Ducommun Incorporated (DCO) Q3 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Third Quarter 2012 Ducommun Earnings Conference Call. [Operator Instructions] I'd now like to turn the call over to your host for today, the moderator, Chris Witty. You may proceed.

Thank you, and welcome to Ducommun's Third Quarter Conference Call. With me today is Tony Reardon, Chairman, President and CEO; and Joe Bellino, Vice President and CFO. I would now like to provide a brief Safe Harbor statement. This conference call may include forward-looking statements that represent the company's expectations and beliefs concerning future events that involve risks and uncertainties and may cause the company's actual performance to be materially different from the performance indicated or implied by such statements. All statements, other than statements of historical facts included in this conference call, are forward-looking statements. Although the company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the company's expectations are disclosed in this conference call and in the company's annual report and Form 10-K for the fiscal year ended December 31, 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 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 update on the quarter and then some market color, after which, I'll turn the call over to Joe Bellino to review our financial results in detail. We were pleased with the progress shown over the last 2 quarters as Ducommun posted third quarter earnings of $0.48 per diluted share, and we continue to execute on our financial performance objectives. The company again benefited from a strong commercial aerospace demand and solid sales of military and space products. Margins rose across-the-board, as Joe will review in a moment, driven by improved mix and better asset utilization. At the same time, we generated nearly $6 million in cash from operations as forecasted and prepaid $10 million of our term loan this quarter. We plan to pay down another $10 million to $15 million in the fourth quarter as we continue to delever the balance sheet, reduce interest expense and increase earnings per share. Our backlog remains solid and reflects strong commercial aerospace and military platforms. We do have a couple of large orders on military programs that are pending final release which should positively affect our backlog during the current quarter. Now let me provide some color on the markets and platforms and programs. Starting with our military and space programs, our revenue and backlog have remained rather consistent the entire year. Ducommun provides complex structures at electronic assemblies for an attractive mix of platforms, and we continue to see consistent demand across the board on the military helicopters, fixed wings and missile defense applications. In addition, our engineering service business has bounced back very nicely. In fact, our total military and space backlog has continued to grow, testimony to the important nature of the programs that we are on and the range in value of added services that we provide. Going forward, there is still much work -- there is still much to be decided with regard to the fiscal 2013 defense spending, most important of which is how and when sequestration will be handled. As always, we remain conservative with that -- with regard to next year when it comes to the government's budget, and we have contingency plans in place that, should sequestration come to pass, we will be prepared to implement. We do believe Ducommun is on the right platforms to prevail if a sensible, disciplined approach is taken to managing the spending by Pentagon, which we expect will ultimately happen. Ducommun is very well-positioned given the continuing need for upgrades, growth of electronic content and the stability of foreign military sales on many of our programs. Turning to the commercial aerospace business. We're very pleased to see Ducommun benefiting from the rising build rates across a number of fixed wing platforms. In fact, our revenue rose on large jets over 25% versus 2011, both in the quarter and year-to-date. We are -- that's reflecting real strong orders from Boeing, Airbus, on programs such as the 737, 747, 777 and 787, as well as the Airbus A330, A340, A350 and A380 programs. We expect build rates to remain strong for the foreseeable future, given high global air traffic and the need for more fuel efficient jets. We're on all the major platforms, and we look forward to additional growth next year. The regional jet and general aviation markets have, on the other hand, been challenging due to the market fundamentals. Revenue was down again during this quarter. Even as large aircraft are showing more resilience, we don't expect any significant resurgence in orders from regional or general aviation customers in the near future. Trends continue to point to a flat demand over the coming quarters. However, our commercial helicopter business remains very strong, with revenues up from 2011. Within our non-aerospace markets, we're still seeing mixed results. Medical sales rose again this quarter, while we saw lower shipments within the industrial and natural resources segments. Our backlog in these areas continue to show softness although stable with last quarter. Bottom line, we expect to see the non-A&D markets remain flat for the next couple of quarters, with demand being impacted by general economic conditions, lower levels of capital spending and softer energy markets. In the meantime, we're actively managing costs and focusing on new business development opportunities. We'll continue our efforts to enhance productivity, reduce working capital and broaden our customer base, with the goal of improving the bottom line results more quickly as we regain traction in these marketplaces. Before turning the call over to Joe, let me reemphasize how pleased we are with seeing the continued improvement in our bottom line results. We are very confident at Ducommun that we're on the right goal to provide more consistent returns to our shareholders. We're building upon attractive programs, strong technology, a product portfolio and a long-term customer relations that position the company for further momentum in 2013. Now I'd like to turn the call over to Joe to review our financial results. Joe?

