Ducommun Inc (DCO) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ducommun third quarter 2015 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will host a question-and-answer session, and instructions will follow at that time. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to hand the call over to the moderator, Chris Witty. Sir, you may begin.

Thank you, and welcome to Ducommun's third quarter 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 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, 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 now like to turn the call back over to Mr. Tony Reardon for a review of the operating results. Tony?

Thank you, Chris, and thank you, everyone, for joining us today for our fiscal third quarter conference call. I'll begin by providing an overview of the quarter, including some market color, after which I'll turn the call over to Joe Bellino to go through the financial results in detail.

Let me start by acknowledging that we had several one-time charges this quarter, which were preannounced, amounting to some $22.7 million on a pre-tax basis. Nearly $12 million of this was related to the previously discussed extinguishment of our debt and the implementation of a new credit facility, which will save the Company around $15 million annually going forward.

But the other costs bare some further discussion. We booked a $10-million charge within our AeroStructures unit related to estimated cost overruns for the remaining contract period of the regional jet program. This is a program that has been problematic for quite some time and was aggressively bid on originally.

While we remain in discussions with our customers about potential price adjustments, we're not optimistic that such negotiations will make this program profitable, so we're taking this charge even as we continue our discussions, and we'll proceed through the contracted period, which is approximately one year. This is obviously a major disappointment.

We also booked a restructuring charge of approximately $800,000 related to the closure of two facilities over the coming months, the first being a small administrative office in St. Louis, and the second plant in Houston that primarily served the Company's oil and gas market. Both locations are within the Ducommun LaBarge Technologies unit. We expect these closures and related organizational realignments to result in a cost benefit that should save the Company $2 million to $3 million annually when fully implemented.

The Houston plant ceased operations at the end of October and was closed because it was not seen as being core to our business operations. The St. Louis facility closure will be completed in the first quarter of 2016.

Turning to our results, we experienced a significant drop in sales this period, both year over year and sequentially from the second quarter. Revenue was $162 million, reflecting a 27% year-over-year decrease in sales within our military and space end use markets. This is a recurring theme that has impacted nearly every platform we serve. The military decline incorporates cancelled programs, lower demand and schedule slides, which result in a larger-than-expected -- which resulted in larger-than-expected drops, particularly across certain defense-related helicopter platforms.

We were unable to offset such (inaudible) with the growth of our commercial aerospace markets, which remains robust but will not see significant increases in sales until late 2016. The good news is that our backlog for the Company has rebounded to its best level this year, over $550 million, due to strong commercial aerospace bookings in both the structures and electronics businesses. We have more work to do as we prepare to emerge from this challenging period.

We previously announced a headcount reduction and streamline actions and supply chain initiatives that would remove $4 million to $5 million of annualized costs from our operations over and above the additional $2 million to $3 million I just mentioned. So we have a total budget of some $6 million to $8 million in cost reductions for the Company, with more work to be done in the fourth quarter.

We're on schedule for the consolidation of our three upstate New York facilities this year, resulting in a state-of-the-art advanced titanium products manufacturing center. We expect to see efficiencies from this facility improving DAS margins in 2016.

We continue to assess every asset of our organization for cost reductions, consolidation opportunities and working capital improvements, and this means that we're also evaluating our product portfolio to determine what areas of our business are non-core, low margin, low growth or otherwise not seen in keeping with what we see as the future for Ducommun.

With sales being adversely impacted by the military slowdown, now is clearly a good time to right-size our Company and make it stronger, leaner and more nimble. Obviously, we'll keep our shareholders apprised of any additional actions we deem warranted going forward.

Now I'll provide some market color for you on products and programs. In the military and space sector, the current environment, with lower US military involvement overseas, general budget curtailments and shifting spending priorities, has impacted both our fixed-wing and our helicopter platforms across the board.

Some of our longest-serving programs were down significantly this quarter compared to 2014, and the underlying reality is that such conditions are likely to continue to exist into next year. We believe the current levels are a baseline for us, and we are not optimistic that near-term growth opportunities, given the current defense spending, are going forward.

This is why we're undertaking an across-the-board look at our facilities and product portfolio. Nothing is being spared in our assessment of the ways -- of any ways to improve our performance or other areas for consolidation.

