog, but we've seen them grow since the beginning of the year and our backlog is $582 million, included $238 million from LaBarge, we expect those backlogs to increase in the quarters ahead, as we are starting to see some nice pickup in demand across many sectors of our business. The backlog as of July 2 excluded orders for C-17, which as Tony mentioned, we expect to have those finalized here in the third quarter. As long as some other programs that will be contributed by the marketing and business development activities of DLT. We call it Ducommun LaBarge Technologies.

In terms of our liquidity and capital resources, our capital structure looks like this today. We have $190 million of secured bank term loan money, we have an unused secured $60 million revolver, and we placed a $200 million of senior notes priced at 9.75%, that are due 2018. We really like the structuring, gives us a lot of capability and allows us to facilitate our growth and allows us to reinvest in the business while giving us flexibility to repay our debt as we generate future cash flows. At the end of the quarter, we had $58 million in availability on our borrowings, which we feel is more than adequate to support our growth and other reinvestment opportunities, near-term.

On that note, I just want to add again to what Tony said, we finished the quarter with a strong cash flow generation, when we strip out the transaction-related expenses, we generated $12.5 million in cash flow from operations. As we have taken on more significant debt, we recognize the importance of good financial results and constant attention to working capital, including inventory returns and receivables collectibility to generate the kind of cash flows used to build this business and of course, to service our debt. Our CapEx, we expect to be $16 million this year. It compares to $7 million last year, it reflects some new program growth and equipment investment, that are already in process to expand our product line offerings as well as some incremental capital from the former LaBarge operations.

Speaking of LaBarge and the transaction, there's been several transaction-related items which will impact Ducommun's accounting provisions, so, I wanted to highlight a few other clarifications for anyone's use in building models. This is based on a preliminary purchase price accounting process which we have disclosed in the Q and we estimate in general that we'll recording the following amounts. First of all, we will be taking, in the second half of the year, called the stub period, about $2.5 million in inventory step up which will affect or lower our margins. Our gross margin -- it will affect cost of goods sold, again in the second half of this year. Some of these other numbers are full-year numbers going forward.

We will have an increase in depreciation from the step up in basis of fixed assets, that will be about $1 million a year of additional expenses. From the recording of intangibles, we'll have approximately $8 million more of amortization of intangibles annually that will run through SG&A. When we look at our current debt that we raised, the $390 million for the foreseeable future, the average interest on that is approximately 7.75% per annum. And, regarding the financing costs in connection with the transaction, we will be recording, in the next several years, approximately $2 million in deferred financing costs that we will be amortizing.

In terms of the tax rate, we haven't finalized that until we finalize our purchase price accounting, which will be done in the subsequent quarter, we estimate our tax rate to be somewhere between 28% and 33%. We had spoken before that on average it's about 31%, but that still remains to be seen, until we finalize that. Lastly, we are on track and we are targeting our synergies at about 2% of the former LaBarge revenues. And, we'll report on the progress of achieving those synergies in subsequent calls.

Now, I would like to ask Tony Reardon to make some additional remarks. Tony?

Thank you, Joe. Before turning the call over to questions, I thought that I'd like to review a couple of key takeaways from this period. We had a very exciting quarter, given our many recent accomplishments. First, we completed the LaBarge acquisition, and formed a the new operating unit, Ducommun LaBarge Technologies.

We believe this transaction will clearly strengthen our growth prospects going forward, and it is going to open up new markets that bring added diversification and transform Ducommun into a leading Tier 2 service provider in the aerospace, defense, as well as industrial, medical and natural resources markets. The combination of these 2 entities brings us closer to our customers, and enables us to supply them with higher-end mission-critical applications while broadening our marketplace. It's a very exciting opportunity and we look forward to seeing the fruits of our labor in the several months to come.

