Ducommun Inc (DCO) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ducommun, Incorporated fourth-quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to our moderator for today, Chris Witty. Please go ahead, sir.

Thank you, and welcome to Ducommun's 2015 fourth-quarter conference call. With me today is Tony Reardon, Chairman and CEO; and Doug Groves, Vice President, Chief Financial Officer 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 on Form 10-K for the fiscal year ended December 31, 2015.

All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are especially 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 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 2015 year-end conference call. I will begin by providing an overview of our operations, including some market color, after which I will turn the call over to Doug Groves to go over our financial results in detail.

Let me start by acknowledging that we had several one-time charges this quarter amounting to $91.3 million on a pre-tax basis that affected our overall performance. Approximately $57 million was related to a non cash write-off of goodwill in our structures business, and roughly $33 million was related to a non cash write-off of the LaBarge trade name, along with $1.3 million in restructuring charges. Doug will go over those details in a moment, but let me reiterate that approximately $90 million of these charges were non cash in nature.

Our management team has been extremely busy since the last earnings call over four months ago, and the Company has taken proactive approach to managing its product portfolio and aligning its businesses with the markets it serves. Given the challenging military environment and the volatile energy sector, we told shareholders last year that we would be decisive in reducing costs and focusing our energies on our core markets and products, particularly with the aerospace and defense sector.

So what we accomplished in 2015 laid the groundwork for additional initiatives earlier this year, all to transform Ducommun into a more strategically focused, streamlined enterprise that can deliver unique structural and electronic solutions to our customers while providing higher returns to our shareholders. We've successfully cut overhead expenses, reduced head count by some 12% over the past five quarters, consolidated multiple facilities in New York, and closed an operation in Texas.

We've also made additional moves to improve Ducommun's long-term growth trajectory and financial performance. The sale of our Pittsburgh facility and Miltec subsidiary sharpens our strategic focus, providing for additional debt reduction, and leaves us in a stronger position to invest in key aerospace and defense markets we serve.

Pittsburgh, with sales of approximately $42 million, provided circuit card assemblies and other electronics, primarily to industrial energy and medical markets. Miltec with sales of roughly $28 million provided engineering and program management services to the United States Department of Defense. Neither business was considered core to our growth plans, and both will benefit from new owners, with broader commitments to the customers they serve.

The Pittsburgh sale was finalized in January, and we expect the military -- the Miltec divestiture to be completed early in the second quarter. In addition, in this quarter we will close an administrative office in St. Louis. With such changes this year and last, we reduced our non-aerospace and defense industrial business to approximately 10% of our sales going forward and virtually eliminate all exposure to the volatile oil and gas market.

We previously announced that our headcount reductions, streamline actions and supply chain initiatives would remove some $6 million to $8 million of annualized costs from our operations. And we're on track to see many of these savings in FY16. These cost reductions will allow us to move closer to our historical gross and operating margin parameters.

In 2015, we also refinanced our debt, lowered our overall indebtedness and reduced interest expenses substantially. We generated approximately $34 million of cash from operations last year, excluding nearly $15 million used to refinance our debt and reduced total indebtedness to $245 million from $290 million at the beginning of 2015.

In addition, we are using the $50 million received from the Miltec and Pittsburgh divestitures to pay down debt even further. Our balance sheet is strong and getting stronger every day.

So we're doing what we said we would do: enacting strategic decisions and cost reduction initiatives that position the Company for improved results going forward. The measures we've taken are meant to increase the Company's asset utilization, while concurrently reducing the volatility inherent in such industries as the energy sector.

We will continue to assess our portfolio for further refinement and believe that the strong commercial aerospace demand, along with greater stability across our military platforms, should lead to higher results in 2016. While we are not pleased at all with our operating performance in 2015, in spite of the many accomplishments I just mentioned, we did experience a number of one-time issues which will not be repeated in 2016. Our team is highly focused to delivering strong operation and growth performance in 2016.

We focused -- excuse me. We closed our 2015 sales of $666 million versus $742 million in 2014. This 10% shortfall primarily reflected a 21% drop experienced across our military and space markets, something we spoke about all last year. We also saw a 4% decline in industrial business, partially offset by a 3% increase in commercial aerospace revenue.