In the meantime, we remain cautiously optimistic about the recently passed budget deal in Washington. We hope that this long-term agreement will bring some stability to the defense industry and, presumably, lead to possible procurement of upgrades and replacements for the many key aircraft platforms we serve, but this is clearly too early to have any clear picture in this regard.

Now we move to our commercial aerospace operations. Revenue this quarter was essentially flat year over year, primarily due to shipment timing as well as continued weakness in our commercial helicopter business, but we remain upbeat about our overall commercial aerospace operations. We're on track to post our highest annual revenue in this year.

Our total Company backlog, as I mentioned earlier, has rebounded to the best point in 2015 due to strong commercial bookings, and our backlog here now stands at over $250 million. This reflects solid orders across many of our large platforms, including the Boeing 737, the 777 and the 787 programs, as well as the A320 and various other Airbus programs.

We continue to win additional content on these and other platforms and believe the Company remains in solid shape for further growth going forward. We have strong and growing relationships with Boeing, Spirit, Airbus, Gulfstream, Rolls-Royce, United Technologies and others. And we have other 30 new development programs in place, much of which we expect to benefit from the top line starting late next year and into 2017. In the interim, we will pursue additional opportunities to leverage our expansive structural and electronics capabilities in this marketplace.

Turning to our non-A&D business, we again saw a mixed performance this quarter with continued weakness in our energy markets somewhat offset by stability within areas such as the industrial and medical fields. As I mentioned previously, we'll exit a large portion of the commodity energy business when we close our Houston facility.

However, we still see opportunities for growth in this marketplace, even given current market conditions. Our non-A&D backlog stands at around $63 million as we target new business for this sector. We are also looking at additional cost reductions and consolidation opportunities as well as possible portfolio considerations.

Now, before turning the call over to Joe, let me just mention that this is his last earnings call with us, as he's retiring at the end of 2015. I want to commend Joe for all he's done for Ducommun these past seven years. He's truly been an inspiration and an asset to the Company, as well as a personal friend. He's been instrumental in the completion of two acquisitions, three debt refinancings, which have been critical to strengthening our overall financial position.

He is very well respected by everyone here as well as our investors, and we certainly wish him the best going forward. I will introduce his replacement, our current Chief Accounting Officer, Doug Groves, next quarter. But we are all very pleased with the Company's carefully executed financial secession plan.

Now I'd like to turn the call over to Joe. Joe?

Thank you, Tony, and good day, everyone. And thanks for the kind words. Looking at the third quarter 2015 results, earlier today we reported a net loss of $9.5 million, or $0.86 per share, for the current quarter. This compares to net income of $2.9 million, or $0.26 per diluted share, for the third quarter of 2014.

I'll get into the details in a moment, but as Tony mentioned, this reflects a pre-tax charge of $22.7 million, which is $1.28 per share on an after-tax basis and includes the following pre-tax charges -- the recording of a $10 million forward-loss reserve on our regional jet program, a $0.8 million restructuring charge, and an $11.9 million charge for debt extinguishment expenses incurred relative to our new debt structure, which we finalized during here the third quarter.

Net sales for the third quarter of 2015 were approximately $162 million. That's roughly 14% lower than the comparable period in 2014. The revenue decline reflected a $26 million decrease in military and space revenues. In this area, we have seen reduced demand for both structural solutions and technology applications. This reflects lower aggregate government defense curtailment and shifting spending priorities.

Within the commercial aerospace arena, by contrast, which was up slightly year over year, we continue to experience solid revenue as we benefit from the sustainable large commercial airframe build rates and increased content. During the quarter, we experienced significant growth in our commercial aerospace bookings, both in the structural and electronics solutions, largely contributing to our total backlog at quarter end being nearly identical to year-end 2014. We expect the current macro environment to be similar over the next few quarters.

We had previously indicated that 2015 would be a transition year as we work through the decline in demand with our military and space end use markets, streamlining operations, realizing supply chain efficiencies and cut costs to strengthen the Company. Excluding the forward-loss reserve, our adjusted gross margins were 18.6%, as compared to 17.6% in last year's comparable quarter, as we realized the benefits from actively managing this transition and from efforts to improve product mix, eliminate lower-margin products and reduce manufacturing expenses. As we continue with profit improvement initiatives, we expect to sustain or potentially improve these gross margin levels.

We remain committed to addressing the issues in front of us and return the Company to the profitability levels of which we're capable. This means further headcount reductions, lowering of indirect labor costs, improving our manufacturing performance, and effective execution on certain new programs.

