Ducommun Incorporated (DCO) Q3 2015 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the Ducommun Third Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will host a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this call is being recorded. I would now like to hand the call over to the moderator Chris Witty. Sir, you may begin.

Thank you and welcome to Ducommun’s third quarter conference call. With me today is Tony Reardon, Chairman and CEO; and Joe Bellino, Vice President, CFO and Treasurer. I would now like to provide a brief Safe Harbor statement. This conference call may include forward-looking statements that represent the company’s expectations and beliefs concerning future events that involve risks and uncertainties and may cause the company’s actual performance to be materially different from the performance indicated or implied by such statements. All statements other than statements of historical facts included in this conference call are forward-looking statements. Although the company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the company’s expectations are disclosed in this conference call and in the company’s Annual Report in Form 10-K for the fiscal year ended December 31, 2014. All subsequent written and oral forward-looking statements attributable to the company or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements. Unless otherwise required by law, the company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this conference call. I would now like to turn the call back over to Mr. Tony Reardon for a review of the operating results. Tony?

Thank you, Chris and thank you everyone for joining us today for our fiscal third quarter conference call. I’ll begin by providing an overview of the quarter, including some market color after which I’ll turn the call over to Joe Bellino to go through the financial results in detail. Let me start by acknowledging that we had several one-time charges this quarter, which were preannounced, amounting to some $22.7 million on a pre-tax basis. Nearly $12 million of this was related to the previously discussed extinguishment of our debt and the implementation of new credit facilities, which will save the company around $15 million annually going forward, but the other cost bears on further discussion. We booked a $10 million charge within our AeroStructures unit related to estimated cost overruns for the remaining contract period of the regional jet program. This is a program that has been problematic for quite some time and was aggressively bid originally. While we remained in discussions with our customers about potential price adjustments, we are not optimistic that such negotiations will make this program profitable. So, we are taking this charge even as we continue our discussion and will proceed through the contracted period, which is approximately one year. This is obviously a major disappointment. We also booked a restructuring charge of approximately $800,000 related to a closure of two facilities over the coming months. The first being a small administrative office in St. Louis and the second plant in Houston that primarily served the company's oil and gas market. Both locations are within the Ducommun LaBarge Technologies unit. We expect these closures and related organizational realignments to result in cost benefits that should save the company $2 million to $3 million annually when fully implemented. The Houston plant will cease the operations at the end of October and was closed because it was not seen as being core to our business operations. The St. Louis facility closure will be completed in the first quarter of 2016. Turning to our results, we experienced a significant drop in sales this period both year-over-year and sequentially from the second quarter. Revenue was $162 million reflecting a 27% year-over-year decrease in sales within our military and space end-use market markets. This is a recurring theme that has impacted nearly every platform we serve. The military decline incorporates cancelled programs, lower demand and scheduled slides, which result in larger than expected drops particularly across certain defense-related helicopter platforms. We were unable to offset such short falls with the growth of our commercial aerospace markets, which remains robust, but will not see significant increases in sales until late 2016. The good news is that our backlog for the company has rebounded to its best level this year over $550 million, due to strong commercial aerospace bookings in both the structures and electronics businesses. We have more work to do as we prepare to emerge in this challenging period. We previously announced the headcount reduction and streamlining actions and supply chain initiatives that would move $4 million to $5 million of annualized cost from our operations. Over and above the additional $2 million to $3 million I just mentioned. So, we have a total budget of some $6 million