Ducommun Inc (DCO) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2014 Ducommun earnings conference call. My name is Mark and I will be your operator for today. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to the moderator. Please proceed.

Thank you and welcome to Ducommun's fourth quarter's conference call. With me today is Tony Reardon, Chairman and CEO, and Joe Bellino, Vice President, CFO and Treasurer. 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 these 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, 2014.

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 would like to turn it over now to Tony Reardon for a review of the operating results. Tony?

Thank you, Jordan, and thank you, everyone, for joining us today on our fiscal fourth-quarter conference call. Before reviewing the financials I wanted to comment on the Company's delayed filings and restatement of prior periods.

We are obviously very disappointed by the restatement which resulted in both internal control deficiencies and employee misconduct. Specifically, after the discovery of misconduct by employees, we identified a single long-term contract in which a forward loss provision should have been recorded in 2009 and the impact on subsequent periods of the adjustment of the forward loss provisions as products were delivered.

The misconduct and its related financial impacts were concealed from Ducommun's senior management, our internal auditors and our external auditors.

The misconduct by these employees is not the way we do business. Ducommun is dedicated to the utmost integrity in everything that we do. We have begun the process of taking corrective actions including termination of employees involved and dedicated -- and we are dedicated to committing the necessary resources to ensure that this never ever happens again.

To be clear, our investigation revealed no other programs were involved in this misconduct and there was no impact to our customers.

At the same time, and unrelated to the employees' misconduct, we discovered errors in our income tax accounting. These errors are also unacceptable and we are committed to enhancing our controls and our technical expertise to ensure that they are not repeated. In addition, the restatement includes previously identified and disclosed immaterial adjustments.

Now turning to our financial results. Ducommun's fourth quarter benefited from improved mix and modest sequential increase in our operating margins. However, the quarter also had several unusual items that somewhat aided these performance gains, as Joe will review in a minute.

Review of the quarter -- or revenue for the quarter was $188 million. Our operating cash flow was $32.5 million and, including the various one-time items, we reported earnings at $0.46 per share.

While 2014 is now behind us and we can look back and assess our overall accomplishments, as well as areas needing further improvement, we ended the year with $742 million in sales, essentially flat with 2013, while recording $1.79 of earnings per diluted share. All in all we had a number of important successes while withstanding a significant decline in our military business.

The growth in our commercial aerospace operations was certainly a highlight. We posted a record revenue of $242 million driven by higher product shipments of large commercial aircraft and modest growth in our regional and business jet markets, helping to offset a $32 million decline in military sales as compared to 2013.

During the year we noted many significant wins, such as on the 737 MAX and Airbus A320, A320neo and the A350 platforms. We also made some excellent inroads penetrating the engine markets positioning us for growth going forward. In addition, we have signed or we are in the process of finalizing long-term supply agreements with Airbus, Boeing, United Technologies, Spirit and Parker Aerospace.

Turning to the non-A&D markets, we continue to see positive results from our efforts of targeting major strategic industrial customers. The catalyst behind our success here has been our constant focus on providing innovative solutions and outstanding service with growth fueled by strong customer relationships and a surge in new business development activity.

This was exemplified by the fact that during the year Ducommun earned preferred supplier status from key industrial customers. We have positioned ourselves to reap positive results from cost savings and efficiency improvement initiatives across the Company and saw excellent working capital gains in several key areas. But we still have more work to do here.

We continue to look closely at our manufacturing footprint and, as an example, have initiated a facility consolidation in one of our structural solutions business units aggregating the operation from three buildings into one. This effort will be finalized earlier in the second half of 2015 as we will continue to focus on driving operational efficiency and margin enhancements going forward.

Improvements already achieved in working capital helped propel operating cash flow to $53 million and free cash flow to $35 million in 2014. We also paid down nearly $43 million of our credit facility last year ending 2014 with a net debt to EBITDA ratio slightly under 3 to 1 from a high of 4.5 to 1 following the acquisition of LaBarge in 2011.

We have consistently told our shareholders and our lenders that we're committed to reducing our leverage ratio to less than 3 times by the end of 2015 and we are on schedule to hit that target. In addition, we are now planning to refinance our debt in its entirety as soon as practical, which we expect will result in significant interest expense savings going forward. Joe is going to talk about this more in a moment.

Looking ahead, we will focus on top-line growth across the commercial aerospace market, engine market and the non-A&D segments to offset the headwinds caused by declining military programs and the sun setting of certain platforms which will impact our sales and margins during the first half of 2015 as we adjust the mix changes and invest in new commercial programs.

We will look to drive higher growth and improved operating performance in the second half of the year, concentrating our efforts on expanding margins, growing the business and ensuring customer satisfaction through operational excellence.

In short, this will be a transition year for Ducommun as we work to refinance our debt and position the Company for higher returns in 2016 and beyond. Now let me provide some color on the markets and our products and of course our programs.

Starting with our military and space markets in 2014, revenue fell 8% or $32 million year over year. The fourth quarter was down 18% or $18 million versus 2013 reflecting the many challenges we have discussed previously including the wind down of the Boeing C-17 program for which we made our last shipments in the fourth quarter.

