Ducommun Inc (DCO) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Fourth Quarter 2011 Ducommun earnings conference call. At this time all participants are in a listen-only mode. Later we'll facilitate a question-and-answer session.

(Operator Instructions)

As a reminder this conference is being recorded for replay purposes. I'd now like to turn the call over to Chris Witty, our moderator. You may proceed.

Thank you and welcome to Ducommun's Fourth Quarter and year-end conference call. With me today is Tony Reardon, President and CEO, and Joe Bellino, Vice President and CFO. I would now like to provide a brief Safe Harbor Statement. This conference call may include forward-looking statements that represent the Company's expectations and beliefs concerning future events that involve risks and uncertainties and may cause the Company's actual performance to be materially different from the performance indicated or implied by such statements.

All statements other than statements of historical facts included in this conference call are forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the Company's expectations are disclosed in this conference call and in the Company's annual report and Form 10-K for the fiscal year ended December 31, 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'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'll begin by providing an overview of 2011, an update of the quarter and some market color, and then I'll turn the call over to Joe Bellino to go over our financial results in detail.

Ducommun just finished a very important year that includes the acquisition and integration of LaBarge. We ended 2011 much better positioned than we were when the year began with our operations bolstered by this transaction. This was by far the largest and most exciting transaction in our Company's history, transforming Ducommun into a much bigger, stronger, and more capable Company with an enhanced platform for growth.

The acquisition increased our technical and manufacturing expertise and added solid experienced Management talent to the Ducommun team. We couldn't be more pleased with where we stand in terms of the LaBarge integration which is effectively complete.

In addition, during this process, the Management team of the newly formed Ducommun LaBarge Technologies or DLT did not miss a beat in terms of meeting customer expectations on delivery and quality of our products. We're also on track to achieve our target synergies and cost savings over the coming year which should translate into improved margins.

With regard to Ducommun Aerostructures business or DAS, we won and started developing on 14 new programs during 2011. These wins, coupled with work already underway from our 2010 new business awards, proved to be both challenging and rewarding. The programs cut across all DAS units and supported both commercial and military aerospace applications, but our investments impacted the Company's 2011 profitability.

That said, we believe that such investments will help drive higher profit margins over the long term as these important new programs ramp up and offset lower sales from our legacy programs. The new business investments are also paying off in terms of our OEM relationships, increased value-added content and expanded applications, which is why we feel that we're very confident that DAS is on the right path to improve operating results, and we have maintained our focus on growth to replace our sunset military programs and will drive execution in 2012 to attain our profitability targets.

Overall our performance during the year was highlighted by strong growth across our commercial aerospace platforms and additional, and the addition of increased business in the military and non-aerospace electromechanical markets. This resulted in a record backlog at the year-end of $636 million representing a much broader customer base. We also posted on our highest ever annual sales on the Blackhawk program, over $60 million, up nearly 50% from 2010. These facts point to an overall strength of our portfolio of business and expanded diversity of our end markets.

During the fourth quarter we saw across -- we saw growth across our commercial aerospace business particularly on the 737 and the 777 programs, while also posting revenue gains with our regional jets and business jet customers. Commercial helicopters were also strong, and the Carson program is shaping up to be one of our top programs overall. On the military side, the fixed wing sales were down year-over-year but this is more than offset by the higher revenue on out rotary wing applications with notable growth in the Blackhawk program as a result of the acquisition.

On a pro forma basis, our sales to customers in the energy and natural resources markets were down from the year earlier primarily reflecting a shortfall in the reduction in sales to the wind turbine industry. Our margins in the quarter were not where we wanted to be due to the investments in the new programs at DAS, which took a short-term toll on our operating results. Lastly, as you saw in the Earnings Release, we took a non-cash goodwill impairment charge of $54.3 million in the fourth quarter.

Joe will review this further in a moment, but it's important to note that this change does not impact the Company's ongoing business operations, nor does it affect our liquidity, cash flow, or compliance with our financial covenants. Let me restate that. It is very important to note that this change does not impact the Company's ongoing business operations nor does it affect our liquidity, cash flow, or compliance with our financial covenants.

Now let me step back for a minute and talk a little bit about the market fundamentals. The commercial aerospace market is playing out as we expected it, with higher orders coming as Boeing and Airbus raise their production levels. We remain very positive about this side of our business, and expect further uptick later in this year as the 787 program increases its build rates. We are also seeing a stable regional jet market and indications of some growth in the general aviation market.