to $8 million in cost reductions for the company with more work to be done in the fourth quarter. We are on schedule for the consolidation of our three upstate New York facilities this year, resulting in the state of the art advanced titanium products manufacturing centre. We expect to see efficiencies from this facility improving DAS margins in 2016. We continue to assess every asset of our organization for cost reductions, consolidation opportunities and working capital improvements. This means that we are also evaluating our product portfolio to determine what areas of our business are non-core low margin, low growth or otherwise not seen in keeping with what we see as a future for Ducommun. With sales being adversely impacted by the military slowdown now it is clearly the time to right size our company and make it stronger, leaner, and more nimble. Obviously, we will keep our shareholders apprise of any additional actions we deem warranted going forward. Now, I will provide some market color for products and programs. In the military and space sector, the current environment with lowered U.S. military environment overseas general budget curtailments and shifting spending priorities has impacted both our fixed wing and our helicopter platforms across the board. Some of our longest serving programs were down significantly this quarter, compared to 2014. And the underlying reality is that such conditions are likely to continue to exist in the next year. We believe that current levels are a baseline for us and we are not optimistic that near-term growth opportunities given the current defense spending going forward. This is why we are undertaking an across-the-board look at our facilities and product portfolio. Nothing is being spared in our assessment of anyways to improve our performance or other areas for consolidation. In the meantime, we remain cautiously optimistic about the recently passed budget deal in Washington. We hope that this long-term agreement will bring some stability to the defense industry and presumably lead to possible procurement, upgrades, and replacements for the many key aircraft platforms we serve, but this is clearly too early to have any clear picture in this regard. Now we move to our commercial aerospace operations. Revenue this quarter was essentially flat year-over-year primarily due to shipment timing, as well is continued weakness in our commercial helicopter business, but we remain upbeat about our overall commercial aerospace operations. We are on track to post our highest annual revenue in this year. Our total company backlog, as I mentioned earlier has rebound into the best point in 2015, due to strong commercial bookings and our backlog here now stands at over $250 million. This reflects solid orders across many of our large platforms, including the Boeing 737, the 777, and the 787 programs, as well as the A320 and various other Airbus programs. We continue to win additional contents on these and other platforms and believe the company remains in solid shape for further growth going forward. We have strong and growing relationships with Boeing, Spirit, Airbus, Gulfstream, Rolls-Royce, United Technologies, and others. And we have over 30 new development programs in place much of which we expect to benefit from the top line starting late next year and into 2017. In the interim, we will pursue additional opportunities to leverage our expenses structural and electronics capabilities in this marketplace. Turning to our non-AND business, we again saw mixed performance this quarter with continued weakness in our energy markets somewhat offset by stability within areas such as the industrial medical fields. As I mentioned previously, we will exit a large portion of the commodity energy business when we close our Houston facility. However, we still opportunities for growth in this marketplace even given current market conditions, our non-AND backlog stands at around $63 million as we target new business for this sector. We are also looking at additional cost reductions and consolidation opportunities, as well as possible portfolio considerations. Now before turning the call over to Joe, let me just mention that this is his last earnings call with us, as he is retiring at the end of 2015. I want to commend Joe for all he has done for Ducommun in these past seven years. He has truly been an inspiration and an asset to the company, as well as a personal friend. He has been instrumental in the completion of two acquisitions; three debt refinancing, which have been critical to strengthening our overall financial position. He is very well respected by everyone here, as well as our investors and we certainly wish him the best going forward. I will introduce his replacement, our current Chief Accounting Officer, Doug Groves next quarter, but we are all very pleased with the company's carefully executed financial succession plan. Now I’d like to turn the call over to Joe. Joe?

