Ducommun Inc (DCO) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2012 Ducommun earnings conference call. At this time, all participants are in a listen-only mode. (Operator instructions)

I would now like to turn the call over to your host for today, the moderator, Chris Witty. You may proceed.

Thank you and welcome to Ducommun's third quarter conference call. With me today is Tony Reardon, Chairman, President, & CEO and Joe Bellino, Vice President & 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 belief 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 the 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, we 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 the Company's annual report and form 10-K for the fiscal year ended December 31, 2011. All subsequent written and for -- oral forward-looking statements attributable to the company, or persons acting on its behalf, are expressly qualified in their entirety by the cautionary statement. Unless otherwise required by law, the company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this conference call.

I would now like to turn the call over to 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 on the quarter and then some market color, after which I'll turn the call over to Joe Bellino to review our financial results in detail.

We were pleased with the progress shown over the last two quarters as Ducommun posted third quarter earnings of $0.48 per diluted share and we continue to execute on our financial performance objectives. The Company again benefited from a strong commercial aerospace demand and solid sales of military and space products. Margins rose across the board, as Joe will review in a moment, driven by improved mix and better asset utilization.

At the same time, we generated nearly $6 million in cash from operations, as forecasted, and prepaid $10 million of our term loan this quarter. We plan to pay down another $10 million to $15 million in the fourth quarter, as we continue to delever the balance sheet, reduce interest expense, and increase earnings per share. Our backlog remains solid and reflects strong commercial aerospace and military platforms. We do have a couple of large orders on military programs that are pending final release, which should positively affect our backlog during the current quarter.

Now, let me provide some color on the markets, and platforms, and programs. Starting with our military and space programs, our revenue and backlog have remained rather consistent the entire year. Ducommun provides complex structures and electronic assemblies for an attractive mix of platforms, and we continue to see consistent demand across the board on the military helicopters, fixed wings, and missile defense applications. In addition, our engineering service business has bounced back very nicely. In fact, our total military and space backlog has continued to grow, testimony to the important nature of the programs that we are on and the range and value of added services that we provide.

Going forward, there is still much to be decided with regard to the fiscal 2013 defense spending, most important of which is how and when sequestration will be handled. As always, we remain conservative with that with regard to next year, when it comes to the government's budget and we have contingency plans in place that should sequestration come to pass, we will be prepared to implement.

We do believe Ducommun is on the right platform to prevail if a sensible, disciplined approach is taken to managing the spending by the Pentagon, which we expect will ultimately happen. Ducommun is very well positioned given the continuing need for upgrades, growth of electronic content, and the stability of foreign military sales on many of our programs.

Turning to the commercial aerospace business, we're very pleased to see Ducommun benefiting from the rising build rates across a number of fixed wing platforms. In fact, our revenue rose on large ships over 25% versus 2011, both in the quarter and year to date. That's reflecting real strong orders from Boeing, Airbus programs such as the 737, 747, 777, and 787, as well as the Airbus A330, A340, A350, and A380 programs.

We expect build rates to remain strong for the foreseeable future given high global air traffic and the need for more fuel-efficient jets. We're on all the major platforms and we're looking forward to additional growth next year. The regional and general aviation markets have, on the other hand, been challenging due to the market fundamentals. Revenue was down again during this quarter. Even as large aircrafts are showing more resilience, we don't expect any significant resurgence in orders from regional or general aviation customers in the near future. Trends continue to point to a flat demand over the coming quarters.

However, our commercial helicopter business remains very strong with revenues up from 2011. Within our non-aerospace markets, we're still seeing mixed results. Medical sales rose again this quarter, but we saw lower shipments within the industrial and natural resources segments. A backlog in these areas continue to show softness, although stable with last quarter. Bottom line, we expect to see the non A&D markets remain flat for the next couple of quarters with demand being impacted by general economic conditions, lower levels of capital spending, and softer energy markets. In the meantime, we are actively managing costs and focusing on new business development opportunities.

We will continue our efforts to enhance productivity, reduce working capital, and broaden our customer base with a goal of improving the bottom line results more quickly as we regain traction in these marketplaces.