We will get into the specifics in a moment, but there are two important things to keep in mind going forward. First, we believe the defense spending across our platforms has stabilized such that the Company should not see the type of severe program swings experienced last year. And second, we have actually taken measures to reduce our industrial end market exposure as we should, which would also lower the volatility for this year.

Now, let me provide some color on our end markets, products and programs. I would like to start by noting a change in how we refer to our operating units to more clearly articulate the business they represent. We renamed Ducommun AeroStructures as our Structural Systems segment, and our Ducommun LaBarge Technologies unit as the Electronic Systems segment. We believe these name changes will add more clarity as we go to the market as one company.

Turning to our military and space sector, let me reiterate that I mentioned just a moment ago we see much greater stability here than last year, which was extremely challenging due to the budget curtailments and spending decisions that impacted nearly all of our platforms. The reductions were beyond what we expected and due to lower build rates and reduced overseas shipments.

In fact, virtually no platform saw growth in 2015, as lower spending impacted fixed wing programs and helicopter programs alike crossed both segments of our company. Our F-15 and F-18 radar rack shipments dropped sharply, as did electronics and structural sales for the Apache and the Blackhawk, although the latter remained our largest military platform with roughly $42 million in revenue.

As I said last year, these steep year-over-year declines have reset the base level for our defense-related operations, and we have rapidly worked to catch up and keep pace with the lower overhead absorption in our facilities by streamlining processes, reducing head count and working capital, and consolidating where possible. These efforts will continue in 2016. It's too soon to say what demand trends will play out this year and next, but Ducommun is dedicated to right sizing our operations for a lower overall level of defense spending.

Moving to our commercial aerospace business, total revenue last year rose to just under $250 million. That's our highest level ever. The growth was driven primarily by large fixed wing aircraft, where revenue expanded 5% to a record $144 million.

But our growth in 2015 was only part of the story. More importantly, we ended the year with a record backlog of just under $270 million across the commercial aerospace sector. That's up from $250 million in Q3 and $230 million a year ago.

The story here is one of strength and diversification that is expected to drive higher growth in the quarters and years to come, and we won a number of new applications in 2015, cementing our position on some of the best aircraft in the industry. As a reminder, our largest commercial platform is the 737, and Boeing's plan to increase the 737 Max output to approximately 57 chip sets a month by 2019 represents a tremendous growth opportunity for Ducommun. While the near-term impact of the transition for both the 737 and the 777 onto their next-generation models may be a little bumpy, the story will accelerate our top-line growth in the coming years.

Also, for 2016, Boeing is increasing the production of the 787 from 12 aircraft -- from 10 aircraft a month to 12 aircraft a month, providing a further boost to our expected growth this year. We continue to work on expanding our business with Airbus and are optimistic about additional content on both the A320neo and the A350 aircraft, as well as other platforms going forward.

We also made substantial headway in winning new content with engine suppliers and OEMs last year, leveraging our proprietary composite technology and our titanium structural applications. In total, we have over 30 new development programs in place, and we expect we will positively impact Ducommun's top line later in 2016 and accelerate in 2017 driven by a step-up in several platform build rates.

Our wins last year included a 10% growth in aerospace electrics content, positioning us for more complex, value-added assemblies going forward. We also expect helicopter sales and regional business jet revenue to mirror 2015, bringing some stability to these platforms. So overall, our commercial aerospace outlook is brighter than ever.

Lastly, in our industrial defense business -- industrial business, is now smaller than last year, as I previously mentioned due to the divestitures and other actions. Given our lack of exposure to the energy markets, we anticipate 2016 to be a more stable year in the remaining areas that we serve. And while we try to grow this business, as our business development initiatives focus on higher complexity and industrial applications, we are very comfortable that the businesses that we serve now in the industrial segment will continue to grow as we go forward.

Before turning the call over to Doug, let me just comment on some recent management changes here at Ducommun. First, we're glad to have Doug Groves as our Chief Financial Officer and Treasurer. Having taken the reigns on January 1, Doug's been a great asset already and proven to be a resourceful thinker as we tackle many of the strategic decisions needed to improve the Company going forward.

