Ducommun Incorporated (DCO) Q2 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Second Quarter 2013 Ducommun Conference Call. My name is Jackie, and I will be your operator today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to the coordinator, Mr. Chris Witty. You may proceed.

Thank you, and welcome to Ducommun's second quarter conference call. With me today is Tony Reardon, Chairman, President and CEO; and Joe Bellino, Vice President, Treasurer 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, 2012. 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 a brief overview of the quarter, including some market color, after which I'll turn the call over to Joe Bellino to go over our financial results in detail. The second quarter clearly highlighted the strengths at Ducommun's diverse aerospace and defense operations as the company benefited from robust demand for large commercial jets and the solid basic key military programs. The top line growth combined with strong margins and lower interest rate -- expense helped drive earnings to $0.51 per share. And by keeping a focus on operating leverage and working capital management, we generated more cash and paid down additional debt this quarter, leaving the company with a stronger balance sheet. So we had a number of things come together that drove the positive operating results, as we continue to execute on the strategy of growth and earnings improvement. Heading into the second half of 2013, our backlog remains solid at $632 million, and we expect some major follow-on orders in both commercial and military markets, along with new business wins, which we expect will bolster our backlog further. While there are still some uncertainties within the non-A&D segment, as well as the potential of impact of sequestration, we're prepared to manage the business through these challenges. Now let me provide some more in-depth color on our markets, platforms and our programs. Ducommun and the entire industry is benefiting from ongoing robust commercial aerospace demand. We're all aware of the increasing build rates from Boeing and Airbus, as well as some of the major orders announced during the Paris Air Show in June that further strengthened their backlogs. Given this backdrop, we're very positive about the large commercial aircraft market where our sales grew over 25% year-over-year. In fact, large commercial aircraft sales represented nearly 20% of our Ducommun revenue during this quarter and we see no let up in demand, particularly across some of our most popular programs: the 737, 777 and 787 aircraft. Our backlog remains healthy across the overall commercial aerospace sector. However, softness continues within the business and regional jet markets and we've experienced a pullback in our commercial helicopter shipments after 2012's record performance. We continue to focus on new business opportunities within the commercial aerospace arena. And during the quarter, we announced an agreement with Alenia Aermacchi, a unit of Italy's Finmeccanica, to produce various fuselage skins for the Airbus A321 aircraft. As our first major contract for an Airbus single-aisle aircraft, this is a great opportunity for us to showcase our technology and production expertise as we look to expand sales across the A320 family. This long-term agreement also significantly strengthens our partnership with Alenia, and Ducommun now supports the A320, A350 and A380 programs. Within the military and space markets, we posted solid results across the board this quarter, representing our diverse set of products and platforms. Our military aircraft revenues rose substantially year-over-year, primarily due to strong deliveries for the F-15 and the F-18. As Joe will review further in a moment, our DLT operations accounted for the bulk of Ducommun's military growth this period, reflecting robust demand for radar racks, upgrades and replacements, with solid sales in missile defense and space. Our military helicopters sales were roughly flat year-over-year, with higher shipments on the Chinook and Bell Helicopters and other platforms offsetting schedule slides on the Black Hawk. That said, we recently received another multi-year contract from Sikorsky to continue producing sophisticated electromechanical assemblies for the Black Hawk, a program we worked on for more than 2 decades. It's one of our most important platforms and it remains the Army's workhorse, one that we look forward to supporting for the years to come. Overall, the defense outlook is still clouded by uncertainties of budget discussions in Washington. Given this climate, we expect that while our military and space backlog remains near record levels, we will likely see more scheduled slides which may push out defense revenues from 2013 into 2014 and 2015. Ducommun's position is bolstered by our strong product mix and need for advanced electronics content and the diversity of our programs, but we're were cautious in terms of how the next few quarters will play out. While we're working on new avenues for growth, the effects of sequestration on our programs will be better understood as budget negotiations commence this fall. We expect that the total military spending will be down in 2014. Now turning to the non-A&D markets. Sales fell 26% year-over-year this quarter. The weakness continued across the board. Our natural resources and industrial segments were down versus last year, although nearly flat sequentially with the first quarter of 2013. We expect similar results for the remainder of this year, given our current backlog and anticipated shipments going forward. However, we're certainly not sitting still. While this portion of our business is very challenging right now, we clearly believe it can be a growth engine for us. To that end, we've developed new strategies for each of these markets, engaged outside assistance along with our talented engineering staff, to identify and capitalize on innovative solutions to address our customer's market requirements. We see a lot of promise in the medical, oil and gas markets and the broad sections of the industrial landscape, with customers such as John Deere, which recently recognized Ducommun as a partner-level supplier with the company's Achieving Excellence program. This partner-level status is John Deere's highest supplier rating and was awarded in recognition of Ducommun LaBarge Technology's high reliability and rapid prototype development of critical components for their assemblies and electronic systems. We will look forward to having a long and growing relationship with Deere and other leading industrial manufacturing companies. Similarly, for the oil and gas markets, we're utilizing our in-house R&D expertise to generate new and innovative design concepts and to modify and improve existing applications, providing a wider array of solutions to our customers in this highly technical field. Overall, given our broad capabilities and engineering focus, we expect to begin seeing a pickup in the non-A&D orders, leading to improved performance across this segment next year. In summary, we have some challenges to overcome in the second half, but with some excellent opportunities to grow our business as well. And with that, I'll turn the call over to Joe to go through our financial results. Joe?