In addition, we have a strong base in our Aero Structures business, where we also feel, we're very upbeat about the future there. The commercial aerospace cycles continues to improve, and we have a presence on a variety of key platforms across the leading aerospace OEMs worldwide. With the capability to add more content going forward, we also see continued demand on such high-profile programs as the Black Hawk, which remains our largest, single platform, company-wide.

And 2011 is playing out as expected and we anticipate further improvements as the quarters progress. Our near-term goals are to continue our integration program and obtain our forecasted synergies. We will drive solid performance by our operating units, manage strong cash flow and improved margins, and add content on new, high-growth platforms. Ducommun is well-positioned for 2012, and we remain dedicated to increasing our customer and shareholder value.

Now, Nicole, I would like to turn the call over to questions, please?

(Operator Instructions). Your first question comes from the line of Adam Plissner of Credit Suisse. Please proceed.

Hi, good afternoon, guys.

Hey, Adam. Afternoon.

I was wondering if we could first talk about -- when I look, the volume is up, and I guess most of that's related to the commercial side, what you expect your conversion and contribution margin on that? And, how it sort of played out versus your plan?

Well, with the commercial business, it gives us operating leverage in our business. So that we not only look at gross margin but operating margin. As we continue to build our business, and support the growth in the various, large commercial aircraft, we ought to see that operating leverage take place in translate into improved operating margins.

Okay, is there any percentage that you use in terms of the contribution margin you expect out of that? Or, nothing --?

No, we really don't. As you saw, our average gross margin was 19.5% and our overall margins were 7%, and historically operating margins have been higher than that. We target 8.25% to 8.75%, so as we build our business, with our variable cost structure is pretty low, so we should expect, with higher volumes, to have incremental improvement in those margins.

The biggest issue in there Adam, is that a lot of commercial programs are brand-new start ups, so as we work through that, we would expect the contribution margin to improve in the out years. So, we've got a lot of start-up programs going.

Got it. Maybe in relation to that, you bring up the startup costs, I was thinking, what exactly ran through in terms of startup costs? Maybe how to better define what you think about as start-up costs. I guess I'm a little confused. Does that mean in connection with what you would think the inefficiencies and learning curve inefficiencies as opposed to maybe an investment in tooling that are up front in the context of getting ready for the program to launch? How do you define that startup cost?

It actually comes in both forms, but primarily it comes in the inefficiency, due to start up and higher up on learning curve. But, there are some investments that are associated and actually they are program particular, so it depends on the program that we are involved in and of course, the complexity of the application. So, as we move up in complexity, the startup costs are generally a little bit higher than we have experienced in the past, but I think in the long run we are down the learning curve and as projected, on our cost estimates. So, I think we have platforms that are in place that will take us forward. So, we look at the cost basis, it all depends on the individual programs that were looking at in terms of the investment on the tooling side, but primarily, we are talking about the startup costs as related to the inefficiencies and the higher up the curve.

I get the investment in tooling is just going to show up as working capital for you guys as well? Has there been a dramatic change, where you are finding yourself having to fund that up front and sort of waiting for recovery? Is that impacting you to any -- from a cash flow degree that's worthwhile mentioning?

Strategically, looking at our balance sheet over the last couple of years we've had increased our investment in tooling, and that is an upfront cost. We recover that with the return on capital pricing, but we talk about it in RFQs that it is a conscious, strategic effort, as we move closer to more complex product offerings in the Tier 2 segment, which we're targeting a portion of our portfolio.

Okay. I know you pointed out before about basically favorable and unfavorable mix I wondered if you could just give a little more color on that, and how you define that to the extent that is it more a relationship by customer, which is looking at better or worse margin-type business? And maybe what you are seeing in terms of a shift in mix and how that is affecting your margins now?

Okay, let me take a stab at that. Basically, when you take a look at the legacy programs, generally your profitability, as the length of the program and in-house obviously improves with your ability to drive lean through your facility. The new start-up programs actually, as you know, are a drag on that. So, when you look at the legacy programs like the 737 program, the C-17, the Apache program, and then to a large extent, the Black Hawk program. We should be able to sustain relatively good margins on that, but then we get a drag by the new business effect and the growth on some of the development programs that we have in the commercial side.