Before turning the call over to Joe, let me reemphasize how pleased we are with seeing the continued improvement in our bottom line results. We are very confident at Ducommun that we're on the right goal to provide more consistent returns to our shareholders. We're building upon the [tracked] program, strong technology, a product portfolio, and a long-term customer relations that position the Company for further momentum in 2013.

Now I would like to turn the call over to Joe to review our financial results. Joe?

Thanks Tony, and good day, everyone. After the market closed today, we reported third quarter results.

Net income grew to $5.1 million, or $0.48, per diluted share. That compares with $0.27 per diluted share last year, excluding merger related expenses for the second quarter last year. Importantly, and as Tony noted, despite flat sales, we saw a number of gain in financial performance. And while Ducommun's year-over-year numbers showed significant strengthening, we thought it meaningful to continue as we have in the first two quarters of the year to sequentially review our changes when we talk about the progress we've been making throughout 2012.

During the third quarter, our gross margins were at 19.3%. We continue to benefit from and see synergies from the LaBarge acquisition and reduced SG&A expenses, taking them down to 11.6% of sales compared to 11.9% of sales in the second quarter of this year. And in the process we've modestly sequentially improved our operating margins to 7.7% from 7.6%.

During our previous earnings calls, we discussed our higher operating margin expectations. So we're pleased that they are being sustained at current levels, while some aspects of the economy remain challenging. In addition, during the third quarter we generated $22 million of adjusted EBITDA or nearly 12% of revenue as compared to $21 million in adjusted EBITDA, or 11.6% of revenue in the second quarter this year. Additionally, our backlogs remain solid at $642 million. That's 10% higher than when we closed the LaBarge transaction on June 28th of 2011. The backlog at the end of the third quarter was about the same as the June 12 period, primarily reflecting continuing awards in the military space and commercial aerospace sectors, offset by slightly lower bookings in some of our non-aerospace and defense markets.

In this recent quarter, sales were in line with the second quarter of 2012 as we are continuing to see the trends that we saw early in the year, larger increasing sales in commercial aerospace and military space revenues offset by softer sales in the regional jet markets and in the non A&D sectors.

Next, in looking at the by business segments, starting first with our Ducommun AeroStructure business, or DAS. DAS' sales for the third quarter were similar to the second quarter of 2012 at nearly $77 million, as the segment benefited from increased sales of large commercial aircraft, offset by decreases in the regional jet revenues. Military revenues increased slightly as increases in military helicopter sales were outpaced -- outpaced a small decline in our fixed wing military aircraft products.

EBITDA increased sequentially to $10.3 million or 13.5% of revenue from $9.8 million or 12.8% of revenue in the second quarter of 2012. The increase in EBITDA and margins was attributable to reductions in development costs for new programs that we've been commenting about for the last couple quarters. We continue to focus on margin expansion opportunities in the DAS segment into the latter part of 2012 and well into 2013.

Ducommun LaBarge Technologies, or DLT business segment, posted sales for the quarter of $107.4 million. It was down slightly from the second quarter of 2012, primarily due to softer non-aerospace and defense revenues, which offset continued sequential improvement that we're seeing in the military electronics product line. EBITDA was $15.2 million, or 14.1% of revenues, which is about identical in the third quarter as the second quarter of 2012. We continue to benefit from a combination of a solid management in our DLT operations and cost savings that we're enjoying that were associated with our integration efforts that continue throughout the quarter.

In terms of corporate, general, and administrative expenses, CG&A, not identifiable to the two business segments, they were 2% of revenues as compared to 2.2% of revenues in the second quarter of 2012.

Turning to another important area, liquidity and capital resources, during the quarter as Tony mentioned earlier, we prepay $10 million of our debt on the term loan B line, reducing our overall debt to $380 million and our net debt to $252 million at quarter end. Given that our trailing 12 month adjusted EBITDA is approximately $83 million, this equates to 4.2 times net funded debt to EBITDA. We expect to pay down another $10 million to $15 million in the fourth quarter of 2012, further reducing our debt. We continue to focus on debt reduction along with selective capital investments in our business as the primary uses of our cash flow.