I would also like to thank Joel Benkie for his service to Ducommun. As we previously announced, he has decided to retire at the end of the quarter.

Joel's been instrumental in many changes at the Company and deserves credit for redesigning the way we think strategically about operational excellence and capacity utilization. We wish him the best in going forward, and I will be personally managing his responsibilities for the time being. With that, now I would like to turn the call over to Doug.

Thank you, Tony, and good day to everybody. Net sales for the fourth quarter of 2015 were approximately $156.6 million, roughly 16% lower than the comparable quarter of 2014. The revenue decline reflected 19% lower revenue in the Company's military and space markets, mainly due to a decrease in US defense spending, as well as procurement delays and a shift in program priorities that impacted the Company's fixed wing and helicopter platforms.

In addition, the overall year-to-year top-line shortfall reflected 20% lower revenue in the Company's industrial end use markets. This was mainly due to the closure of the Company's Houston manufacturing center during the quarter and 12% lower revenue in the Company's commercial aerospace end use markets, primarily reflecting delays in the timing of certain regional jet orders.

That said, we continue to experience solid commercial aerospace demand due to the current build rates and increased content, such that during the quarter we saw significant growth in our commercial aerospace backlog. New orders, both structural and electronic solutions drove our backlog here to the highest level in our history, just under $270 million as of year end, as Tony mentioned.

Moving to gross profit, our gross profit margin was 14.6% in the fourth quarter as compared to 17.9% in last year's comparable quarter. This reflected the lower sales and reduced operating leverage, even as we continued to realize supply chain cost savings and other efficiency improvements.

Given the right sizing initiatives being implemented at the Company, we expect to see gross margin improve as the year plays out and return to the historical levels in the 18% to 19% range, particularly as our customers' new platforms gain momentum in later 2016. Ducommun's operating loss for the current quarter was approximately $88.6 million compared to an operating income of $10.1 million, or 5.4% of revenue for the comparable period in 2014.

The year-over-year decrease was primarily due to an impairment charge of $57.2 million for the entire goodwill within our structural system segment as a result of the Company's annual goodwill impairment analysis and an impairment charge of $32.9 million related to the LaBarge trade name, as we no longer plan on using it. Both of these charges were non cash in nature. The operating loss in the fourth quarter was also impacted by inefficiencies resulting from lower manufacturing volume of approximately $5.7 million, and the prior year included a nonrecurring $3.4 million reversal of a forward loss reserve as a result of the customer settlement that did not recur in 2015.

The fourth quarter also included a $1.3 million restructure charge related to our facility rationalization initiatives. Excluding the impairment charges and the restructure charges, the current quarter operating income would have been $2.8 million, or 2% of revenue.

Our interest expense decreased to $2.2 million in the fourth quarter of 2015 compared to $7 million in the previous year's fourth quarter, primarily due to lower outstanding debt balance and reduced interest rate as a result of the Company's refinancing in July of 2015. We estimate interest expense will be approximately $2.2 million in the first quarter of 2016.

Our effective income tax benefit during the quarter was $26.6 million, or 29.5% compared to a 27.8% income tax benefit for the comparable period last year. Going forward, we expect the effective tax rate for 2016 to average approximately 29% now that the federal R&D tax credits have been made permanent.

We reported a net loss of $63.6 million, or a loss of $5.74 per share compared to a net income of $5.2 million, or $0.46 per diluted share in the fourth quarter of 2014. The decrease to the net loss was primarily due to the impairment charges, the forward loss reversal in 2014, the restructure charge and lower operating leverage due to reduced manufacturing volume, which was partially offset by the income tax benefit as previously mentioned. Adjusted EBITDA for the fourth quarter of 2015 was $11 million, or 7% of revenue compared to $19.4 million, or 10.3% of revenue for the comparable period in 2014.

Now, let's turn to the segment results. Our structural systems segment posted revenue of $61 million in Q4 of 2015 versus $78.3 million in the prior-year period. The lower revenue was primarily due to a 37% decrease in military and space revenue. This reflected a decline in demand for military fixed wing and helicopter platforms and a 14% decrease in commercial aerospace revenue reflecting delays in the timing of certain regional jet orders.