As Tony summarized, we have a total target of some $6 million to $8 million in cost reductions for the Company, with additional work under way. Our cost-cutting activities will continue, as we remain committed to improving financial results in the fourth quarter of 2015 and beyond. We expect our New York facility consolidation project to be completed in the next few months. As a result of this move and other restructuring actions in progress, we expect to take an additional $1.7 million to $2 million restructuring charge in the fourth quarter.

Ducommun's operating loss for the current quarter was approximately $1 million, as compared to operating income of approximately $10 million in the third quarter of 2014. Excluding the $10 million forward-loss reserve and the $0.8 million restructuring expenses, which did total $10.8 million, the current quarter operating income would be $9.6 million, or 6% of revenues, as compared to 5.3% of revenues in last year's third quarter.

We are now seeing the benefits of the completion of our refinancing midyear, and with the new debt structure, interest expenses were $3.4 million, or 2% of revenue, as compared to $7 million, or 3.7% of revenue, in last year's third quarter. We estimate interest expenses will be approximately $2.5 million in the fourth quarter of 2015.

Our effective income tax benefit during the quarter was 42.1%, compared to 37.4% effective income tax rate for the comparable period last year. The higher rate reflects the pre-tax loss this year compared to pre-tax income in 2014. We expect the effective tax rate for the fourth quarter of 2015 to average approximately 37%, excluding any potential benefit from the federal research and development tax credit. There is traction in Congress for approval of these credits for 2015 and 2016, which would be an additional benefit to us.

EBITDA was $5.5 million, or 3.4% of revenue, in the third quarter of 2015. Excluding the forward-loss reserve and restructuring expenses, EBITDA would have been approximately $16 million, or 10% of revenues, as compared to $18.4 million, or 9.8% of revenues, in the third quarter of 2014.

Now, looking at the individual business segments, starting first with Ducommun AeroStructures, or DAS, our Ducommun AeroStructures segment posted revenues of approximately $64 million for the quarter, compared to $81.4 million in the third quarter of 2014. The lower revenue was primarily due to reductions in demand for our military helicopter applications, coincident with lower defense spending levels and sun-setting of two long-cycle defense programs.

Our commercial aerospace structural applications remain at record levels. While up just slightly year over year, they reflect certain timing differences regarding shipments. We continue to meet the delivery requirements of the large commercial airframe manufacturers, primarily Airbus and Boeing, and we are positioned well to support the next level of increased build rates beginning in late 2016 and extending into 2017 and beyond.

The DAS operating segment loss for the quarter was $6 million, compared to an operating income of $6.9 million for the third quarter of 2014. This decrease to an operating loss was primarily the result of a $9 million increase over last year's comparable quarter in forward-loss reserves related to the regional jet program. In addition, DAS was impacted by approximately $3 million from an unfavorable product mix shift and $1 million in net expenses as they work through our cost-cutting efforts. EBITDA for the DAS segment was a negative $3.6 million for the quarter, compared to $10.8 million, or 13.3% of revenue, for last year's third quarter.

Now, turning to the Ducommun LaBarge Technologies, DLT, business segment, our DLT segment posted solid results with operating income, EBITDA and corresponding margin improvement this quarter as compared to last year's comparable quarter. Revenue for the third quarter was $97.5 million, compared to $106.8 million for the third quarter of 2014.

The lower net revenue was primarily due to an approximate 14.6% decrease in military and space revenue, mainly due to lower sales of radar rack and defense helicopter electronic applications, and an approximate 2% decrease in our overall non-aerospace and defense revenue primarily from the energy sector, which was partially offset by a 5% increase in our commercial aerospace electronics solutions. Through recent market development activities, we continue to enjoy increased demand for our commercial aerospace electronics applications with new customers.

In our non-A&D offerings, we have seen lower demand for our energy-related products over the last few quarters and expect that trend to continue well into 2016. However, offsetting this, we are experiencing solid backlogs in other areas, including our medical and in our industrial applications.

DLT's operating income for the third quarter was $8.6 million, or 8.8% of revenues, compared to $8.3 million, or 7.8% of revenues, for the comparable period in 2014. As you heard earlier from Tony, there was also in our results for this quarter $0.8 million other restructuring charges were within this segment. We did benefit in all those key profitability measures due to a favorable product mix and lower compensation and benefit expenses partially offset by a loss of efficiencies from the lower manufacturing volumes.

