Ducommun Inc (DCO) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2012 Ducommun earnings conference call. My name is Darcel and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session.

(Operator Instructions)

I would now like to turn the conference over to your host for today, Mr. Chris Witty. Please proceed, sir.

Thank you, and welcome to Ducommun's fourth quarter conference call. With me today is Tony Reardon, Chairman, 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, 2012. All subsequent and written 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 would like to turn it over now to Tony Reardon for a review of the operating results. Tony?

Thank you, Chris. And thank you everybody for joining us today. I will begin by providing an overview of the quarter and the year and then including some of the market color, after which I will turn the call over to Joe Bellino to go over our financial results in detail.

For Ducommun, fiscal 2012 was clearly a year of accomplishment, even in a challenging operating environment that included federal budget uncertainty and softness in some of our non-A&D markets, issues which continue right up through today. While the sequestration deadline has now come and gone, there remains a lack of clarity as to how things will ultimately play out this year and next. I will provide some more color on that in a moment.

But first of all, we're very proud of Ducommun's achievement in 2012 and we feel confident about our ability to manage the business from a position of strength going forward. Among 2012's notable accomplishments, we fully integrated LaBarge, our largest acquisition ever. We exceeded our expectations in terms of post merger synergies. We expanded margins, streamlined our operations, posted strong cash flow and paid down $25 million of debt. Even with the softness of in our non-A&D markets, we ended the year with a backlog of $657 million, as much an indication of the strength of our broad capabilities as it is our customers who we serve. This level of booked business, the highest in the Company's history, provides a clear indication of our ability to grow heading into 2013.

We achieved record revenue of $194 million in the fourth quarter, fueled by strong demand within our military and space business across both operations. We also posted earnings of $0.32 per diluted share in the quarter and $1.55 for the year. However, a one-time state income tax charge impacted the quarter by $0.21 per diluted share. So the EPS year-over-year comparison does not fully reflect our operating improvement, as Joe will review in a moment. Adjusted EBITDA was $85 million, or 11.4% of revenue in 2012, up from $57.7 million, or 9.9% of the revenue in 2011. We also generated $48 million in operating cash flow in 2012, as we focused on improving asset utilization, increasing inventory turns, reducing debt, and delevering our balance sheet. We are in a much better position as we enter into 2013.

Now let me provide some more in-depth color on the markets and platforms and programs. Starting with our non-A&D markets, we ended the year with weaker than expected results. Sales were down sequentially from Q3 within our industrial, medical, and natural resources end markets, due to both order timing, as well as ongoing customer destocking. Several key clients, as we have discussed in the past, are working through inventory built up in 2012, and we see this process continuing through the first half of 2013. The backlog for this sector has come down considerably, reflecting destocking, along with economic and seasonal factors. But we see this softness in demand as bottoming out in the months to come. We have strong customer relations and believe that the second half of 2013 will show improvement in these areas. We are also putting a great deal of emphasis on growth, as economic conditions continue to improve. And in the meantime, we remain focused on reducing costs and utilizing our expanded technologies to explore new business opportunities.

In our military and space programs, fourth quarter revenue was the strongest of the year. Both Ducommun AeroStructures and Ducommun LaBarge Technologies saw sales peak during the quarter, driven by demand on such platforms as the Black Hawk, Apache, F-15 and our missile defense programs. Notably, we achieved record shipments on the Black Hawk last year, racking up $75 million in sales. In total, our military and space business represented approximately 51% of revenues in 2012; and we ended the year with a backlog of $370 million, up 4% year-over-year.

