Ducommun Incorporated (DCO) Q4 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2011 Ducommun Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I'd now like to turn the call over to Chris Witty, our moderator. You may proceed.

Thank you, and welcome to Ducommun's Fourth Quarter and Year-End Conference Call. With me today is Tony Reardon, President and CEO; and Joe Bellino, Vice President and CFO. I would now like to provide a brief Safe Harbor statement. This conference call may include forward-looking statements that represent the company's expectations and beliefs concerning future events that involve risks and uncertainties and may cause the company's actual performance to be materially different from the performance indicated or implied by such statements. All statements, other than statements of historical facts included in this conference call are forward-looking statements. Although the company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the company's expectations are disclosed in this conference call and in the company's annual report and Form 10-K for the fiscal year ended December 31, 2011. 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'd like to turn it over now to Ducommun's President and CEO, Tony Reardon, for a review of the operating results. Tony?

Thank you, Chris, and thank you, everyone, for joining us today. I'll begin by providing an overview of 2011, an update of the quarter and some market color, and then I'll turn the call over to Joe Bellino to go over our financial results in detail. Ducommun just finished a very important year that included the acquisition and integration of LaBarge. We ended 2011 much better positioned than we were when the year began with our operations bolstered by this transaction. This was by far the largest and most exciting transaction in our company's history, transforming Ducommun into a much bigger, stronger and more capable company with an enhanced platform for growth. The acquisition increased our technical and manufacturing expertise and added solid experience management talent to the Ducommun team. We couldn't be more pleased with where we stand in terms of the LaBarge integration, which is effectively complete. In addition, during this process, the management team of the newly formed Ducommun LaBarge Technologies, or DLT, did not miss a beat in terms of meeting customer expectations on delivery and quality of our products. We're also on-track to achieve our target synergies and cost savings over the coming year, which should translate into improved margins. With regard to Ducommun AeroStructures business, or DAS, we won and started developing on 14 new programs during 2011. These wins coupled with work already underway from our 2010 new business awards proved to be both challenging and rewarding. The programs cut across all DAS units and supported both commercial and military aerospace applications, but our investments impacted the company's 2011 profitability. That said, we believe that such investments will help drive higher profit margins over the long term as these important new programs ramp-up and offset lower sales from our legacy programs. The new business investments are also paying off in terms of our OEM relationships. Increased value-added content and expanded applications, which is why we feel that we're very confident that DAS is on the right path to improve operating results, and we have maintained our focus on growth to replace our sunset military programs and will drive execution in 2012 to attain our profitability targets. Overall, our performance during the year was highlighted by strong growth across our commercial aerospace platforms and additional -- and the addition of increased business in the military and non-aerospace electromechanical markets. This resulted in a record backlog at the year end of $636 million representing a much broader customer base. We also posted at our highest ever annual sales on the Blackhawk program, over $60 million, up nearly 50% from 2010. These facts point to an overall strength of our portfolio of business and expanded diversity of our end markets. During the fourth quarter, we saw across our -- we saw a growth across our Commercial Aerospace business, particularly on the 737 and the 777 programs, while also posting revenue gains with our regional jets and business jet customers. Commercial helicopters were also strong, and the Carson program is shaping up to be one of our top programs overall. On the military side, the fixed wing sales were down year-over-year, but this is more than offset by the higher revenue on our rotary wing applications with notable growth in the Blackhawk program as a result of the acquisition. On a pro forma basis, our sales to customers in the energy and natural resources markets were down from the year earlier, primarily reflecting a shortfall and the reduction in sales to the wind turbine industry. Now margins in the quarter were not where we wanted to be due to the investments in new programs with DAS, which took a short-term toll on our operating results. Lastly, as you saw in the earnings release, we took a noncash goodwill impairment charge of $54.3 million in the fourth quarter. Joe will review this further in a moment. But it's important to note that this change does not impact the company's ongoing business operations, nor does it affect our liquidity, cash flow or compliance with our financial covenants. Let me restate that. It is very important to note that this change does not impact the company's ongoing business operations nor does it affect our liquidity, cash flow or compliance with our financial covenants. Now let me step back for a minute and talk a little bit about the market fundamentals. The commercial aerospace market is playing out as we expected it, with higher orders coming as Boeing and Airbus raise their production levels. We remain very positive about this side of our business and expect further uptick later in this year as the 787 program increases its build rates. We're also seeing a stable regional jet market, indications of some growth in the general aviation market. The U.S. defense market, however, is hampered by a good deal of uncertainty and the landscape continues to change. There clearly will be winners and losers if the defense budget winds its way to the House and the Senate and as the government is projecting $486 billion in cuts from 2012 to 2021. There are too many different scenarios as -- for a meaningful discussion at this point, but suffice to say that our strategic plans are aligned with the various potential outcomes, and we are confident that Ducommun is positioned well in any major programs that may either be cut or terminations. Looking at the proposed budget scenarios, it approves -- it appears that the fixed wing programs we currently support will remain solid for the future through a combination of forecasted U.S. military procurement and projected foreign military sales. The rotary wing market also looks steady with some funding being moved around, we are also best prepared on the programs going forward to take advantage of the growth that appears to be laid out in the budget. Again, the foreign military market looks robust on the rotary wing applications. In addition, our newly increased presence in the military electronics area through our DLT group is a tremendous advantage for us. This is particularly true in the missile defense and space area where again we are on the right programs. The projected budget in the missile defense area remains flat without any serious potential program cuts projected at this time for the programs we support. To be sure, we are going through changes in the defense market. We still have to deal with sequestration and the potential fallout from that if it goes through. But we believe that sequestration aside, there will be opportunities to grow, particularly as our customers increasingly seek capable, high-quality supplier partners who can meet their cost-reduction targets. Moving beyond the aerospace, let me touch briefly on the other areas where we now have a presence, thanks to the breadth of business that came with the acquisition. We saw some softening in our order receipts within the natural resources and industrial markets last quarter, but expect to see our backlog in these areas grow during the first half of 2012 pointing more towards a more solid second half performance. We're currently seeing strength in the oilfield services market, offsetting setting some weaknesses elsewhere, a good example of the benefits of our diversification strategy. Looking forward, we will continue to focus on the margin expansion, top line growth, new program penetration and cash flow. We expect that the margins should improve as we ramp up production on some of our new -- recent wins, and we will target debt reduction with our solid cash flow for this year, deleveraging the business over time leading to lower interest expense and higher returns for our shareholders. Now I'd like to turn the call over to Joe Bellino. Joe?