Thank you, Tony and good day everyone. And thanks for the kind words. Looking at the third quarter of 2015 results, earlier today we reported a net loss of $9.5 million or $0.86 per share for the current quarter. This compares to net income of $2.9 million or $0.26 per diluted share for the third quarter of 2014. I will get into the details in a moment, but as Tony mentioned, this reflects a pre-tax charge of $22.7 million, which is $1.28 per share on an after-tax basis and it includes the following pre-tax charges. The recording of a $10 million forward loss reserve on a regional jet program, a $0.8 million restructuring charge, and $11.9 million charge for debt extinguishment expenses incurred relative to our new debt structure, which we finalized during here the third quarter. Net sales for the third quarter of 2015 were approximately $162 million that's roughly 14% lower than the comparable period in 2014. The revenue decline reflected a $26 million decrease in the military and space revenues. In this area, we have seen reduced demand for both structural solutions and technology applications. This reflects lower aggregate government defense curtailments and shifting spending priorities. Within the commercial aerospace arena by contrast, which was up slightly year-over-year we continue to experience solid revenue as we benefit from the sustainable large commercial air frame build rates and increased content. During the quarter, we experienced significant growth in our commercial aerospace bookings both in the structural and electronic solutions, largely contributing to our total backlog at quarter end being nearly identical to year-end 2014. We expect the current macro environment to be similar over the next few quarters. We had previously indicated that 2015 would be a transition year as we work through the decline in demand with our military and space end-use markets, streamlining operations realizing supply chain efficiencies and cut cost to strengthen the company. Excluding the forward loss reserve our adjusted gross margins were 18.6%, as compared to 17.6% in last year's comparable quarter. As we realize the benefits from actively managing this transition and from efforts to improve product mix, eliminate lower margin products, and reduce manufacturing expenses. As we continue with profit improvement initiatives, we expect to sustain or potentially improve these gross margin levels. We remain committed to addressing the issues in front of us and a return to company profitability levels of which we are capable. This means further headcount reductions lowering of indirect labor cost, improving our manufacturing performance and effective execution on certain new programs. As Tony summarized, we have a total target of some $6 million to $8 million in cost reductions for the company with additional work underway. Our cost-cutting activities will continue as we remain committed to improving financial results in the fourth quarter of 2015 and beyond. We expect our New York facility consolidation project to be completed in the next few months. As a result of this move and other restructuring actions in progress, we expect to take an additional $1.7 million to $2 million restructuring charge in the fourth quarter. Ducommun’s operating loss for the current quarter was approximately $1 million as compared to operating income of approximately $10 million in the third quarter of 2014. Excluding the $10 million forward loss reserves and the $0.8 million restructuring expenses, which did total $10.8 million, the current quarter operating income would be $9.6 million or 6% of revenues, as compared to 5.3% of revenues in last year's third quarter. We are now seeing the benefits of the completion of our refinancing mid-year and with the new debt structure, interest expenses were $3.4 million or 2% of revenue as compared to $7 million or 3.7% of revenue in last year's third quarter. We estimate interest expenses will be approximately $2.5 million in the fourth quarter of 2015. Our effective income tax benefit during the quarter was 42.1%, compared to 37.4% effective income tax rate for the comparable period last year. The higher rate reflects the pre-tax loss this year compared to pre-tax income in 2014. We expect the effective tax rate for the fourth quarter of 2015 to average approximately 37%, excluding any potential benefit from the federal, research, and development tax credit. There was traction in Congress for approval of these credits for 2015 and 2016, which would be an additional benefit to us. EBITDA was $5.5 million or 3.4% of revenue in the third quarter of 2015. Excluding the forward loss reserve and restructuring expenses, EBITDA would have been approximately $16 million or 10% of revenues as compared to $18.4 million or 9.8% of revenues in the third quarter of 2014. Now looking at the individual business segments, starting first with Ducommun AeroStructures or DAS, our Ducommun AeroStructures segment posted revenues of approximately $64 million for the quarter, compared to $81.4 million in the third quarter of 2014. The lower revenue was primarily due to reductions in demand for our military helicopter applications coincident with lower defense spending levels and sudden setting of two long cycle defense programs. Our commercial aerospace structural applications remain at record levels, while up just slightly year-over-year they reflect certain timing differences regarding shipments. We continue to meet the delivery requirements of the large commercial air frame manufacturers, primarily Airbus and Boeing and we are positioned well to support the next level of increased build rates beginning in late 2016 and extending into 2017 and beyond. The DAS operating segment loss for the quarter was $6 million, compared to an operating income of $6.9 million for the third quarter of 2014. This decrease to an operating loss was primarily the result of the $9 million increase over last year's comparable quarter in forward loss reserves related to the regional jet program. In addition, DAS was impacted by approximately $3 million from an unfavorable