EBITDA was approximately $13 million, or 13.1% of revenue, an improvement from the $12.7 million, or 11.9% of revenue, in last year's comparable period. We continue to focus on product mix improvement and achieving the supply chain savings to sustain profitability in this segment.

Corporate, general and administrative expenses (inaudible) allocated to the business for the third quarter were $3.7 million, or 2.3% of total Company revenue, a decrease from $5.1 million, or 2.7% of total Company revenue, in the comparable period.

Now, turning to our backlogs, our overall backlog at the end of the quarter was $553 million, up from $524 million at the end of this year's second quarter. This was primarily driven by significant commercial aerospace orders. The increase reflects a combination of orders for existing programs and recent new awards as we continue to build our pipeline.

As I mentioned in previous calls, timing differences may impact quarterly reporting of backlogs, and at times, it may not truly reflect the strong underlying long-term demands for large commercial airframe products. Quarterly backlogs, even along long-term programs, now tend to be shorter in duration and lower in amount than was previously the case. Despite that, we continue to work diligently to win additional orders across both our diverse commercial aerospace end markets and defense technology platforms.

Regarding liquidity and capital resources, in the first nine months of 2015, we generated $12 million of cash from operations, including the $9.8 million that we used for the redemption of the 200 million senior unsecured notes in July. Excluding this $9.8 million redemption payment, we generated approximately $18.2 million in cash from operations for the first nine months, compared to $20.8 million during the comparable period in 2014. We remain diligent in effective working capital management, and we expect our net cash profile going forward to reflect historic seasonal patterns. At the end of the quarter, our net debt-to-adjusted EBITDA as defined was approximately 4.2-to-1.

One of the real financial highlights was our new capital structure, which involved completing a new credit facility at the end of the second quarter and finalizing with the redemption and new capital structure by taking out and redeeming in late July the 9.75% senior unsecured notes and replacing that with lower interest new credit facilities, which we put in place in June.

Upon completion of the refinancing, we had $275 million outstanding on the term loan and an unused balance on our revolver. Since that time, we have paid down $25 million in the third quarter, and here in the fourth quarter, already we have paid down an additional $10 million since then, reducing our outstanding debt currently to $250 million. In addition, we have approximately $198 million of liquidity.

We are very pleased with the debt structure, as it provides greater financial flexibility to execute strategic initiatives, and it creates shareholder value by significantly reducing interest expenses. At this stage, we continue towards our goal of deleveraging to targets of 2.25 to 2.5 by the end of 2017.

Capital expenditures year to date for the nine months were just under $13 million, and for the year, we expect this amount to be around $15 million. Our capital expenditure spending this year primarily reflects the consolidation and expansion of our upstate New York operations, resulting in a state-of-the-art advanced titanium product center of excellence.

In closing, we continue to focus on managing the changing mix in our business and are working to realize lower manufacturing costs throughout our operations. We also expect to see annualized cost savings of $6 million to $8 million beginning in the fourth quarter through our streamlining initiatives to help drive higher operating and EBITDA margins.

In addition, we remain diligent with regard to expense management and working capital efficiencies, which, along with our significantly lower interest expenses, should generate meaningful free cash flow going forward.

Now I'd like to turn the program back over to Tony. Tony?

Thank you, Joe. Before turning the call over to questions, let me briefly reiterate that we are committed to right-sizing Ducommun quickly and approximately given the current market dynamics. Even as the Company's commercial aerospace business continues to grow, headwinds caused by our defense and our non-A&D end markets may mean the quarterly revenue remains similar to the current level for the foreseeable future, so we will look to further streamline our operations, realize supply chain efficiencies and reduce working capital while assessing our product portfolio and manufacturing footprint to strengthen the Company.

This has been a challenging period, but 2015 remains a year of transition, and we'll do whatever we have to to make sure that we ensure renewed growth, improved performance and margin expansion and higher cash flow for 2016 and beyond.

With that, Trisha, I would like to now open up the call for questions, please.

Thank you. (Operator Instructions). J.B. Groh, D.A. Davidson.

Joe, congratulations on retirement and the accomplishments on the balance sheet. It's great.

Thank you, J.B.