We are obviously very disappointed in the lack of effort in Washington to resolve the budget issues and we have worked tirelessly to do what we could do to make our voices heard. We do believe the fallout from sequestration will play out over the next several months, but it would be too early for us to discern any potential impact on our defense business going forward. That said, even as our backlog in this segment is at record levels, we believe the top-line revenue will likely be flat to down year-over-year, at least through the first half of 2013. This reflects the timing of some programs booked late in the year and expected lower build rates in others, with the war in Afghanistan winding down. We also envision softer demand in after market spares in the current spending environment. It is too soon to say what the second half of the year may hold, given the budget uncertainties and questions as to the timing and the passage of the continuing resolution for the remainder of the fiscal year. However, we've said in the past we have a very balanced, diversified array of products, serving dozens of military programs; and Ducommun's components and systems are critical to the ongoing need for upgrades in advanced electronics content. So we will manage our way through the current fiscal challenges and we look for additional opportunities to grow our defense and missile applications, both here and then abroad.

Within our commercial aerospace business, the economic environment continues to be very favorable, resulting in robust sales and backlog driven by higher build rates, and we are working on increasing our content on large fixed-wing aircraft for both Boeing and Airbus. We also had a great year in terms of commercial helicopter sales, to customers such as Bell and Carson. In general, we continue to view the commercial aerospace market very positively, and many new opportunities on the horizon for increased content on a variety of platforms.

One area we're watching closely is the Boeing 787 Dreamliner and its battery issues, which have been detailed in the press. We are not, as of yet, experiencing any interruption in shipments and do not anticipate any long-term impact to the 787 program. We know that Boeing has proposed solutions to the FAA, which hopefully will allow the restart of the aircraft deliveries once all issues have been resolved. If this transition remains unresolved through May, we could possibly see a slowdown in the build rate for the Boeing shipments.

We ended the year with a total commercial aerospace backlog of $230 million, up 19% year-over-year, and we expect to see continued steady growth in 2013. That said, there remains ongoing weakness within the regional jet and general aviation markets, which saw substantial decline in 2012. Even as larger business jets have shown some stability of late, we have not seen a pick up in the overall end market, so we anticipate softness into 2013. Overall, we believe we're in a very good position to continue improvement in our operating results that build upon our accomplishments in 2012.

With that, I'll turn the call over to Joe Bellino for some detailed financial results. Joe?

Thanks, Tony, and good day, everyone. Earlier this afternoon, after the market closed, we reported results for the fourth quarter and full year of 2012. For the fourth quarter, sales grew 3%, to $194 million, as compared to approximately $188 million in last year's fourth quarter. Net income grew to $3.4 million, or $0.32 per diluted share, compared with $2.8 million, or $0.27 per diluted share. Last year's results excluded merger-related expenses and goodwill impairment charges.

It's important to note that in our fourth quarter 2012 results, it included a one-time regulatory-driven income tax charge amounting to $2.2 million, or $0.21 per diluted share, driving the effective tax rate for the quarter to 48%. This charge resulted from new legislation enacted in the fourth quarter of 2012 in the state of California, which impacted our ability to take advantage of state research and development tax credits that were already on our balance sheet. In effect, we had to write down this tax asset, and thus recorded a valuation allowance in the amount of $0.21 per share. The fourth quarter tax rate in 2012 also did not include the benefits of a federal R&D tax credit, which the fourth quarter of 2011, and all previous quarters in our history since about the mid '80s, reflected such R&D tax credits. As the new legislation was approved in January of 2013, we will record this tax benefit in the first quarter of 2013 in the amount of approximately $2 million, or $0.19 a share. In addition, the legislation provided for the federal R&D tax credit to be applicable for the entire year of 2013. And so in addition to taking the $2 million tax credit in the first quarter, we expect to pay an average of 31% effective tax rate here in 2013.

Looking at our fourth quarter results, we saw a number of gains in our year-over-year financial performance, including a 28% increase in adjusted EBITDA to nearly $23 million from $17.8 million in 2011. This was driven by higher gross margins and a favorable product mix. In addition, we experienced a significant improvement in working capital efficiency, primarily driven by improved inventory turns and continued working -- effective working capital management, in addition to deleveraging of our balance sheet. And while Ducommun's year-over-year numbers show significant strengthening, we thought it was meaningful, as we have in the last three quarters, to talk about sequential improvement when discussing our results.