product mix shift and $1 million in net expenses as it worked through our cost-cutting efforts. EBITDA for the DAS segment was a negative $3.6 million for the quarter, compared to $10.8 million or 13.3% of revenue for last year's third quarter. Now turning to the Ducommun LaBarge Technologies, DLT business segment, our DLT segment posted solid results with operating income, EBITDA and corresponding margin improvement this quarter compared to last year's comparable quarter. Revenue for the third quarter was $97.5 million, compared to $106.8 million for the third quarter of 2014. The lower net revenue was primarily due to an approximate 14.6% decrease in military and space revenue, mainly due to lower sales of radar rack and defense helicopter electronic applications, and then an approximate 2% decrease in our overall non-aerospace and defense revenue, primarily from the energy sector, which was partially offset by a 5% increase in our commercial aerospace electronics solutions. Through recent market development activities, we continue to enjoy increased demand for our commercial aerospace electronics applications with new customers. In our non-AND offerings, we have seen lower demand for our energy-related products over the last few quarters and expect that trend to continue well into 2016. However offsetting this, we're experiencing solid backlogs in other areas including our medical and in our industrial applications. DLT's operating income for the third quarter was $8.6 million or 8.8% of revenues compared to $8.3 million or 7.8% of revenues, for the comparable period in 2014. As you heard earlier, from Tony that there was also in our results for this quarter $0.8 million of the restructuring charges were within this segment Of the restructuring charges were within this segment. We did benefit in all those key profitability measures due to a favorable product mix and lower compensation and benefit expenses partially offset by loss of efficiencies from the lower manufacturing volumes. EBITDA was approximately $13 million or 13.1% of revenues, an improvement from the $12.7 million or 11.9% of revenue in last year’s comparable period. We continue to focus on product mix improvement and achieving the supply chain savings to sustain profitability in the segment. Corporate general and administrative expenses allocated to the business for the third quarter were $3.7 million or 2.3% of total company revenue, a decrease from $5.1 million or 2.7% of total company revenue in the comparable period. Now turning to our backlogs, our overall backlog at the end of the quarter was $553 million, up from $524 million at the end of this year’s second quarter. This was primarily driven by significant commercial aerospace orders. The increase reflects a combination of orders for existing programs and recent new awards as we continue to build our pipeline. As I mentioned in previous calls, timing differences may impact quarterly reporting of backlogs and at times it may not clearly reflect the strong underlying long term demands for large commercial airframe products. Quarterly backlogs even along long term programs now tend to be shorter in duration and lowering amounts than was previously the case. Despite that, we continue to work diligently to win additional orders across both our diverse commercial aerospace end markets and defense technology platforms. Regarding liquidity and capital resources, in the first nine months of 2015, we generated $12 million of cash from operations including the $9.8 million that we use for the redemption of the $200 million senior unsecured notes in July. Excluding this $9.8 million redemption payment, we generated approximately $18.2 million in cash from operations for the first nine months compared to $20.8 million during the comparable period in 2014. We remain diligent in effective working capital management and we expect our net cash profile going forward to reflect historic seasonal patterns. At the end of the quarter, our net debt to adjusted EBITDA is defined was approximately 4.2 to 1. While the real financial highlights was our new capital structure which involved completed a new credit facility at the end of the second quarter and finalizing with the redemption in new capital structure by taking out and redeeming in late July the 9.75% senior unsecured notes and replacing that with lower interest new credit facilities which we put in place in June. Upon completion of the refinancing, we had $275 million outstanding on the term loan and an unused balance on our revolver. Since that time, we have paid down $25 million in the third quarter and here in the fourth quarter already we have paid down an additional $10 million since then reducing our outstanding debt currently to $250 million. In addition, we have approximately a $198 million of liquidity. We are very pleased with the debt structure as it provides greater financial flexibility to execute strategic initiatives and it creates shareholder value by significantly reducing interest expenses. At this stage, we continue toward our goal of deleveraging to targets of 2.25 to 2.5 by the end of 2017. Capital expenditures year-to-date for the nine months were just under $13 million and for the year, we expect this amount to be around $15 million. Our capital expenditure spending this year primarily reflects the consolidation expansion of our upstate New York operations resulting in a state-of-the-art advanced titanium product center of excellence. In closing, we continue to focus on managing the changing mix in our business and are working to realize lower manufacturing cost throughout our operations. We also expect to see annualized cost savings of $6 million to $8 million beginning in the fourth quarter through our streamlining initiatives to help drive higher operating and EBITDA margins. In addition, we remain diligent with regard to expense management and working capital efficiencies which along with our significantly lower interest expenses to generate meaningful free cash flow going forward. Now, I would like to turn the program back over to Tony. Tony?