The US defense market, however is hampered by a good deal of uncertainty and the landscape continues to change. There clearly will be winners and losers as the defense budget winds its way through the House and the Senate, and as the government is projecting a $486 billion in cuts from 2012 to 2021. There are too many different scenarios for a meaningful discussion at this point, but suffice it to say that our strategic plans are aligned with the various potential outcomes and we are confident that Ducommun is positioned well in any major programs that may either be cut or terminations.

Looking at the proposed budget scenarios, it appears that the fixed wing programs we currently support will remain solid for the future through a combination of forecasted US military procurement and projected foreign military sales. The rotary wing market also looks steady, with some funding being moved around we are also best prepared on the programs going forward to take advantage of the growth that appears to be laid out in the budget. Again, the foreign military market looks robust on the rotary wing applications.

In addition, our newly increased presence in the military electronics area through our DLT Group is a tremendous advantage for us. This is particularly true in the missile defense and space area, where again, we are on the right programs. The projected budget in the missile defense area remains flat without any serious potential program cuts projected at this time for the programs we support.

To be sure we are going through changes in the defense market, we still have to deal with sequestration and the potential fall out from that if it goes through. But we believe that sequestration aside, there will be opportunities to grow, particularly as our customers increasingly seek capable, high quality supplier partners who can meet their cost reduction targets.

Moving beyond the aerospace, let me touch briefly on the other areas where we now have a presence, thanks to the breadth of business that came with the acquisition. We saw some softening in our order receipts within the natural resources and industrial markets last quarter but expect to see our backlog in these areas grow during the first half of 2012 pointing towards a more solid second half performance.

We're currently seeing strength in the oil field services market offsetting some weaknesses elsewhere, a good example of the benefits of our diversification strategy. Looking forward, we will continue to focus on margin expansion, top line growth, new program penetration and cash flow. We expect that the margins should improve as we ramp up production on some of our new recent wins and we will target debt reduction with our solid cash flow for this year, delevering the business over time leading to lower interest expense and higher returns for our shareholders. Now I'd like to turn the call over to Joe Bellino. Joe?

Thanks, Tony and good day, everyone. We're very pleased to have completed the first six months of the new Ducommun, after commenting on our financial results for the quarter, I'll outline some factors that we expect to have will have an impact upon us in the upcoming year. Yesterday, we reported results for the quarter, and for the full year 2011.

Excluding pre-tax acquisition costs of $3.2 million, and the goodwill impairment charge of $54.3 million, net income was $2.8 million or $0.27 per fully diluted share, and this compares with $4.2 million or $0.39 per fully diluted share in the fourth quarter of 2010. Excluding the unusual items, we generated nearly $18 million in adjusted EBITDA this quarter which is equivalent to 9.4% margin on sales, as compared to $7.9 million in adjusted EBITDA or 7.8% margin on sales in the fourth quarter of 2010. We were pleased that the additional income stream from the acquisition contributed to higher EBITDA levels and higher margin percentages as compared to last year's.

In this recent fourth quarter sales increased by 85% to $188 million, and this includes $91 million in sales from the newly acquired DLT asset. On a pro forma basis, sales were up 3% ahead of last year's fourth quarter. In bridging this we were up in manufactured products sales $7 million and it was offset by a $2 million increase in our engineering services revenue. I will provide more details when I discuss the individual business segment results.

In looking at the business segment, first on the Ducommun Aerostructure or DAS side, DAS sales for the quarter were up 5% to $69 million and the segment benefited from increased sales in large commercial aircraft, which is reflecting the rising build rates that we're now beginning to see when we expect to see continue over the next two and a half years and beyond. EBITDA was down year-over-year primarily due to the start up expenses associated with the 14 new programs that Tony mentioned earlier.

DAS generated EBITDA of $5.6 million or 8.1% of sales, and this compares to $8 million last year or 12.1% margin on sales. Carving out the impact of the new programs, they adversely impacted the segment's EBITDA by 5.1 percentage points compared to an adverse EBITDA impact in last year's fourth quarter of 2.4%.

Turning to Ducommun LaBarge Technology or DLT, DLT's adjusted EBITDA for the quarter was nearly $15 million or 12.5% of sales compared with $5.2 million of adjusted EBITDA a year ago, or 14.4% margin on sales. The newly acquired DLT assets accounted for $91 million of the $119 million in DLT segment sales and were the primary drivers of increased adjusted EBITDA results.

On a pro forma basis, DLT sales rose by $2 million or 2% as product sales increased nearly $4 million while the engineering services were off $2 million, as I mentioned earlier. When looking further into the DLT product revenue year-over-year, we had a very strong quarter of growth in military electronics, and this was offset somewhat during the quarter by weaknesses in our industrial sector primarily in the semiconductor and natural resources areas.

