Ducommun Inc (DCO) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your first quarter 2012 Ducommun earnings conference call. My name is Yesenia and I'll be your event manager today. Throughout the conference, you will remain on listen-only.

(Operator Instructions)

We will be accepting audio questions after the presentation. And now I'd like to hand the conference over to Chris Witty. Please proceed.

Thank you and welcome to Ducommun's first quarter conference call. With me today is Tony Reardon, President and CEO, and Joe Bellino, Vice President and CFO. I would now like to provide a brief Safe Harbor statement. This conference call may include forward-looking statements that represent the Company's expectations and beliefs concerning future events that involve risks and uncertainties and may cause the Company's actual performance to be materially different from the performance indicated or implied by such statements. All statements other than statements of historical facts included in this conference call are forward-looking statements.

Although the Company believes that's the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the Company's expectations are disclosed in this conference call and in the Company's annual report on Form 10-K for the fiscal year ended December 31, 2011.

All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements. Unless otherwise required by law, the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this conference call.

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

Thank you, Chris, and thank you everyone for joining us today.

I'll begin by providing an update of the quarter and some market color, after which I'll turn the call over to Joe Bellino to review our financial results in detail. Ducommun, as we anticipated, made strides in a number of fronts during the first quarter. Our growth in the commercial aerospace sector continued and consolidated net sales increased to $184 million, up 83% from last year's first quarter including the impact of the LaBarge acquisition.

We saw solid expansion and improvement within our AeroStructures business unit, driving the Company's total adjusted EBITDA to 10.3% of revenue, as we focused on improving asset utilization and posted better results from our new business development initiatives. While we are pleased with our progress, we know we have a lot more work to do and expect to continue to post improvements throughout the year.

Ducommun LaBarge Technologies, or DLT, had solid performance in the aerospace and defense markets, but we did see a drop in the revenue due to lower sales in the industrial medical markets, as we outlined last quarter. That said, DLT's margins and working capital performance was encouraging. Our use of cash improved $20 million year-over-year, dropping to $5 million this quarter, as compared to $25 million a year ago. This reflects solid working capital management and improved operating efficiencies. Prudent cash flow of management will continue as a priority for Ducommun as we plan to reduce the Company's debt level later on this year.

Our backlog at quarter-end grew to a record $647 million, illustrating strength in our commercial aerospace and military end markets, along with improving medical orders offsetting some near term weaknesses in our natural resources and industrial markets. I'll provide more color here in a moment. While we're not where we want to be, overall, we're pleased with the progress we made this quarter in terms of margins, cash flow and backlog reflecting our focus on these areas.

Now let me talk a little bit about the marketplace dynamics. The commercial aerospace segment is still exhibiting strength as demand for large commercial jets fueled build rate increases as expected. Passenger year miles show no sign of letting up and we're very optimistic about our programs with both Boeing and Airbus. With demand for new aircraft rising, we're also seeing increased quoting activity from many of our customers while we are being asked to provide support for the higher build rates. We anticipate that we will see expanded backlog based on the commercial aerospace sector in the next several quarters assuming marketing conditions remain as they are today.

We're experiencing slightly lower demand in the regional jet market, but this is being offset by higher demand in the large aircraft general aviation markets as well as with commercial helicopters. Our Carson Helicopter business remains robust and we anticipate that this will stay strong throughout the year. The defense market is changing. The threat of sequestration adds another level of complexity, which we believe will require across the board spending cuts to meet anticipated budget targets if sequestration is imposed. However, I think the proposed budget from Secretary Panetta gives us a clearer picture of where the DoD is heading.

US defense spending will focus on creating a leaner and more nimble infrastructure with fewer armed forces, but with higher technology applications and spending on upgrades. The Army will take the brunt of the DoD proposed budget cuts by reducing personnel and drastically reducing spending on land vehicles, neither of which will affect Ducommun. We expect missile defense spending to remain flat and military helicopter development to continue to be funded, but with the funds spread over various platforms. The Joint Strike Fighter build rates will stay at lower production levels until full development is complete, opening funding for the retrofit markets and upgrades across other platforms.