Just to clarify, so there's $9 million in AeroStructures and $0.8 in DLT in terms of the add-backs to get to sort of an adjusted operating margin?

Well, the delta was $9 million. We actually took a $1 million reserve in last year's third quarter, so we actually took a $10 million -- that's the one we pre-announced, but the delta is $9 million. But that is in the DAS segment, and the $0.8 million is in the DLT segment.

Okay. And then you mentioned that you're going to take a little bit more in Q4. Can you break that out by segment, or is that unknown at this point?

It's probably -- it's about 60% to 70% on the DAS side.

Okay. All right. Okay.

Because it's related to that consolidation.

And then do you have -- I don't know if this is something we have to wait for the Q to come out, but the segments by -- the different revenue numbers within the segment?

Well, we have that in front of us. What would you like us to comment on?

I think in the Q you break out military and commercial in AeroStructures, and then you break it down, I think, to five components in the DLT.

Yes. Well, would you like me to go over it?

Yes, that'd be great.

Ducommun AeroStructures revenues for the third quarter of 2015 were a total of $64.1 million. It was broken out between the military and space defense structures of about $16 million, and in the commercial aerospace sector, it was $48 million approximately. As we look at the other segments of the Ducommun LaBarge Technologies business segment, that was a total of $97.5 million broken down to round numbers of -- the defense technologies sector was $54 million, commercial aerospace $13 million, energy and natural resources was $7 million, the industrial sector was $11 million, and the medical was approximately $13 million.

That's perfect. Thank you. That's all I needed. Thanks a lot, Joe. Thanks.

You're welcome.

Okay, Jamie.

Edward Marshall, Sidoti & Company.

Joe, you'll be missed. We really enjoyed working with you.

Thanks a lot. We've got a real good team coming up, though, with Joel and Doug and Tony.

So I wanted to start with -- I went back to the call last call and talking about specifically to the DAS segment, and you were talking about stabilization in the military and you anticipated running at those second half run rates that you saw similar to the first half, maybe with small declines, and clearly you guys have a backlog. I'm just kind of curious how a 52% decline kind of snuck up on you in the quarter. I mean, what changed significantly from the time we had the call until intra-quarter here?

I don't think it really snuck up on us. I think the big difference, Ed, was two-fold. One was we had a pretty sizable schedule slide in the helicopter market, close to about $7 million of schedule slides that just came in the third quarter and affected the third quarter sales. Some of the sales went into Q4, but most of it slid into 2016.

So that was one issue, and then probably the largest change year over year in terms of revenue was just the fall off of the C17, which was not (inaudible) this quarter, but the Apache was significant. That was another like $9 million year-over-year change in the revenue base, so those two were pretty large hits to the military side. I don't think they snuck up on us.

The one that did sneak up on us was the schedule slides. We weren't anticipating that, but that was more significant than we anticipated, and that was just about on every one of our major military helicopter programs.

Now, the schedule slide implies that you anticipate the debt revenue is coming back in, but your comments suggest that you're going to be running at this run rate for a while. Can you kind of --

Well, it slides out. It kinds of smooths things out for us, so everything is going to the right. So we had -- on the Black Hawk, we're at a lower build rate, but a lot of the Black Hawk sales for us are spare parts for the leading edges and --

So you're not making up those sales in the fourth quarter. You're just going to go back to schedule.

That's right. They're sliding out to the right, Ed.

So is the defense weakness -- is it getting worse, or is this kind of the run rate from here?

I think this is the baseline. I think -- there's the possibility that it could go down a little bit more given budget constraints, but we don't see any major changes that we haven't forecasted right now.

Okay. And when we think about the commercial kind of expectations, you talked about growth in that business and that defense is stabilizing, and then at the same time, we're going to stay at this 160 run rate on a quarterly basis. I guess the math would imply you'd see some growth off that 161 base. Is that the right way to think about it?

Yes, but the real -- what we're doing right now is we have a number of development programs, in particular on the commercial side. We do have some military wins that we've announced. But most of the growth kind of impacts us late 2016 and 2017, so if you -- when we look at the decline on the military side -- now, let me back up a second and just talk about the marketplace in general, but on the military side, if you look at the overall industry, you see about a 5% to 8% drop at the OEMs, and that equates to what we saw in terms of the drop here, because we're in every one of the OEMS.