So it has more to do with that the majority of the program than it's necessarily the end market or customer?

Right. In some cases, on the commercial side, I have to tell you, that the pricing is a lot tighter. It's a lot more competitive to get in, so you've got a lot more work in front of you in terms of getting the programs to the performance rate that you expect. But, that's what we are in business to do, so that's what we drive to every day. So we start out at a base that needs improvement and that's what we do.

Okay. Last thing I had, just in terms of thinking about the LaBarge opportunity, and you had mentioned some of the synergies targets. I guess, at what point are you going to get a chance to take a look at the footprint and think about maybe more along the lines of consolidation, facility consolidation, or anything along the lines that's a little more significant?

Okay, so we've done, along those lines, Adam, as we've taken a look and we have actually an exercise as part of our integration process to go take a look at the facilities, but as we look at it, we're going to analyze the facilities in terms of not only capability but capacity to grow, and as we look at the growth element of the market, and we look across the facility's capabilities, as you take a look at both sides of the business and you look at Ducommun and you look at LaBarge, you don't see a lot of close commonality to consolidate facilities at first glance.

So, it will be looked at from a opportunity to improve operational performance, of course, as you may or may not know, we just consolidated facilities here in California we closed down a 30,000 the facility and moved into another facility recently on our HMI side, so, we look at that constantly when the opportunity arises. I have not seen, at first glance, a tremendous opportunity to start consolidating facilities at this point in time. As we move down and get more familiar with the product lines, we do have an analysis that is going on right now that will determine capacity growth and the ability to take the company to another level. So, all those will be taken into consideration as we look at capacity capabilities.

Great, thanks, gentlemen.

Thank you.

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

Yes, thanks it's actually Joe DeNardi for Troy. Just looking at Aero Structures margins, can you provide color on the lower operating performance that you have there? Was that just on one program, or how should we --?

We were pleased sequentially to see the operating margins at DAS go to $11.5 million for about 11.5%, excuse me, from 9.7% in the first quarter. They are down historically, because we've had a change in mix. The last couple years we've reported, our two military sunset programs were very mature and at very attractive margins and so, as we've replaced that business with new products and some growth in our legacy products, they weren't as -- at higher margins, plus the newer products online, we're still going down the learning curve as we discussed with the previous discussion. So, we are -- in the context of things, 11.5% is not bad.

Sorry, I was just looking at the release I was just thinking that maybe there was a one-time item this quarter, because you cited slightly lower operating performance in the release. I don't think it was mainly just mix.

Yes, it's mix-driven and there was some startup costs in there. You know the way I look at it, making a $8.8 million operating income was pretty solid on $76 million of sales and last year, as I talked to my comments, it included 1.1, one-time gain, so it's really a $8.8 million versus $8.1 million, headed in the right direction with sales up some 11%. We look forward to seeing that franchise operation to DAS segment continuing to put in those kind of results.

Okay, were there any investment costs or supply-chain figuration costs in the quarter --?

Last year, we reported on those that are impacting DAS, primarily, and we didn't comment on it this year because they are somewhat similar, too. They are slightly below what they were last year, but don't have to report, year-over-year, if they're not a significant change. Yes, we still are incurring, because we are bringing on programs and several new programs this year, two or three in addition to the one or two that we talked about last year. So, that's an ongoing process for us to build our business in this upcoming, commercial cycle.

Okay. So you think those kind of stay at the $1 million range?

Yes, we expect them to abate, yes, over time. But yes, they're probably in that range.

Throughout the year -- the rest of year?

Well, I think they will go down sequentially, as we come down the learning curve and we increased our build.

Okay. All right, thank you.

Thank you.

Our next question comes from Fred Buonocore of CJS Securities. Please proceed.