We expect the airborne intelligence, surveillance and reconnaissance, or the ISR market, to remain strong, so while there are definitely changes coming, we're positioning Ducommun to be flexible enough to successfully adapt to these changes while looking for opportunities to support the new low cost environment. We are also supporting the OEMs in the form of foreign military sales, an area which will help offset the DoD spending declines. Many companies say that they're well-positioned. But when you look at Ducommun, we are very well diversified in the DoD market. We have a strong presence in helicopters, missile defense and fixed wings. We have an increasing presence in the ISR drone market and have several promising programs -- program opportunities there, as well.

We're also very well-positioned to support the growing requirements for foreign military sales, particularly with our significant support in the airborne radar installations. We're much more diversified today than we have been in the past with regard to DoD support. However, as we discussed last quarter, in our non-aerospace markets we continue to see softness in the industrial area resulting in lower than anticipated sales. The natural resources markets have also been slowed due to lower natural gas pricing, but it has been partially offset by an uptick in the oil exploration markets. We expect the industrial market to remain sluggish for Ducommun through 2012, as one of our major customers, Owens-Illinois, is rebalancing their capital requirements.

The medical and commercial electronics markets, however, are seeing some pickup and we expect them to strengthen throughout the year. These markets are much -- move much more rapidly than the A&D sector and offer opportunities to expand our customer base. We feel confident that margins will expand going forward and as we continue to improve performance in our development programs, our focus will be to continue to strengthen our balance sheet and cash flow with plans to reduce our existing debt during the second half of 2012.

Now I'd like to turn the call over to Joe Bellino for a more detailed financial review. Joe.

Thank you, Tony, and good day everyone.

Yesterday, we reported results for the first quarter of 2012. Net income was $2.4 million, or $0.23 per fully diluted share, compared with $2.9 million, or $0.27 per fully diluted share in the first quarter of 2011. During the quarter, we expanded our gross margins to 18.7%, compared with 18.5% last year, reduced our SG&A expenses to 12.3% of sales compared to 14.2% last year, and in the process we expanded our operating margins to 6.4% from 4.1%. These improvements reflect the combination of additional contributions from our DLT portfolio and the realization of cost synergies.

During our last call in March, we discussed our improved operating margin expectations, and we're pleased to see that they're headed in the right direction. In addition, during the first quarter we generated $19 million in adjusted EBITDA, or 10.3% of revenues. This compares with $9 million in adjusted EBITDA last year, or a 9.1% margin. We are pleased that the additional income stream from the LaBarge acquisition contributed to higher EBITDA levels and higher margin percentages as compared to last year's first quarter. Additionally, our backlogs continue to grow and we're at $647 million at quarter-end, and it's up 11% since the June acquisition.

In this recent quarter, sales increased by 83% to $184 million. This includes $85 million in sales from the newly acquired DLT assets. On a pro forma basis, sales were up about 1% ahead of last year's first quarter, with the primary driver being increases in commercial aerospace revenues, somewhat offset by softer sales in the industrial and in the medical sectors. Our largest end market segment, military and space, was relatively flat, as was the natural resources segment.

And looking at the businesses by individual business segment, Ducommun AeroStructures, or DAS, sales for the quarter were up 2% to $74 million as the segment benefited from increased sales in large commercial aircraft reflecting rising build rates at both Boeing and Airbus. EBITDA was $8.6 million, or 11.6% of revenues, compared to $9.6 million, or 13.3% of revenues, last year. The decrease was primarily attributable to start-up costs from new programs, but we did see significant improvements sequentially in the cost performance of these products from last year's fourth quarter and operating margin in the process expanded sequentially.

We expect the trend of increases in EBITDA and EBITDA margins to expand further during the balance of 2012. Ducommun LaBarge Technologies' or DLT's adjusted EBITDA for the quarter was $13 million, or 11.8% of sales, compared with $3 million of adjusted EBITDA last year, or 10.9% margin on sales. The newly acquired DLT assets accounted for the increased adjusted EBITDA results.

Another component of operating income is corporate, general and administrative expenses. Those are expenses that are not identifiable to the two business segments. They're running at 1.6% of revenues for Q1 2012, compared with 5% of revenues a year ago. It reflects both the cost synergies that we've achieved and the economies of scale we're enjoying from the higher revenues.