Conversely, on the commercial side, we're penetrating the large OEMs on that level, so they see 2% to 3% growth next year in -- or, excuse me, into 2017, and we're seeing about 5% growth in 2017, so we anticipate that the commercial marketplace will pick up for us as the 737 MAX and the A350 programs and the A320neo start to hit the marketplace.

Okay, got it. You mentioned about -- you mentioned another $1.7 million to $2 million of charges in the fourth quarter. What is the -- what are the savings that you anticipate to realize off those charges?

We anticipate about $3 million to $4 million in savings on those going forward.

So an additional $3 million to $4 million.

Yes.

Okay. So if I think about your total savings here, we're looking at -- if you include the interest savings as well, I mean, is it right to think that you're saving somewhere between $1.40 and $1.60 in earnings on an annual basis? I mean, that's kind of the math here.

Yes, that's correct.

It's pretty close.

We're using the normalized tax rate and the 11.3 million shares.

Is it 11.3 or 11.1? I mean, I saw the -- but I imagine there's some -- that some of the shares were non-dilutive (inaudible).

Well it's 11.1 when you -- when we have a bracketed net loss, but when it's income, some of those shares are in the money and they're added to -- the diluted shares are added to it.

Cash generation -- as sales drop, I anticipate working capital comes back to the business. Do you have kind of a thought process -- I mean, do you have an idea of what we could kind of think about from a cash flow, which, by the way, have been pretty good for the past three years, but do you think it significantly takes another step higher with the working capital pull-out from the business? I would imagine it would.

It's not going to be significantly higher, because we do have cash outflow from the reserve we took. The cash outflow there could be $2 million to $4 million down, and then the lower revenue generation. Now, we will have working capital coming out. There's no doubt about that. So as we model it, we think we'll be in that $40-million range on cash flow from operations, so roughly the same area -- $28 million to $30 million in free cash flow.

Got it. And lastly, you've been paying down debt. You paid down additional debt into 4Q. I'm curious, are we still on the $30-million pace a year? Is that kind of the goal on a go-forward basis?

Yes. I mean, we pay $25 million. We think we have opportunities for between $5 million and $10 million more. I commented that our cash flow is a business cycle. We believe it'll follow normal seasonal patterns, although it might be down from previous years, but the patterns are similar.

Got it. Thanks very much.

Thanks, Ed.

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

First, because the Q isn't out today -- it usually is the day that you report the earnings, but can you give the stock-based comp number?

It should be out, Mike. I mean, I'm pretty sure we posted it.

Yes, it was posted and accepted by the SEC. Maybe SEC didn't post it on there (inaudible).

Okay, so it should come shortly, but to my knowledge, from the services I use, it's not available yet, so could you just give me the stock-based comp number so I can have an EBITDAS number that's comparable to our EBITDA estimate, that's comparable to all the other EBITDA that we track for your peers?

I could give you what the cumulative is.

Yes, for the nine months.

On the compensation from the cash flow statement. For the full year, the stock-based compensation expenses are $2.8 million for the nine months.

Okay. Thanks.

That's an add back.

And then I guess when we do see that Q, then we'll see the backlog components. You gave some of the revenue components. Were there any -- before we see that, are there any particular movements there of note?

Well, yes, I mean, from -- just sequentially from the second quarter, it went from 524 to 553. The biggest movement was a significant amount of bookings in commercial aerospace. It went from $195 million approximately to $250 million. That was a big number, 55. Our defense overall bookings went from $255 million approximately to $240 million.

Defense backlog.

Defense backlog. And then the rest of our non-A&D was about -- the bookings were pretty much mixed, a little bit of a drop in our medical and other because we'd had pretty good shipments of medical and other during the quarter. Energy was about flat, and industrial was down just about $2 million. So all that -- our bookings went from about $75 million -- excuse me, our backlogs in the second quarter went from $75 million to about $63 million.

Thanks, Joe. That's actually a good segue for my next question. So you talked about that $63 million in non-A&D backlog, and Tony, you mentioned something about possible portfolio considerations relative to those businesses. Does that mean that you might consider divesting these businesses?

Not entirely. We were just looking -- we have an overall portfolio look, and then as we look through each segment, we're looking at which parts of these portfolios enhance, like we're pretty robust in terms of the industrial market and off-road equipment and things of that nature, so I think that there are certain marketplaces that we're penetrating, that we're looking at for growth. The medical market's been pretty solid for us.