We also saw lower revenue within our military helicopter space which included the Apache main rotor blade down in the fourth quarter, but expect -- we expect this business to remain at current levels during 2015. These changes custom military structures business to decline more than our electronic segment last year. Although the electronic segment was impacted by lower radar racks shipment, particularly for the F-18 and the F-15 program.

Going forward we expect that revenue within the military and space markets will continue to trend somewhat lower, reflecting budget realities and platform curtailments with sales stabilizing in the second half of 2015.

While the President's latest budget includes increased defense spending for fiscal 2016, it is clearly too soon to say whether this will actually happen. And if it does, whether Ducommun will see any meaningful increase in orders near-term. That said, we are encouraged by the budget's emphasis on equipment modernization, which plays to our strengths, and the fact that it includes a substantial increase in funding to a number of programs we currently support.

In any event we believe that ongoing conditions in the Middle East combined with the crucial nature of the platforms we serve support a base level demand even as budget negotiations play out in Washington. Electronic upgrades to such aircraft as the F-18 and the F-15 we believe will continue.

Our missile defense business revenue was slightly down in 2014 and we expect this market to stabilize going forward. We also continue to bid on new opportunities within military and missile-defense space and believe our customer relationships and quality reputation put us in a solid footing to win additional content. We are targeting applications that best leverage our technology advances and our structural expertise.

The bottom line is that even in the current budget environment there will always be room to expand our defense business on the right programs and platforms and we intend to do just that, positioning the Company for higher growth when spending in Washington is better defined.

In the meantime, we are actively taking steps across our facilities to reduce cost, increase efficiency and expand our margins. We know we can do this even as run rates start to drop on certain platforms as we look to reduce working capital and drive higher cash flow for investment elsewhere.

And one place we're certainly investing is within the commercial aerospace arena where, as I noted earlier, we had our best year ever. Revenue in the fourth quarter rose to nearly $65 million, also a record, up 25% year over year from 2013 and driving a full-year revenue of $242 million up 14% year over year.

The growth across our large commercial airframe platforms was evidenced by our biggest program, the 737, which rose to nearly $60 million of sales in 2014. The consistent growth in our commercial programs has served to somewhat offset the decline in the military sales.

We will continue to look for further growth in both commercial aircraft as well as the engine markets. I've spoken in the past about the many opportunities we are working on to expand, particularly with Airbus, and we are clearly focused on increasing our penetration with this important customer.

At the same time we are bidding on new electronic instructional solutions for Boeing, Spirit and Bombardier, as well as major engine OEMs where we are working to build on already existing partnerships. We feel confident that even in current levels our business can expand substantially within this space driven by increased content as well as higher build rates.

Moving to our non-A&D business, the end of 2014 saw continued upward momentum. The Q4 revenue of nearly $38 million is the highest since the third quarter of 2012. In addition, our backlog within these markets rose 25% year over year, which bodes well for going into 2015.

We remain focused on winning new customers within this space and have made good inroads into several heavy industrial markets. However, within the natural resources markets we are fully aware of the implication inherent in the slightly lower oil prices and cutbacks -- not slightly -- significantly lower oil prices and cutbacks in the future capital spending.

This business represented about 6% of our total revenue in 2014 and we have strategies in place to deal with the current market fluctuations which will likely negatively impact demand near-term. In fact, we project sales for us in the oil market could drop 30% to 40% during the first three quarters, but we feel confident the success we've taken over the past year will broaden our business base and expand our industrial segment market penetration.

For Ducommun in total in 2014 top line was characterized by solid growth in our commercial aerospace and non-A&D markets offsetting softer revenue within the defense area. I think you will note that as sales were flat we offset $32 million of dropped sales in the military with our growth in the commercial market.

We see the trend continue in 2015 with year-over-year comps a bit tougher, particularly during the first two quarters, but due to the impact of the legacy C-17, Apache and radar rack business.

As I said earlier, we view 2015 as a transition. We will focus on replacing reduce military sales and offsetting oil and gas sales by leveraging strong customer relationships and aggressively pursuing new business development opportunities.

Overall, we feel the robust plan that we have in place will improve margins and drive growth positioning the Company for higher returns. With that I would now like to have Joe review our financial results. Joe?

Thank you, Tony, and good morning, everybody, we appreciate you being on the call this early. As Tony mentioned, we are deeply disappointed in the employee's misconduct and the weaknesses in our internal controls over financial reporting that have led to restatements in certain prior periods. We take this matter very seriously and are working diligently to implement the necessary corrective actions.

We are in the process of remediating four material weaknesses, three related to a long-term contract initiated in prior periods, following the discovery of the misconduct by employees which resulted in the identification of a forward loss reserve and this should have been recorded in 2009, a prior period.