Another important area to us is backlog. As Tony mentioned earlier, our backlogs continue to grow sequentially with the growth primarily in the commercial aerospace and military electronics sectors, while the military aero structure backlog continues to hold steady. During the quarter we booked additional F-18 radar rack orders and we anticipate receiving some significant F-15 orders related to the Saudi buy in the second quarter.

Overall, we expect our backlogs to continue to grow, driven by increased build rates for large commercial aircraft, as well as for higher foreign military sales. We believe the softness we see in some of the other non-aerospace and defense markets are short-term in nature.

Another important area we have continued to comment upon is our liquidity and capital resources. At the end of the first quarter, we had $392 million in debt outstanding, and $360 million in net debt. Given our trailing 12-month adjusted EBITDA of $87 million, this equates to about 4 times net funded debt to adjusted EBITDA. We've continued to focus on debt reduction along with selective capital investments in our business as the use of our cash flow from operations.

From a cash flow standpoint, as you heard Tony talk about earlier, our first quarter was much stronger than typical, cash usage from operations declining by $20 million versus last year's first quarter. Currently, one-third of the way through the second quarter, our cash balance continues to grow and it's in the high $30 million level. For the year, we expect our cash balances to continue to grow to allow us to pay off somewhere between $20 million and $25 million of debt in the second half of this year. And we expect to -- that our $60 million revolving credit line will remain unused for the foreseeable future, giving us nearly [$97] million dollars of liquidity.

We anticipate our CapEx for fiscal 2012 to be in the range of $19 million. Our expenditures are directed toward growth and expansion of our manufacturing capabilities and selected increases in facilities to support our strategic initiatives. In closing, we are pleased to see sequential gross margin and operating margin improvements during the quarter as we benefited from new program cost performance and the synergies realized from our integration efforts.

I now will turn the program back over to Tony for closing remarks. Tony.

Thank you, Joe.

Before opening the call to questions, I'd like to again highlight what we've accomplished this quarter and where we have further work to do. First, we improved margins. And we had better performance within Ducommun AeroStructures, reflecting back on the fourth quarter of last year. We reduced the start-up expenses as key programs moved down the learning curve. We still have more work to do there.

Second, we decreased our working capital requirements, significantly lowering our use of cash, setting the stage for a year of strong cash generation and debt reduction. And third, we increased our backlog positioning the Company for stronger growth going forward. We are working to increase our growth rate and further expand margins and we believe the coming quarters will benefit from higher commercial build rates, increasing new business opportunities and additional radar rack sales with a focus on building a stronger base in our non-A&D markets, driving better performance as the year progresses, particularly in the second half of 2012. We appreciate the Investors' confidence and we remain steadfast in our commitment to increasing your returns.

With that, Yesenia, I'd like to turn the call over now to questions, please.

(Operator Instructions)

Edward Marshall, Sidoti & Company.

The industrial medical sales that we've seen, the decline there, not only year-over-year but also sequentially, how long -- I mean is this a base level here? Or, are we going to continue to see it bleed over the next couple quarters?

Let me address both of those separately. On the medical side, we're seeing increased bookings in the first quarter, so we expect that to stabilize and possibly move up on the quarters to come. On the industrial side, the primary driver of that is Owens-Illinois. So they're going through a rebalancing. We're heavy into their capital equipment market. So, we have two aspects of that business.

One is, we support the original equipment manu -- development with Owens for their test equipment and manufacturing equipment, and the other one is after market support or spares support for the installations that are currently in place. So, that market we expect to continue to be down for the rest of the year as they rebalance their requirements going forward, and then we would anticipate that there would be a pick-up, hopefully, later on in the year. But we're working very closely with Owens to help them readjust their backlog. We do expect to see some spare requirements coming out of Owens as the year goes on.

So to be clear that you didn't lose a contract or there's not additional competition there, it's just a matter of, say, the way the customers decide to buy its inventory from you or is there slowdown in their markets?

That's correct. That's 100% correct.

Okay. The start-up costs seem to be lessening as the margins have improved in the quarter. Can you kind of talk about what the drag was in the quarter from the start-up cost, and I think we're still looking at second half for those to subside?