While commercial sales were down in the quarter, we ended 2015 with a record backlog of $224 million in this portion of our structures business, underscoring the strength of the demand and the outlook for 2016. With the stabilization of the military business in this segment, we expect the current quarter revenue to be our run rate for the next few quarters until our previously announced commercial aerospace wins come online in late 2016.

The structural systems unit had an operating loss for the fourth quarter of $56 million compared to operating income of $6.9 million, or 8% of revenue in the fourth quarter of 2014, and this was primarily due to the previously mentioned $57.2 million goodwill impairment charge, loss of efficiencies resulting from lower manufacturing volume of approximately $2.8 million, the previously mentioned nonrecurring forward loss reversal in 2014 of approximately $3.4 million, and a $1 million restructuring charge in this segment in the quarter.

Excluding the impairment charge and restructuring charge, the operating margin from this segment would have been $2.2 million, or 4% of revenue in 2015. Adjusted EBITDA was $4.7 million for the current quarter, or 7.6% of revenue compared to $10.5 million, or 13.5% of revenue for the comparable quarter in 2014.

Moving to our electronics systems segment, we posted revenue of $95.6 million in the fourth quarter versus $109.3 million in the fourth quarter of 2014. The lower revenue was primarily due to a 20% decrease in industrial revenue, reflecting the closure of our Houston operations, and a 10% decrease in military and space revenue, mainly due to the decline in demand for military fixed wing and helicopter platforms.

For 2016, the divestitures of our Pittsburgh and Miltec operations, as well as our Houston facility closure, will reduce 2016 full-year revenue within the electronics systems segment by approximately $80 million. However, it virtually eliminates the Company's exposure to a volatile energy market. On a pro forma basis, excluding these operations, electronics systems would have posted revenue of $313 million in 2015.

Electronic systems had an operating loss for the fourth quarter of $27 million compared to operating income of $8.5 million, or 7.8% of revenue in the fourth quarter of 2014. This reflects the previously mentioned LaBarge trade name impairment charge of $32.9 million, loss of efficiencies resulting from lower manufacturing volume of approximately $2.9 million, and the $300,000 restructuring charge related to the site closures. Excluding the impairment charge, the restructure charge, the operating margin from this segment would have been $6.2 million, or 6.5% of revenue.

Adjusted EBITDA was $11.3 million for the current quarter, or 11.8% of revenue compared to $13 million, or 11.9% of revenue in the fourth quarter of 2014. Corporate general and administrative expenses for the fourth quarter of 2015 were $5.6 million, or 3.6% of total company revenue versus $5.3 million, or 2.8% of revenue in the comparable quarter of 2014. Corporate general administrative expenses increased slightly due to the higher professional service fees of approximately $1 million related to the Pittsburgh and Miltec divestitures, which was offset by lower compensation and benefit costs of approximately $700,000.

Now, turning to our overall backlog at the end of the fourth quarter, which was $546 million versus $553 million at the end of the third quarter, the significant increase in the commercial aerospace orders was offset by a decline in the defense and industrial bookings. Regarding liquidity and capital resources, we generated approximately $23.7 million of cash from operations in 2015, including the use of approximately $15 million to refinance our debt in mid-2015. Excluding the debt refinancing costs, we generated approximately $34 million in cash from operations compared to $53 million in 2014.

We remain diligent in effective working capital management and expect our net cash profile going forward to reflect historical season patterns. Also, during the fourth quarter, we entered into an interest rate cap hedge totalling approximately $135 million, which decreases our exposure to interest rate increases going forward.

We will be using the net proceeds from the divestiture of Miltec and Pittsburgh of approximately $50 million to pay down debt in 2016, and we continue toward our goal of deleveraging to targets of 2.25 to 2.5 times debt to EBITDA over the next few years. We expect to exit the first quarter of 2016 with approximately $200 million in debt.

Capital expenditures in 2015 were approximately $16 million. Our CapEx spending reflected the consolidation and expansion of our upstate New York operations, resulting in a state of the art advanced titanium product center of excellence. We expect CapEx to be approximately $18 million in 2016, as we continue to invest in new programs and prepare for the next generation platforms that are ramping up later this year.