Another category, non-allocated corporate expenses, which we call corporate SG&A, their expense is not identifiable to the two individual business segments, excluding the acquisition- related expenses of $0.6 million. Our expenses in this category were only 1.4% of sales and this compares with 5.2% of sales in the fourth quarter of 2010. This reflects the cost synergies and the savings that we have begun to realize with the consolidation process and the economies of scale that we'll continue to enjoy going forward.

Now turning to goodwill. In discussing the goodwill impairment charge, as we noted earlier, we recorded a pre-tax non-cash goodwill charge of $54.3 million in the quarter. As the Earnings Release noted and is further detailed in our Form 10-K filed yesterday, this does not impact our financial covenants nor our business operations, nor does it impact upon our liquidity.

There were two primary drivers of the goodwill impairment charge, which is attributable to the DLT business segment. First, the decline in Ducommun's market value at year-end 2011 and second, a softening defense market outlook. Regarding the outlook for the softening defense market that impacted the DLT unit, it had to do with our projections, our future discounted cash flow projections for this business unit that was a key driver in changing our view of the future and our values of the Business which resulted in the impairment charge.

Nonetheless, we believe that the DLT business segment, including the acquisition is going to provide us very solid future cash flows. We reviewed the debt that we've incurred as manageable. We continue here in the first part of 2012 already to enjoy healthy cash balances, and as of year-end 2011, our net debt was lower than when we closed the transaction in late June of 2011.

Moving to another subject, that's very important to us is backlogs. Our backlogs grew sequentially 4% from the October quarter to $636 million and it's up approximately 9% since July 1. The year end backlog also did include new orders for the C17 that we received, but we also have some pending orders coming here in the first quarter of 2012, and that relates to the F-15 and the F-18 aircraft where we expect these orders to be booked here in the first quarter of 2012. Overall, in looking out toward our backlogs, we expect them to grow further as a result of the increases in build rates of commercial aircraft and the continuing market acceptance of both our military and oil field technology products.

In terms of liquidity and capital resources at the end of the quarter, we had approximately $390 million in debt outstanding. Given that our adjusted EBITDA was $88 million in pro forma in 2011, this equates to 4.04 times net funded debt to adjusted EBITDA. We are focusing on debt reduction along with selective capital investments in our Business as the primary use of our cash flow from operations.

We had a traditionally strong quarter in terms of cash flow in the fourth quarter, where we generated $28 million in cash from operations excluding acquisition-related expenses. Currently, as we are two-thirds of the way through the first quarter, our cash balances remain strong, and we expect that our $60 million revolving line of credit will remain unused for the foreseeable future.

In fiscal 2012, we expect CapEx of around $21 million and our expenditures will be directed toward growth of our manufacturing capabilities and selective increases in expansion of facilities to support our strategic initiatives. In closing while we have incurred significant acquisition related expenses during the second half of the year, most of these are all now behind us. In 2012 we expect to immediately begin benefiting from the synergies tied to various cost savings initiatives that we worked on and completed in 2011, as well as look forward to overall top line growth.

I'll now turn the program over to Tony. Tony?

Thank you, Joe. Before opening the call to questions, let me again tell you that we know we have more work to do, particularly with regard to margins, but let me stress how confident we are in the future of the Company that we are building. As I said previously, we're a much stronger, more capable Ducommun as a result of the acquisition, and we're well positioned going forward to take advantage of this new posture.

Our decision to acquire a company that could serve as a base to grow our electromechanical manufacturing and engineering capabilities was strategic. For a long time we've had a very solid and strong Aerostructures business and we now have an excellent complement in place. In addition we have an expanded base of customers in a more diverse non-aerospace applications including the industrial, medical, natural resources and other commercial markets. The ability to sell into these markets we expect will help offset the cyclicality of the aerospace and defense arena over time.

With that, Frances, I'd like to turn the call over to questions, please?

Thank you.

(Operator Instructions)

Jeremy Devaney, BB&T Capital Markets.

Start off with a couple questions here on general strategy. I know in your preamble there Tony, and just wrapping up you commented that this new more diversified strategy you're happy with at this point but it seems that in reviewing the discounted cash flows going forward for the LaBarge transaction you had to take the mark down. I know historically, when the Company has diversified, thinking back to 1980s, there's been issues with diversification in getting everything to pull in the right direction at the same time. Is there any concern that the disparate parts of LaBarge aren't clicking with the core businesses of Ducommun?