Yes. Yes, we are looking for the second half. So, the drag was about $1.5 million for the quarter, and that's kind of what we anticipated coming into the quarter. So, again, we still have several new programs in the development phase, but we did make some significant progress quarter-over-quarter from the fourth quarter of last year. So, we are moving in the right direction. We've got pretty detailed plans, real solid Lean Six Sigma programs in place to be able to help drive that cost down. So, we anticipate that to continue to improve as we move out through the quarters this year, and we anticipate to be much stronger second half.

Just to add to what Tony said, in our full year and fourth quarter release, we had said for the full year, the impact was $8 million in 2011, and it was $3 million in the fourth quarter. And as Tony reported, it was about $1.5 million this year, this quarter, and we expect that $8 million from last year to go down to $4 million and less, and then in 2013 down to $2 million, which is a normal run rate given the number of products we develop.

And to be clear on that, some of it is planned investment, so it's not -- it's an issue that where we're working through planned investments on some of these new programs.

And running, I guess, less on optimal levels at the production level.

That's exactly right.

Right.

Much lower production rates.

Right. Right. And then should we assume a steady build there on those programs, or is that something that's kind of like the Joint Strike Fighter that's had kind of a couple years now to try to get its act -- trying to get back up on its feet. Is it -- should maybe we assume it's a normal production schedule, and that we should see a steady build throughout the year. I think that's what you have said.

Yes. Some of the programs there are steady builds through the year. So I would say that the majority of the programs we have steady builds for the year, but we do have a couple programs we're working on that are similar to Joint Strike Fighter, which the aircrafts are not certified, or they're not flying yet. So we're working through all those development issues.

Okay. But the bulk would be in more of steady manufacturing?

Yes.

Okay. When you look at your backlog first, maybe the organic rate year-over-year, but also is it mostly military and commercial aerospace? I know you talked about medical sales coming in or bookings, anyway, but I would think they're more kind of transactional. How do I think about your backlog, and where it's weighted to?

Well, Ed, our backlog since acquisition date, it was $581 million, and now it's $647 million as I reported. And we look at the sequential growth of those and it's reported by period in the Q. But to make it simple, the growth in our backlog has been primarily in our commercial aerospace sector where it's grown from let's say in the end of the third quarter $193 million to $210 million. Also, though, our military and space backlogs have grown from $320 million to $352 million.

And we're seeing both of the backlogs in military and space being both in from the DAS sector, which went from $120 million to $135 million, and in the DLT sector, with good, strong bookings from $200 million to almost $220 million. So, the way we look at it, these are our core businesses that we know and understand and our team has been executing very well, our business development team, to expand our of backlogs in those areas to offset some of the softness that Tony spoke about in the industrial and natural resources sectors.

And do you know how much of the $647 million is attributable to what's in LaBarge right now?

Well, we've melded the companies in, so we don't -- we have the whole DLT business segment and so we really don't track that because from an integration standpoint we report it as one Company.

So I couldn't -- I can't look at year-over-year comparisons between the two businesses to see how core Ducommun from a backlog perspective is operating?

Sure.

Do you have those or you don't have those?

Well, we have the DLT sector, and the DLT sector overall is -- excuse me, the DAS sector has gone from $292 million to $322 million and the balance is just melded into the DLT. I'm sorry I can't be more helpful. We just don't track it that way anymore.

Is that year-over-year, or is that from June until now, the $293 million?

That's from -- that's actually from the third quarter when we first started reporting it. Again, DAS has gone from $292 million to $322 million, and DLT has gone from about $320 million to $325 million.

And then prepayment penalties on the debt, they expire I think, in July. I mean is that when we start to assume that what you mentioned in your prepared remarks, that $20 million to $25 million reduction --

That's correct.

In the second half of '12.

Yes. Correct.

Perfect. Thank you.

We'll pay it sometime at the end of the third quarter, certainly by the end of the fourth quarter.

Okay. Perfect. Thank you.

Jeremy Devaney, BB&T Capital Markets.

Wanted to follow up on that debt pay down plan, and specifically wanted to look at cash flow through the year here. Do you expect Q2 to be positive cash flow, and what do you sort of see for the balance of the year?