Thank you, Tony, and good day, everyone. After the market closed this afternoon, we reported our second quarter results for 2013. Our overall sales of approximately $191 million were up nearly 4% compared to sales of $185 million in last year's second quarter. The increase was driven by solid growth in the large commercial aerospace market and strong demand for our defense technologies, which was partially offset by the continuing softness in our non-A&D end-use markets, as Tony discussed. Net income was $5.5 million, or $0.51 per fully diluted share, compared with $5.5 million or $0.52 per diluted share in last year's second quarter. Last year's second quarter results were aided by a $0.15 per share state income tax benefit resulting from the LaBarge acquisition. Ducommun's higher sales this quarter favorably impacted our company-wide operating income in terms of both dollars and as a percentage of revenue. Operating income for the quarter was $15 million, or 7.9% of revenue, compared to $14 million, or 7.6% of revenue in the comparable period last year. In addition, we were pleased to see the operating segment margins improved at both segments. At Ducommun AeroStructures, or DAS, they improved 140 basis points year-over-year; and at Ducommun LaBarge Technologies, DLT, they improved 80 basis points. Higher corporate G&A expenses, primarily workers compensation, insurance payroll audit and professional fees, partially offset these gains. In the second quarter, we generated over $22 million in adjusted EBITDA, or 11.6% of revenue, compared to $21 million in adjusted EBITDA for last year's second quarter, which was also 11.6% of revenue. Our backlog remains solid at $632 million and we expect this to grow during the final quarter of 2013. It appears our non-A&D markets have stabilized in terms of sales and in backlogs, and we also have a variety of opportunities being pursued within our commercial aircraft and defense technologies businesses. And looking at results by segment, Ducommun AeroStructures sales for the second quarter increased 9% to $84 million, up from the $77 million a year ago, driven primarily by higher shipments of large commercial aircraft, reflecting higher build rates. DAS' EBITDA for the second quarter was approximately $12 million compared to $10 million last year, and the EBITDA margin expanded 140 basis points to 14.2% of revenues, and reflected continued reductions in development costs for new programs versus 2012. Ducommun LaBarge Technologies, DLT, posted sales for the quarter of $107 million, essentially flat with last year's second quarter. As Tony mentioned, non-A&D revenue fell 26%, and was offset by a 16% increase in the sales of military electronics, which included airborne radar systems and commercial aerospace technology products. For the second quarter, DLT EBITDA was nearly $16 million, slightly higher than the $15.2 million a year ago. However, we expanded our EBITDA margins year-over-year by 70 basis points to 14.8%, as we continue to benefit from cost savings associated with our integration efforts. Corporate, general and administrative expenses. Corporate G&A non-identifiable to the 2 segments were 3% of revenue for the second quarter compared to 2.2% last year, reflecting higher benefit costs, a workers compensation insurance payroll audit charge and higher professional fees. We remain vigilant on our cost-reduction effort. Another measure that we talk about is in the area of liquidity and capital resources. And as Tony mentioned, during the quarter, we continue to delever our balance sheet. We prepaid $7.5 million of our debt, reducing it to $350 million, and our net debt now stands at $317 million. Given our LTM, last 12 months, adjusted EBITDA of $85 million, this equates to 3.7x net-funded debt to EBITDA. As we've discussed in prior calls, in 2013, we expect to pay down $25 million to $30 million of debt this year, with the goal to delever our company to 2.75x to 3x by 2015. In the year's second quarter, we generated a strong $13 million in cash from operations that compares to $11 million in last year's comparable quarter, and it reflects continued diligence and effective working capital management. We anticipate that CapEx for fiscal 2013 will be approximately $13 million, and our CapEx programs will be used to support the expansion of our manufacturing capabilities and products, and to support new contract awards. So in closing, while we were challenged with softer revenues in our non-A&D end-use markets again this quarter, we offset this with very solid gains in shipments of commercial aircraft products and defense technologies applications. In addition, operating and EBITDA margin levels expanded at the segment level as a result of increased revenues and manufacturing cost efficiencies, including better performance on our new program costs. Now I'd like to turn the program back over to Tony.