In addition, a fourth material weakness was recognized related to income tax errors in the year-end reconciliation of income taxes for payables and deferred assets and deferred tax balances primarily in 2013, 2012 and 2011. We expect to remediate the forward loss contract material weaknesses by the end of the third quarter this year and the tax adjustment weaknesses by year-end as they are year-end entity controls.

The 10-K results which we released this morning for fiscal 2014 include restatements of certain previously issued financial statements and selected financial data. I want to try to quantify the effect of that. The restatement has the following effect on our financial statements.

Net income increased $1 million or $0.09 per fully diluted share for the nine months ended September 27, 2014. Net income increased $2 million or $0.19 a share per fully diluted share for fiscal 2013, net income increased $1.2 million or $0.11 per fully diluted share for fiscal 2012 -- these are all compared to what was previously reported.

Our shareholder's equity was reduced by $4.4 million as of September 27, 2014. The restatement had no effect on our revenues or our cash flows from operations.

Now turning to our financial results. Looking at the fourth-quarter results, net sales for the quarter were approximately $188 million, that was very similar to last year's fourth quarter. The revenue does reflect a continuing shift in demand that we have seen throughout the second half of 2014 with a strong 25% increase in revenues for the commercial aerospace shipments and their being offset by an 18% decrease in military and space sales, both structural and electronics products.

Within the commercial aerospace sector we saw increases in both structures and electronic solutions as we continue to benefit from higher airframe build rates and increased content.

Conversely in the military and space sector we have seen reduced demand in both structural solutions and technology applications reflecting lower aggregate demand for government defense spending. We expect these mix shift trends as well as overall levels of demand to continue through the first half of 2015.

Ducommun's net income for the fourth quarter of 2014 was $5.2 million, that is $0.46 per fully diluted share, compared to a loss of $5.2 million or $0.49 per diluted share in the fourth quarter of 2013.

As previously reported in 2013 when we reported our results for the fourth quarter, the net loss included charges of $8.8 million or $0.51 per share after tax and was comprised of two pretax program-related charges of $14 million that were somewhat offset by reduced accrued compensation expenses in that period of approximately $5.3 million.

Fourth-quarter 2014 net income was favorably impacted by an insurance recovery -- we also saw one in the third quarter -- and increases in income from a favorable customer settlement resulting in a modest benefit from the reversal of a forward loss reserve. The fourth quarter also benefited from a favorable income tax rate which was partially offset by higher accrued compensation and benefit costs in our fourth quarter.

In the fourth quarter legislation was passed to approve the research and development tax credit and we recognized a $2.4 million or $0.21 per fully diluted share benefit as compared to last year's comparable period where we had recognized a $0.8 million benefit in the fourth quarter or approximately $0.07 per share.

The reason I talk about these are that in 2013 the legislation was approved on January 2, so we took approximately $0.7 million to $0.8 million a period, or $0.07 a share, throughout the four quarters in 2013, whereas in 2014 we only recognized the R&D tax credit benefit of $0.21 in that period. So as we look at it the delta was $0.14 on a true run rate year over year.

Regarding the availability of federal R&D tax credits in 2015 as legislation has not been passed this year, we do not expect to record any related R&D tax benefit until or if such legislation is passed. As a result we expect a normalized tax rate of 31% throughout each reporting period in 2015.

Operating income for the fourth quarter was $10 million, or 5.4% of revenues, very similar to the amount reported in the third quarter 2014. This reflects the environment and the shift in business mix we experienced in the latter half of the year including the two military programs that Tony spoke about that are winding down.

Our gross margin of 17.9% was slightly higher than the 17.6% gross margin in the third quarter of 2014. We are addressing the impact of mix shift and gross margin levels and taking action by rightsizing our manufacturing cost structure to adapt to these changes.

Higher accrued compensation cost resulted in selling, general and administrative expenses running about 12.6% of revenues resulting in an operating margin of 5.4%. Again, this is very similar to the amount we reported in our third quarter of 2014.

Included in the current quarter results was a $1 million insurance recovery related to property and equipment, which is classified in other income. EBITDA was $18.2 million or approximately 9.7% of revenues in our fourth quarter.

In reviewing results by each of the business segments first, Ducommun AeroStructures, DAS -- DAS reported sales of $78 million in the fourth quarter as compared to $81 million in last year's prior period.

DAS revenue was unfavorably impacted by a 27% decrease in military and space sales primarily due to the reductions in the C-17 as the contract ended in the fourth quarter and the Apache main rotor which has seen reduced customer requirements.

Partially offsetting the military and space declines was an 18% increase in commercial aerospace revenues driven by solid growth of Boeing and Airbus shipments along with an increase in sales of regional and business jet applications.

DAS' operating income was $6.9 million or 8.8% of revenue similar to the third quarter of 2014. Segment operating income was favorably impacted by the reversal of the forward loss reserve as a result of a customer settlement, partially offset by higher accrued compensation and benefit costs. Our EBITDA in the DAS sector was $10.5 million or 13.5% of revenues.

