Ducommun Inc (DCO) 2011 Q3 法說會逐字稿

Good morning Ladies and Gentlemen, and welcome to the Third Quarter, 2011 Ducommun Earnings Conference Call. My name is Lisa, and I'll be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Chris Witty, Investor Relations. Please proceed.

Thank you, and welcome to Ducommun's Third Quarter Conference Call. With me today is Tony Reardon, President and CEO, and Joe Bellino, Vice President and CFO.

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

Important factors that 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 10K for the fiscal year ended December 31, 2010, and Form 10-Q for the fiscal year ended October 1, 2011. All subsequent written and oral forward-looking statements attributable to the Company, or persons acting on it's behalf, are especially qualified in their entirety by the cautionary statements.

Unless otherwise required by law, the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this conference call.

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

Thank you, Chris, and thank you everyone for joining us today. I'd like to give you an update on the quarter with some market color, and discuss the integration of LaBarge, after which I will turn the call over to Joe Bellino, to go over our financial results, in detail.

Let me begin with a high level look at the quarter. The first to include a full 3 months of contribution by Ducommun LaBarge Technologies. We entered this quarter with efforts focused on integrating LaBarge into Ducommun, while hitting our operational goals and conserving cash as we paid a number of acquisition related expenses. We couldn't be more pleased with how Ducommun LaBarge Technologies, or DLT, as we call it, is performing. And we're on track in terms of integrating the operations and the management teams. DLT posted solid financial results this quarter, in line with our expectations.

As Joe will review in a moment, the unit accounted for nearly 60% of our total sales and showed strength across a wide array of end markets, including medical, industrial, natural resources, engineered products, aerospace and military helicopter segments. All in all, the new DLT is performing as expected, and is being received very well with our customers, as we look to combine our capabilities to access new platforms and programs.

We're also on track to achieve the forecasted synergies, and cost savings over the next several quarters, which should result in improved margins as the top line continues to grow.

On the oil structures side, we saw sales rise 11%, versus the third quarter of 2010. Commercial aircraft demand is fueling expansion across our Boeing and Airbus platforms, and we see additional content, along with higher deliveries, driving further growth in the quarters to come. The operating income from DAS was flat, year-over-year. However, we were disappointed that the margins did not track the AeroStructures revenue increase, as we had a number of new programs in the mix, with low margins due to start up costs, and we've had more work to do on these programs to improve profitability in the quarters ahead.

Our DAS helicopter business showed continued strength, particularly with Carson, Black Hawk, and Chinook, and in our military business we saw some growth, quarter-over-quarter on the C-17 program. Overall, DAS showed solid traction and strength in a diversity across a multiple level of key programs. Ducommun ended the quarter with a record backlog of $612 million, up from $582 million last quarter, positioning the Company for continued expansion going forward.

All in all, as we look at the performance of this quarter, given the size of the acquisition and the complexity required for a very sound integration, we are on track and taking the necessary steps to ensure that we manage the integration and solid cash flow, which is the best identified by our solid EBITDA number generated this quarter. Now, let me provide some brief comments on the general market conditions and see how this will play out for us in months to come.

We, like our peers, are experiencing an upswing in demand in the commercial market. Well, with forecasted the build rate increases at Boeing and Airbus, and with a flat regional jet market, we should see growth in the commercial demand for the next couple of years, barring any unforeseen global economic downturns. We are seeing, however, congressional budget delays, impacting some parts of our operations, but our belief is that in such areas, we are stable at this time. We, like everyone else, await the outcome of the Congressional super committee recommendations so that we can chart our strategy going forward.

For military aircraft, lack of spending visibility and the increased oversight and scrutiny on government contracts, along with the changing dynamics in the Middle East, are slowing contract releases on programs such as the F-15 and F-18. But, we remain convinced that our products and platforms will continue to be funded for the foreseeable future. And we will absolutely search for ways to exploit opportunities in the defense markets, as it stabilizes, no matter what happens to the budget.

In the non-AMD areas we serve, which like all markets, are subject to varying economic conditions in both macro, as well as the micro levels, we see modest growth going forward. We view the industrial markets as being able to support growth, with the energy markets very much dependent on global demand drivers. We are seeing a solid trend in support for the oil and gas exploration markets, and expect that to carry forward well into next year. We are, however, seeing some softness in the medical equipment field, and expect that to be down to flat, in near-term. The medical market is adjusting to a softness in the hospital spending.