Thank you, Joe. Before opening the call to questions, let me say a few words and wrap up the quarter. Again, we're very proud of our recent accomplishments, with total A&D revenue up nearly 13% year-over-year, solid margins, strong cash flow and continued debt reduction. Our broad extensive product portfolio, long-standing customer relationships and experienced staff have made Ducommun what it is today, a leading solutions provider serving a number of great platforms and programs. We have a strong presence in the growing commercial aerospace market and numerous growth opportunities ahead of us. But we're also prepared for uncertainties due to the sequestration within the military market. But we have more work to do in the non-A&D segments. As I said earlier, we're developing a strategy for the energy and resources to turn that part of the business around and position it for future growth. This will take time but we're committed to make it happen. Two years ago this quarter, we completed the largest acquisition in the company's history, nearly doubling our sales and EBITDA. We have spent a great deal of time since then successfully integrating the business, streamlining the operations, delivering on projected synergies and putting together a very strong management team. We took on debt to execute this acquisition and have met our commitments to delever over time by reducing working capital, increasing cash flow and paying down that debt. Today, we have a much stronger, more capable company that is dedicated to creating innovative solutions for our customers' requirements. However, our sales and earnings have been somewhat lumpy quarter-over-quarter, primarily due to changes in the market demand and overall economic conditions. We're also investing in new product development, new technologies and more efficient manufacturing techniques, which in the aggregate, can cause variations in our quarterly performance as well, with some quarters negatively impacted by new product ramp-up and other quarters benefiting from R&D tax credits. But if you view Ducommun's performance over a longer stretch of time, such as the half a year or a year, you get a better picture of the improvements we are making to the company. And we expect the lumpiness in our results to moderate over time as the operating environment becomes more predictable. We're building our company for the long-term. And we're focused on growing the business with solid strategies built around our value proposition and customer requirements. We will continue to execute on a strategic plan that leads to sustained growth, higher margin, increased cash flow and more predictable earnings. Our team is making this happen and we appreciate their dedication to both our customers and our shareholders. With that, Jackie, I'd like to open up the call for questions, please.

[Operator Instructions] And our first question comes from the line of Mark Jordan with Noble Financial.

Question relative to DAS and the operating margin of 11.3%. It's the best one you've had since -- for the last 2 years. June of '11 was roughly the same level. I guess, question number one, what was the mix that created such a favorable margin? And then, secondly, looking into the second half of the year, is this type of margin rate sustainable or should we be expecting something that could back off 100 basis points from where you were in the second quarter?

In terms of the mix, Mark, when we look at it year-over-year, even sequentially, what we're benefiting from is an improvement -- a nice improvement in the commercial aerospace part of our products. And that momentum seems to continue. For example, last year's second quarter, we shipped slightly less than $45 million of products in the DAS segment, and this year, it was up to $50 million. Whereas the military structure part of the business had a combination of fixed wing and helicopter business was relatively flat.

Okay. Let me add a little something, Mark. The margins were also driven by improvement in our development costs on our new programs. So as we talked about, we've had a number of new development programs in DAS over the last couple of years that we've been working to improve on the operating results. So some of that margin pickup is a result of that as well. Also your question about the second half of the year, we do have some new programs coming on board, so we expect some learning curve development, but no major investments in those programs. So we're looking forward to putting ourselves in a position where we continue to grow the business.