No, actually, Jeremy, I think there are no actual concerns there. First of all let me go back and reiterate one thing. We have a very strong Management team and we drive the business the same across all the businesses. The other element to that is that when you look at the manufacturing capabilities within the businesses, on the DLT side and quite frankly on the Aerostructures side they're very complementary in the processes and the procedures that we put in place and in terms of the quality systems that are in place and the way we manufacture. So from a manufacturing standpoint, pretty solid.

From the go to market standpoint, there's a little bit of differences as you can imagine with regards to the non-aerospace markets and the aerospace markets but in the non-aerospace side of the business, we've got a very solid marketing team. We have a real solid plan in place to go penetrate that market. We're doing the things that are necessary to do some cross-pollination across our businesses so we understand the capabilities from a manufacturing standpoint in each one of the areas of our business. We did a real nice job of integration on that side of the business in terms of bringing the teams together. So actually, I don't see -- I see this as a help from a diversification standpoint and allows us to look at markets differently, albeit there are some different quality expectations on the aerospace side, but I think from a manufacturing standpoint, I think we're in good shape.

Sure. I guess then drilling down and being more specific as to the impairment charge, I know Joe, you broke out a bit of what was going on with the testing of the discounted cash flows. Could you be more specific in what piece of the LaBarge business, you broke it out separately from Miltec in this 10-K that you released last night. What piece of the LaBarge business was it that you had to take your expectations down on?

Well the analysis as reported in the 10-K breaks down the three reporting units, Miltec, Ducommun Aerostructures and Ducommun LaBarge Technology is one unit. It doesn't differentiate.

But I thought it specified though that DLT is separate from the Miltec unit.

DLT is a business segment as opposed to a reporting unit. DLT does include three things. It includes Miltec, it includes all of the DLT manufactured products which are legacy Ducommun products and newly acquired DLT products.

And I think maybe Jeremy what you're getting at is we rolled all the DLT or all our technology business together and so when you look at the goodwill discussion, Miltec is separated out in that analysis and on the DLT side, it was a combination of all the businesses we have there. There was no one particular business unit that dragged.

All right. Fair enough. Then the last question, on the gross margin side, you had some large start up costs associated with new programs that hit in the year and especially in the quarter. What point in time do you expect to start seeing some leverage in that? Is that something we're going to witness over the next three to six months or is it more a year to two years? Is this going to be ongoing?

Well, first of all I think there's always going to be some ongoing development that goes on in the business but second of all I think we'll expect to see improvement in the second quarter. We'll expect to see improvement in this quarter coming up in terms of performance from a margin standpoint across the Aerostructures business and in particular, I think that we have plans in place to improve the profitability for all these new programs that we have in place. So we're driving through that so we would expect to see some investment going into the first quarter but not anywhere near what we saw in the fourth quarter.

Okay, actually if I could sneak one last one in there. Is there any consideration to going out and starting to provide guidance to the street? It seems that there might be a disconnect between Company expectations, Company performance and street expectations. Any thoughts there?

Well we did have some discussions on that, Jeremy and I think that what we want to do is make sure that we stabilize the business base as we go across and then we may have discussions on that later on.

Okay, great. Thank you very much guys.

Edward Marshall, Sidoti & Company.

Hi guys. So you mentioned in the prepared remarks margins are not where you want them to be and maybe we could focus on operating margins and I know you have some SG&A cost saving plans for 2012 and beyond and then that should be a portion of leverage as well. First, where would you want them to be and secondly, how do you get there?

Let me go back and restate where we were as a baseline in the fourth quarter. When we take out all of the noise, Ed, our gross profit margin in total was about 17.2%. Our SG&A was 11.4% and our adjusted operating income was 5.8%. Now what we're targeting is to, as Tony mentioned, to reduce that $3 million cost that we incurred in the fourth quarter on the start up cost, at least by 50% of those in this quarter and then continue to improve them. So we're targeting our GPs to be up 60 to 120 basis points over a period of time, unspecific, it could be the second half of this year or whatever. So in addition, because we've incurred a lot of SG&A expenses and we have a bigger base, I would expect that 11.4% SG&A ratio to go down to perhaps the 11% to 11.2% area, so when you add those up you can see, we do target our operating income on a GAAP basis to be probably in the 6.75% to 7% range.

So let me add a little bit back on that. So with regards to how we get there, which I think was the second part of your question, right?

Sure.

So what we do is we actually from a business unit standpoint target the improvement that we are requiring within each one of the business units and we drive that across our goal deployment process internally. So I think that when you look at the new programs in particular, we have plans in place, I talked last quarter we had five or six major programs that we were developing in addition to the other eight that we've won, and on those programs we have specific product improvement plans all the way across-the-board. So improvement in material costs as well as labor input and overhead adjustments.