We are monitoring our business base very closely, and are focusing on the many growth markets, while working to capture greater penetration in those markets that we see as flat or slight moderate growth. We're looking to leverage our customer relationships, to target greater numbers of opportunities, and increase the Company's growth trajectory, while at the same time, doing what it takes to improve margins and increase cash flow. Operating margins have continued to be impacted by higher sales mix of new programs, and by inefficiencies that are typical in the lower build rates at the beginning of product lifecycles.

As we increase production rates and continue implement our lean manufacturing across our operations, we anticipate margin expansion in 2012. Our goal, given our healthy, free cash flow, is to pay down debt and to de-lever the business, over time. We remain focused on increasing returns for our shareholders, and building a stronger Company with higher, longer-term growth potential.

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

Thank you, Tony and good day, everyone. We're very pleased to have completed the first full quarter of the new Ducommun. After commenting on our financial results for the third quarter, I'd like to outline several factors which will impact us in the upcoming fourth quarter. Yesterday, we reported our results for the third quarter, and excluding pretax acquisition-related expenses of nearly $4 million, our net income was $0.34 per fully diluted share, versus $0.55 per fully diluted share, in the third quarter of 2010. First, I'd like to bridge the difference of those, to gain a clear understanding of the underlying run rate of our operations.

In looking at last year's $5.8 million for the third quarter of 2010, and comparing it to where we are this year, we have the following changes. First, our EBITDA increased almost $12 million. The offset to these were, we had a merger-related inventory step up, right off, of $1.2 million, our depreciation and amortization increased by $4.3 million, our interest expenses increased about $7.8 million, our income taxes were up $0.2 million, and non cash stock-based compensation increased $0.2 million. When we had all those offsets, that's almost $14 million, which when we add those and subtract the others, it results in the $3.7 million of adjusted net income, or $0.34 a share.

In this recent quarter, sales increased by 86% to $185 million, as we've taken the Company to a new level. This includes $83 million in sales for the LaBarge acquisition. It generated nearly $22 million in adjusted EBITDA, which is equivalent to an 11.8% margin. This compares to $10 million last year, and an adjusted EBITDA margin of 10.2%. On a pro forma basis, the sales of $185 million were slightly ahead of last year's pro forma numbers. In bridging this, as we look at it, our product sales were up nearly $4 million, and our engineering services were down by a similar amount. I will discuss more detail when we look at the segment results of DAS, Ducommun's AeroStructures and DLT, Ducommun LaBarge Technologies.

We are very pleased that the additional growth in revenue from the acquisition, contributed to higher EBITDA levels and margins year-over-year. As we look at the results by business segment, as Tony mentioned, the DAS sales were up to $75 million. They were up 11%, as the segment benefited from increased sales in nearly every category in our commercial aircraft area, including large and regional aircraft, and rotary-wing commercial aircraft. And, on the military side, we continue to see strength -- underlying strength on our military helicopters, and fixed wing military aircrafts.

This sales mix resulted in an adjusted EBITDA of approximately $9 million, or 12.2% of sales, versus a similar EBITDA last year of $9 million, which generated 13.3% EBITDA margin. In Tony's earlier comments, he discussed the reasons why those margins were down slightly, and they were -- in addition, they were adversely impacted by, let's say, a less favorable product mix and some operating performance.

As we turn to Ducommun LaBarge Technologies, or DLT's adjusted EBITDA, it was nearly $16 million and included nearly $4 million in pretax acquisition related expenses. And it was 14.5% of sales, compared to $4 million a year ago, adjusted EBITDA, or 12.9% margin on sales. The newly acquired DLT assets accounted for the $83 million of the $110 million in DLT segment sales, and more important, they were the primary driver of increased adjusted EBITDA results.

On a pro forma basis, we were up nearly $4 million in DLT product sales, and down, as I mentioned earlier, nearly $4 million in engineering services. When we dig further into the technologies product sales, we had a strong quarter of growth in military electronics or technology products, as sales grew nearly $6 million, year-over-year. And, it was slightly offset by some weaknesses in the industrial sector, primarily semi conductor products, as well as in the natural resources sector, which was highlighted by a drop, year-over-year of about $8 million in American Superconductor sales. That being said, our oil exploration product sales are increasing, and our bookings in that area, are very strong, as of the end of the quarter. In addition, we experienced solid growth in a number of other of our end-use markets.