Okay. Relative to sequential growth from Q1 to Q2 in DAS, I mean, you're up $11.3 million. Is there something you can do to smooth that out a little more because obviously you did suffer from a difficult margin environment, I think, due to volume in the first quarter?

I think, one of the issues we had, Mark, in the first quarter is we had some schedule slides on some of our helicopter blades. And if you could help me solve out that customer problem, I think I could smooth it out for you. But I think that the real issue is that as you look at the 2 quarters and you blend that, you get a better picture of what happens to some of those pickup in revenue in the early second quarter were actually sales that were slid out of the first quarter.

Okay. Final question for me. The corporate, general and administrative expense of $5.7 million. I think you mentioned there were some onetime workers' comp payments and professional fees. What should be the normalized run rate of that line?

Well, we looked at that, Mark, and it was about $4.6 million in the first quarter, and we think more normalized is about $4.7 million to $4.8 million. There was about $1 million worth of -- it was a result of a workers' compensation insurance audit over last couple of years and some nonrecurring professional fees that we paid during the quarter. You heard in Tony's comments that we're -- in looking at our business development activities, we're utilizing some outside resources help us in the BD, as well as our internal engineering services department. And those are more one-offs.

And then, I guess, I'll sneak one more. Is the second half tax rate, should that be similar to the...

Yes. I think the second quarter tax rate of 27.6%, let's round it to 28%, is more normal for the third and fourth quarters.

Your next question comes from the line of J. B. Groh with D.A. Davidson. J. B. Groh - D.A. Davidson & Co., Research Division: Tony, you mentioned some in the press release there that you had some specific initiatives on DLT in terms of tapping into some markets that are maybe a little bit more stable. Could you give us a little flavor as to how -- what specifically you're doing there? Is it just tapping the same customers? Are you looking for different applications to help us out there?

Are you talking on the non-A&D, J. B.? J. B. Groh - D.A. Davidson & Co., Research Division: Yes.

Okay. Yes, we're doing both. So we're looking at -- I guess, the easiest thing to do is kind of give you an overall view. We bring a lot of capabilities in the oil and gas and industrial markets and what we've done is harness those together. So we've gone out and using our engineering capability. Surprisingly enough, those markets are very similar in terms of technology requirements to the aerospace market. So we're able to combine resources and go after the marketplace. So we've actually picked up some business with new customers and I think we're enhancing our position from existing customers. So there's a nice mix of either modifications to existing applications and some potential new business that we're looking at. But because it's more along the development lines and working with them to change some product lines, I think that it's going to take a little bit more time than we originally -- we still have our base of business with those companies. But it is a combination, J.B., of both new customers and existing customers. J. B. Groh - D.A. Davidson & Co., Research Division: What do you think it takes for those -- anything specifically that it would take for natural resources, industrial, medical, I guess, your non-A&D, for those markets to turnaround?

Yes, I think, well it -- we are -- the 2 markets that are hurting us were the industrial and the oil and gas, and we played more heavily in the gas market than we did in the oil market in terms of the downhole frac-ing. So we're trying to realign that. So we think that there's some opportunities in the second half of the year, I'm not sure if they'll all blossom immediately. So we are looking for some growth in those markets in the second -- into 2014. J. B. Groh - D.A. Davidson & Co., Research Division: Okay. And then, just one last one. On the A321, great entry into that platform. Is what you're doing there, can it be applied to the rest of the A320 family where there's a little bit bigger production rates? Or is this -- just give me your color on that?

Yes, absolutely. And I think, obviously, the type of manufacturing expertise that we're bringing to that product line does lend itself across the A320 family, and we're looking at other applications as well on the A320 with other customers. Airbus manufactures through a host of Tier 1s, if you will. And so we're working with a couple of other companies to see if we can pick up similar applications, both on the structure side, as well as on the technology side of the business.

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

In your remarks, you talked about an expected decline in total military spending in 2014. If that is just, say, a modest decline compared with current budget expectations, how would that correlate with your expected military and space business?

Well, Mike, what we've seen on the military market is if you look at our businesses from the split between the AeroStructures and the Technology, AeroStructures has remained relatively flat. So if there's a modest drop in some of the build rates, we would hope would hold and so, therefore, we should be able to sustain in that marketplace and hopefully stay flat. On the Technology side of the business, it depends on what programs are impacted. But we see some opportunities there from a growth standpoint and there are some products that would probably change going forward. So there's kind of a mixed bag there, so that's flat to up slightly, I would say, in that side of the marketplace. And then, one thing to recognize is that in the out years, '14 and '15, we'll see probably decreased production rate on the C-17 program, which is a good program for us.