During the fourth quarter Ducommun's sales, as I mentioned, was $194 million. That increased $10 million from the third quarter, $184 million. As we look at that growth, the sequential sales growth was driven by a combination of increased shipments in both military electronics and AeroStructure products. Operating margins held at 7.6%, rough the same as the third quarter, and we continue to see sustainable synergies from the LaBarge acquisition. And in addition, we sequentially reduced our SG&A expenses to 10.7% compared to 11.6% in this year -- in 2012's third quarters. During our previous earnings calls, we have discussed our higher operating margins expectations. So we're pleased that they're being sustained at current levels.

In addition, during the fourth quarter we generated $22.7 million in adjusted EBITDA, or 11.7% of revenues. That compares with $22 million in adjusted EBITDA, or 11.9%, in a percentage of revenues in the third quarter of 2012. Our backlogs grew to a record $657 million. That's 13% higher than when we acquired LaBarge in June of 2011. The backlog at the end of fiscal 2012 primarily reflects increased orders in the military space and commercial aerospace markets, and they are partially offset by lower bookings in some of our non-aerospace and defense markets.

Now if we turn to results by the business segments, first starting with Ducommun AeroStructures, or DAS. DAS sales for the quarter grew sequentially to $82 million from $77 million in the third quarter of 2012, as the segment benefited from increased sales of military helicopter products. We spoke earlier about the revenue from large commercial aircraft products. Those build rates continued at high levels in the fourth quarter, just as they had been in the third quarter, and it parallels the build rates at the mainframe manufacturers. DAS's adjusted EBITDA for the fourth quarter of approximately $10 million, or 12% of sales -- 12.6% of sales, was about the same as the third quarter of 2012, despite an $800,000 increases in charges for pension fund expenses, which we recorded here in the fourth quarter. During the quarter, we continued to see reductions in development costs for new programs, as compared to the third quarter of 2012, an item we have been closely monitoring and discussing with you throughout the year.

Moving to our Ducommun LaBarge Technologies segment, DLT. We posted sales for the quarter of nearly $112 million, versus $107 million in the third quarter, with the increase driven primarily by higher electro mechanical shipments, such as military airborne radar systems and electronics for military helicopters, somewhat offset by softer non-aerospace and defense revenues. For the fourth quarter, DLT's adjusted EBITDA expanded to 16.2%, or 14.5% of revenue, up from $15.2 million, or 14.1% of revenue in the third quarter. We are really pleased to sequentially during the year that both our adjusted EBITDA dollars and our percentage of revenues expanded in the DLT segment. We continue to benefit from a combination of a favorable product mix, solid management at our DLT operations, and cost savings associated with our successful integration efforts. In terms of corporate G&A, those are the costs that are unallocated by business segment, they ran about 2%, which is about the same as they have been in the third quarter, reflecting good strong cost controls in that area of management.

Now turning to liquidity and capital resources. During the quarter, we prepaid an additional $15 million of our debt, on top of $10 million in the third quarter, and in the process, we reduced our overall debt to $366 million and our net debt was reduced to $319 million. Given our full-year 2012 adjusted EBITDA of approximately $85 million, this equates to 3.7 times net funded debt to EBITDA. As I mentioned before, for the total year, we paid down $25 million in debt; and in '13, we expect to pay down another $25 million to $30 million, with the goal of deleveraging the Company to -- by 2015 to funded debt to EBITDA levels ranging from about 2.75 to 3 times.

In this year's final quarter, we generated a strong $36 million in cash from operations; and for the entire year, we generated $48 million in cash from operations and $32 million in free cash flow. The $32 million in free cash flow equates to about $3.00 per diluted share. We are driving cash generation from a combination of internal initiatives resulting in higher EBITDA levels, increased inventory returns, and overall, more effective working capital management. We expect our $60 million revolving credit line to remain unused for the foreseeable future. In terms of capital expenditures, we expect to expend about $15 million in 2013, which is about the same as 2012. Our future capital expenditures are focused on two things, expanding of our manufacturing capabilities and supporting our new contract awards.