Thanks, Tony, and good day, everyone. After the market closed today, we reported third quarter results. Net income grew to $5.1 million or $0.48 per diluted share, that compares with $0.27 per diluted share last year, excluding merger-related expenses for the second quarter last year. Importantly, and as Tony noted, despite flat sales, we saw a number of gains in financial performance. And while Ducommun's year-over-year numbers showed significant strengthening, we thought it meaningful to continue as we have in the first 2 quarters of the year to sequentially review our changes when we talk about the progress we've been making throughout 2012. During the third quarter, our gross margins were 19.3%. We continue to benefit from and see synergies from the LaBarge acquisition and reduced SG&A expenses, taking them down to 11.6% of sales compared to 11.9% of sales in the second quarter this year. And in the process, we modestly, sequentially improved our operating margins to 7.7% from 7.6%. During our previous earnings calls, we discussed our higher operating margin expectations, so we're pleased that they are being sustained at current levels while some of -- aspects of the economy remained challenging. In addition, during the third quarter, we generated $22 million of adjusted EBITDA or nearly 12% of revenue as compared to $21 million in adjusted EBITDA or 11.6% of revenue in the second quarter this year. Additionally, our backlogs remained solid at $642 million. That's 10% higher than when we closed the LaBarge transaction on June 28, 2011. The backlog at the end of the third quarter was about the same as the June 12 period, primarily reflecting continuing awards in the military, space and commercial aerospace sectors, offset by slightly lower bookings in some of our non-aerospace and defense markets. In this recent quarter, sales were in line with the second quarter of 2012 as we continued to see the trends that we saw early in the year: larger increasing sales in commercial aerospace and military space revenues, offset by softer sales in the regional jet markets and the non-A&D sectors. Next, in looking at the results by business segments, starting first with our Ducommun AeroStructure business or DAS, DAS' sales for the third quarter were similar to the second quarter of 2012 at nearly $77 million, as this segment benefited from increased sales of large commercial aircraft, offset by decreases in the regional jet revenues. Military revenues increased slightly, as increases in military helicopter sales were outpaced -- outpaced a small decline in our fixed wing military aircraft products. EBITDA increased sequentially to $10.3 million or 13.5% of revenue from $9.8 million or 12.8% of revenue in the second quarter of 2012. The increase in EBITDA and margins was attributable to reductions in development costs for new programs that we have been commenting about for the last couple of quarters. We continue to focus on margin expansion opportunities in the DAS segment into the latter part of 2012 and well into 2013. Ducommun LaBarge Technologies or DLT business segment posted sales for the quarter of $107.4 million. It was down slightly from the second quarter of 2012, primarily due to softer non-aerospace and defense revenues, which offset continued sequential improvement that we're seeing in the military electronics product line. EBITDA was $15.2 million or 14.1% of revenues, which was about identical in the third quarter as the second quarter of 2012. We continue to benefit from a combination of solid management at our DLT operations and cost savings that we're enjoying that were associated with our integration efforts that continued throughout the quarter. In terms of corporate, general and administrative expenses, CG&A, not identifiable to the 2 business segments, they were 2% of revenues as compared to 2.2% of revenues in the second quarter of 2012. Turning to another important area, liquidity and capital resources. During the quarter, as Tony mentioned earlier, we prepaid $10 million of our debt on the term loan B line, reducing our overall debt to $380 million and our net debt to $252 million at quarter-end. Given that our trailing 12-month adjusted EBITDA is approximately $83 million, this equates to 4.2x net funded debt to EBITDA. We expect to pay down another $10 million to $15 million in the fourth quarter of 2012, further reducing our debt. We continue to focus on debt reduction, along with selected capital investments in our business, as the primary uses of our cash flow. Speaking of cash flow, in the third quarter, we generated nearly $6 million in cash flow from operations. And year-to-date, we've already generated $11 million of cash flow from operations compared to $11 million usage of cash at this time last year, excluding 2011 year-to-date merger-related costs. We are driving cash flow generation through the combination of several initiatives, and we expect our $60 million revolving credit line to remain unused for the foreseeable future. We also anticipate that our capital expenditures for fiscal 2012 will be in the $15 million range, which is nearly identical to the amount of capital expenditure spending that we incurred in 2011. Further expenditures will be continued to be targeted towards growth in our manufacturing capabilities and select facility expansions to support our strategic initiatives. In closing, we're pleased to see a sequential operating margin and adjusted EBITDA expansion during the quarter as we benefit from new program cost performance and synergies realized throughout the company from our integration efforts. I'd now like to turn the program back over to Tony for his closing remarks. Tony?