Just to add to that, Mike, on the defense technologies business, you might recall, we booked a $50 million worth of orders in June on the radar rack and other missile defense systems. And we're working through that nice backlog and shipping it. And that $260 million segment, the LTM 12 in 2013 is up about $35 million from last year. And what we do say, we believe that segment over the next couple of years for us, because of the electronic content needs and the updates in cockpits, that it should grow 2% to 5%. That'll offset the structural part of our -- more than offset the structural part of our business, the drop -- from the drop in military helicopter builds and fixed wing that Tony talked about. So we feel very strong about the franchise we have developed there on the defense technology side of the business.

Okay. And I noticed Raytheon became a 10% customer and that's because of the airborne radar systems primarily?

That's correct.

That was one of the larger contributors. But we're pretty prolific in terms of our capabilities and product offerings to their missile defense system, which as you know, is very diversified.

Okay. And then, we've seen the still-increasing commercial air builds, so that bodes well for next year. In terms of getting back to the margin question, I know there's kind of opposing forces, one, where you're marching down on the learning curve on products that you're already fabricating. And then, you have the new learning curves that you ramp-up as you take on new projects. So if you had to say which force appears greater at this point for the second half of the year and then for next year, where you sit now, which looks like a greater force?

Well, I would say that they're about equal, Mike. We hope for continued margin improvement on the existing development programs. We do have a couple of programs that we're introducing into production, which will be at the higher end of the learning curve. So that may be somewhat of a drag in the second half.

Okay. And then, final question relates to Airbus. I mean, they have over 5,000 aircraft in backlog right now and it looks like you have some good growth coming down the pike with the A320, the A350. I think that was less than a $15 million revenue customer last year. Where do you think you could be with Airbus within a couple of years?

The run rate is -- it looks like it's running a little over, annualized, over $15 million, $16 million, which is up from about $10 million or $11 million a year ago. So yes, the market acceptance and the -- our product offerings and capabilities with Airbus are improving nicely. I want to add one thing, on the commercial aerospace side where we're really benefiting, where it was up over 20%, as Tony mentioned, year-over-year, we're now enjoying the higher build rates of the 787 and the 777, and somewhat to the 737. But those 2 programs that I mentioned, the 787 and 777, are really driving our large commercial aircraft growth, along with the incremental volume from Airbus.

With the Airbus program, as you remember, the A321s will start up this year for us, so that will add some incremental revenue. And then the A350 program, of course, is in development. So as we go forward, we would expect that. I don't see we'll -- A321 should help us next year, A350 probably in 2015 and going forward from there.

Your next question comes from the line of Les Sulewski with Sidoti & Company. Les Sulewski - Sidoti & Company, LLC: I have a question regarding, perhaps were they misshipments from last quarter that came in and were booked for this quarter?

In terms of revenue? Les Sulewski - Sidoti & Company, LLC: Yes.

Yes, yes, there were. Not missed. Moved. Les Sulewski - Sidoti & Company, LLC: Was there a significant portion of the revenue?

I don't have that data, to be honest with you. But there were some schedule slides that came out in the first quarter. I think we talked about that in the first quarter, especially on the helicopter blades that were actually picked up in the second quarter, so that was benefited. So if you smooth out the first 2 quarters, I think you'll get a pretty good picture of what it looks like. Les Sulewski - Sidoti & Company, LLC: Okay. And then, I saw there's a little bit of an increase in accounts receivable. Can you shed a little color on that?

Yes. When we look at our working capital management, our accounts receivables are up and a user of cash because of the strong amount of sales to $191 million from a $176 million number. So you would normally expect that, in terms of days outstanding, they're still very liquid and they're at 48 or 49 days. I look at a ratio, it's a liquidity ratio called a quick ratio. And as we've converted work-in-process inventory and finished goods into sales, we have a stronger liquidity position. And we expect to collect the bulk of that -- those shipped, those receivables here during this quarter, the third quarter, and we feel really good about our accounts receivable portfolio. The other stuff you'll notice is when you look at the cash flow year-to-year, we've improved our -- because of inventory management, we've improved our inventories position by $5 million, which is more than offsetting our growth in receivables. So we're creating more liquidity and our cash balances are holding quite well. Les Sulewski - Sidoti & Company, LLC: And then, one final one regarding the John Deere partnership. Can you just get into a little bit of detail on that? How can that affect our revenue outlook looking forward?