Speaking of cash flow, in the third quarter we generated nearly $6 million in cash flow from operations and year to date we've already generated $11 million of cash flow from operations, compared to $11 million usage of cash at this time last year, excluding 2011 year to date merger related costs. We are driving cash flow generation through the combination of several initiatives and we expect our $60 million revolving credit line to remain unused for the foreseeable future.

We also anticipate that our capital expenditures for fiscal 2012 will be in the $15 million range, which is nearly identical to the amount of capital expenditure spending that we incurred in 2011. Further expenditures will continue to be targeted towards growth in our manufacturing capabilities and select facility expansions to support our strategic initiatives.

In closing, we're pleased to see a sequential operating margin and adjusted EBITDA expansion during the quarter, as we benefit from new program cost performance and synergies realized throughout the Company from our integration efforts.

I would now like to turn the program back over to Tony for his closing remarks. Tony?

Thank you, Joe. Before opening the call to questions, let me just take a moment to thank our investors for their patience as we executed the plan to integrate LaBarge, improve bottom line results, and focus our Company towards new business opportunities that will drive growth over the long-term.

Our management team has spent the past year working through many facets of a strategy to drive higher shareholder returns, even as we face a variety of ongoing headwinds, including lower C17 sales, the possibility of sequestration, and a draw down in demand from the war in Afghanistan. We are starting to see results in our efforts, as the past two quarters have shown. Near term, we will keep our operations focused on streamlining initiatives to tackle the economic challenges we're currently facing in some of our non A&D markets. But I'll tell you that our operations are better integrated than they ever were before, and the OEMs are providing us with opportunities to bid on more complex structural and electronic assemblies, leveraging the breadth of what we now bring to the market.

We're pleased with the strength of our customer relationships, a pipeline of new business initiatives, and the diversity of our portfolio. Our cash flow remains strong, very solid, and our commitment to delivering the balance sheet is unwavering. Everything we do is dedicated to strengthening our Company and increasing shareholder value. We're confident that Ducommun is very well positioned to continue performance improvements as we head into 2013.

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

(Operator Instructions) The first question is from the line of Mark Jordan from Noble Financial. You may proceed.

Good afternoon, gentlemen. My first question is relative to your relationships with, say, Boeing. A couple of weeks ago Spirit announced that they had major write-offs that had to be incurred because they had failed to properly estimate future cost decreases that were necessary to hit their profitability goals, specifically it seems that they had to assume design and cost guarantees.

Could you discuss a little bit about your business relationship with Boeing and the relative amount of risk that you have with regards to long-term cost performance?

Okay, Mark, this is Tony Reardon talking. First of all, most of our contracts with Boeing probably similar to with what Spirit has, our multiyear contracts on a variety of platforms. We also have contacts directly with Spirit as well. So as we look through it, Spirit had investments where they did design and build, and we're a subcontractor from a manufacturing standpoint. So we don't incur those design costs, which will lend to a very expensive investment on the part of the supply base.

So our investments are pretty straightforward and we've detailed over the last year or so the investments that we've made. But in proportion to the types of investments that Spirit makes, they're significantly lower, obviously. And as we work through them, we identify them. But we are nowhere near the situation that Spirit is in, simply because we're not in the detailed design aspect of the structural assemblies.

Okay. Question for Joe. The tax rate in the quarter was just under 15%. I believe that normalized rate is about 33%. Is that correct and so therefore you would have been around $0.37, $0.38 if you had not had any specific tax benefits?

Well, we look at the tax benefits as an integral part of our operations. They have to do with the work we've done on integration and the benefits from the LaBarge acquisition, Mark, as well as benefits we derive from R&D tax credits that were put into reserve accounts FIN 48, in previous years that as the statute of limitations run out we're able to record those into earnings.

So we look at that as we record those as the activity occurs, but we look at those as an integral part of our business operations.

Okay, I guess in the next question, assuming that there are no other turning up with tax benefits, should we assume a 33% tax rate in the fourth quarter?

31% actually I think would be a safe one to use for the fourth quarter because we probably have some minor state tax benefits that we'll enjoy here in the fourth quarter, as those filings run their course.

And my final question is relative to sequential revenue trends in the fourth quarter versus the third. Should we assume given a continuation of sort of the same economic environment that the BLT should be relatively flat sequentially? And would you be able to maintain in the fourth quarter DAS at its third quarter run rate?