So in closing, we're very pleased with the sequential quarterly improvement through the year in our key performance measures, most notably, growth in adjusted EBITDA, operating margins on a sustainable level, and strong cash flow generation, as we are benefiting from an improved mix of products, better performance on new program costs, and synergies realized through our integration efforts.

I'll now turn the program back over to Tony for his closing remarks. Tony?

Thank you, Joe. And before opening the call to questions, I would like to again highlight some of our many accomplishments in 2012. We posted sales of $747 million and ended the year with a record backlog of $657 million. At the same time, we managed costs and drove higher asset utilization, generated $48 million in operating cash flow, and paid down debt by $25 million. Our adjusted EBITDA in 2012 was up sharply from 2011, and our people performed exceptionally well in a challenging and cloudy marketing environment.

So where do we go from here? We will continue to aggressively pursue new business opportunities across all of our end markets in 2013. This means targeting increased content on a number of commercial aerospace platforms, maintaining our position on many critical military and missile defense applications, and growing our business with the non-A&D end markets as they rebound in the second half of the year. We all have to deal with the challenging defense environment and the outcome of the 787 battery issue. But I wanted you to know that we're making great progress in integrating our sales teams and finding new opportunities in all markets.

We have already seen a great response to our Company's broader set of capabilities, exemplified by our recently announced win providing complex wiring harnesses to Augusta Westland for the AW139 multi-mission helicopter. We've supported Augusta Westland for years with structural components, and we're now pleased to provide them with sophisticated electronics content, as well, a direct result of our efforts at cross selling and increasing our penetration with new and existing customers alike.

We are also making progress in increasing our after market sales in business units that traditionally did not consider this as part of their portfolio, in both the A&D and non-A&D end markets. We are just starting to expand the awareness, both internally and externally, of our broader advanced capabilities. We are finding opportunities that are available because of the expanded technology that we bring to the markets. The non-A&D markets are soft, but offer opportunities to think differently about how we penetrate our customers with more expanded and cohesive product offerings. As always, we will remain disciplined in containing our costs and expanding margins going forward. We will also pay down more debt, as Joe mentioned, and delevering our balance sheet and lowering our interest expense along the way.

We have truly accomplished a great deal in the past year and we believe that the best is yet to come. It will take continued focus and execution, and we believe the Ducommun team is creating a company that has some of the best capabilities to serve the needs of growing number of leading companies in the aerospace, defense and industrial markets. We challenge ourselves every day to do what's right for our customers and our shareholders, and that commitment will carry us through the remainder of 2013. With that, Darcel, I'd like to now open up the call for questions.

(Operator Instructions)

Your first question comes from the line of Mark Jordan with Noble Financial. Please proceed.

Good evening, gentlemen. Nice end to the year.

Thank you.

A question first relative to backlog. What percent of the $167 million would be expected to be delivered in 2013?

The $167 million?

Our overall backlog is $656 million.

Okay. Excuse me. $656 million?

Yes.

And what percent of that --

Let me perhaps break it out this way, based on history. Going into the DAS segment, which has a $320 million segment, we typically have 75% to 80% of that that will ship in the next 12 months, and the balance over the next -- from months 13 through 18. On the Ducommun LaBarge Technologies, where our back logs are $336 million, we typically have a book to bill ratio going in the year of about 55%. And so that says that we get those orders in quicker and we fulfill them quicker, Mark. And it's much as you saw with the LaBarge portfolio when you were covering that.

Okay. Thank you. Second question. You gave us guidance where the normalized tax rate should be for quarters two through four next year -- or, this year. What would be the normalized tax rate for the first quarter before you realize the $2 million worth of tax benefits?

Here's what I would suggest you do. Whatever you come up with, a pre-tax number, take the taxes at 31% and then deduct from that tax estimate $2 million, and you'll come up with the actual amount of taxes that one would expect to pay that quarter.

Okay. Any guidance relative to what you think the cash flow from operations should be in 2013? Do you think you should be in the same general area as you achieved in '12?