Thank you, Joe. Before opening the call to questions, let me just take a moment to thank our investors for their patience as we executed the plan to integrate LaBarge, improve bottom line results and focus our company towards new business opportunities that will drive growth over the long-term. Our management team has spent the past year working through many facets of a strategy to drive higher shareholder returns, even as we face a variety of ongoing headwinds, including lower C-17 sales, the possibility of sequestration and a drawdown in demand from the war in Afghanistan. We are starting to see results in our efforts as the past 2 quarters have shown. Near-term, we will keep our operations focused on streamlining initiatives to tackle the economic challenges we're currently facing in some of our non-A&D markets. But I'll tell you that our operations are better integrated than they ever were before, and the OEMs are providing us with opportunities to bid on more complex structural and electronic assemblies, leveraging the breadth of what we now bring to the market. We're pleased with the strength of our customer relationships, the pipeline of new business initiatives and the diversity of our portfolio. Our cash flow remains strong, very solid, and our commitment to delevering the balance sheet is unwavering. Everything we do is dedicated to strengthening our company and increasing shareholder value. We're confident that Ducommun is very well-positioned to continue performance improvements as we head into 2013. With that, operator, I would now like to turn the call over for questions.

[Operator Instructions] Our first question is from the line of Mark Jordan from Noble Financial.

My first question is relative to your relationships with, say, Boeing. A couple of weeks ago, Spirit announced that they had major write-offs that had to be incurred because of -- they had failed to properly estimate the cost -- future cost decreases that were necessary to hit their profitability goals. Specifically, it seems that they had assumed design and cost guarantees. Could you discuss a little bit about your business relationship with Boeing and the relative amount of risk that you have with regards to long-term cost performance?

Okay. Mark, this is Tony Reardon talking. First of all, most of our contracts with Boeing, probably similar to -- with what Spirit has, are multi-year contracts on a variety of platforms. We also have contracts directly with Spirit as well. So as we look through it, Spirit had investments where they did design and build, and we're a subcontractor from a manufacturing standpoint. So we don't incur those design costs, which we'll lend to a very expensive investment on the part of the supply base. So our investments are pretty straightforward, and we've detailed over the last year or so the investments that we've made. But in proportion to the types of investments that Spirit makes, they are significantly lower, obviously. And as we work through them, we identify them, but we are nowhere near the situation that Spirit is in simply because we're not in the detailed design aspect of the structural assemblies.

Okay. A question for Joe. The tax rate in the quarter was just under 15%. I believe that normalized rate is about 33%. Is that correct? And so therefore, you would have been around $0.37, $0.38 if you had not had any specific tax benefits?

When we look at the tax benefit as an overall part of our operation, they have to do with the work we've done on the integration and the benefits from the LaBarge acquisition, Mark, as well as benefits we derived from R&D tax credits that were put into reserve accounts in $0.48 [ph] in previous years that as the statute of limitations run out, we're able to record those into earnings. So we look at that as -- we record those as the activity occurs, but we look at those as an integral part of our business operations.

Okay. I guess the next question, assuming that there are no any other freeing up of tax benefits, we assume a 33% tax rate in the fourth quarter?

31% actually is -- I think would a safe one to use for the fourth quarter because we probably have some minor state tax benefits that we'll enjoy here in the fourth quarter as those filings run their course.

Okay. And my final question is relative to sequential revenue trends in the fourth quarter versus the third. Should we assume, given that continuation of sort of the same economic environment, that the DLT should be relatively flat sequentially? And would you be able to maintain in the fourth quarter DAS at its third quarter run rate?