Well, we're in the early stages. We're able to support them on a couple of major programs for their large farm vehicles, which are actually like drones, right? They're not manned. And that's a marketplace that we see with an opportunity to grow. So I think, like any major customer, when you get in, you prove yourself. We were really pleased with the award. That was a significant deal. We're seeing more opportunities out of Deere as a direct result of that. So we're putting ourselves in a position where we will grow the business. Again, these will be development programs and then step into production. So it's going to take a little bit of time, Les. But I think that will be a nice customer base for us as we move forward.

Your next question comes from the line of Kevin Ciabattoni with Keybanc Capital Markets.

Most have been answered, just a couple for me. Following up on the A321 contract, that's obviously a nice win for you guys. Just wondering if you could give us any color in terms of execution against that contract, I guess with regards to timing and maybe if there's any margin impact kind of relative to the broader DAS margins once that gets ramped up?

Well, I think that it's -- let me start with your first question and that was impact on the revenue. I think we should see a slight pickup in the last quarter, more revenue generation as we go into 2014. In terms of margin impact, it should balance into the margins that we have there. So to the effect that it allows us to absorb more overhead, it could have an incremental increase in margins as we come down the learning curve, which usually takes 6 to 7 months to get you back to where you believe you should be.

Okay. Perfect. That's extremely helpful. And then, lastly, looking at your commentary from last quarter, it seemed like you maybe expected natural resources and industrial to kind of pickup in the back half of this year after being sequentially flat in 2Q. So we saw the 2Q part of that play out. Just wondering, it sounds like you may be not quite as optimistic on the back half in terms of those 2 end markets. And I was just wondering if, a, that's the case, and, b, if there's anything specific that changed between last quarter and this quarter in those specific end markets?

Okay. Kevin, I think there's a couple of things there. One was, you're correct, we did anticipate somewhat of a pickup in the second half. But I think, as Joe talked about in the last quarter, we really see -- in this marketplace, we see -- how your bookings are in a quarter will determine what's your pickup will be in the second -- in the next quarter. So this is a short-cycle type product, so generally, you've got a 90-day window to book and ship. So what we're seeing is soft bookings, which leads us to believe that it's going forward. So any major changes, not necessarily. We haven't lost any customers. We haven't lost any programs. The market just has not recovered the way we anticipated that it would. Natural gas has not come back. We've moved more into the oil business -- the oil drilling section of that marketplace. So I think that will help us going forward and we anticipate that some of the natural gas market will start picking up as the prices start to increase a little bit. On the industrial side, a couple of major customers there still working through some issues that they have with regards to capitalization and how they're going to proceed forward. Again, we haven't lost any business there, it's just slow in recovery.

Were bookings pretty consistent throughout the course of the quarter? I mean, did you see any kind of pickup at the end of the quarter? I know you said they were soft, but I'm just curious as to how they kind of played out throughout the quarter?

Yes, they were pretty flat. We got fooled a little bit. In March of last year, April, we picked up a nice booking and we thought it was going to start picking up and that's kind of where our comments came from. But if you look at the second quarter, it was pretty flat.

[Operator Instructions] Your next question comes from the line of Michael Callahan with Topeka Capital Markets.

I guess, just kind of a follow-up on the technology segment and the non-A&D markets again. Were there -- I guess, throughout the quarter, were there large variations between natural resource, industrial and medical, and both in sales this quarter and in backlog? I think, last quarter, that was the case. I was just curious if that's still the case here?

It's in our -- I trend this. It's in our Q, if you had a chance to look at our level of backlogs in sales, Mike. And the backlog sequentially are the same in the end of the second quarter as they were in the first quarter. And our sales in the second quarter were only slightly down from the first quarter. So that's what gives us a read on what we could expect. Let's say our visibility is only in the next 90 days, really, where flat sequential backlogs from Q1 to Q2 leads us to believe that our sales level of activity in the absence of a surge in orders will be -- in the absence of that, will be similar to what it was in the second quarter.