So those are marketplaces that we'd look at, and then we'd look at potential divestitures in marketplaces where we don't feel like we're as solid as we should be. But we haven't made those decisions yet, and we've got a plan across the board that we're taking all of our capabilities within the platforms, but we haven't made any decisions there at all.

Okay. Great. Thank you very much.

Thanks, Mike.

Ken Herbert, Canaccord Genuity.

Congratulations, Joe. You'll be missed on these quarterly calls.

Thank you, Ken.

I just wanted to follow up on the commercial business. I mean, you clearly continue to win a lot of business there with growing backlog, but at the same time, you've obviously had another charge this quarter on the regional jet program. Can you just talk about, as you continue to build the backlog on the commercial business, maybe how you're better at derisking some of these programs or maybe even from a price or execution standpoint, just what you're doing to, obviously, get better confidence from an execution standpoint on these programs moving forward?

Okay, good. I think that's a good question, Ken. What we've done across the board over the last three years is really take a hard look at new program introduction and how we're developing that, so we have a phase gate system that we put in place that we're utilizing for every one of our key new development programs as we go forward. The regional jet program dates back quite a few years and was not, unfortunately, a part of this process.

As I indicated on that program, it was aggressively bid, and we're unable to hit the efficiencies that we need in order to make that program profitable. So on the programs going forward, we have a double-check system that we're going back and making sure that we're hitting the margins that we quoted in terms of our cost inputs and coming down the learning curves that we anticipated.

So we do thorough reviews on a -- in some cases on a monthly basis, in some cases on a quarterly basis, depending on the program, so I think that internally they have different program reviews, so I think that we really beefed up that system. We looked at this program and a couple other programs where we had struggled with it early on several years ago, and we've really changed the system for how we introduce new products.

Okay. Would you say -- Tony, that's helpful. Would you say that on the content you're winning, for example, on the 373 -- because I know, obviously, both from Boeing and Boeing's major suppliers, you're trying for other companies. Pricing pressure is certainly continuing to increase, even obviously as the rates are going up. Would you say that the pricing you're getting now and what you're winning is better than what you've gotten in the past, or are you able to, through better execution and through the cost cutting, maybe drive some margin improvement, or are you getting any price on these contracts?

Yes, we're not getting any price, I can tell you that. It's a very highly competitive bid. But we do, as we walk through the program, identify areas where we think that we can be more efficient, and we've done some really interesting things with how we're tooling some jobs so that we can be more efficient on those, and so we're really doing it out of the lean manufacturing side and getting after the cost levels.

But the programs, as you know -- and you know the pressure that we receive from our customers in terms of cost base and pricing pressures is all there, so it's awful difficult to get higher prices.

Yes. Okay. And just one final question on the commercial side. I mean, clearly there's, again, just recently speculation about another step up in rate. You've heard it out of Airbus on the A320, likely out of Boeing on the 737. Are you capitalized to support a rate of 60 or even higher on the 37? And then, second, just your view I'd be interested in on the commercial cycle, and are we maybe just getting ahead of ourselves here a little bit?

Okay, let me answer your first question first, and I think that, yes, we are capitalized. We may have some tooling adjustments for evaluating that now. We're going through rate readiness with both customers, both Airbus and Boeing, as we look at tooling requirements, and there may be some adjustments in tooling to make sure that we hit those higher rates and then work our way through that, but in terms of capitalization, we're pretty well capitalized.

We will be capitalizing over next year and the following year for new business programs that we brought online, but those are for brand new applications as opposed to existing business space. But that's all part of the bid process when we bid the program.

Now, in terms of the commercial market and where we see that in terms of the growth rates, again, I think it depends on two things. We talk about that internally a lot, but it really depends on how the capital markets are behaving and the capital available for, say, the emerging markets so that -- this issue with Axiom Bank does not help the Boeing Company, for example, and then, therefore, has a direct reflection on us in terms of financing customers overseas, so hopefully we get through that and change that from a progressional standpoint and get that passed. I think that would benefit that. So that has a bearing in terms of how these things are financed, and I think that's one aspect.

The other aspect is how strong will the emerging markets, in particular China, be going forward, because I think a major thrust in terms of selling out there is in China. But I will say that both Boeing and Airbus have five to six years of solid backlog, so I don't see a crash here, and if there's some slowdown for whatever reason, we'll enjoy the current rates that we're at for sure.