Well, I think a couple things, Mark. I think you want to spend a little time looking at where the direction of the backlogs are going. We continue to increase our backlogs in the DLT, military, electronics business and we reported at the end of the second quarter that we picked up some sizable orders for the F18, the radar racks for Raytheon. That some would ship here in the fourth quarter and the balance would be shipped evenly over 2013. So we believe we'll be showing some of the beginning of those shipments here in the fourth quarter, which should give us a little boost. The non A&D sector should probably be flat.

Plus, then on our DAS side of the business, the commercial aerospace business backlogs continued to grow, and we expect to see a modest increase sequentially in sales from that sector.

Thank you very much.

Your next question comes from the line of Ken Herbert from Imperial Capital. You may proceed.

Tony and Joe, first, just wanted to ask you, in prior quarters you've obviously talked a lot within DAS about some of the startup costs with the new programs. Can you just provide an update on where you stand with these and sort of relative to second quarter, progress you've made and visibility over the next few quarters on these new programs?

We have. We've commented before last year and put it in our earnings release at year end that we incurred about $8 million of development costs, and we've talked about prior conference calls that we expected that sequentially to go to $4 million with about $3 million of that to be incurred in the first half of the year and then getting down to about $500,000 per quarter run rate. And we're pleased to see that that is about what we're realizing.

And then we said next year we'll probably get that level to a normal run rate because we continue to bring on new programs and have development costs. But normal run rate will be around $2 million in '13 for the full year.

Okay, about $2 million so about give or take $500,000 a quarter as a normal run rate?

Yes.

Okay, that's helpful. And then you've talked a few times about specifically on the military side, the helicopter business doing well. Can you -- and there' been a few multiyears that have been signed recently. Can you just give some commentary on specific programs that you're seeing strengthen and visibility into those programs into 2013?

As we look, I think the largest one obviously is the Black Hawk. So now, they've already announced and they did it I think last quarter that they would have somewhat of a pullback in terms of their sales in the fourth quarter of next year. But it was even with discussions with Sikorsky, it looks like they have some foreign military sales that will fill that in. So I would expect them to be down maybe slightly, but pretty stable on the Black Hawk.

The Apache should be stable at the levels that it's currently at now for us. And then the Chinook helicopter now, that -- with the draw down in Afghanistan, Ken, we're seeing some softness on the aftermarket requirements. We saw some slide outs this quarter on the Chinook helicopter, for example, which we would expect. The orders are not cancelled. They're just moved to the right for a longer time.

So I would expect that on the helicopter market that as the war draws down next year that we'll see some softness in the helicopter sales. That's in general.

Okay, but it sounds like relative to expectations, I think, it sounds like Black Hawk is maybe doing a little bit better than you had expected.

I think the Black Hawk has actually been pretty solid. If you look at the revenue base in the quarter-over-quarter, you have some fluctuation and it depends on their spares demand and their aftermarket demand. So we get some pickup there and then of course we may lose that in the next quarter. But from a steady state on the bill that's been pretty consistent for us.

That's helpful. Then just finally, I know we've talked in the past quite a bit about the climate in terms of profitability and contracting terms with your DoD customers, and I know it's been very fluid. And certainly with the election yesterday and some of the reactions today, can you just talk, Tony, for a few minutes about any change you've seen recently from any of your customers or specifically from the Department of Defense or other prime customers on contract terms, and profitability, and that landscape, and your ability to continue to sort of capture economics on these programs as we move forward?

I think so. I think that -- I think not unlike all of the contractors in the defense market, there's a tremendous amount of pressure on cost. I think that like our customers and I'm sure competitors, we are seeing an increased amount of scrutiny with regards to the cost base diligence from DKS and the DCMA. So there is prolonged negotiations with regard to that, but there are weighted guidelines on profitability and we stay within those weighted guidelines and always have. So we work the cost end of the business. We're in several negotiations right now and we work the cost end of it. We're very solid in terms of our use of lean in terms of reducing labor and material costs, and of course, all that data is provided.