Yes. Mark, we've talked in our third quarter call in November, we said that we generally generate cash flow from operations of $40 million to $45 million. We put in the K that we're going to probably spend $15 million. And that's why -- there's plus or minuses there, but that's why we feel confident about the $25 million to $30 million in free cash flow next year that we can use to pay down debt by same.

Okay. Just a final question, relative to your statements. You think that the de-inventorying process that's going on in some of your non-defense and aerospace product lines should end by the middle of the year. Could you add a little more color as to, specifically, the generic kind of products and industry segments that you see that turn in?

Okay. Mark, I think one of the -- both industries that are impacted are in the natural resources and the industrial market. So on the industrial side, it's really been -- they've been cutting back on their inventory since just about mid-year last year. And we see them continuing through that. We've been very close with the customers in that market. I think we got a good handle on exactly what they're trying to do. And then at the same time, we're trying to put ourselves in a position where we create more value added for them.

On the natural resources market, it's more of a shifting from the natural gas market to the oil market. And as the drilling intensified in the oil market, some of the shift in that marketplace caused them to reevaluate their stocking industry. So I think that we're seeing, in both situations, an opportunity later on in the year to regain some potential. But you know, I think one thing of important notice is that we have not lost any business. It's primarily been just for them working through their working capital.

Okay. Thank you very much.

And your next question comes from the line of Ken Herbert with Imperial Capital. Please proceed.

Hello. Good afternoon.

Good afternoon, Ken.

Hello, Ken.

Tony and Joe, I just wanted to follow up on that question regarding the natural resources, or essentially the non-A&D portion of the portfolio. I mean, it sounds like you expect inventory levels to stabilize mid-'13, which helps with the outlook. But are we in a situation then where we start to see some significant growth in these markets in the second half of '13? Or how would you think about the upside, as that hopefully hits an inflection point mid-year?

I think what we're anticipating, Ken, would be that we would see some increased orders -- bookings in the last half, late half of the second quarter. And that would translate probably to some sequential increases in revenue into the late third quarter and fourth quarter.

Okay. Okay. Yes, that's helpful. As you look at the -- as you look at, Joe, the inventory in the quarter, you had a really nice improvement there. Was that related to a particular program or a few particular programs, or can you provide more detail on that?

It's several programs. It's -- part of it, our Executive VP and COO, Joel Benkie, has, when he came in after the end of June, those are one of the initiatives that he has worked with our teams to improve the level of inventories that we're carrying in our units, improving returns, address operational issues and in our scheduling. And we're really pleased that we've seen the benefits of that, and we believe the benefits are sustainable and there's more room to go, potentially, in terms of improving our working capital turnover, which was about -- our inventories were turning about 3.3 times a year in 2011. Now they're up to about 3.6. So we still have some overall room and progress to make.

Okay. So you expect that to improve again in 2013 then?

That's the goal. That is the goal, Ken. We're working through it. It is across all programs. You have ups and downs, as you increase the order size and you prepare to start shipments. So if you look at our business, traditionally there is a build up in inventory in the first half of the year and a depletion in the second half. So I'd anticipate the same type of results, as we bring in raw material to support builds across all the product lines. But in general, it's a major effort for us to be driving down working capital. And that will continue, we hope, into 2012 -- or '13.

Great. And just finally, I know you've won some new business lately in Augusta Westland and Bombardier. It's been impressive. And I know, Joe, you've talked about the step-down and the start-up costs. But with the business you are winning, as you look to 2013, does the operating income in the DAS segment -- do we step up like we stepped up from '11 to '12, or how should I think about that?

I would say that what we're doing on that side, Ken, is we are continuing to -- let me back up just a second. First of all, there are some minor investments in some of the new programs that we're making. So initially, you know, you have the startup costs. We have not made any major investments in any of the new business programs that have come on. So we would not expect to see the investments that we saw in 2009 and '10, for example. Having said that, I would expect us to continue to be in a position where we start seeing some improved margins as we move along, offset a little bit by some of the new programs. But we still have a number of new programs that are on the horizon with some other customers. And so, we'll be bringing that in. And I think that's why last year when we talked about it, or maybe it was even two quarters ago that we talked about there is always an ongoing investment on that side of the business. But I think our emphasis here is to see continued improvement in the margins on that side of the business.