Yes, good afternoon.

Hi, Fred.

First question, just kind of purpose in your press release where you mentioned the second half of 2011, looked to be one for growth for Ducommun. Can you put any more color around that in terms of how we should think about organic business, top line growth and maybe how it should look, relative to the first half of the year?

Okay, so, let me try to run through the on just -- and I'll include both -- the entire business as I look forward. So, that would also include the acquisition of course. So, we see some uptick in the marketplace, especially in the industrial side, there's an uptick there that we are encouraged by, and then -- so we'll see some growth on that side of the business.

And then, what we are seeing Fred, on the aerospace side, and I have to tell you that on the commercial side of the business, it looks pretty solid from a growth standpoint. So, we still see the 777 program coming up for us, there is a nice pickup on the 737 that will happen in the third quarter, we believe. Across the board. And then, we're also looking for an uptick on the 787. Now, the 787 program is running a little bit less for us then two ship sets month and we expect that to pick up toward the end of the fourth quarter as they ramp into 2012. So, on the commercial side of the business, we see an uptick.

Now, there will be some offset, we think, on some of the military programs going out into the fourth quarter. We expect the Apache, for example, to probably subside just a little bit more than where that right now. But, we are in a steady state production on that program as that rolls through. As we look at the marketplace, and we look at the build rates going forward, on the commercial side of the business, the aerospace market looks strong, excuse me, the Airbus business looks strong and growing. And then we have nice platforms on the Boeing in commercial side that look strong. We also had a nice uptick in a couple military applications through the DLT operation that should bring to fruition, some growth in the second half. So, as we look at the second half of the year, we should be stronger and I can't give you an exact percentage going forward, but will be stronger third quarter over second quarter.

Okay, well that's helpful and you mentioned you saw a nice uptick on a couple military programs in DLT. Just sort of carving out the LaBarge piece of that, pre-the acquisition by Ducommun, LaBarge was experiencing, I think, inordinately strong levels of growth while other military suppliers were moderating or even declining, and I'm wondering if you can give us a peek into that LaBarge window, in your experience over say the last month or so, as to what the trends have looked like in their military business. And, has that been able to hold up and continued to buck the trend as it has been pre-acquisition?

Yes, will based on my vast experience with LaBarge, Fred. (Laughter) We are seeing an uptick on some of the business and then, there are couple of applications that came in that we were looking for a follow-on orders are as well. So, both on the military, but I hasten to say that there's also excellent opportunities in the commercial side of the business, in terms of the natural resources market. Now, we did see a downturn in the win market for the quarter and the next two quarters to come so the largest supplier on the Appleton facility will be down a little bit as we disclosed in the Q. As we look across the board, we see some nice upticks on both the military and the natural resources market, so I look to be solid for us going forward. So, we're very positive about where we have. I, can't again, give you much more detail than that, because it's just -- we're really diving into the details as we speak.

And, as you know, Fred, as you covered LB, the company had come to a higher plateau and the last 4 or 5 quarters, and the sales had ranged from between at about $82 million and $85 million, and it is our expectation is that the teams working together and business development people together growing the DLT portfolio, that will be able to expand that, reinvesting in the business and acquiring new programs. As you know, it's a very solid business and we like the portfolio diversification into the other end-use markets, natural resources, energy, and Tony commented about the industrial sector, the solid medical that complements the AMD. So again, we have this portfolio that is now 50% military, 25% commercial, that's expanding and 25% industrial, natural resources and medical which is expanding because of the dynamics in the market place. So, we have a well-positioned portfolio to handle the growth.

We've got a terrific team in place, Fred, that's looking at growth on that side and from an operational standpoint, as well from a marketing standpoint. So, we're very positive on where we are and what we think we need to do in the future.

Excellent. And then, finally, just looking at the engineering services side of the Ducommun business, are we or do you think were kind of reaching a bottoming level in terms of sales? Or do we have more to go? Is this totally a function of just federal budget clarity or lack thereof or is there some other drivers that could improve or conversely make things more challenging for this business?