So I would say the negotiations are more prolonged today. There's more data required from us than we've ever seen in the past, both for the OEM and for the ultimate end user, the United States Government. So you have to have the patience and the diligence to work your way through it. And then you have to really continue to work your cost base across the board. So those are the things that we're concentrated on.

I will say that the commercial side of the business is just as tough.

Thank you very much.

Your next question comes from the line of Mike Crawford with B. Riley and Company. You may proceed.

Thank you. A couple other topics you haven't addressed further. One, on the military programs where there could be some orders pending final release, are any of those subject? Have they been under protest or is there anything else you can provide regarding those programs?

Mike, this is Tony. None of those orders are under protest. It's just prolonged negotiation. So we're waiting for release and sometimes it's a matter of supplying additional data to finalize negotiations. So nothing out of the ordinary other than the length of time, it takes to settle the contract.

Thanks, Tony. And then with Boeing, you have multiyear build contracts, no design contracts. But would you see any risk and/or opportunity given the rather large management and defense business restructuring announced by Boeing today?

I'm not sure I understand your question. Are you talking about on the commercial side of the business?

Well, I don't think that would affect the commercial side so much. I think most of the restructuring is on the defense side.

I would look at on the restructuring on the defense side, I would look at it as an opportunity. That's the way we have to look at it. So I mean there's things that we can do to help them reduce their costs and I think that's the way we would look at it. There's always issues with regards to cost base and issues in any negotiated package on the long-term basis. But as they start to focus on moving to firm fix from their cost plus basis then I think that gives us an opportunity to be able to go in and help them meet their targets.

Thank you. Then just getting back to the development program. So you've made great progress on the programs you started a year ago, but the $2 million of expense you're talking about next year, is that related to continuous improvement on the same systems that you're starting to produce now? Or is that envisioned as something that would be applicable to new products and systems?

Well, new program development is basically a fluid process over time. If you look at product life cycles, Mike, as they go to maturity we're always acquiring new programs where we're positioned internationally and the global markets. And it's primarily resides in the Ducommun AeroStructure sector, and it primarily resides in the commercial products. So even as these build rates are increasing, we have been awarded programs to fulfill the needs of the customer. We're actually taking some position away from other competitors.

And so as we enter into those and it's a constant pipeline, it's not -- your question was, as I understand it, it wasn't as if those from the existing programs are going to continue along. It's absorbing the cost of new programs we enter into with the strategic view that we'll improve that cost structure. Then over the next couple, we'll keep rolling in new programs.

Okay, thanks Joe. And then last question relates to the business. So you have these five primary segments, including the smaller ones, natural resources, industrial, medical, and other. Does the Board look -- how closely -- what is the analysis regarding if the Company is better off retaining all of those businesses or perhaps in terms of improving shared costs and absorbing fixed costs versus maybe monetizing them and then paying down some of the debt more quickly with the proceeds?

Mike, with regards to the strategy of the business and how we would look at it, I don't think that I'd like to comment on that. But I can tell you that as you look at each one of these businesses, they handle multiplicity of marketplaces. So we would have a business that would not only be in the medical market, but it would also be in the capital goods market.

So as you look through the businesses, you have to understand from a strategic standpoint the product line and then the value, and the strategic value that we'd bring to the customer base. So as we focus on the customers, we'll align the strategy and we're in the process of relooking at the entire strategic outlook for the business, and how we align cost centers and more importantly, value added natural business unit selection.

So as we look through the process, we'll make decisions on programs or companies, but I would not sit here today and tell you that we look at any particular marketplace and say that we don't belong in it.

Thank you very much.

Also, Mike, when we were doing our diligence with regard to buying the DLT businesses, we saw huge cycles over the last several years. In an expansionary cycle, these markets, these non A&D markets can expand as much as 20% to 25% year-over-year for a four or five quarter period. And they could also contract 15% to 18% as we saw up and through from the fourth quarter of '08 through the fourth quarter of '09. It happens to be at a trough now, but these markets move pretty quickly and as we start -- as these markets rebound and we look at the long-term growth rates of these, these are 3% to 5% growth markets. And so we look at it as an opportunity now because it is at the trough level, and we continue to work hard in business development to go out and seek new customers. So strategically, we're in good shape.

Okay. Thank you.