Well, I think a couple of things, Mark. I think you'd want to spend a little time looking at where the direction of the backlogs are going. We continue to increase our backlogs in the DLT military electronics business, and we reported at the end of the second quarter that we picked up some sizable orders for the F-18, the radar racks for Raytheon, that some would ship here in the fourth quarter and the balance would be shipped evenly over 2013. So we believe we'll be showing some of that, beginning of those shipments here in the fourth quarter, which should give us a little boost. The non-A&D sector should probably be flat. Plus -- then on our DAS side of the business, the commercial aerospace business backlogs continue to grow, and we expect to see a modest increase sequentially in sales from that sector.

Your next question comes from the line of Ken Herbert from Imperial Capital.

Tony and Joe, first, just wanted to ask, in prior quarters, you've obviously talked a lot within DAS about some of the startup costs with the new programs. Can you just provide an update on where you stand with these and sort of relative to second quarter, progress you've made and visibility over the next few quarters on these new programs?

We have. We've commented before last year and put in our earnings release at year-end, that we incurred about $8 million of development costs. And we've talked about in prior conference calls that we expected that sequentially to go to $4 million, with about $3 million of that to be incurred in the first half of the year and then getting down to about $0.5 million per quarter run rate. And we're pleased to see that, that is about what we're realizing. And then we said next year, we'll probably get that level to a normal run rate because we continue to bring on new programs and have development costs, but normal run rate will be around $2 million in '13 for the full year.

Okay. About $2 million is about, give or take, $0.5 million a quarter is a normal run rate?

Yes.

Yes. That would be good.

Okay. Okay, that's helpful. And then you've talked a few times about specifically the -- on the military side, the helicopter business doing well. Can you -- and there's been a few multi-years that have been signed recently. Can you just give some commentary on specific programs that you're seeing strengthen and visibility on those programs into 2013?

Yes. As we look -- I think the largest one obviously is the Black Hawk. So -- now they've already announced that -- and they did it, I think, last quarter that they would have somewhat of a pullback in terms of their sales in the fourth quarter of next year. But it was -- even with discussions with Sikorsky, it looks like they have some -- for military sales, that will fill that in. So I would expect them to be down maybe slightly but pretty stable on the Black Hawk. The Apache should be stable at the levels that it's currently at now for us. And then the Chinook helicopter, now with the drawdown in Afghanistan, Ken, we're seeing some softness on the aftermarket requirements and we saw some slide-outs this quarter on the Chinook helicopter, for example, which we would expect the orders are not canceled, they're just moved to the right for a longer, longer time, so I would expect that on the helicopter market, that as the war draws down next year, that we'll see some softness in the helicopter sales. I mean, that's in general.

Yes, okay. Okay. But it sounds like relative to expectations, I think, it sounds like Black Hawk is maybe doing a little bit better than you had expected.

I think the Black Hawk has actually been pretty solid. If you look at the revenue base in the quarter-over-quarter, you have some fluctuation and it depends on their spares demand and their aftermarket demand. So we get some pickup there, and then, of course, then we may lose the next quarter. But from a steady state on the build, it's been pretty consistent for us.

Okay. Okay, that's helpful. And then just finally, I know we've talked in the past quite a bit about the climate in terms of profitability and contracting terms with your DoD customers, and I know it's been very fluid certainly with the election yesterday and some of the reactions today. Can you just talk, Tony, for a few minutes about any change you've seen recently from any of your customers or specifically from the Department of Defense where there are prime customers, on contract terms and profitability and that landscape and your ability to continue to sort of capture economics on these programs as we move forward?

Okay. I think so. I think that -- I think not unlike all of the contractors in the defense market, there's a tremendous amount of pressure on cost. I think that like our customers and I'm sure competitors, we are seeing increased amount of scrutiny with regards to the cost base diligence from DKS [ph] and the DCMA. So there is prolonged negotiations with regard to that, but there are weighted guidelines on profitability and we stay within those weighted guidelines and always have. So we work the cost end of the business. We're in several negotiations right now, and we work the cost end of it. And we're very solid in terms of our use of lean, in terms of reducing labor and material costs. And, of course, all that data is provided. So I would say the negotiations are more prolonged today. There's more data required from us than we've ever seen in the past, both for the OEM and for the ultimate end user, the United States government. And also, you have to have the patience and the diligence to work your way through it. And then you have to really continue to work your cost base across the board. So those are the things that we're concentrated on. I will say that the commercial side of the business is just as tough.