Well, the way the defense budget is going everything can always be more challenging. So, having said that, I think that we are seeing a bottoming. I think that the business clearly depends on the continued funding and what we are seeing out of the Defense Department is inefficiency in terms of the contract releases and I don't think that's unusual to Ducommun. That's more of across the board issue. I would point you to the fact that the continuing resolution expires at the end of September, so that's an issue that needs to be resolved from a budget standpoint. We've got in any event, worst case being a month-over-month move in that direction.

So, I think we are seeing a bottoming there. We've restructured the business, we have an excellent management team and the facility and they do a great job of refocusing the business on the nano satellite market and a couple of other strategic markets within the military defense missile business. So, we have some opportunity that we are working on their that should stabilize and then hopefully provide growth that we need in the future.

Thank you very much.

Okay, Fred.

Your next question comes from the line of Jeremy Devaney of BB&T Capital Markets.

Good afternoon, Tony and Joe.

Good morning, Jeremy.

Afternoon, Jeremy.

Just want to stick with the LaBarge transaction for a minute here. Looking at the synergies, what do you see out there as opportunities to move beyond this 2% synergy market that you've noted? Is there anything exceptional, low hanging fruit that you think it move you beyond that number?

Jeremy, I think that what we are looking at right now is we've got our real solid plan in place to ensure that we hit the targets that we have in place. And then, we're working through other opportunities. So, for me to say that we can go beyond it right now, would probably not be prudent. I think that we are looking for further opportunities to improve that synergy and that's the goal. But, at this point in time, with the amount of time that we've had in terms of the total integration process, I think we're well down the path to identifying what we can attain from a synergy standpoint.

All right, fair enough. Looking at the capital structure post the transaction, what are you thinking about in terms of debt pay down timelines and where are you comfortable, more long-term in terms of leverage?

We looked at -- first of all, long-term where we'd like to be is a 2.75 to 3 times, that's funded debt divided by EBITDA. Whereas now we are about 4.25. When we pro forma the two companies, prior to the transaction, historically, the last 4 or 5 years, the companies that have generated about, we figured, $30 million to $35 million of free cash flow. We would like to continue to maintain those levels and perhaps squeeze out more cash flow from the balance sheet. So, the way we look at it, Jeremy, is we would like to be down to the $310 million $320 million debt level from the current $390 million by the end of 2013.

All right, great. And then, looking at the programs this quarter, were there any exceptional surprises in terms of the out-performance with any particular programs versus your expectation?

In terms of revenue?

In terms of revenue. Is there anything particularly strong?

Well the Ruag program was very strong. We picked up some spares, that's on the regional jet business, the CRJ, 700, 900 series was exceptionally strong in the quarter. So, we have picked up a couple of spare panels that were shipped out and probably equal to a ship set that was expedited through and that was probably a little stronger than what we had anticipated. And then, we did have the uptick on the 777 with the start up of a brand-new application on that program. So, although, that was not an unanticipated and I think that will continue into the next several quarters. But the Ruag was probably a higher production rate that we had anticipated.

And, what we are looking forward to, is during the quarter, we didn't yet see the impact yet of the potential increase in build rates for the 737 to the current 30, to 31. So, our sales were flat year-over-year and we just look at that as an opportunity. Once build rates, probably starting in the fourth quarter, will start shipping to support them going to 37 per month. And then, eventually 42 in the next year. So, we look at that as that's one of our single, largest programs, as you know. It's a $45 million program that by the middle of 2012 should be running 20% to 24% higher than its current rate.

The growth will be, to go to 34 and then to 37.

All right. And, just to circle back to that Ruag program, from your comments, Tony, I take it you don't expect those extras to continue to flow? That was a one-time exception of the quarter?