Okay. Great. Thank you very much.

And your next question comes from the line of Mike Crawford with B. Riley and Company. Please proceed.

Thank you. On the call, you mentioned $75 million in revenue on the Black Hawk platform in 2012. Did I hear that correctly?

That's correct.

All right. Thank you. And then, with the increasing content per unit I think that you're achieving now on the Black Hawk, is that something you think offsets any decline in production on that program in 2013? Do you expect that to go up or down at this point, or is it too hard to tell?

I think it's pretty hard to tell, Mike. I don't know what's going to happen with regards to the budget issues. As we talked about in the past, at the end of the year, Sikorsky is scheduled to drop the build rate by about 10 aircraft in the last quarter, 10 to 14 aircraft in the last quarter. That's already built into their forecast. And whether or not they offset that build rate year-over-year with foreign military sales, we would anticipate that quite a bit of that will be filled in. But as far as the content, it should be similar to what we have here. Now there is some spares activities that's in that $75 million that may not duplicate, because of the draw down in the war in Afghanistan. And we'll just have to see how that plays out.

Okay. Thanks, Tony. And then, on your end customer sales in 2012, led by Boeing down to Schlumberger at $30 million on the year. Do you expect the same top six customers in 2013? Or do you think someone like Airbus could get in there or -- ?

I doubt that we will have any major shift in the top five or six customers. Our hope is always to have a shift, right? But I would think that you'll probably see the same customer base going into '14.

We have been expanding our Airbus opportunities, though, even into the -- not only the A350 wide body, but also the A320 family of products. And that and the Boeing sales comprise our large commercial aerospace sector. And Airbus now is probably $12 million to $15 million. We hope to expand that.

Okay. Thank you, gentlemen. And then, if I could just go back to maybe tie together again what you're hoping to achieve on inventory turns in 2013, as well, and considering what you may be ramping up on, on new programs. So I believe in 2012 there was considerable tooling and learning curve ramp up on new programs that kind of hurt margins earlier in the year, and you've seen some nice improvement. Again, in 2013, is this where we should look for another -- get inventory turns up to, closer to 4 and maybe some further margin improvement, or it's just too hard to call, depending on --

Well, there is a lot of dynamics going on in our earnings release on the full year results. We showed that in the DAS sector, our EBITDA margins went from 12.2 to 12.6 for the year. And certainly, we have targets to improve on that at least some 20 to 40 basis points. And specifically, I had spoken in 2011, it was very costly for us, at about $8 million in development costs, and we targeted that we would reduce that to $4 million this year. And we actually did better than that. And then we said -- had said that we'd try to get that down to about a $2 million to $2.5 million run rate throughout the year and spread that out over the four quarters. Yes, on the inventory, that's some related to it.

But I think overall process improvement, continuous improvement in all the things that we do with [kaisan] events and the systems that we're addressing should allow us to -- generally speaking, when inventory turns improve, we generate more improvement in our gross margins. And that's what we're targeting for. What Tony said is correct, though. We generally slightly build inventories in the first half of the year so that -- because our peak performance of operating days occur between the second quarter and the third quarter. And then during the second half of the year, we generally are in a mode where we start liquidating inventory. So at the end of the year, with higher turns we should be in a pretty good position from an inventory position, say, going into 2014. And that's the plan.

Yes. Let me just follow up with one addition to Joe. I think that as you look at the balance sheet, you can see that working capital clearly has been an emphasis in all areas, whether it's inventory, receivables or payables. And we'll continue to work that extremely hard during the year. It's a major focus within the business, within all of our business units within the business. And we'll continue to do that. So our overall goal would be to increase the turns. But as you grow new business, the opportunities may not be there because of the -- bringing on inventory to support that. So there is always the offset with growth. So as we look through things, we'll see. But the objective internally is to continue to manage the working capital as effectively as we possibly can.