The next question comes from the line of Mike Crawford from B. Riley & Co.

Couple of other topics you haven't addressed further. One, on the military programs, where there could be some orders pending final release, are any of those subject -- have they been under protest? Or kind of, is there anything else you can provide regarding those programs?

No, no. Mike, this is Tony. None of those orders are under protest, it's just prolonged negotiations, so we're waiting for release, and sometimes it's a matter of supplying additional data to finalize negotiations. So nothing out of the ordinary other than the length of time it takes to settle the contract.

And then, with Boeing, you have multi-year build contracts, no design contracts, but would be see any risk and/or opportunity given the rather large management and defense business restructuring announced by Boeing today?

Mike, I'm not sure I quite -- not sure I understand your question. I mean, are you talking about on the commercial side of the business?

Well, I don't think that would affect the commercial side so much. I think the most of the restructuring is on the defense side.

I would look at, on the restructuring and on the defense side, I'd look at it as an opportunity. That's the way we have to look at it. So I mean, there's things that we can do to help them reduce their costs and I think that's the way we would look at it. There is always issues with regards to cost base and issues in negotiated package on the long-term basis, but as they start to focus on moving to firm fixed from their cost-plus basis, and I think that gives us an opportunity to be able to go in and help them meet their targets.

Okay. And then just getting back to the development programs, so you've made great progress on the programs you started 1 year ago. Are -- but the $2 million of expense you're talking about next year, that's -- is that related to continuous improvement on the same systems that you're starting to produce now? Or is that envisioned as something that would be applicable to new products and systems?

New program development is basically a fluid process over time. If you look at product life cycles, Mike, as they go to maturity, we're always acquiring new programs, where we're positioned internationally in the global markets. And it primarily resides in Ducommun Aerostructures sector and it primarily resides in the commercial products. So even as these build rates are increasing, we have been awarded programs to fulfill the needs of the customer. We're actually taking some position away from other competitors. And so, as we enter into those and it's a constant pipeline, we -- it's not -- your question was, I understand it, it wasn't as if those from the existing programs are going to continue long, it's absorbing the cost of new programs we enter into with a strategic view that we'll improve that cost structure, then over the next couple of years, we keep rolling in new programs.

Okay Joe and then last question relates to the business. So you have these 5 primary segments, including the smaller ones, natural resources, industrial, medical and other. Does the board look -- how close -- what is the analysis regarding if the company is better off retaining all of those businesses? Or perhaps in terms of improving shared cost and absorbing fixed costs versus maybe monetizing them and then paying down some of the debt more quickly with the proceeds?

Mike, with regards to the strategy of the business and how we would look at it, I don't like that I'd like to comment on that. But I can tell you that as you look at each one of these businesses, they handle a multiplicity of marketplaces. So we would have a business that would not only be in the medical market but it would also be in the capital goods markets. So as you look through the businesses, you have to understand, from a strategic standpoint, the product line and then the value and the strategic value that we bring to the customer base. So as we focus on the customers, we'll align a strategy and we're in the process of relooking at the entire strategic outlook for the business, and how we align cost centers and more importantly, value-added natural business unit selection. So as we look through the process, we'll make decisions on programs or companies, but I would not sit here today and tell you that we're looking at any particular marketplace and say that we don't belong in it.

And also, Mike, we -- when we were doing our diligence with regard to buying the DLT businesses, we saw huge cycles over the last several years. In an expansionary cycle, these markets, these non-A&D markets can expand as much as 20% to 25% year-over-year for 4- or 5-quarter period, and they could also contract 15% to 18% as we saw up and through from the fourth quarter of '08 through the fourth quarter of '09. It happens to be at the trough now. But these markets move pretty quickly. And as we start, these markets were bound and we look at the long-term growth rates of these, these are 3% to 5% growth markets. And so we look at this as an opportunity now because it is at the trough level, and we continue to work hard in business development to go out and seek new customers. So strategically, we're in good shape.

Your next question comes from the line of Bhakti Pavani from C.K. Cooper.

My question relates to -- Tony, you mentioned that you were seeing softness in the upper market requirements relating to the Chinook and relating to the helicopter market in general. Would you comment on the recent Chinook deal that India, that Boeing did and announced a couple of days ago, and how would that impact the business?