I don't think -- it will stabilize at a rate that's a little bit lower than that. So, yes, I would not expect the third quarter -- excuse me our third quarter to be a strong in the Ruag side because of the spares.

All right. And then, conversely, could you talk a little bit about, was there anything that you viewed as truly an under performance versus your expectation in the quarter? Perhaps any in the military programs?

Yes, the F-15 for sure. We had anticipated to have that release actually in the first quarter and we would have had revenue base in the second quarter. But, that has slid out now. We received the order this quarter, actually hopefully within this next month, this month of August. And, what we anticipate their then is it will be tight to have shipments this year which -- and that's an under performance in terms of our forecast.

Okay great. And then lastly and I will get out of the way, the commercial side of your business is really looking like it's lining up to continue firing away later this year and next year. I think there's a lot of questions around how defense is going to play out, given the current environment. When you look out there at the budget, and possible cuts in some programs that you are tied to the military side, what are you thinking in terms of the biggest risks to your performance over the next 12 to 18 months? And then longer-term?

Well, the biggest risk, I would have to say is, an unsubstantiated budget cut on the defense side which is blanketed across all programs. When I look at our programs and the programs that we're on, I would say that, from a budget standpoint and from a defense standpoint, I think we're on very good platforms. I mean, we are on the JSF, we are the F-18 program, the F-15 is in continuing operations from a manufacturing standpoint, but we're on the F-16 program from a fixed wing standpoint, Black Hawk is our largest program in our business, which is continuing to be -- to remain stable going forward.

So, when I look at the budget and I look out and I take a look at these programs, plus we're on a number of missile defense programs, so, which we received some orders this year on, so I think when you look across this business, it looks as if as if there's a major cut in the defense budget is going to be in areas where maybe they lower the rates in the out-years. That would be something -- but I don't see any major program risk where the program gets slashed and goes away. Now, we do have the C-17 that is coming down, and we've talked about that in previous quarters, but the C-17 program actually has picked up a lot of foreign military sales. So, as long as that stays stable I can do that program continuing at around the 6 to 8 aircraft a year rate.

Just to add to Tony's comments, on the Black hawk, LaBarge had been a gold supplier and in our backlog reports, we've added in not only Ducommun's, but the former LaBarge's and so we have $80 million worth of backlog. You could call that a risk, we call it an opportunity, because we have diversified product offerings for both the technology and the Aero Structures side, and that's -- even organic DCO grew fairly significantly in the quarter. So, we want to be able to take advantage of the market positioning with all of our product offerings and growth that one also.

Okay. Nicole?

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

Good morning, gentlemen.

Michael, how are you?

Good, good. Hi, first question is on the CapEx for the rest of the year. Can you break that down DLT versus Aero Structures?

Well, yes. I can break that down. As I mentioned in my commentary, it was -- it's going to be $16 million for the year. The CapEx is going to be $16 million per year and so far, we've spent about $6 million, as you will see in the Q, $4 million for DAS and $2 million for DLT. We are finishing up on some fairly significant investments in DAS. So, I would expect, Michael, you're probably doing your EBITDA analysis by entities. I would probably say about $10 million for the DAS and about $6 million for the DLT

And, on the $6 million at DLT, how much of that is related to LaBarge?

Well, we folded in about $3 million to $4 million. They have -- LaBarge, in last couple of years has made some modest investment, improving the facilities flow, capabilities and those things and there still some further adjustments to do to keep those facilities world-class.

Okay. And then, on LaBarge, again, have you had a chance to present to your customers a sense that the bundled offering and what with the new company looks like and have you got any reaction from those customers?

Yes, Michael, we've talked to several of our customers and I think the feedback, across the board, has been positive, in terms of the ability to bring additional capability to them. We still have to be able to bundle that for them so they can see how that would work. I think, from a capability standpoint, we've gone to United Technologies we've had conversations with them, we've had conversations with Boeing, on both military and the defense side. I'll be going to Raytheon next week to have discussions with them, with Craig LaBarge. So, we will be out in front of the customers and talking to them and I think that the combination that they are looking at very positively.