Okay. Joe, you mentioned 11% to 11.2% from SG&A line but are you talking about this base level of sales because obviously as sales go up, the percentage will change the number from the absolute dollar value.

It's our expectation that our sales would go up and that ratio would go down, recognizing there are some normal inflationary costs in our SG&A base.

Sure. Do you have a defined cost take out for the SG&A as we move forward over a period of time?

Well, let's go back to when we first announced this transaction in April of 2011. We said we expected synergies in the area of cost savings to be at least 2% of the $326 million of LaBarge sales so that would put us in the $6 million range. We believe the initiatives we have taken so far in this stub period the last six months that we're going to realize sequentially a $5 million to $6 million cost savings primarily in the SG&A with further savings to come in the cost of goods sold area with supply chain management, improvements on the buy side and operational efficiencies.

Okay. Secondly, you've had LaBarge now for about six months or so. You mentioned some of the synergies and kind of how you've trended thus far. Is there anything that we can quantify from maybe even a cost synergy, you said $5 million to $6 million from that perspective but what about as far as footprint is concerned and anything and it's probably too early and I'm assuming that's what you'll say, but can you talk about the footprint and what's necessary and what can be cost savings down the road?

It's too early to talk about footprint.

Okay. Fair enough.

But we are analyzing things. We just consolidated a facility from Newbury Park, in California and we consolidated two facilities. We bought one Newbury Park facility down into our Carson, California facility so we're not adverse to doing that but I think if you look across the breadth of the product lines, I don't think we're in a position to be able to tell you that there's something dramatic that's going to happen in that area. I would not anticipate that we would have a situation right now where we anticipate any consolidation of facilities.

Okay. Last quarter you gave us somewhat of a look for free cash flow for 2012 and I think you said $4 in free cash flow and a lot of that was from inventory liquidation and I don't know how far you're through that process, and clearly the fourth quarter was a pretty strong quarter from a cash flow perspective but any outlook for maybe 2012 and if you'd prefer, maybe a normalized cash flow run that you're looking for?

I've noted before that I believe we can get anywhere from $8 million $10 million of cash flow off of our balance sheet from improved inventory turns, and I think that's the context within which I spoke. We have about $160 million let's say rounded of inventory and we think that we have an inventory improvement, if you will, initiatives going on this entire year to improve our inventory turns, we calculate them internally from say about 3.7 times to 3.9 to 4 times and that's the context of that. The other things I think, Ed, are related to, will be a result of the model that you throw out that you generate including in terms of our cash flow, we talked about the $21 million of CapEx that we plan to spend this year. Does that help?

A little bit. And then I guess you've talked about debt pay downs and that's the first use of cash and first, I want to ask you about goals because I don't think you'll give them but are there prepayment penalties on any of the debt and which traunch would you look to retire first? Is it the senior notes or the term and I think that there's --

Those are three very good questions and I'll try to answer each one of them. Really in terms of goals what we want to get our leverage down to is somewhere between 2.75 to 3.25 to 1, certainly by the middle of 2014 and as we look at that, we looked at our combined cash flows less our CapEx requirements, we should be able to pay down $20 million to $25 million annually. So that's a very important to us and we expect that the latter half of this year that we will be in a position to be able to reduce that. As you saw in our balance sheet at year-end, we had $41 million of cash and an unused $60 million worth of unused revolver, so you could see we have substantial liquidity.

Regarding your question on which one will we prepay, the senior unsecured bond if you will, the $200 million note which is due in 2018 has a pretty onerous prepayment penalty for the first four years because it's non-callable. If we were to -- when we prepay debt, we will do it on the term loan and there's a 101 soft call as its called until July 1 of this year and after that, there's no prepayment penalty. So when factoring all those things in, we want to make sure we have enough sustainable cash for the business to keep reinvesting in it and once we define what that level is of stability, the excess cash flow will get plowed into reducing debt.

And when you say cash to run the business, you're talking about more than working capital and obviously with a $21 million expenditure for next year?

Yes, those are the two things, yes. Working capital to support growth, although we are managing our receivables and inventory quite well, and that's right in the CapEx to reinvest in our business.

What does that $21 million consist of? Is that sticks and mortar and new facility or is that machinery and maintenance?

That's mostly equipment, capital equipment and there is no brick and mortar in there. There is some maintenance repairs that we have to make so we'll do that but most of it's, and a lot of it's tied to new program wins.

Okay, thanks guys.