Thank you, Joe. Before turning the call over to questions, let me briefly reiterate that we are committed to rightsizing Ducommun quickly and appropriately given the current market dynamics. Even as the company’s commercial aerospace business continues to grow, headwinds caused by our defense and our non-A&D end markets may mean quarterly revenue remains similar to the current level for the foreseeable future. So we will look to further streamline our operations, realize supply chain efficiencies and reduce working capital while accessing our product portfolio and manufacturing footprint to strengthen the company. This has been a challenging period but 2015 remains a year of transition and we will do whatever we have to, to make sure that we ensure renewed growth, improved performance and margin expansion and higher cash flow for 2016 and beyond. And with that, Tricia, I would like to now open up the call for questions please.

Thank you. [Operator Instructions] And our first question comes from the line of J.B. Groh with D.A. Davidson. Your line is now open.

Thanks guys. Joe, congratulations on retirement and accomplishments on the balance sheet, it’s great.

Thank you, J.B.

Just to clarify so there is $9 million in aero structures and $0.8 million in DLT in terms of the ad backs to get to sort of an adjusted operating margin.

Well the delta was $9 million. We actually took a $1 million reserve in last year’s third quarter. So we actually took a $10 million, that’s the one we preannounced but the delta is $9 million but that is in the DAS segment and the $0.8 million is in the DLT segment.

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

It’s probably…

It’s probably 60% to 70% on the data side.

Okay. All right.

Because it’s related to that consolidation.

And then do you have I don’t know and we have to wait for the Q to come down but the different revenue numbers within the segment.

We have that in front of us. What would you like?

I think in the Q you break out military and commercial and aero structures and then you break it down I think but the five components in the DLT.

Yes. Would you like me to go over it?

Yeah, that would be great.

Ducommun Aerostructures revenues for the third quarter of 2015 were a total of $64.1 million. It was broken out between the military and space defense structures of about $16 million and in the commercial aerospace sector it was $48 million approximately.

Okay.

As we look at the other segments of the Ducommun LaBarge Technologies business segment, that was a total of $97.5 million broken down to round numbers of the defense technology sector with $54 million, commercial aerospace $13 million, energy and natural resources was $7 million, the industrial sector was $11 million and the medical was approximately $13 million.

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

You’re welcome. Okay, J.B.

Thank you. And our next question comes from the line of Edward Marshall with Sidoti & Company. Your line is now open. Mr. Marshall, if your phone is muted, please un-mute it.

Hey, guys. How are you doing this evening?

Hi, Ed.

Hi, Ed.

Hey, Joe, you will be missed. I really enjoy working with you.

Thanks a lot. We got a real good team coming up with Joel and Tony.

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

I don’t think it really snuck up. I think the big difference Ed was two-fold. One was we had a pretty sizeable schedule slides in the helicopter market close to about $7 million of schedule slides that just came into third quarter and affected the third quarter sales. Some of that sales went into Q4 but most of it slid into 2016. So that was one issue and then probably the largest change year-over-year in terms of revenue was just the fall off of the C-17 which was not this quarter but the Apache was significant. That was another like $9 million year-over-year change in the revenue base. So those two were pretty large hits to the military side, I don’t think they snuck up on this. The one that did snuck up on us was the schedule slides. We weren’t anticipating that but that was more significant than we anticipated and that was just about on everyone of our major military helicopter programs.

Now, the schedule side implies that you anticipate that that revenue is coming back in but your comment suggest that you’re going to be running at this run rate for a while. Can you kind of…

It’s kind of smooth things out for us, so everything is going to the right. So we had on the Blackhawk we had a lower build rate but a lot of the Blackhawk sales for us are spare parts for leading edges and…

So you’re not making up those sales in fourth quarter, you’re just going to go back to schedule.

That’s right.

Okay.

They are sliding out to the right, Ed.

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

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

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

Yes. But what we are doing right now is we have a number of development programs in particular in the commercial side we do have some military wins that we announced. But most of the growth impacts us late 2016 and 2017. So if you – when we look at the decline in the military side it’s only back up a second and just talk about the marketplace in general. But on the military side, if you look at the overall industry, you see about a 5% to 8% drop at the OEMs and that equates to what we saw in terms of the drop here because we are in everyone of the OEMs. Conversely on the commercial side, we are penetrating the large OEMs on that best level so they see 2% to 3% growth next year in the 2017 and we are seeing about 5% growth in 2017. So we anticipate that the commercial marketplace will pick up for us as the 737 MAX and A350 programs on A320 NEO start to hit the marketplace.