Thanks, Tony, and good day, everyone. We are very pleased to complete the first 6 months of the new Ducommun. After commenting on our financial results for the quarter, I'll outline some factors that we expect to have will have an impact upon us in the upcoming year. Yesterday, we reported results for the quarter and for the full year 2011. Excluding pretax acquisition costs of $3.2 million and the goodwill impairment charge of $54.3 million, net income was $2.8 million or $0.27 per fully diluted share and this compares with $4.2 million or $0.39 per fully diluted share in the fourth quarter of 2010. Excluding the unusual items, we generated nearly $18 million in adjusted EBITDA this quarter, which is equivalent to 9.4% margin on sales, as compared to $7.9 million in adjusted EBITDA or 7.8% margin on sales in the fourth quarter of 2010. We were pleased that the additional income stream from the acquisition contributed to higher EBITDA levels and higher-margin percentages as compared to last year's. In this recent fourth quarter, sales increased by 85% to $188 million and this includes $91 million in sales from the newly acquired DLT asset. On a pro forma basis, sales were up 3% ahead of last year's fourth quarter. In bridging this, we were up in manufactured products sales $7 million and it was offset by $2 million decrease in our Engineering Services revenue. I will provide more details when I discuss the individual business segment results. In looking at the business segment, first on the Ducommun AeroStructure or DAS side. DAS sales for the quarter were up 5% to $69 million, and the segment benefited from increased sales in large commercial aircraft, which is reflecting the rising build rates that we're now beginning to see -- when we expect to see continuing over the next 2.5 years and beyond. EBITDA was down year-over-year, primarily due to the start-up expenses associated with the 14 new programs that Tony mentioned earlier. DAS generated EBITDA of $5.6 million or 8.1% of sales and this compares to $8 million last year or 12.1% margin on sales. Carving out the impact of the new programs, they adversely impacted the segment's EBITDA by 5.1 percentage point compared to an adverse EBITDA impact in last year's fourth quarter of 2.4%. Turning to Ducommun LaBarge technology or DLT, DLT's adjusted EBITDA for the quarter was nearly $15 million or 12.5% of sales compared with $5.2 million of adjusted EBITDA a year ago or 14.4% margin on sales. The newly acquired DLT assets accounted for $91 million of the $119 million in DLT segment sales and were the primary drivers of increased adjusted EBITDA results. On a pro forma basis, DLT sales rose by $2 million or 2% as product sales increased nearly $4 million while the engineering services were off $2 million, as I mentioned earlier. When looking further into the DLT product revenue year-over-year, we had a very strong quarter of growth in military electronics and this was offset somewhat during the quarter by weaknesses in our industrial sector, primarily in the semiconductor and natural resources areas. Another category, non-allocated corporate expenses, which we call corporate SG&A, they are expenses not identifiable to the 2 individual business segments. Excluding the acquisition-related expenses, $0.6 million, our expenses in this category were only 1.4% of sales and this compares with 5.2% of sales in the fourth quarter of 2010. This reflects the cost synergies and the savings that we have begun to realize with the consolidation process and the economies of scale that we'll continue to enjoy going forward. Now turning to goodwill. In discussing the goodwill impairment charge, as we noted earlier, we recorded a pretax noncash goodwill charge of $54.3 million in the quarter. As the earnings release noted and is further detailed in our Form 10-K filed yesterday, this does not impact our financial covenants nor our business operations, nor does it impact upon our liquidity. There were 2 primary drivers of the goodwill impairment charge which is attributable to the DLT business segments. First, the decline in Ducommun's market value at year-end 2011 and second, a softening defense market outlook. Regarding the outlook for the softening defense market that impacted the DLT unit, it had to do with our projections, our future discounted cash flow projections for this business unit that was the key driver in changing our view of the future and our values of the business which resulted in the impairment charge. Nonetheless, we believe that the DLT business segment, including the acquisition is going to provide us very solid future cash flows. We review the debt that we incurred as manageable. We continue here in the first part of 2012 already to enjoy healthy cash balances and as of year end 2011, our net debt was lower than when we closed the transaction in late June of 2011. Moving to another subject that's very important to us is backlogs. Our backlogs grew sequentially 4% from the October quarter to $636 million, and it's up approximately 9% since July 1. The year-end backlog also did include new orders for the C-17 that we received, but we also have some pending orders coming here in the first quarter in 2012, and that relates to the F-15 and the F-18 aircraft where we expect these orders to be booked here in the first quarter of 2012. Overall in looking out toward our backlogs, we expect them to grow further as a result of the increased -- increases in build rates of commercial aircrafts and the continuing market acceptance of both our military and oil field technology products. In terms of liquidity and capital resources at the end of the quarter, we had approximately $390 million in debt outstanding. Given that our adjusted EBITDA was $88 million in pro forma in 2011, this equates to 4.04x net-funded-debt to adjusted EBITDA. We are focusing on debt reduction, along with selected capital investments in our business as the primary use of our cash flow from operations. We had a traditionally strong quarter in terms of cash flow in the fourth quarter where we generated $28 million in cash from operations excluding acquisition-related expenses. Currently, as we are 2/3 of the way through the first quarter, our cash balances remain strong and we expect our $60 million revolving line of credit will remain unused for the foreseeable future. In fiscal 2012, we expect CapEx of around $21 million, and our expenditures will be directed toward growth of our manufacturing capabilities and selective increases in expansion of facilities to support our strategic initiatives. In closing, while we have incurred significant acquisition-related expenses during the second half of the year, most of these are all now behind us. In 2012, we expect to immediately begin benefiting from the synergies tied to various cost savings initiatives that we worked on and completed in 2011, as well as look forward to overall top line growth. I'll now turn the program over to Tony. Tony?