We look at corporate SG&A, not identified in the 2 business segments, and including certain transaction expenses, they were running at 2.1% of sales, versus 3.6% of sales a year ago. This reflects the economies of scale we're enjoying, from higher revenues and from continued cost controls in our operations.

Now, turning to backlog, as Tony mentioned, our backlog grew sequentially from the July 2 period, or by about 5% to nearly $612 million, which is really a record, even on a pro forma basis. The quarter end as of October 1, excluded pending new orders for the C-17. I'm pleased to report that we have received approximately $25 million of new purchase orders in this current quarter for the C-17, and that's pretty much resolved that issue for the next 18 months or so. Regarding the F-15, again which Tony commented upon, orders may not get booked until the first half of 2012. Overall, we expect our backlog to grow as a result of the upcoming increase in build rates for large commercial aircraft, and continued market acceptance of both our military and oil-field exploration technology products.

I want to visit a little bit on liquidity and capital resources. The end of the quarter, we had approximately $390 million in funded debt outstanding. Given our LTM adjusted EBITDA of $88 million, this resulted in a 4.4 times funded debt to adjusted EBITDA, as defined in our loan agreement. We are now focusing on debt reduction as the primary use of our free cash flow. We had a solid quarter, in terms of cash flow, and excluding transaction related expenses, we generated positive cash flow. We are -- we have a $60 million revolver, that's unused and we had expected to be unused as of year end. We're coming into our strongest quarter of the year, in terms of cash flow, and we expect to generate even more significant positive free cash flow in this quarter.

In addition, in the CapEx area, we expect our CapEx spending to be about $17 million this year, and includes some projects we're working on that were initiated on both the DCO side, and on the DLT side. And this compares to about just $7 million that we spent a year ago. And is primarily for new program growth, and to expand our product capabilities, which we're very excited about the existing opportunities.

Now, turning to the fourth quarter impact, there are several transaction related items, which began in the third quarter, that will impact our results here in the fourth quarter. My purpose is to provide further clarification going forward, so I wanted to highlight some of the items that will impact our fourth-quarter ending December 31 of 2011. As a result of purchase price accounting, we will be recording a $1.2 million inventory step up, which affects our cost of goods sold and we consider this merger related expenses. Secondly, our total depreciation and amortization of intangibles, is estimated to be about $7.5 million this fourth quarter, which was similar to the third quarter. The next area in the area of net interest expense, we estimate it to be about $8.2 million in the fourth quarter, similar to the third quarter. It includes interest of $7.6 million on our $390 million of debt, and it also includes $0.6 million in deferred financing costs, incurred as a result of the transaction.

The next area, in the fourth quarter, we expect additional merger related expenses, to be in the range of $3 million. So, our total merger related expenses in the fourth quarter including the $3 million I just noted, plus the $1.2 million for the inventory step up, will approximate $4.2 million. Finally, our estimated tax rate will be in the 29% to 31% range.

And with that, I would now like to ask Tony to make some additional remarks. Tony?

Thanks, Joe. Before turning the call over to questions, let me again highlight where we now stand, in terms of the business fundamentals, and our future goals. We made a great addition to Ducommun when we acquired LaBarge, and we've created a much more diversified and well-balanced Company as a result. Have a bright future, as we look towards continuing to integrate our team and focusing on being one Ducommun. Given the size of acquisition, we focused our attention on integration and managing cash. We are pleased to report, that the integration of this business is on track, as is the attainment of the expected synergies next year.

Seeing growth in our commercial aerospace operations, which we anticipate will continue going forward. And, in addition our military business is more diversified, and the platforms we participate on, appear to be stable. We believe our programs will continue to be funded in the future, due to ongoing demand, both at home and in a growing foreign sales market. So, Ducommun is more strongly positioned for the future, than it has been a long time. Our goal is to leverage this position, to increase content when assisting customers, improve our market presence, and use this anticipated growth going forward, to fuel both higher margins and stronger cash flow.

Our operating margins, they are not where we want them to be. But we're taking the necessary steps to expand the margins, in the quarters to come and in doing so, increase cash flow and reduce our debt. We are positive about the future, and believe that 2012 will create a solid base for Ducommun for the years to come. As always, we remain dedicated to increasing shareholder value in everything that we do.