Okay. Thanks. And then, last question. With the net leverage coming down pretty quickly to around 3X, your senior secured debt is -- the first call is in July 2015 at 104.875? Is that correct?

That's correct.

That's our $200 million senior unsecured note. Yes, the first call is then.

Okay. Thank you very much.

Okay, Mike.

(Operator Instructions)

Your next question comes from the line of Bhakti Pavani with CK Cooper. Please proceed.

Hello, Tony. Hello, Joe.

Hello, Bhakti.

I just wanted to talk about the revenue line. During the year 2012, during the first three quarters, the revenue was kind of flat, and in the Q4 it was a nice bump. Was it majorly related to the timing, and is that something that we should expect going in 2013?

In our -- my comments -- and then we look at it trended. We had spoken about it in the third quarter that, as a result of these F18 orders for radar racks that we received at mid-year, that I had said in the November call that we would expect a nice spike in those military electronics applications. And that's what we saw in the fourth quarter. And I also said, because we have a significant amount of backlogs in that area, it will be more level loaded or have even shipments throughout the quarters here in 2013. In addition, when we look at our sales -- when we look at our sales, we continue to see strengthening in our commercial aerospace structures, the large aircraft for Boeing and Airbus, we'll see, I think, sustainable levels at these build rates that they have achieved and they expect to achieve.

Okay.

You know, I think, Bhakti, when we look at it over the year, then you got a bump up in the quarter. I think, as Joe indicated, that was a direct result of late order receipts. We had a nice pick up on order receipts in the fourth quarter. Unfortunately, some of them were late, compared to when we anticipated them. So they'll smooth out through the year. So when you look at the year, as you start taking a look at 2013 versus '14, you'll have some of the same things play out. And as we indicated, the non-A&D business is pretty soft and has been soft through the year. So those are things for consideration.

Oh, okay. Talking about the gross margins, if you compare the third quarter and the fourth quarter, the margins in the fourth quarter were about18.3% compared to 19.3% in the third quarter. Would you provide some color on the events that led to the decline in the margins?

We got affected, as in my comments, by an $800,000 fourth quarter pension fund defined benefit pension fund expense. And if you look at the periodic costs, they've gone from $1 million to $2 million year-over-year, as a result of changes in the discount rates used. In addition, Bhakti, traditionally the fourth quarter cycle has either been a flat or a sequential decline in gross margins from the third quarter. So for example, the $800,000 charge affected our margins, our 18.3% margins, by about 40 basis points; or on an adjusted basis, it would be 18.7%. The rest of it, the decline from the third quarter, 19.3% margin to the 18.7%, can be related to the holiday schedules, less operating days, more inventory -- manufacturing cost absorption, and those things, which is a normal cycle in the Ducommun financials.

Okay. Also, in your prepared remarks, you mentioned that you intend to pay the similar amount of debt in 2013. Would you provide some color on the timing of the debt repayment? Is it going to be evenly distributed throughout the quarters or more towards the second half?

That's a good question, Bhakti. As you saw on our balance sheet, with the good working capital, we ended up the year with $47 million in cash. And even as of now, we've continued to be solid and we probably have around $40 million in cash. So specifically to your question, we at this point in time plan to start making quarterly payments on that $30 million, as opposed to the lump sums that we did in the third quarter and the fourth quarter of $10 million and $15 million, respectively. We think quarterly level payments and those things signals a very positive sign to the debt holders and to the credit markets, and certainly to the equity markets, in turn.

Great. Yes, that's helpful. Also, Tony mentioned that still it is not clear how much the sequestration is going to affect the business. But have you -- have your strategies changed to the new developments that have happened in the market? And the question on the backlog, you have $657 million in backlog. Is there a probability that that backlog could be cut short because of the sequestration cuts?

Those are good questions, Bhakti. With regards to strategy and any changes there -- let me address the backlog first. I would expect that anything that happens to the backlog, I don't see any of our programs being cut or defunded. So what we would expect is that some of those programs are moved to the right. For example, the Black Hawk is our biggest program. If there was any movement on that program, we would expect that the revenue base would move to the right. So you would have lower revenue in 2013 or '14 than originally planned. Same thing on all the other programs that we participate on. So that's the overall plan.