I think it would be positive, first of all. So the deal that was recently announced, is Boeing has been working on it quite a long time, and we've actually had a team over there to help look at potential offset requirements. So I would say that as you look at the Boeing build rate, it's built into that. So I wouldn't say that it was significantly additional -- added build rates, but I believe that India has the design to do some of the build and manufacture over there themselves, and Boeing is looking for support from their supply base to be able to help support that. So there's opportunities there as well.

Bhakti, also I'd comment a little bit of a higher level, but what we're seeing in this Ducommun Aerostructures business as it relates to several of those programs between military helicopters and fixed wing products of military in the DAS segment. We're seeing a mix shift, we're seeing a decline in fixed wing shipments. But we're seeing sustained improvements in the military helicopter business because some of those products are being consumed in the international markets in foreign conflict situation. They're buying from Boeing and other North American suppliers, our allies. So the Chinook, even parts of the Apache and certainly the Black Hawk, look, they have nice modest sustainable growth rates. They're being offset as I said, a little bit by the shrinkage of fixed wing products such as the C-17, as it comes down to the 10 build rate-a-year levels from 14, 15, a couple of years ago.

Right. Joe, a question for you. You mentioned that the reduction and the development cost, up, would it help boost the gross margins, and do you see those margins going back up to 20% levels in the coming quarters?

Most of the costs are related to -- on the DAS side, and yes, I mean, they come through costs of goods sold. So to the extent we could reduce those, we'll improve our gross margins and then attendant operating margins. When we look at the total business, I just want to give a little perspective, we were running at, the fourth quarter last year, an adjusted 17.2% margin and we have those in the quarter at 19.3% and for the year, averaging about 19.4%, 19.5%. I commented in the last quarter that in this current environment, in the mix of our business, we'll probably have a plus or minus of 20 to 30 basis points in any given quarter. We have to see a bigger increase in our shipments of non-A&D products on the DLT side and continued cost improvement in that DAS side of new programs to see those get beyond those bands.

All right. So how soon do you think -- I mean, as you mentioned that you are -- the non-A&D business are in the trough cycle and like a couple of quarters -- for the next couple of quarters, you assume them to be flat. So would it be fair to assume that like in the second half of 2013, do you see them rebounding and that would help improve the margins?

Bhakti, this is Tony. I think that's the way we look at the non-A&D market, and that's going to go pretty much as the economy goes. So as we start to see the economy pick up, we would expect those marketplaces to pick up. And we're clearly targeting, in the second half of next year, to show some improvement, but if the economy doesn't pick up, I think that these markets will stay where they're at. But -- and this is -- that's a general comment on the entire industrial market.

All right. And one last question on the capital expenditure. Would it be fair to assume a $15 million expenditure going into 2013? Or is that expected to go up?

It may go up slightly depending on new programs, but it should be generally in that range.

[Operator Instructions] Our next question is from the line of Jim Foung from Gabelli.

Just a couple commercial aerospace questions. I guess, at one time you mentioned that there was a possibility of getting additional businesses with the commercial ramp-up, as other suppliers can't meet the capacity requirements. I'm just wondering, are you kind of getting any indications that you might be able to pick up more businesses with the doubling of the production 1 year from now?

We're working on it right now, Jimmy. And so it's a slower pace than probably we would anticipate, but it's probably the right pace, and it's primarily with the Tier 1s and the OEMs. So we are seeing capacity issues there and we are seeing some opportunities. And then the biggest issue in front of us is making sure that we both are in the same cost profile.

We're not saying -- Ducommun is not seeing capacity issues. We're saying our customers are having capacity issues. And as they tend to outsource more products, that gives us opportunities. I think Tony commented, Jim, in the previous quarters, that the level of productivity is up significantly over the last couple of years.

That's great for you guys because you guys can be fulfilling some of that. And so I was wondering, could you give us an idea if you were to get more outsourced business, what that range could be? And...

In terms of value?

Yes. In the kind of a...

No, I'd hate to comment on that right now, Jimmy, because we do have a couple of things that are very competitive.

Okay. And then how -- if it does come, how soon do you think it might come?

I would say, probably in the first half of next year.

Great, okay, so it could relatively be soon then, okay.