Now next, in reviewing the Ducommun LaBarge Technologies, or DLT, segment, net sales for the fourth quarter of 2014 were $109 million, that is a 2% increase compared to last year's comparable period. That said, we are also seeing a modest shift as defense electronics sales declined by $8 million. They were offset by increases in commercial aerospace electronics revenue which were up $5 million and a $5 million increase in non-A&D sales.

We attribute the decrease in defense technologies' applications revenues primarily because of reductions in funding for F-18 modernizations affecting our [radar rack] applications and softness in military helicopter demand.

In recent years we have seen sequential declines in our defense electronics backlog, but we continue to see higher demand for our commercial aerospace electronics and our non-A&D offerings, both a result of recent business development initiatives.

However, while revenue within the natural resources sector was solid for the quarter, and for the year, we are now seeing the adverse impact of the changing dynamics in the energy markets including higher oil prices, and this is being reflected on our sequential decline in current backlog.

DLT's operating income for the fourth quarter of 2014 was $8.5 million or 7.8% of revenue, that compares to $9.4 million or 8.8% of revenue in 2013. The decrease reflects an unfavorable product mix, higher manufacturing costs and accrued compensation and benefit expenses that are partially offset by higher revenues.

We are currently addressing and taking action on the level of manufacturing expenses and are aggressively pursuing cost reduction activities and supply chain initiatives aimed at improving operating performance.

EBITDA was $13 million during the quarter, or 11.9% of revenue, compared to $13.9 million, or 13% of revenue, in last year's comparable period.

Corporate general and administrative expenses which are unallocated to the business segment for the fourth quarter of 2014 were $5.3 million or 2.8% of revenue compared to $3.5 million or 1.9% of revenue in last year's comparable period, primarily as a result of higher accrued compensation and benefit expenses this year as compared to last year.

Our overall backlog at the end of the quarter was $559 million. This equates to a sequential decrease of $10 million versus Q3 2014 and reflects a $13 million decline in our military and space backlog, a $7 million increase in commercial aerospace products, and a $4 million reduction in demand for industrial and energy applications.

As I mentioned, most of those are really related to the slowdown in backlogs from the energy sector. We are working diligently to finalize additional orders across various commercial aerospace and defense technology platforms in the upcoming half of this year consistent with normal seasonal patterns.

We now turn to liquidity and capital resources. Earlier Tony mentioned that during the quarter we continued to delever our balance sheet and generate very solid cash flows. In 2014 we generated a record $53 million in cash flow from operations compared to just under $46 million in full year 2013.

We generated approximately $38 million in free cash flow, which is approximately $3.40 per fully diluted share and used all of that and some cash on hand on our balance sheet to repay nearly $43 million in debt in 2014.

We remain diligent in effective working capital management and expect our net cash profile going forward to reflect historic seasonal patterns. We ended the year with sufficient cash balances and expect to continue deleveraging the balance sheet.

At year-end our net debt to adjusted EBITDA was approximately 3 to 1. During the first quarter 2015 we also made another $10 million prepayment on our term loan debt and we have now reduced our total funded debt to $280 million. At this stage we are on schedule with regard to our goal of deleveraging to targets of 2.75 to 3 by year-end 2015.

In addition, we recognize that we may have the opportunity this year to refinance our debt and reduce interest expenses significantly going forward as well as increase our ability to execute on our strategic growth initiatives.

Capital expenditures for fiscal 2014 were $18 million, we expect them to be $15 million in fiscal 2015.

In closing, as we continue to focus on managing the changing mix on our business, addressing manufacturing costs and pursue supply chain savings and opportunities to support our goal of achieving sustained operating and EBITDA margin, which, along with diligent and frugal expense management and a focus on working capital efficiency, should permit the Company to generate meaningful free cash flow going forward.

And with that I would like to turn it back to Tony for his closing remarks. Tony?

Thank you, Joe. We faced many challenges these past few years while building a solid business across multitude of platforms and technologies and we are dedicated to improving performance across all aspects of our operations. In addition, we have realigned our Company to offer faster, more innovative responses to our customers and built a real strong management team.

Our commercial aerospace business is firing on all cylinders and we have grown this part of our business over 50% organically in the past five years through a combination of broader structural offerings, advanced technology applications, higher run rates and excellent customer service.

At the same time, our non-A&D operations have rebounded and we see further room for growth by targeting electronic solutions for advanced automation within the industrial, energy and medical end markets. That said, we believe the first half of 2015 will be negatively impacted in terms of both top-line revenue as well as margins by lower defense spending versus 2014.

In addition, our non-A&D business has seen some softness with the energy space due to the lower oil prices while at the same time we are investing and ramping up on new programs.

We see plenty of room for operational improvement and margin expansion in this year. And as Joe indicated, we are looking forward to refinancing our debt, unlocking further value for our shareholders. This is something we are committed to doing.

We want to thank our shareholders for their continued interest in Ducommun. Our employees are dedicated to our success and that of our customers and we believe 2015 will lay the groundwork for higher growth and improved margins in 2016 and beyond. We have the talent and the technology to take this Company to the next level and that is exactly what we plan on doing.

With that I -- Mark, I would like to turn the call open for questions, please.