With that, Lisa, I would now like to turn the call over to questions.

(Operator Instructions) Troy Lahr, Stifel Nicolaus.

I wondered if you talk a little bit more about the product mix, the unfavorable product mix at DAS? Maybe a little bit more about what contributed to that, and how long that should continue to put pressure on those margins?

Within DAS, we have 6 to 7 brand-new programs, that are going through, what we would call, first article, right now, so in this quarter, and the next quarter, to continue that. As we go through that, there is lower margin. The revenue base off that was probably $2.5 million, and we put that in perspective from a start-up standpoint, so there's a number of programs. They extend, some in the commercial market, some in the regional jet market.

We have new programs in the general aviation market, as well as in the military helicopter market. So, it's across all of our business space in the business, and it puts some pressure on the revenue, in terms of the start up costs associated with those programs, so I would expect that to carry into the fourth quarter and probably into the first quarter next year.

Can you talk about the investment costs associated with those programs? It seems like, going back, they've been in that $1 million to $1.4 million range, for the past few quarters, but it seems like I think, each call you say -- or you expect them to keep coming down. Did they come down again? Or can you just give us some ideas?

I think investment costs went up a little bit, because we introduced some new programs, so we had some carryovers from programs we started in 2010. We're still not at the maturity level yet. And they are abating, they're decreasing. But, in addition, we picked up 2 or 3 new, significant programs here in the mid-2011, and we're still at the immature stage in terms of getting down the learning curve.

One of the things that we've always talked about, is we have to replace some of this legacy business that we have, that is slowing down. So we've spent an awful lot of time working on bringing in new business, and we have a number of new programs that we're running through our facilities. And, in particular, on the AeroStructures side. As we win the new business, we put ourselves in a position to create the start up costs that are going forward. Although the start up costs are higher, we are absolutely putting ourselves in a position to continue to grow this business going forward, and unfortunately, at this time, we are in a position where we have to invest a little bit, in order to be able to make that happen, and secure the future. But, we're doing what's absolutely correct for this business to grow.

When you say there up a little bit, are you talking year-over-year or quarter-over-quarter

Both.

And then going into the fourth quarter, does that continue to be at $1 million level?

I would say would be up about $1 million, $1.5 million.

Up again? So, like $2 million is kind of --

No. Close to the $1 million, $1.5 million.

Total, $1 million, $1.5 million. On the acquisition costs, it seems like they were higher than what we thought, or what I was thinking, last quarter. Did they come in a little higher? If you look at fourth quarter, it sounds like putting all of the merger costs in there, it looks like it's going to be very similar to the third quarter, maybe a little more challenging? Is that fair?

Well, yes. Last quarter, I had spoken, maybe $1 million to $2 million. And in this case, they were about $2.7 million, and I talked today they would be -- excluding the inventory write up, they would be about $3 million. They are really related to accrued compensation expense, some of which has been accelerated, some are related to change in control. The good news is these expenses we're incurring now in the stub period will go away starting 1 January in 2012. So we should see sequentially -- we would see those non-recurring expenses go away, and would say lower level of SG&A throughout the organization.

So, the $1 million to $2 million, was excluding some of the purchase accounting and that --

Yes, it was. The $1 million to $2 million compares to be $2.7 million, this quarter. And third quarter and then as I mentioned, the fourth quarter will be about $3 million, we expect. And the other part of it is the $1.2 million for inventory related. So we would say $4.2 million is our current estimate of merger-related, nonrecurring expenses, that we're going to incur in the fourth quarter.

Edward Marshall, Sidoti & Co.

Looking at the business and commercial sales in the quarter, and I heard your comments about how that business is growing, but sequentially, they seem to be stepping down from the second quarter. I'm not sure if it's related to the way, the segments are now broken out and maybe something a moved around? It looks like it was a 13% decline from the June quarter. Was there program or something that fell off? Or what's going on with the commercial business? I would have assumed it would've been up.

Actually, the commercial business is up.

From June of 2011?

Yes. It on the commercial aerospace side. You're looking at the Q?

I was looking at, not only this Q, but the last quarterly Q. You had $108 million in sales of which 47% ran into the commercial business line. That was $50.8 million, and you did $44.14 million, in this particular quarter.