Yes. And again, that depends on the acceleration of the build rates.

Just for example, Jim, last year, compared to this year where we are LTM through Q3, our, let's say, our commercial aerospace business of D.C. overall has expanded from a rate of about $180 million to over $200 million annually. So you could see the kind of growth that we've enjoyed already. And the build rates, there still is some -- more room for expansion through, at least 2014.

Right, especially as Boeing talks about doubling their 787 production between now and next year. I mean, can you just talk about the new narrow body, I guess, the A320 NEO and the Boeing 737 MAX? I mean, do you have any exposure to those aircraft? And does that -- and if you don't, does it represent an opportunity for you to pick up some business in the future?

It will. I think, Jimmy, I think what we'll see though, is -- and typically we're more later cycle than the new development, so as you start the engine development on both aircraft, we would not see structural requirements come out until much further down the line. So we've had some discussions with both Airbus and Boeing on different applications, but they are not prepared -- they're not in a position right now with final designs to be able to start discussing changes in structure. On the electronic side of the business, that's an area that we're trying to bring forward in that marketplace and we're working with some other OEMs to see if we can support some of their requirements.

Okay. And then just on the non-A&D business. So you probably won't see a pick-up in those markets until second half of 2013. And so, does your soft backlog, -- I mean, those backlog can turn around fairly quickly?

Yes, that's the issue with them. I know they don't carry a long-term backlog like you do on the aerospace side. On the aerospace side, you're on 8 to 12 months out. On the non-aerospace market, it's 3 months, and 3 to 6 at the max. So the cycle is much faster.

Where would you first see the pick-up to give an indication that those markets are turning?

We usually reflect them in the backlogs that we report. Because we have at least 3 cycles and more really embedded, but in the industrial side, it's related to capital goods. Those can measured, and on the natural resources side, it's both oil, gas, surface mining and coal mining-type applications, and then medical is actually a relatively steady. But that's concentrated on just a few customers and it depends what they're -- which direction they're going with their business.

So we should be looking at the capital goods market, oil and gas and in the mining area to give us an indication of the trends...

Right. And then watch the environmental issues so that, especially in the mining areas, to see how that eases or doesn't ease and that will tell you how fast that market recovers.

And most of these applications are North American made.

Right, okay. And then just the last question on the military side. It looks like there's an emerging feel that if there was sequestration and budget cuts, it won't happen for another 6 months, they'll probably some form of continuing resolution? Under that scenario, is there -- are there any programs where you were kind of -- do some decline in revenues because the budget's frozen and they're not granting new businesses?

Jimmy, it depends on how it's implemented, right? So the way that the budget control act is written right now, everything gets cut the same. And I think if they get together, they're in the lame-duck session and do something to move it out there, I think the purpose would be then to be able to balance how they're going to put the budget together. We're more interested in what happens on the defense side, on the Pentagon side, but it affects everything; Coast Guard, FEMA, FBI, I mean, there's a broad range of issues they have to deal with. So we couldn't -- we'd be hard-pressed to tell you and I don't think the OEMs could tell you, how -- what the impact of their programs would be.

Okay. But if everything just stays the way it is currently, are you affected in any way? Or it's just pretty much...

If sequestration doesn't go into effect. Then...

For another 6 months -- let's say, we get continuing resolution for 6 months until they work out some budget reduction plan?

Yes, it would be steady state and then I don't think you might see some minor pullback from these draw down in the war.

In Afghanistan, right?

Exactly.

The next question is from the line of Carter Leake from BB&T Capital Markets.

Maybe to go back to the sequestration discussion. Any -- I know you are not giving guidance. But any color on growth rates that might be sustained in the event of -- let's just assume it's a kick-the-can type CR situation. You briefly talked of -- it's about 3% to 5% growth in technologies and then down 3% to up to 1%, structures. Could you sort of combine those and give me what might be a better range on defense in the event of a kick-the-can type scenarios?

Okay. So you're talking about the kick-the-can down the road and sequestration doesn't go into impact, right?

Right. So really, let's just say, sequestration doesn't happen, but Collins recently commented on this, that they view a kick-the-can continuing resolution almost having the same impact. Do you view it that way? Or...