I do believe the second quarter to be positive cash flow, Jeremy, because our cash balance at the end of March was $31 million, and today it's almost $40 million. And we front loaded some CapEx in the first quarter, so our -- not only our cash from operations but our free cash flow should be positive, and your second question was how it looks at the end of the year. When we do some modeling, we expect -- here's what we basically expect to do, to pay down this $25 million to -- let's say approximately $20 million to $25 million, and still have about $25 million in our checking account, if you will, by the end of the year. And we feel pretty good at it.

We think our cash flow from operations this year ought to be somewhere between $30 million and $35 million, with a CapEx of $19 million and the net would give us about -- the free cash flow of $15 million. But we started the year with $40 million. So we'll still have enough of a cushion so we don't borrow on our revolver, and thus the covenants won't be applicable and we'll have enough cash flow going through the part of next year and we have an excess cash flow requirement. We would be required to pay up another $5 million.

As you know, we're very conservative. But we're going to take those debt levels down to the levels we discussed here today, and then look at what other opportunities we have in the first half of 2013, and what the timing of that would be. But generally we have been thinking, our thinking process is about $20 million to $25 million a year of debt reduction such that, say, by the latter part of 2014 we'll be down to the $300 million to $310 million level of debt, and we'll be able to take those EBITDA funded debt to EBITDA ratios down to somewhere between 2.75 and 3 times.

Great. That detail is extremely helpful. And then I'm not sure if it was touched on by the first questioner. But looking at gross margin, I was wondering if we could talk a little about the cadence as we go through the year. Looking out roughly 19%, how do you get there? What opportunities are there for margin expansion, excluding those one-time charges like the inventory mark-ups that we saw last year. But can we get back to the 20% gross margin level? And what do we need to do to get there?

Let me reiterate what I spoke about in the fourth quarter. In the fourth quarter, we had said our gross margins were an unacceptable 17.2%. But I said we had the potential with the momentum we have going here into 2012 for those margins to expand 60 to 120 basis points. We were pleased. That's what we talked about in our comments. The upper part of that 120 expansion was 18.4% and we got 18.7%.

We had -- Tony will complete this, but we have in terms of directionally, as we continue to improve on cost performance of our programs and to the extent we sell more DLT products, which are inherently higher margin products, it will be a more favorable richer mix. We can't incrementally improve those margins by 20 to 30 basis points from where we are now. Those are our basic primary initiatives and they would be ahead of really what we were thinking of in the fourth quarter.

And I think, Jeremy, the biggest opportunities obviously are get these development programs out of our way and move forward. And there are some second half programs that will be kicking in that we think will help generate a higher margin ratio than the current mix that we have today. So, as we look through to the second half of the year in particular, especially in the fourth quarter, we have a couple programs that should be kicking in on the production levels that would improve some of the margins.

And we're still working on the development on the non-A & D side so that looking for programs and opportunities to improve our margin base over there. So I think we have a lot of opportunities in front of us. We're -- it's one of our primary focuses throughout the business. The operations teams are doing an excellent job of managing the business and driving the cost basis. So, I think that that's our -- those are the opportunities that we have in front of us. It's not very specific for you but it's -- trust me, it's a focus.

All right. Excellent. And then lastly, Joe, could you help us with the pace of tax rate through the year? I know --

Yes. The way we record it like many other companies, we expect that Congress will pass the federal R&D tax credit. But it won't be until the fourth quarter as we've seen in many years. So the way we're building the model is we expect about a 30.5% full year rate, but the way to get there was we have -- we're accruing at the rate of the blended rate now without the federal R&D tax credit will be about 34% for the first three quarters, and then in the fourth quarter will be approximately 20% to get to that 30.5% rate. If the legislation doesn't get approved, then we would be at 34% rate, but we think the likelihood of that is rather small.

Excellent. Thank you for the answers.

Ken Herbert, Wedbush.

Yes. Good morning, this is Andrew [Dupuy], on for Ken Herbert. I want to -- you guys have disclosed the cost synergies pretty well. I was wondering if you guys were closing in on any opportunities on the sale side, like cross-selling opportunities on like Black Hawks especially. Are you guys closing on those opportunities at all?