Thank you, Joe. Before opening the call to questions, let me again tell you that we know we have more work to do, particularly with regard to margins. But let me stress how confident we are in the future of the company that we are building. As I said previously, we're a much stronger, more capable Ducommun as a result of the acquisition, and we're well positioned going forward to take advantage of this new posture. Our decision to acquire a company that could serve as a base to grow our electromechanical manufacturing and engineering capabilities was strategic. For a long time, we've had a very solid and strong AeroStructures business and we now have an excellent complement in place. In addition, we have an expanded base of customers in a more diverse non-aerospace application, including the industrial, medical and natural resources and other commercial markets. The ability to sell into these markets, we expect, will help offset the cyclicality of the aerospace and defense arena over time. With that, Frances, I'd like to turn the call over to questions, please.

[Operator Instructions] Our first question is from the line of Jeremy Devaney from BB&T Capital Markets.

I'll start off with a couple of questions here on general strategy. I know in your preamble there, Tony, and then just wrapping up, you commented that this new more diversified strategy you're happy with at this point. But it seems that in reviewing the discounted cash flows going forward for the LaBarge transaction that you have to take the markdown. I know historically when the company is diversified, thinking back the 1980s, there's been issues with diversification in getting everything to pull in the right direction at the same time. Is there any concern that the disparate parts of LaBarge are clicking with the core businesses of Ducommun?