We have such a large diversified portfolio, I'll address the commercial side of it. We look at year-over-year, and on the commercial business and the structures side, we were up about $4 million. So we were pleased with that year-over-year growth and expect that to increase. We have now 6 product lifecycles, so we're seeing a lot of the things that both Tony and I commented upon; different economic cycles and so we see the positives and negatives, that can happen, pluses and minuses that can occur during a given quarter.

When we look at the business, we have really a strong military technologies products, and we have strong outlook in bookings in the commercial products, and our oil exploration business should grow and we're just seeing softness in some of the industrial markets, and some of the medical markets, as Tony commented upon. Combine that with the fact that on the F-15, which as we commented last couple of quarters, pending C-15 -- excuse me, F-15 orders, that were very robust last year, they're down. That has been one of the declines in the business, both year-over-year.

There's no question that the portfolio certainly diversified from where it has been, but when you look relative June to September, you know, was there something unusually high in the June quarter that we should be taking a look at? I look at the commercial business, and I look at you know, Ducommun historically, the commercial business is something that is relevant to the future growth. As the military kind of stabilizes over a period of time.

That might have been some foreign military sales in the quarter, we classified as commercial in the second quarter that we don't see now. But, let's focus on the growth of our large commercial aircraft business. It was up about $2 or $3 million, year-over-year again. We haven't seen any impact yet, and we're expecting it in the first quarter of next year, the full impact of the higher builds in the 737. So we look at that is positive as well as the 787, still only pulling about 2.5 shift sets a month.

There are a lot of positive things, and as you know, you study this business very closely, there's a lot of, let's say, lumpiness by quarter. For example, we saw Boeing just recently reported that they shipped only 31, 737's in the month of October, whereas last year, they did 37. We look at these is timing differences. But the underlying business is really strong for us.

As I look at it, Ed, even on a year-over-year or quarter-over-quarter base, commercial business is up.

Okay. We'll have to follow-up back up with that. The program sales, I see you no longer break them down even for backlog, or by sales in the quarter. Either both military, as well as, commercial. Is that something that we should expect going forward that will be broken down any longer?

Yes.

You talked about some of the items that you expect for Q4. Did you say that they will end in Q4? You won't see them recur in 2012?

Some of the items?

Yes. Nothing should repeat in 2012, right?

The $4.2 million per quarter that we projected for the fourth quarter will go away. The other one, the interest expense, will be a function of how much debt we pay down, the depreciation, amortization are pretty well fixed for multi-years. The inventory step up will go away at the end of the quarter. That's part of the $4.2 million.

And the additional point $6 million of financing costs? How long is that amortized over?

Probably another 4.5 to 5 years.

J.B. Groh, DA Davidson.

Can you remind us when you locked, the click down in C-17 rates? When does that flatten out?

We saw an uptick, this quarter on the C-17, and that's primarily a function of last year; we had a strike. I would expect that, going into the first quarter, we'll have probably lower C-17 sales here in the fourth quarter than we did in the third quarter, and then next year we'll drop off to about 10 aircraft.

So, there's a little bump in here, which normalizes in the first part of next year?

Right. We've said that's probably going to be about a $30 million to $32 million program, from all items that we supply on that aircraft, down from the $44 million that it used to be. As the build rates, now we see them -- they are still a little higher than 10 a year, but as Tony said, they'll go to 10 a year next year, and to be about $30 million to $32 million, we project.

It looked like that the natural resources business was really strong and I guess you made up for the American Superconductor business with some real strength in oil and gas?

Yes, that's right. When we looked at the backlogs for the natural resources, which includes very little for the Superconductor business. There are up to $44 million on a pro forma -- excuse me, on a pro forma basis. Back in July, they were $31 million. We started seeing more bookings for Schlumberger and those related activities. We've proven our product capabilities as very diverse product offerings. With the rig counts in North America, which is the key driver, with those increasing, we're very bullish about that, probably, for the next year or so. Although all recognizing that it's cyclical. Looking good there.

Did that $31 million prior backlog number, that included something for American Superconductor, correct?

Yes, those levels have stayed flat because we didn't ship anything in the quarter.

I understand on your segment presentation, but in the press release you said you had the $308,000 in SG&A, as the merger-related change in control compensation expense, that's up in cost of goods sold, isn't it?