(Operator Instructions). Mark Jordan, Noble Financial.

A question for Joe relative the potential refinancing of the debt. If you had to do it today, what would be a reasonable range of -- excuse me, of interest savings that you believe you would incur or be able to realize? Secondly, what would you expect to pay in terms of one time nonrecurring costs to execute that transaction?

Mark, good morning. Regarding the one-time costs which would be the GAAP accounting costs which would include the prepayment of the $200 million senior note, which will be about $10 million plus the write off of deferred -- unamortized deferred financing costs from the 2011 financing, that would be about -- plus accounting and legal fees, that would be a one-time $16 million charge.

Okay. And do you have a sense as to what would be the annualized savings you might be (multiple speakers) if you were to do it today?

Yes (multiple speakers) I think what we are thinking of -- as I mentioned, we have $280 million currently outstanding. We would probably -- and we are building some cash again as we normally do. We will probably refinance approximately $285 million. I would be thinking of a range, Mark, in terms of somewhere between 5.25% to 5.75% interest rate all in. And that would compare to slightly over 8% which we are paying today.

In terms of timing, we are really pleased that the Fed is going to keep interest rates down. We are closely monitoring the interest rate markets and market timing certainly is a factor of that. But we said all along we would like to conclude this financing in the third quarter. And perhaps sooner than later in the third quarter because we have -- our first call on the $200 million senior note is in July.

Okay. In the first quarter you typically have your lowest corporate G&A expense as sort of a seasonal pattern that you have shown over the years. Given the restatements, is there meaningful cost that would be added in that would sort of offset that normal seasonal decline in corporate expense? I mean, should we be looking for another $1 million of expense in that area in the first quarter?

That is a very good comment and a very good observation. We have spent more time with outside resources into assisting us in getting close as well as more review with our outside auditors. So I don't think million is the number, that is pretty hefty. But it will be in the tens of hundreds of thousands of dollars. And we haven't resolved all that yet. You can add that to in your modeling for the first quarter.

Okay. Final question for me. You mentioned the growth opportunity you have in the commercial air structures business. You mentioned that you were working to finalize long-term supply agreements with virtually all of your major customers there, Boeing, Airbus, Spirit, etc.

What fundamental change will the establishment of those longer-term agreements have with regards to margin opportunity and enhanced visibility of revenue and being able to plan out better over time?

Mark, this is Tony. So that was a good question. I think the long-term agreements do two things for us. First of all, they guarantee the supply base I think. But probably the more important aspect of that is they put us in a position to grow our business significantly with that customer.

Almost all customers, and we have talked about this, Boeing has there partnering for success and United Technologies have what they call their [V squared] program, Spirit has a program very similar. And as we work with them for the long-term, there is clearly -- they look at three things. One is your expertise in delivering on time; your ability to maintain excellent quality; and then how do you manage your cost structure.

And as we look forward we have set long-term agreements with our customers and in some cases they are three-year supply agreements where we set up an opportunity to not only maintain the business that we have but also secure some enhancement and grow it across the board.

So there will be more predictability on platforms that we currently serve and there will be more predictability for us in terms of opportunities to get new business. Of course, you always have to be competitive in those marketplaces and you always have to win the business.

But we have really put ourselves in a position where we have improved our quality over the years, we have improved our delivery performance over the year and we put ourselves in a position where we think we can be successful with capturing new business. So it has opened up the opportunities for us to grow with each one of these customers, I can tell you that.

Okay. Finally, 737 is going through a evolution from the NG to MAX. Could you sort of quantify what kind of content you have on NG, what you have locked up for MAX and what incremental opportunity you have on picking up more content as MAX evolves?

Yes, I think I gave you a number earlier about what our total revenue base was and that is probably about as far as we generally go. We don't normally give [shipment] value out and actually Boeing doesn't like us to do that.

So I can tell you that we have done a real nice job on the MAX, especially in the engine area and in the cell area, we have had some real nice wins across the board on that. But we expect that most of our applications will carry forward. We do deliver the 737 spoilers on the NG program and that is one of our larger programs and that will carry right into the MAX for example.

So we expect a lot of our applications -- we actually haven't seen I think maybe one application that may not be transferred over where they have either eliminated it or they have changed it, but it wasn't a significant number. But we have been able to offset those on the MAX program.

So we think that we will be able to sustain pretty good growth in those areas. And we think once we finalize with Spirit we will have more opportunities along those lines as well.

Okay, thank you very much.

Chris Van Horn, FBR.

So, when I look at the backlog growth in 2014, could you just get in a little more detail on whether some of that growth is new customers or is it existing programs increasing their volume? Just any sense of where the growth is coming from.

I think, Chris -- hi, good morning, this is Joe. I think you would break it into buckets. Your question is where is the growth in the backlog coming from. On the commercial aerospace it is coming from a combination of some higher build rates from the large airframe manufacturers and increased content, I made those in my earlier remarks.