No, actually, Jeremy, I think it's -- there are no actual concerns there. I think -- first of all, let me go back and reiterate one thing. I think we have a very strong management team, and we drive the business the same across all the businesses. The other element to that is that when we look at the manufacturing capabilities within the businesses on the DLT side and quite frankly on the AeroStructures side, they're very complementary in the processes and the procedures that we put in place and in terms of the quality systems that are in place and the way we manufacture. So from a manufacturing standpoint, pretty solid. From the go-to-market standpoint, there's a little bit of differences as you can imagine with regards to the non-aerospace markets and the aerospace markets. But in the non-aerospace side of the business, we've got a very solid marketing team. We have a real solid plan in place to go penetrate that market. We're doing the things that are necessary to do some cross-pollination across our businesses, so we understand the capabilities from a manufacturing standpoint in each one of the areas of our businesses. We did a real nice job of integration on that side of the business in terms of bringing the teams together. So actually I don't see -- I see that as a help from a diversification standpoint and allows us to look at markets differently, albeit there are some different quality expectations on the aerospace side. But I think from a manufacturing standpoint, I think we're in good shape.

Sure. I guess then drilling down and being more specific as to the impairment charge, I know, Joe, you broke out a bit of what was going on with the testing of the discounted cash flows. Could you be more specific in what piece of the LaBarge business did you broke out separately from Miltec in this 10-K that you released last night. What piece of the LaBarge business was it that you had to take your expectations down on?

The analysis that we put in the 10-K breaks down the 3 reporting units to Miltec, Ducommun AeroStructures and Ducommun LaBarge Technologies as one unit. It doesn't differentiate.

But I thought you specified, though, that DLT is separate from the Miltec unit.

Yes, DLT is a business segment as opposed to reporting unit, DLT does include 3 things. It includes Miltec, it includes all of the DLT manufactured products, which are legacy Ducommun products and newly acquired DLT products.

And I think one of the things I -- maybe, Jeremy, you should get at is we rolled the -- all the DLT or all our Technology businesses together. And so when you look at the goodwill discussion, Miltec is separated out from that in that analysis. And on the DLT side, it was a combination of all the businesses that we have there. There was no one particular business unit that dragged.

Right, fair enough. And then the last question. On the gross margin side, you had some large start-up costs associated with new programs that hit in the year, especially in the quarter. What point in time do you expect to start seeing some leverage in that? Is that something we're going to witness over the next 3, 6 months or is it more 1 year to 2 years? Is this going to be ongoing?

Well first of all, I think there's always going to be some ongoing development that goes on in the business. But second of all, I think that we'll expect to see improvement in the second quarter. We'll expect to see improvement in this quarter coming up in terms of performance from a margin standpoint across the AeroStructures business. And in particular, I think that we have plans in place to improve the profitability for all these new programs that we have in place. So we're driving through that, so we would expect to see some investment going into the first quarter, but not anywhere near what we saw in the fourth quarter.

Okay. Actually if I can sneak one last one in there. Is there any consideration to going out and starting to provide guidance to the Street? It seems that there might be a disconnect between company expectations, company performance and Street expectations. Any thoughts there?

Well, we did have some discussions about -- on that, Jeremy, and I think that what we want to do is make sure that we stabilize the business base as we go across, and then we may have discussions on that later on.

Your next question is from the line of Edward Marshall from Sidoti & Company.

So you mentioned in the prepared remarks that margins are not where you want them to be. And maybe we could focus on operating margins and I know you have some SG&A cost-saving plans for 2012 and beyond and then that should be a portion of leverage as well. First, where would you want them to be? And then secondly, how do you get there?

The -- let me go back and restate where we were as a baseline in the fourth quarter. When we take out all the noise, Ed, our gross profit margin in total was about 17.2%, our SG&A was 11.4% and our adjusted operating income was 5.8%. What we're targeting is to, as Tony mentioned, to reduce that $3 million cost that we incurred in the fourth quarter on the start-up cost at least by 1/2 of those in this quarter and then continue to improve them. So we're targeting our GPs to be up 60 to 120 basis points over a period of time. On specific, it could be the second half of this year or whatever. So in addition, because we've incurred a lot of SG&A expenses when we have a bigger base, I would expect the 11.4% SG&A ratio to go down to perhaps the 11.2% area. So when you add those up, you could see we do target our operating income on a GAAP basis to be probably in the 6.75% to 7% range.

Let me add a little bit back on that. So with regards to how we get there, which I think was the second part of your question, so what we do is we actually, from a business unit standpoint, target the improvement that we're requiring within each one of the business units, and we drive that across our goal deployment process internally. So I think that when you look at the new programs, in particular, we have plans in place. I talked last quarter we have 5 or 6 major programs that we are developing in addition to the other 8 that we won. And on those programs, we have specific product improvement plans all the way across-the-board. So improvement in material costs, as well as labor input and overhead adjustments.