Thank you, Ed.

J.B. Groh, D.A. Davidson.

Hi guys. Thanks for taking my call. I had kind of a detailed question on the backlog and some of the stuff that was in the queue. It looks like you had some pretty strong growth sequentially in military and space and then natural resources went down a bit just from last quarter. Is that military and space growth just, is there just a delay in stuff going out the door or help us understand kind of how you got some pretty good sequential growth and actually good year over year growth in the military and space side when it sounds like that's one of the businesses where we're kind of -- there's some question marks.

I'll quantify that, J. B., for our listeners and then Tony will add some color.

Okay.

Yes, as you noted as our overall inventories, excuse me, backlogs from the third quarter period to fourth quarter improved from $612 million to $636 million, a large portion of that was the $33 million improvement in backlog in our military and space business, both on the structure side and on the electronics or technology side. Where it fell back as you also noted from your studies was our primary offset to that overall $24 million increase in backlog sequentially for those two periods was about a $5 million drop in our natural resources. That was really our, it was in our oil exploration markets with one large customer that actually is a timing difference but the underlying natural resources and energy markets as is noted are really pretty solid and strong so we expect subsequent backlogs in that area.

Okay, so like you said just a timing issue there, stuff going out the door quickly and orders, maybe timing issues on the orders but we shouldn't see that little drop there in natural resources as emblematic of any sort of market softness it wouldn't seem. Correct?

Well, I think when you look at it there was softness in the fourth quarter there, so and part of that natural resources was taking out some backlog on the American Superconductor.

Okay.

So when you look across there is some softness on the wind turbine market.

Right, okay. Okay, yes, I forgot about that so that would be in that bucket so that would make sense. That's really all I had. Thanks for your help guys.

Okay, J. B.

Jonathan Richton, Imperial Capital.

My question is actually regarding the, my first one regarding the presentation. You give us nice color on the expected growth rates over the next three to five years and I've noticed that they've come down pretty much across-the-board for each one of your segments versus the third quarter information you guys gave us. I'm just kind of wondering if you can give us a little bit of idea or more color on what's a driver particularly on the natural resources industrial sides.

I'll quantify it again and Tony will add color but what we've taken down, we said the average growth rate in the intermediate period of some of these market sectors non-A&D and non-commercial because those haven't really changed, the other non-A&D sectors we took it down from 4% to 6% estimated growth to about 3% to 5%.

And then some of it is on the natural resources side, as we're seeing softness obviously in the wind turbine business, but that's somewhat offset by some pick up on some of the oil industry capabilities we have. And then we're seeing a little softness in the industrial area as well, from the fourth quarter bookings. So we expect that to pick up in the second half of the year so those are kind of the markets but when you look across-the-board and you look out, we have to build that business base back up and I think that we have some expectations that we can do that but we softened the outlook as a result of that.

So I guess my question is regarding when you guys were looking at the LaBarge acquisition and looking at these other industries to get involved in, is it the industry as a whole is not performing as previously expected and more of a surprise for everyone or is it more particular for the specific areas that you guys are involved in and affecting you that way. I'm just trying to think about versus all of the optimism that it's still there but it's on the lower scale, I'm just wondering like really was that expected or is there any way to kind of see that coming?

Well, I think that it's, I don't think necessarily it's a complete industry issue. I think that when we come across we look at some of the customers that we have and when we look across-the-board like Schlumberger has really picked up and they're driving -- actually they're driving a lot harder than we thought going north. And then we've had a couple of customers on the industrial side of the business that are changing a little bit of the way they're looking at things and in those cases we're tying into some of their capital equipment so they are moving that to the right a little bit but I think that all in all we should be okay.

Okay, great and then I was just wondering if you may give us a little more color on some of the recent contract wins, you've been telling us about not necessarily specifics maybe on what areas of military, commercial and which area you're seeing more of the flow coming through.

You know, actually, we're seeing it across-the-board, Jonathan, but a lot of these we haven't released for competitive reasons and some for customer reasons as well, but let me try and break this down for you. We had some nice wins at Pratt & Whitney both on the military and on the commercial side of the business and had nice wins at Boeing in Seattle and Charleston, good pick ups on Spirit. Those are primarily commercial applications, some of the commercial applications are in the general aviation market. Nice pick up in Bombardier and a couple of different applications as well as Sakorski on some applications. So when you look at the break down, I was doing some analysis last night and it looks like that about 40% of the wins were in the military area and about 30% in the commercial and then split between the general aviation and the regional jet market.

Okay, great. Thank you very much.

Michael Callahan, Auriga Securities.