Okay. Fair enough. And then, I guess, just the one other thing I want to ask here. On the Technology segment, again, and on operating margin, I guess, even despite somewhat soft sales trends in the segment, margins were pretty strong. Is that sustainable at that level? Or is it largely due to mix? And then, assuming you do get -- from higher revenues going forward, I would assume there's even pretty substantial leverage beyond what you saw this quarter?

Yes, I mean, we've seen both, Mike. Even in the first half of the year, when you level out our EBITDA margins for the DLT segment have gone up 13% to 13.5%, and in the quarter, 14.1% to 14.8%. It's a result of improved product mix, selling more defense technology applications, which are a little more sophisticated than -- in their usage of military than industrial and commercial applications. Continued cost reductions from our integration efforts that's really prolific throughout the organization and it's manifesting itself through the DLT business segment. So a combination of those 2 things have led us to the point where we had -- as I mentioned, we have a 14.8% DLT segment margin for the quarter.

Your next question comes from the line of Gregory Macosko with Lord, Abbett. Gregory M. Macosko - Lord, Abbett & Co. LLC: Could we talk just a little bit about the structures business? And I know that -- I believe that the Black Hawk is a big share of its total, pretty good size. Are we seeing anything with regards to international orders? Is that -- is there any offset there? And are you seeing any possibility for growth there or offset to military?

Well, in general, I think the answer to that question is yes, Gregory. But we don't -- we actually don't see it at our level. What we get is the blanket order from Sikorsky and then we ship to that org. So we wouldn't really see the mix that they see. But our market intelligence is that -- and our customer intelligence is that they have a nice mix of the foreign military buys. They have not had any cancellations that have been announced or that we're aware of. So I think we've talked, even the last quarter, we anticipate that there will be a production level drop in the fourth quarter, about 14 aircraft for the military, U.S. military. But I think that will be backfilled by foreign military sales. So we expect to be flat going into the fourth quarter. We're down a little bit on the Black Hawk because a couple of modification programs that were used primarily for the war have been pulled back as the war has slowed down. But in general, on our production rate programs, it's been very solid for us. Gregory M. Macosko - Lord, Abbett & Co. LLC: Okay. Good. And then, with regard to working capital, Tony, you've mentioned, you've had some nice cash flow there. Inventory came down. I know you talked about it being volatile. Do you feel that level? Or is there -- should we expect more volatility going forward or kind of a more stable situation?

In terms of the inventory? Gregory M. Macosko - Lord, Abbett & Co. LLC: Yes, the inventory, right.

Here's how -- I'll let Tony answer that, but in terms of quantifying it, in the end of the third quarter last year, our inventories, Greg, were about $164 million, and they have gone down to the $148 million level the last 3 reporting periods and they seem pretty sustainable. We think that there's more opportunity to actually increase our inventory turnover levels.

Right. That's kind of where I was going to go. We have a nice program in place that our COO is running. And so we're walking through the inventory. There's always a possibility -- what you see with our inventory is it gets a little, I'll use the term lumpy, in terms of pickup. So as we have no runs in some of our structures, facilities, from a material buy, whether it's a large program like a C-17 or other programs, then we'll see a pickup, but we've got a nice program in place to get after those elements of the business. And we're working hard on that side of the fence to improve the inventory turns, as Joe indicated, and continue to work that backlog, the inventory levels. But the one caution I will give you is that as we enter new programs, we always pick up inventory and it flushes out a little slower. So we do have some new programs coming into the second half of the year. We anticipate that we'll be able to manage the inventory levels to maintain or lower levels, but that's just a cautionary tale. Gregory M. Macosko - Lord, Abbett & Co. LLC: And then, finally, you mentioned some cost savings from the integration, et cetera. Are we pretty much through with that today? Or is there a bit more to come in terms of just the efficiency, productivity and those kinds of things?

I would say we're essentially through that. So what you've seen is probably the level that we're at. So I don't anticipate -- there's no major cost reduction efforts on that side, from a synergy standpoint, that we anticipate seeing going forward.

Ladies and gentlemen, with no further questions, I will now like to turn the presentation back to Mr. Tony Reardon. You may proceed.

Thank you, Jackie. And I'd like to thank everybody once again for your continued interest and support, and we look forward to speaking with you next quarter. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.