No, that is in SG&A.

SG&A, okay. But, in the segment presentation, it shows up in DLT?

Yes. It's the -- yes. That's correct. It is all attributable to DLT, yes.

Jonathan Richton, Imperial Capital.

On some of these new projects that you're beginning work on, is there any way you can give us some indication what the potential revenue impact is, and when you'll start seeing that increase?

The increase in sales?

Yes. $2 million, right?

We had about $2 million in inventory or, excuse me, in revenue this quarter, and the actual -- what we're experiencing right now, is obviously, first article and low rate production. I would expect those to pick up last half of next year in particular, and we'll see some revenue increase on a couple of programs going forward. Probably at a steady state level of what we saw last quarter, and then it will gradually pick up in the third and fourth quarters next year. We are at pretty low level rate of production on all those programs.

Can you give us a better idea about the mix of programs versus you know, how much of it is commercial military versus regional versus GA?

When I think about it in terms of the revenue base, that probably about 50% of it is in the commercial side, so about 30% is in the regional jet. And then 10% in the general aviation and military. If that adds up.

Going through it quickly, but I'll double check it later.

I think it's 50%, 30%, 10% and 10%.

And that's 30% on the regional, right?

Yes, 50%, 30% on the regional.

And then, in terms of the DAS sales, I know you don't break it out by program, but just giving us an indication of which programs were more of the drivers there?

It was across the board, Jonathan, as we look at it year-over-year. We looked at each one of those sub-segments of the large commercial aircraft, regional products including [waiting lists], commercial helicopters. They were all modest growth, in each one of those categories segments. Which we're really pleased with.

Let me give you a little color on some of the programs. As we walk through last year, and we don't want to go into the programs too much, but you know, the military helicopters were driven up by the Chinook program, offset by lower Apache sales. As you look through that, we had a pick up on the military side of the business, as well as on the commercial side, and the large commercial jets helped us.

Adam Plissner, Credit Suisse.

In speaking to some of the start-up costs and inefficiencies over the last couple of quarters, I think you're now mentioning that it might take -- it might drag on for another 2 quarters or so. Putting that in perspective historically, relative to your new business launches, does that -- is that taking longer, sort of unusual relative to the number of launches? Anything going on, you think the drag is lingering longer than typical?

I think it's 2 things, Adam. There are some inefficiencies that we shouldn't be working through, that we are, on some of the programs. But, I think, the number of programs that we have, is really what's driving some of that aspect of it. So, there's a larger number of new programs that are going through right now than we've experienced in the past. Generally you'll hit 1 or 2 in a year. We've got 5 of them that are pretty hot right now. So, it's the number of programs that go through, and then, as luck would have it, a lot of them are within the same business unit. So, you have your work cut out for you on the (inaudible) standpoint. So, that's basically it.

I know you don't break your business out like this, but looking at the revenue breakdown, and the DAS business being up 11% you went into the details there. When you strip out the LaBarge confirmation for acquisitions, you noted in the press release, it was $82.8 million of contribution. You are kind of left with the year-over-year decline in the old base Ducommun technologies business. And it was down about 17% in the quarter, been down about 17%, for the last 9 months. And I guess, historically, you have talked to some specific programs, F-15, some drag for budgetary declines, but is that something that has to be dealt with in a way other than sitting tight? How do we look at that old-base Ducommun business and explain how long it's going to go on for?

Well, I think the first issue that we have is, on the services side, so we did break that out --

Right, $4 million.

You can see that kind in the quarter-over-quarter, and that's a big drag on it. And then, we do have some of those military programs that have been delayed, that we anticipate the release in the build, and you mentioned the F-15. That's a perfect example. That's down significantly, year-over-year, and quarter-over-quarter. As a result of the delays in the release on certain foreign military sales. As we go forward, we are anticipating that release, and we are actually anticipating somewhat of a pick up on that as we get into that. But, in terms of the timing, and the way things are coming out of the government, in terms of releases, it's been awful difficult for us to forecast that release.

Joe, I think you mentioned in your commentary, that you're coming on to Q4, it's a good free cash flow quarter seasonally, as well. Tony, you mentioned the declining build rates on the C-17 coming up in Q4 and Q1, next year. Have you thought about some of the legacy programs and timing going into Q4? Do you expect Q4 still to be up sequentially versus Q3 where we have the net benefit of the commercial build and other new business opportunities to offset the legacy? Is this something that you think the headwind is going to stall things our for a little bit?