Okay, got it. You mentioned another $1.7 million to $2 million of charges in the fourth quarter.

Yes.

What is the savings that you anticipate to realize of those charges?

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

So an additional $3 million to $4 million?

Yes.

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

Yes, that’s correct.

Okay.

We are using the normalized tax rate and the 11.3 million shares.

Is it 11.3 or 11.1? I mean I saw that but I imagine there is some – some of the shares were non-dilutive considering…

It’s 11.1 when we have a bracketed net loss.

Right, got it.

But when it’s an income, some of those shares are in the money and they are added to - the diluted shares are added to it.

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

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

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

Yeah. I mean we paid $25 million. We think we have opportunities between $5 million and $10 million more. Like I commented, our cash flow at the business cycle we believe it will follow normal seasonal patterns although it might be down from previous years but the patterns are similar.

Got it. Thanks very much.

Thanks, Ed.

Thank you. [Operator Instructions] Our next question comes from the line of Mike Crawford with B. Riley & Company. Your line is now open.

Thank you. First because the Q is now today usually is the day that you report the earnings, but can you give the stock-based comp…

It should be up, Mike. I’m pretty sure we posted it.

Yeah, it was posted and accepted by SEC. It may be SEC didn’t posted on their EDGAR.

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

I could give you what the cumulative…

Yeah, for the nine months.

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

Okay, thanks.

That’s an add back.

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

Yes. From just sequentially from the second quarter that went from $524 million to $553 million. The biggest movement was a significant amount of bookings in commercial aerospace that went from $195 million approximately to $250 million, that’s a big number, $55 million. Our defense overall bookings went from $255 million approximately to $240 million.

Defense backlog.

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

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

Not entirely. We are just looking at – we have our overall portfolio look and then as we look to each segment, we are looking at which parts of these portfolio enhance like we’re pretty robust in terms of the industrial market and offered equipment and things of that nature. So I think that there is certain marketplaces that we are penetrating, that we are looking for growth, the medical markets have been pretty solid for us. So those are marketplaces that we look at and then we look at potential divestitures in marketplaces where we don’t feel like [indiscernible] we should be but we haven’t made those decisions yet and we’ve got a plan across the board that were taken all of our capabilities and within the platforms but we haven’t made any decisions there.

Okay, great. Thank you very much.

Thanks, Mike.

Thank you. And our next question comes from the line of Ken Herbert with Canaccord Genuity. Your line is now open.

Hi, good afternoon.

Hi, Ken.

Hi, Ken.

Congratulations, Joe. You will be missed on these quarterly calls.

Thank you, Ken.

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

Okay, good. I think that’s a good question, Ken. What we’ve done across the board and over the last three years is really take a hard look at new program introduction and how we’re developing that. So we have a face gate system that we put in place that we are utilizing for everyone of our key new development programs as we go forward. The regional jet program leads back quite a few years and was not unfortunately a part of this process. As I indicated on that program, it was aggressively bid and we are unable to hit the efficiencies that we need in order to make that program profitable. So on the programs going forward, we have a double check system that where you’re going back and making sure that we are hitting the margins that we quoted in terms of our cost inputs and coming down the learning curves that we anticipated. So we do thorough reviews in some cases on a monthly basis, in some cases on a quarterly basis turnaround the program. So I think that internally they have program reviews, so I think that we really beefed up that system. We looked at this program and a couple of other programs that we had struggled with it early on several years ago and we’ve really changed the system for we introduce new products.

Okay. Would you say Tony that’s helpful, would you say that on the content you win for example on the 737 because I know obviously both from Boeing and Boeing’s major suppliers [indiscernible] other companies, pricing pressure is certainly continuing to increase even obviously as the rates are going up. Would you say that the pricing you’re getting now and winning is better than what you’ve gotten in the past or you able to the better execution, the cost cutting maybe drive some margin improvement or you getting any price of these contracts?

We are not getting any price I can tell you that. It’s very highly competitive bid and but we do as we walk through the program identify areas where we think that we can be more efficient and we’ve done some really interesting things with however doing some job so that we can be more efficient on those and so we are really doing it out of lean manufacturing side, we’re getting after the cost levels. But the programs as you know and the pressure that we receive from our customers in terms of cost base and pricing pressures is all there, so it’s also difficult to get higher prices.