In closing, we continue to focus on managing the changing mix of our business, on taking decisive actions to streamline operations as evidenced by the two divestitures announced this quarter. We believe commercial aerospace demand will fuel higher revenue this year and that our defense-related business us will be more stable going forward versus the sharp declines we experienced in 2015.

At the same time, as Tony mentioned, we will look to drive margin expansion, cash flow generation, and further reduce debt. Our cost cutting activities will continue as we remain committed to improving financial results in 2016 and beyond.

I will now turn it back over to Tony for his closing remarks. Tony?

Thank you, Doug. Before turning the call over to questions, let me briefly summarize our strategic priorities as we begin 2016. If last year was a year of transition, exemplified by lower debt, strengthening our balance sheet, cutting costs and strategic assessment of our operations, then the coming year is one of action and growth. We've already taken decisive steps to shed non-core under performing assets and will, as I've stated, close an additional facility this quarter.

The Company is focused on providing unique value-added electronic and structure solutions for the aerospace, defense and other high technology markets, and we will continue to benefit from a strong commercial aerospace cycle and increasing build rates going forward. We paid down debt and we will continue to do so based on our solid cash flow projections, leaving us with an even stronger, more flexible balance sheet this year. We will also strive to reduce working capital, increase asset utilization, and expand margins as we review our operations and product portfolios for additional efforts to focus the Company and drive increased shareholder value.

The bottom line is that we did what we said we would do in 2015 and positioned the Company for stronger growth and improved bottom-line results going forward. With our commercial aerospace programs on track for continued expansion and stability across our defense markets, we believe the Company is in good shape to take advantage of the numerous opportunities across old and new customers alike.

We're a focused unique provider of cutting edge aerospace technologies with strong client relationships and our reorganized business development team dedicated to executing on a variety of growth initiatives.

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

(Operator Instructions)

Our first question comes from the line of Mark Jordan from Noble Financial.

Good afternoon, gentlemen.

Hi, Mark.

First, I want to clarify, did you say if you eliminate all the non-normal items to Structures fourth quarter, the operating margin, was it 4.4%, you said?

Yes, I think that's the number, Mark.

Okay. Now, in the past, we had looked that when that Structures group was running the way you want it to, that operation should show 9% operating margins, plus or minus. Given where you were on an adjusted basis, 4.4% in the fourth quarter, and you're looking for relatively flat sequential Structures, revenues for the first couple of quarters.

Should we assume that, that operating profit number will be in that mid single-digit range for the first couple of quarters and then improve as your volume improves in the second half and going into 2017 towards that 9% goal that might be a 2017 target?

Yes. No, Mark, we had a couple things in the fourth quarter that drove quite a bit of unabsorbed overhead, one of which was all the move activity of our New York operations to consolidate those facilities.

And then we had another facility that shut down for a longer than normal period of time to make some required repairs and maintenance. No, we fully expect that as we walk into 2016 for our Structures business, we're getting back to that 9% range, 8% to 9%.

So you believe you can still -- you will approach that type of range in the early quarters of the year, despite the lower revenue numbers that you talked about?

Yes, it will ramp through the year, because as we mentioned, a lot of the growth that we see comes in the second half, in the latter part of 2016. So it will start lower in the first quarter and continue to gain momentum through the year.

Okay. You did mention that you were going to invest the $50 million in proceeds from the two business sales early this year in debt reduction. Do you have a target for additional debt pay-downs in 2016 on cash generated from operations?

Yes. I mean, we see ourselves continuing to pay down that $25 million a year in debt based upon our go-forward plans in addition to the proceeds we talked about from the sale of the two businesses.

Okay. Final question for me, is part of the non cash charge was amortization, writing down some intangibles? How much of an annualized impact will the write-offs that occurred in the fourth quarter lower amortization charges in 2016?

A very, very small piece, because the vast majority of the goodwill and the trade name were in indefinite-lived assets. They weren't amortizing through to the P&L.

Okay. Thank you very much.

Thanks.

Thank you. And our next question comes from the line of Edward Marshall from Sidoti & Company.

Good afternoon.

Hi, Ed.

So I wanted to -- you made a comment about the commercial business in decline and you see that as a run rate for the next couple of quarters. I wanted to get the same response from you maybe on the military. Do you think this is the run rate on a go-forward for the next couple quarters as the military as it is for the commercial aerospace?