Andrew, we're actually close on a couple of opportunities and one of them is on the Black Hawk program. But these are going to be development programs for the future, but I think that we're very close on one or two opportunities that we have within the business to try and utilize both Company bases, if you will, to go across. And we continue to look for more. But as you know, I think, and again can understand, it's what the big opportunity is in front of customers that we have, existing customer bases and expand our base that way so a lot of that activity is actually going on right now. So the first thing to do is get in and expand the existing customer bases from the different pieces of the business and then the cross-selling opportunities will generate themselves from that. We're hard at work at that right now. We've got an excellent new business development team out there, working across the board for the entire Ducommun. So it's one of our one Company goals.

Okay. Great. Yes. Thanks. That's helpful. Is it just Black Hawk, Tony, then, as far as the cross-selling thus far would you say?

Well, there some Black Hawk opportunities and then some missile defense opportunities as well.

Okay. All right. And then obviously the new Black Hawk contract with the Army hasn't closed yet. Do you have any insight onto that and when you guys expect that to close? And if so, do you know when you would eventually book that into backlog?

We're expecting to do that. We're I think like a majority of the supply base on the Black Hawk. We're in the final throes of negotiating the contract with Sikorsky. And then I'm not quite sure where they are on the MY8 receipt for their order, but I know that they're funded and we would expect that we would see some type of order increase in the second to third quarter of this year.

Okay. And then is that built into your guys' sort of guidance internally, if for that not contract -- is that a swing factor for you? And If so, would that impact the Black Hawk shipment?

Yes. It's part of our operational planning mode.

Okay.

It's not upside, if you will.

All right. And then I just wanted to ask you -- I know you guys don't play a whole lot into the after market, but specifically in defense in the Middle East, I just -- you hear a lot -- it's sort of hot right now for helicopters and blades and stuff. Are you guys seeing -- is that running pretty hot for you guys right now, a defense after market in the Middle East?

Well, actually, it was on the -- most of our after market sales are sold directly through the OEM. Okay. So there was a high, in particular when Iraq was going on, there was a pretty high usage on the after market sales. The current marketplace has stabilized if I can use that term a little bit, so it's not as robust as it was let's say 1.5 years or 2 years ago, but it's still a requirement that we're filling for the government. We see them as part of the normal row production run if you will on particular helicopter programs, whether it's the Black Hawk, the Chinook or the Apache, they're folded in as the requirements. We don't really get any emergent upload, if you will.

My then just finally my last one was around the US defense budget, and I guess OCO fundings especially. If -- can you quantify at all the sensitivity around that line item in the budget, and if it were to go down 5% or maybe more each year, is -- can you provide any sort of context around that, how we should think about, how you guys are exposed to that line item in the budget if we were to see that drop?

On the OCO. Okay. On the budget I saw yesterday it said that that was about $88 million in the next year's budget. So with $519 million base, billion, not million, billion dollar base. So, as that comes down, then what that would primarily impact for us would be probably spares usage, depending on the applications that we have over there. But it doesn't necessarily go nickel for nickel as you come down. So it depends on -- most of that money, obviously, is spent for personnel usage.

Right.

And a portion of that goes for the -- if they have an extraneous application for support requirements. But primarily the budgets, the defense money that we see comes out of the initial defense budget. It doesn't really come out of the OCI.

Okay. Great. Thank you very much.

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

Could you maybe outline your thoughts on the opportunity on the MAX and NEO and maybe give us an idea as to when the bulk of any sort of development spending would happen in those two programs?

Okay. That's a great question. There's things -- there's activity actually going on in both programs right now. So Airbus has -- they're actually looking now in the states for support specifically for the A320 program, and then probably more specifically later on for the NEO program, so there's activity that's happening right now on that. From a timing standpoint, I'd say we're probably a year away.

And then there is activity on the 737 MAX on some opportunities for development. And that the 737 MAX as we anticipate right now will not be as dramatic a change as the NEO for the program. So, as we look at that, there are some opportunities for us there and again, I think we're -- you're probably 18 months away from engineering release, so we're -- we've got a window to work. We're working them right now as we speak.