Your next question comes from the line of Bhakti Pavani from CK Cooper. You may proceed.

Hi Tony. Hi Joe. My question relates to, Tony, you mentioned that you were seeing softness in the aftermarket requirements relating to the Chinook and the helicopter market in general. Would you comment on the recent Chinook deal with India that Boeing did and announced a couple of days ago, and how would that impact the business?

I think it would be positive, first of all. So the deal that was recently announced Boeing has been working on quite a long time, and we've actually had a team over there to help look at potential offset requirements. So I would say that as you look at the Boeing build rate, it's built into that. So I wouldn't say that it was significantly added build rates, but I believe that India has a design to do some of the build and manufacture over there themselves and Boeing is looking for support from the supply base to be able to help support that. So there's opportunities there as well.

Bhakti, also, a comment on a little bit higher level, but what we're seeing is common aerostructures business as it relates to several of those programs between military helicopters and fixed wing products of military in the DAS segment. We're seeing a mixed shift. We're seeing a decline in fixed wing shipments, but we're seeing sustained improvements in the military helicopter business. Because some of those products are being consumed in the international markets in foreign conflict situation. They're buying from Boeing and other North American suppliers, our allies. So the Chinook, even parts of the Apache and certainly the Black Hawk look like they have nice modest sustainable growth rates that are being offset, as I said, a little bit by the shrinkage of fixed wing products such as the C17 as it comes down to the 10 build rate a year levels from 14, 15 a couple years ago.

Joe, a question for you. You mentioned that the reduction in the development costs. Would it help boost the gross margins and do you see those margins going back up to 20% levels in the coming quarters?

Most of the costs are related to on the DAS side, and yes, I mean they come through cost of goods sold. So to the extent we could reduce those we'll improve our gross margins and then attendant operating margins. When we look at the total business, just want to give a little perspective, we were running at the fourth quarter an adjusted 17.2% margin and we have those in the quarter at 19.3%. And for the year, we're averaging about 19.4%, 19.5%. I commented last quarter that in this current environment, in the mix of our business, we'll probably have a plus or minus of 20 to 30 basis points in any given quarter. We have to see a bigger increase in our shipments of non A&D products on the DLT side and continued cost improvement on the DAS side of new programs to see those get beyond those bands.

So how soon do you think, I mean as you mentioned that the non A&D business are in the trough cycle, and for the next couple of quarters you assume them to be flat. So would it be fair to assume that in the second half or 2013, do you see them rebounding and that would help them improve the margins?

Bhakti, this is Tony. I think the way we look at the non A&D market, and that's going to go pretty much as the economy goes. So as we start to see the economy pick up, we would expect those marketplaces to pick up. And we're clearly targeting the second half of next year to show some improvement. But if the economy doesn't pick up, I think that these markets will stay where they're at. And that's a general comment on the entire industrial market.

And one last question on the capital expenditures. Would it be fair to assume a $15 million expenditure going into 2013? Or is that expected to go up?

It may go up slightly depending on new programs, but it should be generally in that range.

Thank you very much.

(Operator Instructions) Our next question is from the line of Jim Foung with Gabelli. You may proceed.

Hi, good afternoon Tony and Joe. Just a couple of commercial airspace questions. At one time, you mentioned that there was a possibility of getting additional businesses with the commercial ramp up as other suppliers can't meet the capacity requirements. I was just wondering, are you kind of getting any indications that you might be able to pick up more businesses with the doubling of the production a year from now?

We're working on it right now, Jim. So it's a slower pace than probably we would anticipate, but it's probably the right pace and it's primarily with the tier ones and the OEMs. So we are seeing capacity issues there and we are seeing some opportunities. And then the issue in front of us is making sure that we both are in the same cost profile.

We're not seeing -- Ducommun is not seeing capacity issues. We're seeing our customers are having capacity issues and as they tend to outsource more products that gives us opportunity. I think Tony commented, Jim, in previous quarters that the level of [pulled] activity is up significantly over the last couple years.

That's great for you guys because you guys can be fulfilling some of that demand. So I was wondering, could you give us an idea, if you were to get more outsourced business, what that range could be?

In terms of value?

Yes, kind of --

I'd hate to comment on it right now, Jimmy, because we do have a couple things that are very competitive.