Okay. Okay, that's helpful. And then, just one final question. You talked about savings specifically as you consolidated some of the facilities in upstate New York, and I know you've got the titanium facility there and very good capability. Can you provide any more quantification around that within the broader opportunity that you're seeing on the cost side?

Well, I think that's -- what we'll see there is higher efficiency. I know that you're looking for some numbers, but what we're doing is working through that. We still have some additional costs that we have to work through as we consolidate that facility, but we have it laid out I think from an extremely lean performance standpoint, and I think that when we look at this business, we'll be much more efficient in that -- in the flow of that business and be able to take on additional new business as well, so we think that we'll get some margin improvement.

Again, when you get margin improvement in a business unit, the reflection up top takes a little bit at the DAS level, so it may not be as great there, but we're expecting to see some margin improvement within that business segment itself.

Okay, great. Thank you very much.

Thanks, Ken.

Thanks, Ken.

Christopher Van Horn, FBR & Company.

This is actually Dan Drawbaugh on the line for Chris. First of all, Joe, congrats. It's been a pleasure getting to know you. I hope everything goes well.

Thanks, Dan.

So if I could get down to the details of this private label deal that you guys announced yesterday, it looks like this is for medical technologies, so is this the kind of relationship that you might be leveraging I guess just sort of given the cost consolidation that you guys are undergoing? Is this the kind of relationship that you guys might be leveraging in sort of those non-aerospace and defense markets going forward?

Well, it's a possibility. This is -- what we've done is we've tied into a distributor (inaudible) that will help us penetrate markets. There are two elements to it. One is our ability to get parts manufacturing authority and sell new products as well, so it's primarily an RF product line, but it is something that we're looking at in the non-A&D marketplace where we have the ability to sell our own products. In most cases, Dan, we're -- in the non-A&D, we're a make-to-print business, similar to our aerospace market. This particular product line that we have is our own design work and we're developing through that, so this fits what they do very well (inaudible) as well as offers us a tremendous benefit to get into marketplaces that we're not in on a more secure basis.

Okay, great. Thanks for the color. And I guess just looking more broadly, I know you guys don't really want to speculate that much about the defense budget environment in 2016, but I've gotten -- we've been hearing some fairly positive things regarding the progress that Congress has made so far on this front, so do you think that just sort of a general -- on a more broad scale, we've reached sort of the trough here in contracting?

I think so. We still have to deal with the budget constraint I think out in 2017, but I think we -- it sounds like we have a two-year deal, and that to me will add significant stability to the budgeting process and also the contracting process, so one of the things that we've seen on the military side is not only the slowdown in spending, but also delays in contracting, which has been because of the CRs in place and things of that nature, so we're bullish on this.

If this happens, we think it'll add a lot of stability to the marketplace. How much of an upswing will happen in the marketplace? I doubt if there's going to be a big upswing, but it certainly will add the funding to the programs that need to be funded and will put us in a position to have better predictability on the programs going forward.

Okay. Thanks. And I guess on that note, when you're looking at the defense space, do you see any specific technologies or just areas that you might want to become a little more exposed to once that budgetary environment recovers?

Well, I think there are two areas in particular. One is we're very heavy into the missile defense side of it, and we continue to penetrate that marketplace, and we think the budget will help stabilize that and put us in a position to continue to pursue the applications that we are pursuing in the new development program.

The other one is in the modernization. I think there will be more money on some of the modernization programs that we're working on and developing. And the release of the bomber contract, I think that bodes well. We're bullish on that. Now, that's a long-term development program, but I think that's really been a nice pickup, and I think that will benefit our business going forward, so we're really solid on that.

So if you look at the missile defense market and if you look at the modernization programs and upgrade programs, I think that's where we'll benefit the most from.

All right. Terrific. That's a lot of help. Thanks, guys.

Thanks, Dan, for your questions.

Thank you. And I'm showing no further questions at this time. I would now like to turn the call back over to Tony Reardon for any closing remarks.

Thank you, Trisha, and thank you, everyone, for joining us today, and we look forward to talking to you at our fourth quarter conference call. Have a great weekend -- or a great week. Thank you. Bye, now.

Ladies and gentlemen, thank you for participating in today's conference. That does conclude the call. You may all disconnect. Everyone have a great day.