But even as we saw in the first quarter here we saw that Boeing increased their shipments, it was primarily in the 737 and then the larger growth was in the Dreamliner where they delivered 30 planes versus 18 last year. And in Airbus, their A320 family of products, single aisle carriers, are seeing nice growth and increased build rates as well as the A350 is coming on.

The reason I mention those, those are the two programs that we are really focused on. On Boeing's 777 we -- it's been pretty flat. So that is where we are seeing the growth. But also over the years we have been obtaining more content with primarily our titanium forming solutions, thermoforming solutions and so we expect those trends to continue.

In the industrial sector, that has really been a focus of our market development efforts, it is in industrial electronics that cover an array of applications on the Ducommun LaBarge Technologies side. And we are seeing nice backlog growth of -- those are new sprouts, new growth of new customers.

And then how about on the medical side? Same as industrial or is there some different dynamics going on?

The medical (multiple speakers).

In terms of -- go ahead --.

No, go ahead.

Chris, in terms of the medical side in terms of specifically backlog, is that the question?

Yes.

Yes, the backlog has been pretty stable on the medical side and I don't think we have seen much change. It has been stable to up actually over the last year and a half and we have actually brought in some new customers there and then we are weaning out some customers as well.

So that's kind of remained pretty stable year over year and it is actually up slightly from 2013. So it has been a relatively solid performer for us over the last couple of years. As the industrial market was down that market was actually growing over 2012 and 2013.

Got it, got it. And then kind of a long those lines, can we -- looking at your able presentation, can we still kind of use those long-term growth rates that you have or are those up for revision?

We have updated those, the ones that are in the April one that we posted last night, they reflect our (multiple speakers) --

Oh, okay.

-- of those end markets for the next three years on average.

Got it, I apologize. I must have missed that. And then if I think about CapEx, you mentioned $15 million in fiscal 2015. Just two questions I guess around that. What is kind of your maintenance versus growth mix there?

And then is there opportunities as you kind of ramp down on the defense side to move some of that capacity more towards the commercial? Because it seems like we are going in a little bit opposite directions in those two end markets.

Yes, let me take that one, Joe. I think, Chris, that on the CapEx side -- so your first question was maintenance versus growth and it is about 45% to 48% on the maintenance side. And then the rest is on growth and it has shifted from -- to more supporting the commercial market.

So we had a couple of big wins last year and we had some capital expenses there associated with this. If you look at 2014 our capital was actually up to about $18 million versus our normal run rate around somewhere between $12 million and $15 million.

But we think that -- we don't think -- most of the capital that is allocated for 2015 will primarily, in addition to the maintenance capital, will primarily be dedicated to growth on the commercial side of the business. There are a couple of new military programs we are working on, but I don't believe there is too much capital expense related to those programs.

Okay, great. Thanks again for taking my questions.

Ken Herbert, Canaccord.

I just wanted to follow up on a question first. On the CapEx side, when we go past 2015, just looking out a few years, are you in a situation where coming out of 2015 you will be fairly well capitalized to support the 777, specifically the MAX rates, up to 52? Or is the -- and 87 rates step up as well? Or do we see a nice sort of scale down in the CapEx after 2015? Or should we assume this $15 million is sort of a normalized number for the next few years?

I would say that we would see some scale back say to around the 12 range, Ken, because we have a number of new programs that we are working on that may drive further CapEx, but in terms -- specifically in terms of the 787 and the 737 programs, I think that we had some CapEx this year related to the MAX program and some of that may spill over into 2015. But I think we will be pretty well capitalized for both those programs.

If we have to do anything it will probably be more along the line of production tooling. I don't see us envision major capital to support the current applications that we have on the 787 or on the 737 programs. Now we are working on a couple of new applications on the 787 program that may require some CapEx, but those problems that we don't have in house and they would fall in that line of support of new customer development.

Okay, okay, no, that is good. And then, Joe, if I could, when you look at the components of free cash flow here into 2015, it looks like working capital was fairly consistent from 2013 to 2014. You obviously get maybe some cash savings on the interest.

But can you just talk about the other moving pieces specifically for the free cash flow in 2015? And how much growth do you think you can get out of working capital with some of the initiatives you just talked about that might be a benefit here to cash in 2015?

Ken, in the last two years with -- we have very robust programs initiated under Joel Benkie and his team's leadership of working on improving scheduling deliveries to customers, reducing past-due backlogs and inventory turnover.

The reason I say all of that is if you quantify those just a little over two years ago, in September of 2013 we have about $142 million -- $164 million of inventory and we are down to $142 million. And we think that there is more opportunities there to reduce our inventory dollars and improve our returns which will free up more cash flow. That is certainly one area that we look at.

I also mentioned supply chain initiatives and our supply chain initiatives are not only in bringing more value to our improvement in profitability to our operations but more value to our customers by a more robust supply chain. We will see not only, we believe, some cost savings but we will see some cash flow savings of us not having to stock so much incoming raw materials. So we are really excited about our opportunities there.