It should be very similar, Ed, to what we saw the third and fourth quarter.

There's no additional stepdowns? I know you said the military business was somewhat stable at this point.

We don't see any additional stepdowns right now. We see steady state in Q1 in particular. It's been steady state from Q4.

Okay. You had a bunch of cost revisions, and you mentioned the $6 million to $8 million, but there was some additional restructuring I think in the fourth quarter here.

Can you add up for me the episodes, the events that you did in 2015 and what that new cost structure, the costs that you actually took out in 2015 in total? Is that -- I think it's higher than $6 million to $8 million. Can you walk me maybe through that?

Sure, Ed. So we announced at the end of the second quarter that we were taking some headcount reductions and had kicked off our supply chain initiatives, which was going to be in the $4 million to $5 million range.

And then in the third quarter we took a small restructure charge of about $800,000, and that was really aligned with closing the Houston operations in St. Louis for which we said we would see an annual cost savings of $2 million to $3 million on those facility closures. Then the restructure charge in the fourth quarter of $1.3 million was largely around the consolidation of the New York facility, as well as some continued headcount reductions. And we had said that would yield a savings of about $3 million to $4 million.

So when you aggregate those numbers up, it's about $9 million to $12 million on an annualized basis, recognizing that we're in various stages of implementing each of those things. So Houston just closed at the end of the year. The St. Louis operation doesn't close until the end of this quarter. So once we flush through everything, that would be the range that we're expecting.

And what was the additional cost of supply chain optimization?

So the supply chain optimization is what we kicked off and announced at the end of Q2. That was $4 million to $5 million.

But again, bearing in mind, a lot of this is offsetting some of the volume reductions. So it's not necessarily just additive to the bottom line.

Sure. And when I look at a -- point of clarification. When I look at the goodwill and the impairment charge, are those both taxable events as it relates -- I know sometimes they can run through non-taxable.

No. There was a small impact in our income tax expense for the books this year, but largely -- no, they weren't a big taxable event for us.

Okay, and then, the fully diluted share counts on adjusted basis, I'm assuming that was -- isn't fully diluted at [11.084 million]. Is it closer to 11.3 million, I would assume?

Yes, under GAAP because we had an operating loss, we don't show fully diluted. But in a profit situation, the share count would be closer to probably that 11.3 million.

11.3 million.

Okay, and then finally, do you have anything on the Max yet that you can talk about from a content perspective? We mentioned that it was a growth program for you. I assume there is something running through the lines.

So on the Max, the -- first of all, I would say 95% of the applications that we have on the 737 are transferring over to the Max, and then so we've picked up new applications in the [cell], the ducting system. We have a couple of other applications that we're working on. So we've increased the chip set rate on the 737 going forward with the Max.

Could you give me a for instance percent of maybe, if the old 737 was 100%, what was the -- what's the new rate?

The new rate's probably 110% to 115% when we get done with the development.

Sure. Okay, great. Thanks very much.

Thank you. And our next question comes from the line of Mike Crawford from B. Riley and Company.

Thank you. You talked about the military business being flat this year after being down 21% last year, which was greater than you thought.

Given the budget request for some potential severe reductions in helicopters, how do you position yourself for that, given even though congress is likely to mark up those numbers a little bit? Is it fair to assume there should be some further military reductions in 2017?

Maybe in 2017 we might see a small drop-off. But we just -- we were at a conference. The biggest helicopter hit is the Blackhawk, and we were just at Sikorsky last week.

They are reiterating what they believe will be the build rates, which are not too far off the existing forecast that you had, like, say in Teal. So we think there may be a slight downdraft, but I think that what we will see coming out of congress is something much stronger than what the President asked for.

Okay.

Let me tell you this. We will adjust the manufacturing overhead costs to make sure that on the reduction of sales, we will do what we have to do in order to maintain the cost basis.

Tony, similarly, you're seeing reductions in F-15 and F-18 radar rack shipments. Now, with the third offset where future procurements are going to be more technological in nature, maybe low cost, high quantity platforms, like drones, are you positioning Ducommun to address that need, or are you --

We are working --

Strategy --

On the drone side of the business, we have limited ISR applications, but we have positioned the Company to be more involved in that as we go forward. But I can't point to any specific major applications that we picked up recently.