Now in terms of strategy, our strategy remains the same. I mean, what we're trying to do is put ourselves in a position to grow this business, even in a down market, and come up with opportunities to help the customers realize their goals of cutting their cost. And in the end, quite a few of us have been through a few of these cycles, most notably back in the early '90s. Quite frankly, we're paid to manage the business and we will manage through the cycle. And that's exactly what we have to do. But our focus is on trying to take advantage of the technology base that we have and continue to try to grow the business in a tough market. And that's the goal. But rest assured, we will manage the business through the cycle.

Okay. Just a last question. I am not sure if you gave out the CapEx number. But could you please give out the CapEx number, or your expectation on capital expenditures for 2013?

I think it will be about the same, maybe slightly higher than where we are in '12. So we closed the year at about $15 million even, pretty close to that. And we should be at that level, if not maybe slightly higher.

Okay. Thank you very much. That's it from my side.

Perfect. Thank you.

And your next question comes from the line of J.B. Groh with D.A. Davidson.

Hello, Tony, Joe. How you doing?

J.B., how are you today?

I am well. You may have covered this, and I apologize if you did. Do you think there's been any pull forward -- I was pleasantly surprised that the military programs are pretty strong. Do you get the sense that's concurrent with what's going on, or do you see any sort of pull forward early ordering, that kind of thing that was a precursor to the lower levels of volume? Just curious.

No, we haven't really seen any pull forwards. I think what allowed us to increase the shipments was we did a lot of expediting in the fourth quarter, in order to -- the customer probably had a late release, because they were late releasing to us. So we did a lot of expediting in order to able to pull shipments in for them, so they could support their customer base. But I don't think there was any early ordering, if you will, in order to be able to spend going forward. Because you got to remember you're, at that time towards the last half of the year, you're already into FY '13 budget, right?

Got you. Okay.

On the CR side.

J.B., just to add to that, we spend a lot of time trending numbers. Going back to our back logs in the military and space defense technologies, in this first quarter our back logs were approximately $218 million. And we booked a bunch of orders in the second quarter of 2012, and our back logs went up to $251 million and they've sustained themselves there throughout the third and fourth quarter. I believe it's customer acceptance for the products, but it also includes those F-18 orders. And we go back in the same periods, we look at the first quarter, we shipped $54 million of that product in the first quarter of 2012; whereas in the third quarter, we shipped $61 million, and then in the fourth quarter, $68 million. So it wasn't necessarily a pull forward of anything related to the fiscal cliff or anything like that. It's just more acceptance for our military electronics technologies products that we're pleased that, as we look today, our backlogs have held for the last three quarters at that 250-some level.

Good. Okay. And then, Joe, just make sure I'm doing this math right. Your tax rate pre one-time item, was that 15% in the quarter?

Yes. When you do the math, that's what it comes out to be. We are very aggressive at getting state and local -- or state tax credits and IRS examinations successfully reviewed and closed out. And so that's why we're able to -- it's lumpy, quarter to quarter, but that's why we're able to enjoy, in certain quarters, the benefits of our initiatives that we record during the period within which that activity occurs. But thinking at it, generally speaking, 31%, which bakes in the federal R&D tax credit for '13 is an appropriate for modeling, with the exception of taking the $2 million here in the first quarter of 2013 from the retro tax credit.

So 31%, excluding the $2 million?

Correct.

Exactly.

Okay.

And then your second, third, and fourth quarter, if you're modeling these, you would use -- we expect a 31% tax rate.

Okay. Thank you. That's helpful. Congratulations on the year.

Thanks, J.B.

(Operator Instructions)

And there are no further questions at this time. I will now turn the call over to Mr. Tony Reardon for closing remarks.

Thank you, Darcel. And I'd like to thank everyone for joining us today, and for your continued interest and support. And we look forward to talking with you in the next quarter. Thank you very much. Bye now.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.