I guess all my remaining questions really kind of revolve around Ducommun Aerostructures at this point. I guess just start on the margins and I guess in the quarter of what's happened so far, you mentioned the 14 new programs. Are there any specifically that are not performing to expectations from a margin perspective at this point? And then of those programs, where are we in the process of kind of a stabilized rate where some of that would start to go away?

Yes, I'd say that there's about four of them that are not performing to our expectations and we do have a plan in place to fix that, so we see that sequentially coming down to the first half of the year but we expect to see improved margins in the coming quarter on those programs, albeit there will be some investment on those. But they will be improved over the last quarter.

Okay, I guess is the issue more low rate kind of initial production or is it just that it's a new program and there's a steeper learning curve than what you anticipated.

It's more the latter on a couple of the major programs. It's more of a steeper learning curve than anticipated. Let me, from an explanation standpoint, we took on a couple of major assemblies that we performed well on early on and then ran into some issues from the manufacturing standpoint, so I think that it's a little bit of a learning curve there and we're working our way through it. So I think, I can tell you that on those programs we're 100% on schedule with our customers, so now it's up to us to get the thing ramped into a position where we can improve the margins.

Okay, and then I guess you guys mentioned in the prepared comments about the 787 ramp up to kind of help the top line. As that program begins to expand, is there a risk to margins as a result of that program as well?

We have some issues on that 787 program, we're working through those now and I wouldn't anticipate that there would be any significant risk to margins.

Okay, and then I guess the last thing I wanted to ask, and again it's all related really to Aerostructures, the growth rate on the top line in the forth quarter kind of I guess sequentially kind of came down a little bit. It's the opposite of what you might anticipate just given the narrow body production increases throughout the year. Was there specific softness or was this a one -- kind of a one quarter thing where there was some different order flow or what was going on there?

Yes, there was softness but not in the commercial side. The commercial side was pretty solid but when you look quarter over quarter or year over year, we are actually -- when you look at the rate build rate like specifically on the 737 from our standpoint, it was only up slightly, maybe $1 million quarter over quarter in terms of revenue. But when you look at the softness came on the military side on the structures and so a couple programs were pushed out a little bit on that side of the fence and we would anticipate that those would pick up in the second and third quarter this year.

Okay, just one last thing and then I'll hop back in the queue. What does your timeline look like when the production increases take place at Boeing? What is the lead time to you guys?

Depends on the program and it depends on the application but if you looked at probably, if you backed up like six months that would probably be a good average for us to be impacted.

Okay, so you saw the step up to 35 quite some time ago? Okay.

Oh, yes.

Okay, fair enough. Thank you, guys.

Thank you.

Rand Gesing, Neuberger Berman.

Hi guys. My question was answered, thank you.

Okay. Thanks Rand.

Anna (inaudible)

So on the G&A line, obviously that came down quite a bit and helped offset some of the margin pressure through operating segments. How much of that was synergies and how much was other stuff that may not be in effect going forward? So how sustainable are the G&A margins going forward?

In the SG&A on the consolidated income statement for the fourth quarter, we show $23.5 million. $2 million of that was non-run rate transaction related that will go away. The second part of your question, so if we use the $21.5 as a baseline, and there's a lot of pluses and minuses that occur in a normal period business cycle, but we feel we've taken out $5 million to $6 million of costs going sequentially on an annual basis and so we feel that we sequentially will see lower SG&A per quarter than even this fourth quarter baseline. Now, that being said, there's compensation expenses that are variable and there's also an ERP implementation cost, probably $1 million to $1.25 million that we will be incurring each year for the next couple of years as we consolidate our platform, so yes we do expect those ratios to improve as I mentioned earlier and as we grow our level of sales too, they'll even -- they will be reduced further.

Sounds great. Thank you. Do you have a pro forma EBITDA for Q4 handy by chance?

Yes, I do.

From last year?

Pro forma EBITDA from the fourth quarter last year? Well, before I get there, remember I mentioned on a pro forma fourth quarter of 2011, it was $88 million.

Yes.

Were you asking for '10?

Yes, and I apologize. Can you refresh my memory, what that number was last quarter per your calculation?

It was almost $18 million adjusted EBITDA as defined in our banking covenant.

Okay. Sounds great, and then on the DLT business, the heritage business seems to be down about 20%. What's the primary driver of that?

One analyst did report that in their reports that they noted that when you look at the DLT business and run rates and all of the data that's in there, it's down 20%. That's correct.