So in terms of -- so part of that $4 million you're spending now is some of that's related to those two programs?

Not now.

Not now. Okay. Not now. But in terms of content potential, I mean, is it 50% more? Is it double? Kind of what's -

It's hard to tell right now, because it depends on what kind of changes come out, J.B. It's really difficult for me to analyze that right now in terms of content. Look, we would anticipate that for the 737 program, that we would maintain existing type of content, and then upgrade for new applications.

Okay. And then I think you mentioned in the release, if I missed this I apologize, the mix in DAS was unfavorable and talked about some lower margin products. Anything specific there that you can tell us? What types of products?

It's the development programs.

The newer stuff. Okay.

Exactly.

All right. And then on 37, Boeing is always throwing out these production numbers to suppliers that seem a little, I don't know, fantasy-like. I was just curious as to what your kind of what your capacity is.

Our build rate right now, we're running at about 34 ship sets a month, 34 to 35 depending on the application. And capacity-wise, we're working on that right now, so I think we can go to 41.

Okay. That's helpful. And what sort of -- if they said 45, what -- or something higher, what sort of CapEx requirements are you talking about?

You know, let me think about that. There would be CapEx requirements to go to 45, but I'd be -- I don't think I'd be accurate if I just threw a number out.

Okay. That's fair enough. Okay. Appreciate it. Thank you.

Jonathan Richton, Imperial Capital.

Really quickly, I've taken a look through your presentation, and I notice that the key growth drivers, you guys increased your outlook a little bit from the say 3% to 5% range to the 3% to 6% range. I just wondering if there's something there specifically that caused you to be a little more upbeat on the high end there in.

I think it was just a -- it's a fine-tuning, but as we ran through the mix of our sales with the greater percentage of large commercial aerospace with those build rates, we have them 8 to 10. There could be more likely the upper rate of that. And the reason I say that, Jonathan, is in the quarter Boeing had reported their large commercial aerospace products increased 33%. We're on many of those programs and our large commercial portfolio increased about 22%. So we just tweaked it a bit.

Okay. So commercial is the driver there?

Yes.

Okay. Great. And then speaking of the F-18 orders, were these orders that we've been waiting on over the past few quarters? And is there any other type of delays or funding pressure that you might see that could continue to hold up the actual shipments or we've kind of gotten over that hump for now?

Yes. I think, Jonathan, we're over the hump. On the F-18, we did receive the follow-on order in the first quarter. We would expect to receive the second half of that order towards the end of the year, but we're in production on that or running with that right now. The F-15 order we're expecting this quarter, early this quarter, so we're working on that right now. But it is funded and it is -- it's just in the sign-off stages. So, we don't anticipate any shortfall on that at all. So, both those orders should be in place and flowing, and they've been a long time coming.

Was the F-15 order always related to the Saudi Arabian order? Or was it -- there's like a US and now the Saudi Arabians kind of a like a nice little bump.

The only applications for the US are spares, so there's some minor spares there requirements, but the bulk of the order was in the F -- on the Saudi buy.

Okay. Great. And then I was just wondering if you can give us some idea of -- talk about the Black Hawk a lot. It's obviously a very big program for you guys now, of some idea of what the revenue and maybe how much of your backlog is related to it.

Yes, the entire UH-60 Black Hawk program to us is annually about a $70 million to $75 million program. And our backlogs on those are very good, and we expect over at least the next balance of this year and through at least the first half of next year, for the build rates for those to remain at existing levels. And from time to time, we're picking up additional content, so we feel real good about that.

We also are aware that probably latter part of 2013, they might cut back the buy from the sale to the government, might -- could be cut back from 8% to 10% in the latter part of '13. We would have enough heads up, though, to factor that into our planning process. But it's offsetting that potential cut, it's widely accepted in foreign international markets, our allies, and that's an additional potential increase that we would get on that helicopter plan.

Okay. Where was it I guess previously, before it reached the $70 million to $75 million?