Okay. And then separately, in the 10-K, you did provide, as in the past, the end use segment detail for the backlog, but not, I believe, for sales for 2015, is that correct?

No. We've got it in there for sales, in the 10-K.

Okay. Maybe Doug, I will check with you later because I can see it for 2013 and 2014, but not for 2015.

Sure. We can get you that information. I can point you to it.

Okay, and then final question just relates to what you think your historical operating margin parameters should be for the whole business going -- you said you wanted to get back to there. How do you view that now?

Well, I think again, clearly this year had a lot of noise in it, but if you rolled back to like 2014, that's what we would say where the operating margins had been in each of the segments and for the business in general. So as we think about our GP and our SG&A together, getting back to that, the levels where we were at in 2014, so that 10% range for the Company as our -- the right operating margin number for the Company.

We see it ramping up as the quarters go on. Historically first quarter's been a little bit lower in revenue base and then they pick up going forward. So we think the margins will increase as we get towards year end.

Okay, great. Thank you.

Thanks, Mike.

Thank you.

(Operator Instructions)

Our next question comes from the line of Ken Herbert from Canaccord.

Hi, good afternoon.

Hi, Ken.

Hi, Doug or Tony, if you could provide any more detail -- I know you don't give official guidance, but how should we think about free cash flow in 2016? You obviously have taken out a lot of costs, you've closed facilities, you've had a lot of moving pieces. What's the profile of free cash into 2016, and what's the upside and a few key moving pieces?

Yes, I think we will start to bear the fruit of the supply chain initiatives starting in the second half of 2016. There was a lot of work that got off the ground in the second half of 2015. And we're looking at cash flow from operations probably in the -- based upon this volume that we're anticipating in the $35 million to $40 million cash flow from operations range, and then obviously take off that our CapEx that we've said we're expecting somewhere around $18 million, just a slight uptick from where it was in 2015.

Okay. So as I think about then, I think you said about $3 million to $4 million from the supply chain or procurement, other initiatives, should we expect coming out of 2016 those are all tailwinds heading into 2017? Or do you think part of this effort now spills from the restructuring, spills into 2017 as well?

No, I think it's -- we've got most of it, but we're never done. I will just say that. Whether it's supply chain savings or looking at our cost basis, as Tony referred to, as we see volumes starting to move around, we will do whatever we have to, to maintain those margins. But for the initiatives that we kicked off in 2015, we should start to really see the fruit of that labor in the second half of 2016.

Right. We should see a full complement of what we've started, Ken, by the second half. Let's say going into the fourth quarter.

Okay, okay. So into the fourth quarter. So you are expecting at least two to three quarters of incremental benefit then heading into 2017?

Yes.

Yes, okay. Then Tony, on the portfolio you've clearly done a lot, been pretty busy over the last few months certainly, and it looks like the increased focus or mix of A and D should benefit as those markets turn on the defense side, in particular.

How should we think about the portfolio now? And I know you've alluded to a few things.

Are you happy with the portfolio? Do you think you might want to look at divesting or anything else you could say strategically how you think about the business now?

Sure. I think right now, Ken, we're real happy with the portfolio we have in front of us. We're always taking a look at opportunities.

I think that where we are focusing now is on the opportunity maybe to consolidate if we have that, we're not going to be planning on doing any of that in 2016 as we look forward. But I think we will start looking for acquisitions probably later on at the end of this year to start looking to see if we can find complimentary acquisitions to build a portfolio. But as far as the current portfolio we have, I believe we're pretty well set right now.

Okay. And then just finally, on the 737, as you talk about the share gain to support the Max and you talk about rate of [57] in 2019, where are you from a capitalization standpoint or CapEx to support that? Do you have the CapEx in place to support rate [57], or is there incremental investments you're looking at?

We will have incremental investments both in equipment and probably in facilities in order to be able to support the uptick. And that also includes the pickup that we see with the Airbus programs that we've won or are winning.