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

Okay, let me answer your first question first. And I think that yes we are capitalized. We may have some tooling adjustments, we are evaluating that now. We are going through rate readiness with both customers, both Airbus and Boeing as we look at tooling requests may be some adjustments in tooling to make sure that we hit those higher rates and then work our way through that. But in terms of capitalization we are pretty well capitalized. We will be capitalizing over next year and the following year for new business programs that we brought on online but those are for brand new applications as oppose to existing business days, but that’s all part of the bid process when we bid the program. Now in terms of the commercial market and where we see that in terms of the growth rates, again I think it depends on two things, you know we talk about that internally a lot, but it really depends on how the capital markets are behaving and the capital available for, say the emerging markets so that this issue with Axiom Bank does not help the Boeing Company, for example and therefore has a direct reflection on us in terms of financing customers overseas. So hopefully we get through that, we change that from a congressional standpoint and get that past. I think that will benefit that. So that has a bearing in terms of how these things are financed and I think that’s one aspect. The other aspect is how strong will the emerging markets in particular China be going forward because I think a major thrust in terms of selling out there is in China. But I will say that both Boeing and Airbus have 5 years to 6 years of solid backlog. So, I don't see a crash here and unless there is some slow down for whatever reason, we will enjoy the current rates that we are at for sure.

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

Well I think that’s, what we will see there is higher efficiency. I know that you are looking for some numbers, but what we are doing is working through that. We still have some additional costs that we have to work through as we consolidate that facility, but we have it laid out I think from a extremely lean performance standpoint and I think that when we look at this business we will be much more efficient in the flow of that business and be able to take on additional new business as well. So, we think that we will get some marginal improvement. Again, when you get marginal improvement in a business unit the reflection of top takes a little bit, you know at the DAS level, so it may not be as great there, but we are expecting to see some marginal improvement within that business segment itself.

Okay great, thank you very much.

Thanks, Ken.

Thanks, Ken.

Thank you. And our next question comes from the line of Christopher Van Horn with FBR & Company. Your line is now open.

Hi guys this is actually Dan Draba on the line for Chris. First of all Joe congrats, it's been a pleasure getting to know you.

Thanks Dan.

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

Yes, well it is a possibility. This is, what we’ve done is we’ve tied into a distributor [parts] like that will help us penetrate markets as two elements due, one is our ability to get parts manufacturing authority and sell new products as well. So, it is primarily in our RF product line, but it issomething that we are looking at in the non-AND marketplace where we have the ability to sell our own products. In most cases Dan in the non-AND we are making the print business similar to our aerospace market. This particular product line that we have is our own design work and we are developing through that. So, this fits what they do very well. They will be as generic as well as offers us a tremendous benefit to get into marketplaces that we are not in on a more secure basis.

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

I think so. We still have to deal with the budget constraints, I think out in 2017, but I think it sounds like we have a two-year deal and that to me will add significant stability to the budgeting process and also the contracting process. So, one of the things that we’ve seen on the military side is not only the slowdown in spending, but also delays in contracting, which has been because of the CR’s and place and things of that nature, so we’re bullish on this, if this happens we think it will add a lot of stability to the marketplace, how much of an upswing will happen in the marketplace, I doubt that there is going to be a big upswing, but it certainly will add the funding to the programs that need to be funded and will put us in a position to have a better predictability on the programs going forward.

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

I think there is two areas in particular. One is we are very heavy into the missile defense side a bit and we continue to penetrate that marketplace and we think the budget will help stabilize that and put us in a position to continue to pursue the applications that we are facilitating [indiscernible]. The other one is in the modernization I think there will be more money on some of the margin expansion programs that we are working on and developing and this - the release of the Balmer Contract [ph] I think that bodes well. We are bullish on that, now that is a long-term development program but I think that is really been a nice pickup and I think that will benefit our business going forward. So, we’re really solid on that. So, if you look at the missile defense market and if you look at the modernization programs and upgrade programs, I think that’s where we will benefit the most from.

All right, terrific. That’s a lot of help. Thanks guys.

Thanks Dan for your questions.

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

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

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