And so, we have looked at this since the whole consolidated business in 2012 and it has been -- it certainly follows -- the cash flow follows the seasonal patterns they have in 2012, 2013 and 2014. But our discipline on working capital effectiveness has allowed us to always generate this kind of cash and at the end of the year we had, as you see, $45 million in cash.

Yes, no, the cash flow, I mean, in the fourth quarter was good. But as I look at 2015 is it possible to quantify those? I mean you see you've got obviously a $3 million tailwind from lower CapEx, you get some interest -- cash interest savings. Can these other initiatives generate $3 million to $5 million in free cash this year as a positive? Or how should I think about free cash flow, specifically the bridge from 2014 to 2015?

I think there is a couple of things to think about when you look at it, Ken. See, you've got the mix change. So make no mistake about it, the military program has [driven] a lot of cash, right. So you have that change.

But the supply chain initiatives that Joe talked about and the things that Joel and Doug Groves, our Chief Accounting Officer, are driving just really the management of not only the receivables and the payables but how we are managing the inventory coming in, we are looking at what we call the sales order and operating planning so that we can reduce our Q times.

So we are really concentrating on trying to stay level or increase the cash flow. To give you a number of that it would increase by for next year I think -- or for this year, I think we really have more work in front of us.

But I would say that it would be safe to say that in terms of the pickups we see that are right in front of us towards the end of the year, we think we will pick up some additional savings on the inventory turns and of course the savings that we anticipate from the refinancing.

So, I would say that if you looked at normal cash flow for the year our goal is to try and stay stable with what we did last year, even with the decline on the military side. [As I said], there is a significant loss of business if you look at -- we went down $32 million in sales but we still had the front end of the year where we had significant military sales that drove some cash. So we are going to offset that with better management of our working capital in the first half of the year.

Okay, no, thanks, Tony, that's very helpful. And then if I could, you have talked/alluded to a lot sort of softness for your markets specifically on the military side in the first half and oil and gas or in the natural resources with maybe some more stability and growth in the second half.

Is it possible that -- to help us a little bit with just sort of a cadence and maybe how soft are we -- how much of another leg down do we have perhaps here from current levels or are we going to sort of maintain current levels and then see more growth sequentially in the second half? Any more specifics around the cadence would be helpful for 2015.

I think that if you looked at last year's first quarter, from a revenue standpoint, and then turned around and looked at the margins we generated, we had some nonrecurring pickup in the first quarter. But the revenue base -- if you take a look at that, that we had in the first quarter last year, that included about $14 million to $15 million in military sales which we don't have.

So -- and then the replacement of that has been partially offset. So the revenue base we see for the first two quarters will be down slightly we think year-over-year, but we'll be able to pick that up in the second half. We really have a lot of work that kind of takes off at the end of Q2 and starts growing for us that is coming through today.

So we think the first quarter is going to be pretty soft. And the second quarter will be better, and then third and fourth quarter. So we see sequentially going forward. Joe, I think maybe you want to add something to that.

No, I think that's pretty -- very accurate, Tony.

So if that helps --.

Yes, that's good.

Yes.

(Operator Instructions). Mike Crawford, B. Riley.

In the past you have talked about possibly upping your facility when you refi your debt this summer, maybe increasing unsecured borrowings of $300 million from $200 million and that would give you some more flexibility to do further M&A?

Your question, Mike, was that -- certainly to pursue growth initiatives, both organically and potentially modest acquisitions, we certainly would build in capacity either upon refinancing or having the capability to expand our credit facility to support our strategic growth, yes.

And, Joe, have you started or is there an ongoing process to evaluate potential targets?

Well, yes, where we are is we are internally evaluating the most appropriate structures. There is a number of criteria that we are looking at. There is actually up to as many as 10 criteria that we are evalue -- for the appropriate structure which fits our corporate strategies and our longer-term plans. I feel we are moving along in the process quite well and we do -- assuming market conditions permit, we ought to be able to complete our refinancing here in the third quarter.

Okay, thank you. And then just operationally, given that the Boeing C-17 revenue pretty much in the -- I believe at the end of September 2014. So now what is happening with the footprint where that activity had been a drain, what are you putting in there in its stead to (technical difficulty).

Okay, that is a good question, Mike. On the C-17 program there is a couple of things going on. First of all, we are still finalizing and, as you can imagine, the footprint for that program was primarily taken up by the tooling that was required for that program as we had over 105 applications on that program.

But as that wound down, what we have done in particular with the machine tools and stuff, there are new programs in there for the Bombardier 7000 new business jet. The A320 or the A319 program that we picked up has picked up some of that use of the capital equipment.

So I think we are moving through and we are filling the shop with new orders. We've got a couple things in the engine market that we are working on that hadn't been announced that are taking up some of the footprint. So I think we plan on having the opportunity to fill that shop as we go forward. And it creates opportunities for us, that is the way we look at it, and I think that we will be just fine as we go forward.

And if you remember, from a press standpoint we have got some of the largest presses in the United States from a forming standpoint. So we are well-positioned to grow that business with the current requirements in the marketplace.