Well, let me just go back in the history. It's an example of what the resources that Ducommun brings to the marketplace, in that it was a $25 million business for us before we made an acquisition of what is today DAS New York, and we increased that because there's such -- there's a lot of content in that Aero Structure business to $50 million. Then when we acquired the newly acquired DLT assets, it gave us another $25 million. It was also a gold supplier, recognized as a gold supplier, 1 of only about 15 out of several thousand suppliers that we received that, so that brand awareness and our reputation on the technology side, in addition to the aero structure side really positions us well with the customer there.

Okay. Great. Thank you very much.

(Operator Instructions)

[Emil Waist], Sykes Advisors.

Hi. This is Anya Varth from Sykes Advisors. Can you tell me what the LTM pro forma EBITDA was?

Yes. It was $87 million as defined by our banking covenants.

Okay. Sounds great. And then not sure if you gave the cash from operations guidance for 2012 yet.

Well, we -- what I mentioned in my comments for us, I think we believe we'll wind up with about $25 million of cash in our checkbook. We had $41 million last year. And we go through the reconciliation. Our cash flow from operations this year should range from $30 million to $35 million, and our CapEx is, we put it in the Q, $19 million. So the difference between those two would give us anywhere from $12 million to $17 million around at maybe the mid-point, $15 million of free cash flow. This year, we expect to pay down $20 million to $25 million on our debt in the second half of this year.

Okay. Sounds good. You wept went fairly quickly over the technologies DLT segment. The heritage business was down a little bit. Can you provide a bit more color on your view for the rest of the year, specific to that segment?

Well, I'll start and then Tony Reardon could finish. Yes. When we broke out our total sales during the quarter of $184 million, $85 million was from the newly acquired companies, so the residual base legacy technologies business was down about 8% to 10%. Some of that was in our engineering services. It was down by about $1 million. The other was from our -- it's really from our F-15 and F-18 shipments were down that made it up, but it's real solid. As far as outlook, I'll have Tony Reardon comment about the outlook, F-15, F-18 and others.

On the military side, I think the second half will provide us for an opportunity to grow through that. So on the legacy business, I think that's probably what the major drag was and then there was some lower military sales in the AeroStructures business as well with the down tick on the C-17 program. But that was more than offset by some other applications that we had on the commercial side of the business.

Okay. So I'm sorry, the 8% to 9% revenue drop, that was a combination of the F-15, F-18 and the engineering services, or the engineering services were down?

We're talking about the DLT, Ducommun LaBarge Technologies portfolio. Yes, it's those. And the F-15 and 18, we are sole suppliers on the electro mechanical systems that support those sophisticated radar systems of Raytheon. We have a multi-year contract to sole source. So, it's a matter of funding and timing by the time those purchase orders get let to us and last year we had received orders six months beforehand. And we're doing more fulfillment in the first quarter than we did here. We look at those as timing differences not personal change -- permanent changes in the demand levels for those products.

Okay. So, I'm sorry. So, how much of the total revenue drop was in the segment was related to the timing differences on the F-15, F-18 versus the engineering services, which are I think has been soft for quite some time, right.

Well, the engineering services dropped from $8.2 million to $6.8 million. So, when you work through the mathematics, it's only a couple million where the drop in sales of what we called the legacy technology products.

Got you. Great. Thank you so much.

Richard Johnson, RBC Asset Management.

Richard, are you there?

Richard, your line is open. You may proceed with your question.

Sorry. It helps when I turn the mute off. Again, this is Rich Johnson from RBC. When you made the acquisition, I guess it was almost a year ago, I recall that it was going to be accretive. I believe that this is -- I had the right Company straight. Is that the case? Has it worked out according to the plans that you thought?

Well, when we made the announcement on or about April 4th, we did say it would be accretive in 2012. And our definition of accretive is the delta generated from the additional income stream relative to the cost of financing it. And when we look at the $19 million that we generated in EBITDA during the quarter, less than $9 million, that's a $10 million delta, and our out-of-pocket interest cost for that is $8 million. So by that definition, yes, it is accretive.

Okay. Thanks, Joe.

(Operator Instructions)

And with no further questions in queue, I would like to hand the conference back over to Tony Reardon for closing remarks.

Thank you. Thank you, Yesenia. Thank you everyone for your continued interest and support and we look forward to speaking with you in next quarter. Thank you.

Ladies and gentlemen, that concludes your conference. You may now disconnect. Have a wonderful day.