And if it does come, how soon do you think it might come?

I would say probably in the first half of next year.

Okay, so it would be relatively soon then. Okay.

And again, that depends on the acceleration of the build rates.

Just for example, Jim, last year compared to this year where we are LTM through Q3, our -- let's say our commercial aerospace business of DC overall has expanded from a rate of about 180 million to over 200 million annually. So you can see the kind of growth that we've enjoyed already and the build rates, there still is some more room for expansion through at least 2014.

Right, especially as Boeing talks about doubling their 787 production between now and next year. Could you just talk about the new narrow body, I guess the A320 Neo and the Boeing 737 Max? Do you have any exposure to those aircrafts and if you don't, does that present an opportunity for you to pick up some business in the future?

It will. Jimmy, I think what we'll see though is typically we're more later cycle than new development. So as you start the engine development on both aircrafts, we would not see structural requirements come out until much further down the line. So we've had some discussions with both Airbus and Boeing on different applications. But they are not prepared and they're not in a position right now with final designs to be able to start discussing changes in structure.

On the electronic side of the business, that's an area that we're trying to bring forward in that marketplace and we're working with some other OEMs to see if we can support some of their requirements.

And then on the non A&D business, so you indicated you probably won't see a pickup in those markets until the second half of 2013. And so, does your soft backlog -- I mean those backlogs can turn around fairly quickly.

Yes, that's the issue with them. You don't carry a long-term backlog like you do on the aerospace side. The aerospace side, you're on eight to 12 months out. On the non-aerospace market it's three months, three to six at the max. So the cycle is much faster.

Where would you first see the pickup to give you an indication that those markets are turning?

You'd see it reflected in the backlogs that we report because we have at least three cycles and more really embedded, but the industrial side is related to capital goods. Those could be measured and on the natural resources side, it's both oil, gas, surface mining, and coal mining type applications. And then medical is actually a relatively steady, but that's concentrated on just a few customers and it depends which direction they're going with their business.

So we should be looking at the capital goods market, oil, and gas, and then the mining areas to give us an indication?

Yes, then watch the environmental issues so that, especially in the mining areas, to see how that eases or doesn't ease and that will tell you how fast that market recovers.

And most of these applications are North American based.

Then just the last question on the military side, it looks like there's an emerging field that if there was sequestration and budget cuts, it won't happen for another six months, there'd probably be some form of continuing resolution. Under that scenario, are there any programs where you would kind of see some decline in revenues because the budget is frozen and they're not granting new businesses?

Jimmy, it depends on how it's implemented, right. SO the way that the budget control act is written right now, everything gets cut the same. And I think if they get together, they're in the lame duck session, and then do something to move it out, I think the purpose would be then to be able to balance how they're going to put the budget together. We're more interested in what happens on the defense side, the Pentagon side, but it affects everything, Coast Guard, FEMA, FBI. I mean it's a broad range of issues they have to deal with.

So we'd be hard pressed to tell you, and I don't think the OEMs could tell you what the impact to their programs would be.

Okay, but if everything just stays the way it is currently, are you affected in any way or it's just pretty much -- ?

If sequestration doesn't go into effect --

Let's say we get continuing resolution for six months until they work out some budget reduction plan. Are you impacted?

It would be steady state and then I think you might see some minor pullback from the draw down on the war.

From Afghanistan, right.

Exactly.

Thank you very much.

Your next question is from the line of Carter Leake from BB&T Capital Markets. You may proceed.

Good evening. Thanks for taking my call. Maybe go back to that sequestration discussion. I know you are not giving guidance, but any color on growth rates that might be sustained in the event of, let's just assume it's a kick the can type CR situation. You briefly talked of 3% to 5% growth in technologies and then down 3% to up to on structures. Could you sort of combine those and give me what might be a better range on defense in the event of kick the can type scenarios?

Okay, so you're talking about the kick the can down the road and sequestration doesn't go into an impact, right?

Right, so that really let's say sequestration doesn't happen, but Collins recently commented on this, that they view a kick the can continuing resolution almost having the same impact. Do you view it that way?