That's right and the drivers on that are late orders on both the F-18 and the F-15 business, those are the primary drivers for the revenue base. You also see in the legacy DTI that on a quarter over quarter and year over year that our engineering services business is down, so if you take a look at those combinations. Now we have picked up the F-18 orders and we anticipate the F-15 orders will be in this year. They may not impact revenue in 2012. They will on the F-18 but they may not on the F-15 completely, so but those orders are flowing now. So it was just late release either due to tie up on foreign military sales and/or issues within the government just getting the orders out.

I see, so how much of that do you think is more of a timing issue rather than lost business?

It's all-timing. None of it is lost.

Sounds great. That's all I had. Thank you so much.

Thank you.

(Operator Instructions)

Edward Marshall, Sidoti & Company.

A quick question on the new program details that you gave us and I appreciate the level of detail that you were able to provide and I understand that these are both DAS and DLT wins.

No, the ones I just gave you were all DAS.

All DAS. I'm curious, so I guess that there's no kind of joint effort from say LaBarge/DAS that worked into these new wins and have you been successful in the combination of the two businesses and if any level of detail you could give there, that would be appreciated.

Well, I think Ed, that's a good question. We're working very hard on that and as you know it takes time to develop that.

Sure.

Let me categorically say we had a number of excellent wins on the DLT side last year, so very nice robust bookings for the year and exceeded our expectations if you will for the stub period so we did a great job on that side of the business. The reason I categorized the Aerostructures business is because of the announcement of the number of new programs that we had that impacted our earnings, our margins if you will. But with regards to the growth across the Company, we're doing a good job of integrating in terms of the sales force, the type of capabilities that we have and as you know it takes time to go in and expand your base, so we're working on a couple of programs that we have in place that would be a nice combination from our engineering capability and our manufacturing capability. And we have a couple other applications that we're looking at but we haven't received a win yet on any of those.

But Ed, just to add to what Tony said, for example, our largest program now is a U860 Blackhawk, and even in our investors presentation we break out the components on the structure side and the electronics side, it's now our largest program, it probably is a $75 million program. That's where the symbiotic relationship has come together, where we've on both sides we strengthened our relationships with the customer and some of the other Tier 1s who were supplying that in this entire process, and where it recognizes a gold supplier to Sakorski on that particular program.

And if I could poke a little bit further in the details you've given us and I don't know that you've quantified or even actually confirmed a 787 win at this point, but knowing that you mentioned Charleston, I'm assuming and you talked about the build rates over the next couple quarters or the next couple years, I'm assuming that it's safe to say that you do at least have some 787 business?

Yes, we do.

Okay.

We've commented, and I think again it's in our literature, we have about 300,000 to 350,000 per ship set on the 787.

Perfect and then finally the ERP systems the cost that you talked about, Joe, $1 million to $1.25 million over the next few years, is that the expense or is that the capitalized rate?

That's the expense of it net of any benefits we expect to receive from it.

Okay, is there a capitalized cost as well?

Well the capital will be embedded in our CapEx program. The CapEx is probably, it varies but it's probably $1.5 million.

$1.5 million.

There's some up front CapEx in the smaller portion in subsequent years because the up front is related to acquiring licensing and some hardware.

Sure, so then I'm assuming it's not material to the whole?

No, it's not material.

Okay, thanks.

Thank you.

Okay, Ed, thank you.

Jonathan Richton, Imperial Capital.

Hi. Thanks for dealing with me a second time. Just regarding some of the contract wins, back on that topic a little bit, I know the trend for the Tier 3, Tier 2 suppliers has been expectations of some of the larger guys passing stuff down the supply chain so I'm just wondering if any of those contract wins are related to that happening yet or we're still waiting for that to really start getting some legs?

Well a couple of the wins were as a result of that and then but we, I will be, I think it's probably the most candid answer is that we haven't seen the large releases that we anticipate. I think the OEMs and the Tier 1s are still struggling with how they manage that, so we're working our way through that but we do have a couple of these wins that we're working with. And one of them that we're actually really struggling with is a direct result of that, so we're working our way through those and I think that there's more opportunities coming.

Okay, but just the timing is becoming a little more opaque I guess than originally thought?

Yes. Well see a lot of these companies are tied up on the military side as well so you have to wait and see how that flushes out.

Right. Okay, great. Thank you very much.

Okay.

Thank you.

Thanks Jonathan.

At this time there are no further questions. I'd like to turn the call back over to Tony Reardon for closing remarks.

All right, I'd like to thank everyone again for your continued interest and support and we look forward to speaking to you next quarter. Thank you very much.

Ladies and gentlemen this concludes your presentation. You may now disconnect and have a good day.