Okay. Joe, you mentioned 11%, 11.2% from SG&A line, but are you talking about this base level of sales because obviously sales go up, the percentage will change the number from the absolute dollar value. And so...

It's our -- yes, it's our expectation that our sales would go up and that ratio would go down. Recognize there are some normal inflationary costs in our SG&A base.

Sure. I mean, do you have a defined cost take out for the SG&A as we move forward over a period of time?

Well, we -- let me -- let's go back to when we first announced this transaction in April of 2011. We said we expected synergies in the area of cost savings to be at least 2% of the $326 million of LaBarge sales, so that would put us in the $6 million range. We believe the initiatives we have taken so far in this stub period the last 6 months that we're going to realize sequentially a $5 million to $6 million cost savings primarily in the SG&A with further savings to come in the cost of goods sold area with supply chain management, improvements on the buy side and operational efficiencies.

Okay. Secondly, we -- we've talked -- you've had LaBarge now for about 6 months or so. You mentioned some of the synergies but -- and kind of how you've trended thus far. Is there anything we can quantify for maybe even from a cost synergy? You said $5 million to $6 million from that perspective, but what about as far as footprint is concerned and anything, and it’s probably too early and I'm assuming that's what you'll say, but can you kind of talk about kind of the footprint and what's necessary and what could be -- what we typically call cost savings down the road?

Okay. It's too early to talk about footprint. But...

Okay, fair enough.

But we are analyzing things. We just consolidated a facility from Newbury Park in California. We consolidated 2 facilities and we brought one Newbury Park facility down into our Carson, California facility. So we're not adverse to doing that. But I think if you look across the breadth of the product lines, I don't think where in a position to be able to tell you that there's something dramatic that's going to happen in that area. I would not anticipate that we would have a situation right now where we anticipate any consolidation of facilities.

Okay. And last quarter you gave us somewhat of a look for free cash flow for 2012. And I think you said $4 [ph] in free cash flow and a lot of that was from inventory liquidation. And I don't know how far you're through that process, and clearly the fourth quarter was a pretty strong quarter from a cash flow perspective, but any outlook for maybe 2012? And if you'd prefer maybe a normalized cash flow run that you're looking for?

I've noted before that I believe we can get anywhere from $8 million to $10 million of cash flow off of our balance sheet from improved inventory turns. And I think that's the context within which I spoke. We have about $160 million, let's say rounded, of inventory. And we think that we have been -- we have an inventory improvement, if you will, initiatives going on this entire year to improve our inventory turns. We calculate them internally from, say, about 3.7x to 3.9 to 4x. That's the context of that. The other things I think, Ed, are related to -- will be a result of the model that you throw out, that you generate, including -- in terms of our cash flow, we talked about the $21 million of CapEx that we plan to spend this year. Does that help?

A little bit. And then I guess you've talked about debt pay downs, and that's the first use of cash. And first, I want to ask you about goals because I don't think you'll give them, but are there prepayment penalties on any of the debt? And which crunch would you look to retire for us? Is it the senior notes of the term, and I think that there's...

Those are 3 very good questions, and I'll try to answer each one of them. Really in terms of goals, what we want to get our leverage down to is somewhere between 2.75:3.25:1 [ph] certainly by the middle of 2014. And as we look at that, we looked at our combined cash flows less our CapEx requirements, we should be able to pay down $20 million to $25 million annually. So that's very important to us, and we expect that the latter half of this year that we will be in a position to be able to reduce that. As you saw in our balance sheet at year end, we had $41 million of cash and an unused $60 million worth of unused revolver, so you could see we have substantial liquidity. Regarding your question on which one will we prepay, the senior unsecured bond, if you will, the $200 million note which is due in 2018 is -- has a pretty onerous prepayment penalty for the first 4 years because it's noncallable. If we were to -- when we prepay debt, we will do it on the term loan. And there's a 101 soft calls that's called until July 1 of this year and after that, there's no prepayment penalty. So when factoring all those things -- and we want to make sure we have enough sustainable cash for the business to keep reinvesting in it. And once we define what that level is of stability, the excess cash flow will get filed into reducing debt.

And when you say cash to run the business, you're talking about more than working capital and obviously with the $21 million expenditure for next year.

Yes, those are the 2 things, yes. It's working capital to support growth, although more managing our receivables and inventory quite well and that's right in the CapEx to invest in our business.

What does that $21 million consist of? Is that sticks and mortar and new facility, or is that machinery and maintenance?

That's mostly equipment, capital equipment, and there is no brick and mortar in there. There is some maintenance repairs that we have to make, so we'll do that. But most of it's -- and a lot of it's tied to new program wins.