Yes, what happens on the continuing resolution issue is that you don't get that kick the can down the road type thing, but you get some delay in budget release because they have to still realign the budget to the spend last year on the changes that they wanted in the program. So there's a release and then the reallocation of the budget across the line. So you're overall growth would be impacted. I think the growth for us would be more impacted, as we discussed, on the structure side. We're down a little bit on that side and that's primarily projecting the drawback in the war. With regards to growth rate across the board, I think even with continuing resolution, if they move sequestration out, we would be in the 3% range to 5% we would believe across.

Across both technologies and structures?

Yes.

Carter, that's why we break out in our website presentation, we updated it where we look at those growth rates. We separate the Ducommun AeroStructures from the DLT Electronics, Tony mentioned. The DLT Electronics we expect to grow 3% to 5%. It's a completely different application with interconnectivity solutions, missile defense products, and printed circuit card assemblies for complex military applications. Whereas on the Ducommun AeroStructures, it comprises primarily five programs in procurement that we know they're going to cut 3% to 4%. That would be the helicopter programs we mentioned earlier, military helicopter plus C17 and those kinds of things. That we do think that that's do for it.

You could mathematically figure out what the blended rate is, 20% of our portfolio is Ducommun AeroStructures and 30% is military electronics.

I would expect, Carter, to see a softness in releases starting in the fourth quarter. So it may impact us as early as the first quarter, a little lower first quarter and then steady state.

Moving onto the regional market, have you ever disclosed what percentage of commercial airspace is regional aircraft?

We have in general that sector. It's probably about 10% to 15%, 10% of our business I would say. It's been in a trough since probably, yes, latter part of 2010, early 2011 and it doesn't look like it has much of a heartbeat.

So Embraer is quite optimistic about what might happen in US reorder cycle. Do you have any opinion on that? We have the C series now delayed. We don't really know what will happen with American. Just maybe some color on how we should view this regional piece of your business would be helpful?

I would say that we're projecting it to be flat.

To be flat?

Yes, and I don't anticipate that it would be down, but I would expect it to be flat.

You talked about fixed wing helicopters being -- doing well, fixed wing being down. You mentioned the C17. Anything else or is it all C17 on the fixed wing?

The C17 and then we have a big order on the F15 that's coming through and we expect that to be -- to [tough] down. That's not in production. That's aftermarket upgrade. But there are some other programs with upgrades that would offset that like the F16 and on four military buys on the radar systems.

Let me just do one more. What is your biggest new opportunity on the commercial -- large commercial aircraft side that you see? Would it be more of the 77-9 or would it be more -- would we have to wait and be more like 737 Max?

Well, I think that there's opportunities in the offload cycle as the primes, and the OEMs, and the Tier Ones hit capacity issues as the build rates go up. So that's what we're working on now is programs that we would pick up and that would range from the 747 to 777, to the 787 program.

Then of course on the Airbus side, there's the A320 opportunity and as they move over here, and opportunities on the A350 additional.

Any additional color on what capacity issues you're talking about? We haven't even really hit the big increase based on narrow bodies. What are you hearing are some of the problems? I assume these are Tier Ones struggling with the rate increase?

Primarily the OEMs and the Tier Ones. So let's talk specifically about Airbus. I think they have two issues. One is they're at capacity now. They're running about 38 aircrafts to 41 aircrafts a month now. And so, they want -- I think they have two issues that they're trying to get started. One is the fact that they, if they increase rates to the 45, they need capacity to support that. And then the other aspect of that is that they would like to get a broader base of American suppliers as they move over there, with some of their production rates in the '14, '15, '16 timeframe.

And what about on the Boeing side?

On the Boeing side, I think Spirit is a good example. I think they are looking to make their determination on whether or not they recapitalize or they offload some applications to support their production strategy. So we're talking to them on some applications.

Thank you.

At this time, gentlemen, there are no other questions in the queue. I'd now like to turn the call back over to Mr. Tony Reardon, Chairman, President, and Chief Executive Officer, for your closing remarks.

Okay, I would just like to really thank everybody for joining the call today and we really look forward to talking to you in the next quarter. So thank you for interest and thank you for your patience with our growth. Thank you.

And ladies and gentlemen, this concludes your presentation. You may now disconnect and have a good day.