We still have work to do, as you can imagine in terms of bundling capabilities and making sure that as we walk through on a given platform, that we have the ability to enhance our sales capability across the board. Now, that is also -- we have not been to the commercial side, if you will, or the natural resources side or the medical side in order to be able to discuss with those customer bases, and that is to come in the future.

Okay, that sounds great. Thank you and good luck.

Thank you.

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

Hi, good morning.

Hi, Jon.

Really quickly, I think more on the commercial side, with regards to your production rates increasing I know in the past, you've spoken about almost at an inflection point where you have to start investing in higher capacity and it seems like we could be reaching that point fairly soon. So, just wondering, what your thoughts are around that at this point?

Okay, there's a couple of programs there that require some possible future investment and that would be if the 737 hits that peak rate of let's say 40 to 42, then we would have to invest in tooling. The other programs, the 787, we're tooled up for 10 ship sets a month, but there may be additional -- if they ever have that rate, there maybe additional tooling required and we'll want to be able to support that. So as you look at that, their projection is to be at that rate in 2013, so let's say it's actually 2014, so we're a couple of years out. We try to stay in front of that as we walk through and understand where the build rates are going to go. So, I would not see out of the ordinary investment moving forward on these programs and I think that you would see if folded into just the allocation of resources as we move forward. So, I don't see a significant investment, if you will, to support these programs going forward.

Okay, but there could be something that needs to come around, I guess, sometime next year depending on --?

Yes, I would say late next year.

And what about on the 777, how are you --?

777, we are tooled to hit the rate at 9 a month and on the A330 and A340, as they step up in rates, we are tooled to manage that, so I don't see any issues there. A350 is just coming online, and the A380 program, we can handle that, no problem.

All right. And then, just looking at the backlog, you guys broke out in your presentation the portion that was LaBarge and Ducommun, just wondering if you can give us a little more color on the mix of LaBarge's backlog?

Well, the mix of the backlog parallels what the mix of their sales are -- have been.

Okay.

You notice, as we look at that business, it should grow on a sustained basis somewhere between 6% and 10% a year, and the backlogs reflect that. The only exception is in the energy business, with the American Super Conductor, which is in our Q, but that is being offset by the oil field services. The energy markets are very robust, and we continue to see growth in that segment that offsets the decline in that super conductor business. So, we are real pleased about how the mix in the diversification has allowed a different economic cycle for the DLT side of the business to really continue to grow and sustain orders and improve backlog.

I think, one, if you look at LaBarge closely, you would see that they have done an excellent job in growing over the last several years and they've actually been double digit growth in terms of their market presence. So, their balance was a little less than 50% on the A&D side, and then the other 53% of their business was spread through different markets. But, their backlog is pretty well-balanced our cost the marketplace and their projected growth.

Okay, thank you. And then, looking in terms of the inventory step up, just for modeling purposes, is it going to impact the third quarter more than the fourth quarter? Or is it going to be kind of even within the quarters?

I would split them evenly, because our average inventory turnover is 4 times, so we would take -- we would work through that by the end of the stub period in December.

Okay, and lastly, also, I guess in the Tier 2, Tier 3 suppliers, there's been a lot of talk about how the larger Tier 1s are going to be driving down some additional work. Just wondering what are the issues you have in terms of trying to capture that work and have you seen it already start to pick up?

I guess the answer is in terms of actions were already out in front of them and we have been working on that and so we're starting to see -- there's lots of quote activity going on right now and we'll see, as the Tier 1 and the OEMs start to offload. So, the new program -- on the 777 program is an example of an offload that we picked up as a result of this continued outsourcing. So, we have lots of opportunities in front of us. We're working on new applications as we speak and I think there's plenty of opportunities to take a look at how the OEM and Pan-Boeing or Airbus are going to continue to offload. And that we are continually analyzing our capacity and capabilities to support that. So, those are the big -- the big trick now is to get the right business in, so that you can continue to grow going forward.