That's a tough call, but we haven't seen, like on the large commercial aircraft, we haven't really seen the uptick yet, on the 787 program, for example. That has not taken care of itself. And on the 737, we have a real robust schedule of build rates on the 737 for example, with Spirit. But we haven't seen because of our later delivery on the other applications, up to Boeing, Seattle, we haven't seen that uptick in terms of build rates. So, some of those things should offset. But, we will have the headwind on the legacy programs, both on the C-17 and the Apache.

(Operator Instructions) Ken Herbert, Wedbush.

Any comments you can specifically make on the 747-8? And, do you have any visibility on any potential rate increases, or increase in volumes on that program?

Actually, we've done pretty well on that. That's up slightly, quarter-over-quarter. The build rate at Boeing right now is moving closer to the 2, as they got through their certification. It's a nice program for us, but right now, I think, probably, we have it forecasted steady state going out until Boeing really kicks into gear.

On the military side, similar question, but on the Black Hawk. I know there's been some potential delays in terms of a potential multi-year contract, and some other issues with Sikorsky. But, are you seeing any impact at all from that, either positively or negatively and the outlook on that program?

Not so much in the actual -- we're working through, like everybody else, we're working through our contract with Sikorsky, and that is slow going. But steady, if you will. In terms of build rates, I think that their build rates would actually go up, if they can increase their rate. But, in terms of business base, things of that nature, I think that we should be stable year-over-year, if not up a little bit, if they increase their rate.

And then, for the synergies, I know you've gone through some of this detail, Joe, but is there any update you would provide on outlook, specifically in 2012, either in the timing or the magnitude of the opportunity, that you've talked about in the past from LaBarge and how we should think about that?

Over the next four years, we will average about 2% of the $330 million, or approximately $6 million a year, with a slow pick up from the Southwest to the Northeast, meaning that, as we get in the latter years, 3 and 4 years, we ought to expect $7 million to $8 million. I think in 2012, we probably ought to enjoy synergies of somewhere between $4 million and $5 million.

Some of the synergies are readily identifiable. Some of the longer-term strategic synergies are in the operations area, as we rationalize product, say, between different locations and we obtain the supply-side synergies. Those take a little longer, strategically, to work through with our supplier base. And those kinds of things. It usually takes anywhere from 12 to 15 months to really begin to enjoy those. And that's why we're confident in year 3 and 4 we'll realize those.

You see an initial bump this year, from some of the low-hanging fruit, and then as you work through some of the longer strategic issues, it's a little bit lower than, sort of, a normalized run rate next year, before stepping up 2013 and 2014, is how we should thing about it.

Yes.

Can you talk all about, for 2012, free cash flow, and what your expectations are there, and --

Yes. I'm sorry to interrupt you.

Go ahead, Joe.

Over a 3-year period, the importance of free cash flow, is driven by our strong thrust to take our $390 million of debt down to, by the end of 2013, down to about the $300 million and $310 million and mathematically, that's about an average of $30 million of free cash flow. Embedded in that is a capital reinvestment program somewhere between $16 million and $20 million a year. When you add that up, we expect cash flow from operations to average about $46 million to $50 million a year, with the cash flow potential of the new Ducommun. What would like to do on the debt side is be down to about the 3 times level, 2.75 to 3, leverage level, and the absolute numbers to be in that range, I spoke about.

Jeremy Devaney with BB&T Capital Markets.

I just wanted to look at this LaBarge transaction a little bit. Looking at the old LaBarge statement, it looks like we are down about 2.5%, year-over-year on the LaBarge base of business. Could you give us a little color on how you view that performance versus your expectations? And then also, when you look out for the remaining stub period that we're using for the organic growth calculations here, what kind of outlook do you have for the growth expectation, as we move forward?

Jeremy, I put something on our website that's now available that shows our expectations for the combined businesses of somewhere between 5% and 7% a year, compounded annually, for the next 4 or 5 years, and break it down by end segment. More specifically to your question, we see a lot of momentum from the newly acquired DLT assets, as we call them. What happened year-over-year, we did see the softness that you noted when you work through the numbers.