Your next question is from the line of J.B. Groh from D.A. Davidson.

Just have kind of a detailed question on the backlog and some of the stuff that was in the Q. It looks like you had some pretty strong growth sequentially in military and space and then natural resources went down a bit just from last quarter. Is that military and space growth -- is there just a delay in stuff going out the door or -- help us understand kind of how you got some pretty good sequential growth and actually good year-over-year growth in the military and space side when it sounds like that's one of the businesses where we're kind of -- there's some question marks?

I'll quantify that, J.B., for our listeners and then Tony will add some color. Yes, you -- as you noted, as our overall inventories -- excuse me, backlogs from the third quarter period to fourth quarter improved from $612 million to $636 million, a large portion of that was the $33 million improvement in backlog in our Military and Space business, both on the structure side and on the electronics or technology side. Where it fell back, as you also noted from your studies, was our primary offset to that overall $24 million increase in backlog sequentially for those 2 periods was about a $5 million drop in our natural resources. That was really our -- it was in our oil exploration markets with one large customer that actually is a timing difference, but the underlying natural resources and energy markets as is noted are really pretty solid and strong. So we expect subsequent backlogs in that area.

Okay. So like you said just a timing issue there, stuff going out the door quickly and orders, maybe timing issues on the orders, but we shouldn't see that little drop there in natural resources as emblematic given any sort of market softness it wouldn't seem, correct?

Well, I think that when you look at it, there is a little bit -- there was softness in the fourth quarter there. So -- and part of that natural resources was taking out some backlog on the American Superconductors. So when you look across, there is some softness on the wind turbine market.

Okay. Right. Okay. I forgot about that, so that would be in that bucket, so that would make sense.

Your next question is from the line of Jonathan Richton with Imperial Capital.

My question is actually regarding -- the first one regarding the presentation. You gave us a nice color on the expected growth rates over the next 3 or 5 years. I've noticed that it's come down pretty much across the board for each one of your segments versus the third quarter information that you guys gave us. I'm just kind of wondering if you can give us a little bit of idea or more color on what's the driver, particularly on the natural resources and industrial sides?

I'll quantify it again, and Tony will add color. But what we've taken down, we said the average growth rate in the intermediate period of some of these market sectors, non-A&D and noncommercial because those are -- those haven't really changed. The other non-A&D sectors, we took it down from 4% to 6% estimated growth to about 3% to 5%.

And then some of it is on the -- in the natural resources side is we're seeing a softness obviously in the Wind Turbine business. But that's somewhat offset by some pick up on some of the oil industry capabilities we have. And then we're seeing a little softness in the industrial area as well from the fourth quarter bookings. So we expect that to pick up in the second half of the year, so those are kind of the markets. But when you look across the board and you look out, we have to build that business base back up, and I think that we have some expectations that we can do that. But we softened the outlook for -- as a result of that.

So I guess my question is regarding when you guys were looking at the LaBarge acquisition, looking at these other industries you got involved in. Is it just the industry as a whole is not performing as previously expected and a kind of more of a surprise for everyone? Or is it more particular to the specific areas that you guys are involved in and affecting you that way? I'm just kind of trying to thinking about versus all of the optimism that it's still there, but it's on a lower scale. I'm just kind of wondering like really was that expected, or is there any way to kind of see that coming?

Well, I think that it's -- I don't think necessarily it's a complete industry issue. I think that when we come across, we're looking at some of the customers that we have. When we look across the board like Schlumberger has really picked up and they're driving, actually, they're driving a lot harder than we thought going north. And then we've had a couple of customers on the industrial side of the business that are changing a little bit at the way they're looking at things. And in those cases, we're tied into some of their capital equipment, so they're moving that to the right a little bit. But I think all in all, we should be okay.

Okay, great. And then I'm just wondering if you can guys can maybe just a little bit more color on some of the recent contracts once you know you've been [indiscernible] so specifics maybe on what areas in military, commercial and which areas are you're seeing more of the flow coming through?

Actually, we're seeing across the board, Jonathan. But a lot of these we haven't released for competitive reasons and some for customer reasons as well. But let me try and break this down for you. We've -- we had some nice wins in Pratt & Whitney both on the military and on the commercial side of the business. We had nice wins at Boeing in Seattle, in Charleston, good pick-ups on Spirit. Those are primarily commercial applications. Some of the commercial applications are in the general aviation market. Nice pick up in Bombardier in a couple of different applications, as well as Sikorsky on some applications. So when you look at the breakdown, I was doing some analysis last night and it looks like that about 40% of the wins were in the military area and about 30% in the commercial and then split between the general aviation and the regional jet market.