Okay, thank you very much.

Thank you.

(Operator Instructions). Your next question comes from the line of Ken Herbert from Wedbush. Please proceed.

Yes, hi, good morning everybody.

Hello, Ken.

Just wanted to follow up on the CapEx question. What would you, then, talk about in light of what you just commented on in terms of 37 and some of the other aircraft looking to support the build rates? Does CapEx in 2012 directionally -- can you talk about where it goes, or maybe orders of magnitude?

I would say, Ken, let me ask the question in terms of the 737. I don't think it's as much a capital issue as it is investment in tooling. So, we wouldn't capitalized that for a program. But, from a capital expenditures standpoint, the one thing to note, in particular on the Aero Structures side, is that we have a significant capital investment in this year that was for a brand-new program that we have in place that we don't really talk about, for a company. Proprietary data.

That's been a significant investment, so I would think that on the structured side of the business that we will see something lower, something in the $7 million to $8 million area in terms of capital investment next year and I would expect that the DLT side of the business would be somewhere in that range as well. Somewhere between the $7 million to $8 million range. So, when you look at the capital investment into 2012, with regards to program rates and things of that nature, I would say that we would be in the $14 million to $16 million max range in terms of capital.

Okay, great. That's very helpful. And just a follow-on to an earlier question. Obviously, you are well-positioned to continue to take share on some of these programs, specifically on the commercial side as volumes start to really step up here. And, I know you just indicated that it sounds like your activity is picking up in this regard.

Are you getting a sense at all from opportunities and customers that they're really starting to look to accelerate some of what they might do in terms of outsourcing and opportunities for you? I guess, my question is really is the tone changing at all? Or is it just sort of a continuation of what you'd seeing in terms of a pick up gradual in activity levels?

I think, as the rates pick up, Ken, you'll see more. I think what the big issue is inside the -- what's happening, in my estimation, in terms of the tier ones and the OEMs, is that they are getting ready. So, we are seeing a lot of activity in terms of them actually analyzing capability, and I still think they have some more work to do in terms of as they hit these higher rates, capacity wise internally. Our goal here is, if we take the offload because we are manufacturing service across the business, whether it's on the DLT side or on the Aero Structures are, if we take the offload, we want to make sure we got it for the long run. So, it's not just business that they want to offload and then the rates go back down they pull back in house.

So, we're trying to partner with our customers and be more important as we go forward and that's part of the whole integration process in terms of trying to make sure that we walk in with the capability from a combined company, from a One Ducommun, if you will, to go sell an application that will service the customer and help them actually focused their efforts in other areas. So that's the kind of revenue base and sales that we're chasing. We are addressing a lot of open RFQs and I think right now, from a tone standpoint, they actually are going to be in a position to offload it. And we just -- we'll position ourselves to be available.

Great. Just finally are you seeing any pressure points or any potential constraints in your supply base?

That's a great question. And, the answer is yes, we do have suppliers that are peaked out at capacity and we have an ongoing effort on our supply chain to actually -- that's also a big part of the integration process, is to identify additional suppliers so we can go forward. So, that's one of the things that Boeing does very well and Airbus has picked up, and also Embraer has just been in, in terms of capacity planning and, what they call re-readiness, is a complete review of the supply base. So, we are in the middle of that and working through that, so we have areas that are of concern to us and then, we are working through that and we started that effort, going back to the beginning of this year.

Great, thank you very much.

Thank you.

(Operator Instructions). I would now like to turn the call back over to Mr. Tony Reardon for closing remarks.

Thank you, Nicole. And, I'd like to thank everyone once again for your continued interest and support and we look forward to speaking to you in the third quarter. Thank you very much.

Thank you for your participation in today's conference. This concluded the presentation, you may now disconnect. Have a great day.