And the primary driver was American Superconductor last year was $8 million of sales, and we haven't sold any. We put that in the queue, we haven't sold any since April of this year. So that's one big headwind, and we don't expect any sales for that of any significant magnitude for the next couple quarters as they are in the de-stocking mode.

That being said, we grew our military electronics technology businesses, as I call it, by $6 million or $7 million, and we also had some softness in the semiconductor business from some of the non-military businesses. When we look at that big hurdle of $8 million of lost sales and the attendant margin, that portfolio has done very well to recover from that. As we look forward, we have a couple things that we want to resonate clearly. One is the oil exploration portfolio, and the bookings are very strong, and we look forward for that momentum to carry here, into the fourth quarter and beyond.

In addition, we had some real significant bookings in, what I call, the military and space technology side of it. Those bookings went from $305 million in this July period, July 2 to now, almost $320 million. So we had good bookings and we'll be fulfilling those orders here in the fourth quarter and the first quarter. We think things look really bright, and I think, we've done a great job of managing that business despite the loss of pretty significant piece of business, that will eventually we'll come back.

Drilling down and really looking at your expectations, do you feel like the acquisition, thus far, is meeting your expectations at the point of purchase?

I would say, absolutely. I can tell you that, from the information we obtained during the due diligence through today, we have absolutely had no major surprises in the business. We understood the issues with American Superconductor as we came into the acquisition. That happened slightly right before we acquired LaBarge. But I can tell you that, from a management standpoint, they are on target. It's a tremendous management team across the board.

The integration process is going extremely well. We've got good camaraderie going on between the businesses, and I think that there is some opportunities that we'll see in the future coming forward. In terms of how they've performed, I think, what I see internally and what I'll say to you, is it is as advertised. We do have the upswing in the oil and gas market, which is partially offsetting some of the other issues that we're seeing, other than American Superconductor.

The whole business has performed well; the management team is doing a terrific job all the way across the board. We've rolled our technology business underneath the DLT business, and I think we're going to see some positive results going forward. So, we are real pleased, Jeremy, with where we are, with that business.

On the free cash flow in 2012, it seems like there's a lot of levers that can go in either direction for you. For a bit of the called-out slowdown, in LaBarge; Miltec is definitely kind of here and there. You haven't seen the ramp, quite yet, on the commercial side, on the large body airframes. DOD and space biz certainly has it's headwind.

When you think about cash flow, it is risks to cash flow next year. Help us to think about how conservative your number is in that $40 million-plus free cash flow run rate. Is that truly achievable? What do we have see happen in order to hit that number?

We looked at it on a historic basis, and the free cash flow, from the 2 operations, is, what, $50 million to $55 million annually for the last 5 years. So, we are a little bit more conservative. We see there's an opportunity to improve our inventory returns. We are averaging only $3.75 million, blended, and we have programs in place that we are addressing to get it to $4 million.

It's a combination of the cultures and how we accommodate the customer needs, with just-in-time, and on-time delivery and good quality. But, with the complete systems on the buy-side and on logistics of supply-chain management, we really do think that is low hanging fruit, that we can squeeze out another $10 million and improve those inventory returns. And then hopefully over time, as we expand our EBITDA and those things, we can continue to generate increased levels of cash flow from operations.

We'll have a tight hold on the CapEx, and probably that $15 million to $20 million we probably won't exceed. It's just a matter of our Company judiciously allocating the capital and putting that into perspective, with our reinvestment, back in the business.

When you look at the cash flow, we're going to drive the working capital very hard, as Joe indicated, on the business. And we will be prudent about the capital expenditures. But, we're not going to restrict capital expenditures, at the expense of trying to grow the business. We're going to grow this business and put ourselves in a position to be successful going forward. We're going to work really hard in terms of improving our working capital going forward and that's really going to be a focus in 2012. We have got an excellent management team that's in place and aligned to do that. I think that's the level with which we need to project ourselves, and put ourselves in position to be successful, and that's what we're going to do.

At this time, there are no additional questions in the queue. I will now turn the call conference call back over to Mr. Tony Reardon for closing remarks.

Once again, I want to tell you how pleased we are with the acquisition of LaBarge. I think that our business space is very solid and diversified. And, we look forward to talking to you again next quarter, and thanks again for your continued interest and support. Thank you.

Thank you very much. Thank you for your participation. You may now disconnect. Have a great day.