Yes, I mean, what happens on the continuing resolution issue is that you don't get that kick-the-can down the road type of thing, but you get some delay in budget release because they have to still realign the budget, to spend last year on the changes that they want in the program. So there's a release and then the reallocation of the budget across the line. So your overall growth would be impacted. I think the growth for us would be more impacted as we discussed that like on the structure side, we're down a little bit on that side and that's primarily projecting the drawback in the war. With regards to growth rate across-the-board, I think even with continuing resolution, if they move sequestration out, we would be in the 3% range to 5%, we would believe, across.

Across both technologies and structures?

Yes. Carter, that's why we break out in our -- on our website presentation, we updated it where we updated those growth rates, we separated the Ducommun AeroStructures from the DLT electronics, Tony mentioned. The DLT electronics, we expect to grow 3% to 5%, it's completely a different application with inter-connectivity solutions, missile-defense products and printed circuit card assemblies for complex military applications. Whereas on the Ducommun AeroStructure, it comprises primarily 5 programs in procurement, that we know they're going to cut 3% to 4%. That would be the helicopter programs we mentioned earlier, military, helicopter, plus C-17, and those kinds of things that we do think that that's due for -- you could mathematically figure out what the blended rate is, 20% of our portfolio is Ducommun AeroStructures and 30% is military electronics.

Yes, I would expect, Carter, to see a softness in releases starting in the fourth quarter. So it may impact us as early as the first quarter, a little lower first quarter and then steady-state.

Okay. Moving onto the regional market, have you ever disclosed what percentage of commercial aerospace is regional aircraft?

We have, in general, that sector. It's probably about 10% to 15%. 10% of our business, I would say. It's been in the trough since probably the latter part of 2010, early 2011, and it doesn't look like it has much of a heartbeat right now.

And it will show -- do you look at -- Embry is quite optimistic about what might happen on a U.S. reorder cycle. Do you have any opinion on that? We have the C-Series now delayed. We don't really know what will happen with American. Just maybe some color on how we should view this regional piece of your business would be helpful.

I would say that we're projecting it to be flat.

To be flat?

Yes. And I don't anticipate that it would be down, but I would expect it to be flat.

Overall, you talk about fixed wing being -- helicopters being -- doing well, fixed wing being down. You mentioned the C-17. Anything else, or is it all C-17 on the fixed rate now?

Yes, the C-17 and then, we have a big order on the F-15 that's coming through, and we expect that to be -- to step down. That's not in production. It's aftermarket upgrade. But there are some other programs with upgrades that would offset that like the F-16, on 4 military buys on the radar systems.

And let me just give one more. What is your biggest new opportunity on the commercial -- large commercial aircraft side that you see? Would it be more of a dash -- 77-9 [ph] ? Or would it be more -- will we have to wait and be more like 737 MAX?

Well, I think that there's opportunities in the offload cycle as the primes and the OEMs on the Tier 1s hit their -- hit capacity issues as the build rates go up, so that's what we're working on right now, is programs that we would pick up and that would range from the 747 to 777 to 787 program. And then, of course, on the Airbus side, there's the A320 opportunity, and as they move over here, and opportunities on the A350 additional.

Any additional color on what capacity issues you're talking about? I mean, we haven't really hit the big increase, based on [ph] narrow bodies? What are you hearing are some of the problems with the -- I'm assume these are Tier 1 struggling with the rate increase?

Well, and primarily the OEMs and the Tier 1s. So let's talk specifically about Airbus. I think they have 2 issues. One is they're at capacity now, they're running about 38 aircraft to 41 aircraft a month now. And so they want -- I think they have 2 issues that they're trying to get started. One, is the fact that they -- if they increase rates to the 45, they need capacity to support that. And then the other aspect of that is they would like to get a broader base of American suppliers as they move over here, with some of their production rates in the '14, '15, '16 timeframe.

And what about on the Boeing side, what...

On the Boeing side, I think it's -- like Spirit's a good example. I think they are looking to -- they're trying to make the determination on whether or not they recapitalize or they offload some applications to support their production strategy. So we're talking to them on some applications.

At this time, gentlemen, there are no other questions in the queue. I'd now like to turn the call back over to Mr. Tony Reardon, Chairman, President and Chief Executive Officer for your closing remarks.

Okay. I would just like to really thank everybody for joining the call today, and we really look forward to talking to you next quarter. So thank you for your interest and thank you for your patience with our group. Thank you.

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