Okay. Is it fair to say that you've maybe invested to support? I know the [737] steps up again in 2017. Are you looking at a fairly steady investment, I guess, as the rate goes from [47] to [52] to [57] over the next three years? Is that maybe a fair way to look at it?

Yes, for sure. Heavy investment in 2016 and 2017 to ensure we get to those rates.

Okay. That's great. All right. Thank you very much.

Thank you.

Thanks.

Thank you. And our next question comes from the line of Christopher Van Horn from FBR and Company.

Good afternoon. This is Dan Drawbaugh on the line for Chris. Just a quick couple of questions on backlog.

First of all, is there any way you could give me a sense within the commercial aerospace breakout, which I know you mentioned is about $269 million, is there any way you could give me a sense of what parts of that or the wide bodies and what's regional and maybe what's single aisle in there?

We don't break out the single aisle per se.

Sure. Okay. So how about -- can you -- I mean, I'm looking at the regional jet slide-off, and I'm wondering what activity you're seeing in that specific market and how maybe your sales mix might be changing going forward.

We anticipate that if you just take, Dan, if you just take 2015 revenue, we should be pretty stable in 2016.

Okay.

And so we don't anticipate a lot of change in any of the markets, though we did have some schedule slides, as we talked about on the regional jet market, but we think we will be pretty stable.

Okay, great. Thanks for that.

And then secondly, in terms of, again, the backlog, I know you've got about $16.1 million here. I'm looking at the 10-K. You've got about $16.1 million that's left from the Pittsburgh and Miltec.

Do you think you could give me a little more clarity on what exactly is in the natural resources, industrial, medical segments? Because I think that comes to about close to -- closer to $50 million.

So do you think you could just talk me through what's in there that's not in Pittsburgh and Miltec?

Dan, let me be sure I understand your question. So you're asking how much in the industrial backlog is not Pittsburgh?

Yes, because I see that you've got $16.1 million, and that includes Miltec and Pittsburgh, right? And then natural resources, about $8.5 million. Industrial's about $17.4 million. Medical is about $23 million. Where does that $16.1 million break out between those three, I guess is just my question.

So most of that comes out of industrial, the Pittsburgh business was about 70% industrial.

Some medical.

Say 20% natural resources, about 10% medical.

Okay.

Come out in those buckets.

Okay, great.

Miltec was all military.

Yes, yes, great. Okay, guys.

Thanks for that. I will jump back in queue.

Okay. Thank you, Dan.

Okay.

Thank you. And our next question is a follow-up from the line of Edward Marshall from Sidoti.

Hi. There was a change in the deferred tax. What was that related to?

That was -- there's two things. If you look at the balance sheet, Ed, we reclassed. We had in the prior year about $13 million as a deferred tax asset. There's a new accounting pronouncement that came out that said you could net it all down in deferred tax liability.

So the big change, $13 million of that was just a reclass out of the deferred tax asset down into the deferred tax liability. And then the other piece, call it about $30 million was related to the good will write-off and the trade name impairment. So about $30 million of deferred taxes related to that $90 million write-off that drove down the deferred taxes.

And that's what ran through -- it was the goodwill and the impairment that ran through the income -- the cash flow statement, is that right?

Yes.

Okay.

It gets added back in the cash flow statement. When you look at our net loss for the year, since it's a non cash charge.

Yes, yes. Okay. And what was the -- what's your expectation for depreciation and amortization for 2016 as a total?

So we will continue to probably have about $10 million in amortization related to the intangibles. And then about $16.5 million in depreciation, which is our average CapEx amount that we incur from year to year. So about $26 million in total.

Okay, and the inefficiencies that were related to the moving expenses and the extended shutdown for repair, was that in the Structures segment?

Yes.

Could you quantify that?

Yes. So I think in our prepared remarks, we had about $2.8 million of inefficiencies in the structure segment in the quarter related to that unabsorbed overhead.

Got it. Okay. Thanks very much.

Thank you. And that concludes our question-and-answer session for today. I would like to hand the conference over to Mr. Reardon for any closing remarks.

Thank you, and I want to thank everybody for joining us today and your continued support and interest in Ducommun. We look forward to speaking to you next quarter. Thank you very much. Bye, now.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference.

This does conclude the program and you may now disconnect. Everyone, have a good day.