Your next question is from the line of Michael Callahan from Auriga Securities.

I guess all my remaining questions really kind of revolve around Ducommun AeroStructures at this point. I guess I'll just start on the margins in the, I guess, in the quarter of what's happened so far. You mentioned 14 new programs. Are there any specifically that are, I guess, not performing to expectations from a margin perspective at this point? And then of those programs, where are we in the process of kind of a stabilized rate where some of that would start to go away?

Yes, I'd say that there's about 4 of them that are not performing to our expectations. And we do have a plan in place to fix that. So we see that sequentially coming down to the first half of the year, but we expect to see improved margins in the coming quarter on those programs, albeit there will be some investment on those, but they will be in -- during the last quarter.

Okay. I guess is that more a low rate kind of initial production, or is that just that it's a new program and there is a steeper learning curve than what you anticipated?

It's more the latter on a couple of the major programs. It's more of a steeper learning curve than anticipated. Let me -- from an explanation standpoint, we took on a couple of major assemblies that we performed well on early on and then ran into some issues from the manufacturing standpoint. So I think that it's a little bit of learning curve there, and we're working our way through it. So I think I can tell you that on those programs, we're 100% on schedule with our customers, so now it's up to us to get the thing ramped into a position where we can improve the margins.

Okay. And then I guess you guys mentioned in the prepared comments about the 787 ramp up to kind of help the top line. As that program begins to expand, is there a risk to margins as a result of that program as well?

I -- we have some issues that -- on the 787 program. We're working through those now, and I wouldn't anticipate that there would be any significant risk to margins.

Okay. And then I guess the last thing I want to ask to you, and again it's all related really to AeroStructures. The growth rate on the top line in the fourth quarter kind of, I guess sequentially kind of came down a little bit, I guess the opposite of what you might anticipate just given the narrow body production increases in -- throughout the year. Was there a specific softness, or was this a one, kind of a one quarter thing where there's some different order flow, or I guess what was going on in there?

Yes, there softness, but not in the commercial side. The commercial side was pretty solid. But when you look quarter-over-quarter or year-over-year, we're actually -- when you look at the rate -- build rate like specifically on the 737 from our standpoint, it was only up slightly maybe $1 million quarter-over-quarter in terms of revenue. But when you look at the softness came on the military side on the structures. And so a couple of programs were pushed out a little bit on that side of the fence, and we anticipate that those would pick up in the second and third quarter this year.

Okay. Just one last thing and then I'll hop back on the queue. What does your time line look like when the production increases take place at Boeing. What's the -- what is the lead time to you guys?

It depends on the program and it depends on the application, but if you looked at probably -- if you backed up like 6 months, that would probably be a good average for us to be impacted.

Okay, so you saw the step up 35 quite some time ago? And okay...

Yes, yes.

Your next question is from the line of Ana Wat [ph] from Sykes.

This is Ana Wat [ph] from Sykes. So on the G&A line, obviously that came down quite a bit and helped offset some of the margin pressure on your operating segments. How much of that was synergies and how much was others that may not be in effect going forward? So how sustainable are the G&A margins going forward?

The -- in the SG&A on the consolidated income statement for the fourth quarter, we showed $23.5 million. $2 million of that was non-run rate transaction-related that will go away. The second part of your question, so if you use the $21.5 million as the baseline and there's a lot of pluses and minuses that occur in a normal period business cycle. But we feel we've taken out $5 million to $6 million of costs going sequentially on an annual basis. And so we feel that we sequentially will see lower SG&A per quarter than even this fourth quarter baseline. Now that being said, there's compensation expenses that are variable and there's also an ERP implementation cost, probably $1 million to $1.25 million that we will be incurring each year for the next couple years, as we consolidate our platforms. So yes, we do expect those ratios to improve, as I mentioned earlier, and as we grow our level of sales too -- they'll even -- they'll be reduced further.

Sounds great. Do you have a pro forma EBITDA for 4th Q handy by chance from last year?

Yes, I do. Our pro forma EBITDA for the fourth quarter last year -- well, before I get there, remember, I mentioned on a pro forma fourth quarter of 2011, it was $88 million. Are -- were you asking for '10?

Yes. And how much -- I apologize, can you refresh my memory what that number was last quarter for your calculation?

It was almost $18 million adjusted EBITDA as defined in our banking covenants.

Okay, sounds great. And then on the DLT business, the Heritage business seems to be down about 20%. What's the primary driver of that? And then one...

One analyst did report that -- in their reports they noted that when you look at the DLT business and run rates and all the data that's in there, it's down 20%. That's correct.