Okay, thanks, Tony. And then last question relates to the Apache. So we know the budget request is actually quite favorable. It remains to be seen what is going to happen with that. But given that kind of uncertainty, how do you see Apache overall rolling through for Ducommun?

Well, if you look year over year, as we talked about last year, the main rotor blade actually -- we supply kits on that. So we are probably -- on the main rotor blade we are probably at a 40% level of what revenue -- of what we were at -- maybe it was probably closer to 35% of the revenue that we had on the main rotor blade. The tail rotor blade should stay flat. But again, those sales are down comparatively year over year.

We anticipate -- you've got the Apache program and then, as we indicated, the helicopter market was soft last year, so we do all the leading edges for all the military programs in the United States and that market was down as well last year. And we think that that will stabilize this year.

So when we look at the first half of the year, there were quite a bit of Apache sales in both the first quarter and the second quarter that were significant that we won't see this year. And they kind of wound down in the second and third quarter last year.

C-17, as you mentioned before, actually we completed all the shipments in the fourth quarter on that. So primarily you are right about September, but actually through November we were shipping C-17 hardware.

Okay, great. Thank you very much.

Bob Franklin, Prudential Financial.

You mentioned that the accounting issues are going to get resolved, one of them by the end of the third quarter, the other by the end of the year. Can I take it that you can do the refinancing without having those resolved?

Yes, we can do that as resolved. We are required to report until they are remediated -- those activities. And we found that the financial markets are accepting to that, we will report on that quarterly.

The ones related to the contract we -- and we have disclosed this in our 10-K, some of the remediation efforts and we will be testing those at the end of the second quarter and hopefully we will get those all taken care of.

The tax ones are -- it is an annual entity level of control rather than a quarterly. And that is why when we issue our 10-K for 2015 that will be remediated given the actions that we have identified and are working on.

Okay. I think you mentioned the 737 program is now at $60 million a year, is that right?

That's correct.

All right. Is that your largest program now?

That's correct.

Yes it is, yes.

Okay. And then are you on the C-Series at all?

Yes.

And is that in your backlog?

Yes, it is.

Are you able to tell us how much of your backlog is a C-Series?

It is not significant. I would say it is under $4 million, something like that.

Okay. And then I was surprised that energy was such a big factor for you, it took your backlog down I think you said by $4 million. I know non-A&D I think is 18% -- 18% rather. Can you tell us what energy is and specifically what kind of work you do in energy?

The energy market represented about 6% of our total sales in 2014. And so, what we do in the oil and gas market specifically is we do electronic components for Schlumberger for their down hole drilling capability, we do down hole drilling support for -- primarily with motors for positioning control on drill bits and things of that nature.

And then we also have outfitting for fracking. So we do -- we outfit the control centers for the fracking business. So all those businesses are softer this last quarter as opposed to where we were last year with regards to the significant drop in the oil prices.

Okay, terrific. And I know this conference call is 12 minute -- 12 hours off your usual schedule, so thank you for being up for this.

You bet, absolutely. Glad to be of service.

Thank you. See you.

Ken Herbert, Canaccord.

Tony, I just had one follow-up. You referenced a few times growth in commercial aircraft engines. Can you just provide a little bit more granularity on exactly what you are doing there and what type of engines you got exposure to where you expect to get more exposure on?

Yes, I think that if you look at some of the new engine development work that is going on, in particular on the 787, we have been able to penetrate some markets there. We haven't announced any of this. But we have been able to pick up a nice win there.

So if you look at the three primary engine manufacturers that we are working with is General Electric, we have some structural equipment that we are working with them on. Pratt & Whitney is primarily structural and then Rolls-Royce is both structural and electronics -- and our electronics background. So we are working with all three.

Fortunately, Joe Benkie, when he came in, had a terrific background in the engine market, so that has really helped us kind of get some entries in there and we have been able to do a real nice job of penetrating that market. And our business development team has done an excellent job in the last year and a half of really getting in and reestablishing.

We have always had great relationships with both Pratt and GE, but we have been able to increase our relationship with Rolls-Royce. So now we look at it as the three major engine manufacturers and we are able to work with them on hot sections. We also have penetrated the nacelle business deeper. So I think as -- and we look at that as being part of the engine market.

So was with those markets we have been able to do nice work both on the structure side and the electronic systems group has really penetrated those markets as well. So, when you look at where LaBarge was when we bought them, they had like zero commercial aerospace sales. And because of the contacts that we've been able to pick up we have grown that business significantly in the last two years, almost 15 fold from let's say [1 million].

Okay, great, thank you very much.

You bet.

I would now like to hand it over to Tony Reardon for closing remarks.

I would like to thank everybody for joining the call today and tell you that we are really going to put the corrective actions in place and drive the corrective actions that are necessary to remediate the issues that we faced in the last part of 2014.

And we will be in a position this next year to really drive growth in our business as we offset the military decline. So I want to thank everybody for joining us and we look forward to talking to you at the end of the first quarter. Thank you very much.

Thank you very much. This concludes today's conference. Thank you for your participation. You may now disconnect and have a great day.