That's right. And the drivers on that are late orders on both the F-18 and the F-15 business. Those are the primary drivers for the revenue base. You'll also see on the legacy DTI that on a quarter-over-quarter and year-over-year that our Engineering Services business is down. So if you take a look at those combinations now we have picked up the F-18 orders, and we anticipate the F-15 orders will be in this year or they may not impact revenue in 2012. They will in the F-18, but they may not on the F-15 completely, so -- but those orders are flowing now. So it was just a late release either due to tie up on foreign military sales or -- and/or issues within the government just getting the orders out.

I see. So how much of that do you think is more of a timing issue rather than lost business?

It's all timing. None of it's lost.

[Operator Instructions] Your next question is a follow-up from the line of Edward Marshall from Sidoti & Company.

Quick question on the new program details you gave us, and I appreciate the level of detail that you are able to provide and I understand that these are both DAS and DLT wins.

No, they're all -- the ones I just gave you are all DAS.

They're all DAS. I'm curious if you -- so I guess, that there's no kind of joint effort from the say LaBarge/DAS that kind of worked into this new wins. And have you been successful on kind of the combination of the 2 businesses, and if any level of detail you could give there, that would be appreciated.

Well, I think that, Edward, that's a good question. We're working very hard on that. And then as you know, it takes time to develop that. Let me categorically say we had a number of excellent wins on the DLT side last year, so very nice robust bookings for the year and exceeded our expectations, if you will, for the stub period. So we did a great job on that side of the business. The reason I categorized the AeroStructures business was because of the announcement of the number of new programs that we had that impacted our earnings, our margins, if you will. But with regards to the growth across the company, we're doing a good job of integrating in terms of the sales force the type of capabilities that we have. And as you know, it takes time to go in and expand your base, so we're working on a couple of programs that we have in place that will be a nice combination from our engineering capability and our manufacturing capability. And we have a couple other applications that we're looking at, but we haven't targeted and we haven't received a win yet on any of those.

But, Ed, I'd just add to what Tony said. For example, our largest program now is the UH-60 Blackhawk and there's -- and even in our investors' presentation, we break out the components on the structure side and on the electronic side it's now our largest program, it probably is a $75 million program, that's where the symbiotic relationship has come together where we've won both sides. We've strengthened our relationships with the customer and some of the other Tier 1s who are supplying that in this entire process. And we're recognized as a gold supplier to Sikorsky on that particular program.

And if I could poke a little bit further in the details you've given us. And I don't know that you've actually quantified or even actually confirmed the 787 win at this point. But knowing that you mentioned Charleston, I'm assuming that, and you -- to talk about the build rates over the next couple quarters, over the next couple years, I'm assuming that it's safe to say that you do at least have some 787 business?

Yes, we do.

We've commented and I think, again, it's in our ledger, we have about 300,000, 350,000 per ship set -- on the 787.

Perfect. And then finally, the ERP systems, the cost that you talked about, Joe, $1 million to $1.25 million over the next few years. Is that the expense, or is that the capitalized rate?

That's the expense of it net of any benefits we expect to receive from it.

Okay. Is there a capitalized cost as well?

Well, the capital will be embedded in our CapEx program. The CapEx is probably -- it varies, but it's probably $1.5 million. There's some upfront CapEx in the smaller portion in subsequent years because the upfront is related to acquiring, licensing and some hardware.

Sure. So then it's -- I'm assuming it's not material to the host?

No, it's not material.

Your next question is a follow-up from the line of Jonathan Richman from Imperial Capital.

Just regarding some of the contract wins at the -- back on that topic a little bit, I know the trend for the Tier 3, Tier 2 suppliers has been expectations of some of the larger guys passing off -- passing stuff down the supply chain. So I'm wondering if any of those contracts are related to that happening yet, or we're still waiting for that to really start, I guess, getting some legs?

Well, a couple of the wins were as a result of that. And then we -- I will be -- I think it's probably the most candid answer is that we haven't really -- we haven't seen the large releases that we anticipate. I think the OEMs and the Tier 1s are still struggling with how they manage that. So we're working our way through that, but we do have a couple of these wins that we're working with, and one of them that we're actually really struggling with as a direct result of that. So we're working our way through those, and I think that there's more opportunities coming.

Okay. Well just the timing is becoming a little more opaque, I guess, than originally thought?

Yes. We see a lot of these companies are tied up on the military side as well, so you have to wait and see how that flushes out.

And at this time, there are no further questions. I'll have to turn the call back over to Tony Reardon for closing remarks.

All right. I'd like to thank everyone again for your continued interest and support, and we look forward to speaking to you in -- on the next quarter. Thank you very much.

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