Good day ladies and gentlemen and welcome to the Ducommun Incorporated Fourth Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this conference is being recorded. I would now like to hand the conference over to the moderator for today, Chris Witty. Please go ahead, sir.

Thank you and welcome to Ducommun’s 2015 fourth quarter conference call. With me today is Tony Reardon, Chairman and CEO; and Doug Groves, Vice President and Chief Financial Officer and Treasurer. I would now like to provide a brief Safe Harbor statement. This conference call may include forward-looking statements that represent the company’s expectations and beliefs concerning future events that involve risks and uncertainties and may cause the company’s actual performance to be materially different from the performance indicated or implied by such statements. All statements other than statements of historical facts included in this conference call are forward-looking statements. Although the company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the company’s expectations are disclosed in this conference call and in the company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015. All subsequent written and oral forward-looking statements attributable to the company or persons acting on its behalf are 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 over to Mr. Tony Reardon for a review of the operating results. Tony?

Thank you, Chris and thank you everyone for joining us today for our 2015 year end conference call. I’ll begin by providing an overview of our operations including some market color after which I will turn the call over to Doug Groves to go over our financial results in detail. Let me start by acknowledging that we had several one-time charges this quarter amounting to $91.3 million on a pre-tax basis that affected our overall performance. Approximately $57 million was related to a non-cash write-off of goodwill in our Structures business and roughly $33 million was related to a non-cash write-off of the LaBarge trade name along with $1.3 million in restructuring. Doug will go over this detail for the moment, but let me reiterate that approximately $90 million of these charges were non-cash in nature. Our management team has been extremely busy since the last earnings call over four months ago and the company has taken proactive approach to managing its product portfolio and aligning its businesses with the markets it serves. Given the challenging military environment and the volatile energy sector, we told shareholders last year that we would be decisive in reducing costs and focusing our energies on our core markets and products, particularly with the aerospace and defense sector. So what we accomplished in 2015 laid the groundwork for additional initiatives earlier this year, all to transform Ducommun into a more strategically focused streamline enterprise that can deliver unique structural and electronic solutions to our customers while providing higher returns to our shareholders. We've successfully cut overhead expenses, reduce headcount by some 12% over the past five quarters, consolidated multiple facilities in New York and closed an operation in Texas. We've also made additional moves to improve Ducommun's long-term growth trajectory and financial performance. The sale…

Thank you, Tony and good day to everybody. Net sales for the fourth quarter of 2015 were approximately $156.6 million, roughly 16% lower than the comparable quarter of 2014. The revenue decline reflected 19% lower revenue in the company's military and space markets mainly due to a decrease in U.S. defense spending as well as procurement delays and a shift in program priorities that impacted the company's fixed wing and helicopter platforms. In addition, the overall year-to-year top line shortfall reflected 20% lower revenue in the company's industrial end-use markets. This was mainly due to the closure of the company's Houston manufacturing center during the quarter and 12% lower revenue in the company's commercial aerospace end-use markets primarily reflecting delays in the timing of certain regional jet orders. That said, we continue to experience solid commercial aerospace demand due to the current build rates and increased content, such that during the quarter we saw significant growth in our commercial aerospace backlog. New orders, both Structural and Electronic Solutions drove our backlog here to the highest level in our history just under $270 million as of year-end as Tony mention. Moving to gross profit, our gross profit margin was 14.6% in the fourth quarter as compared to 17.9% in last year's comparable quarter. This reflected the lower sales and reduced operating leverage even as we continue to realize supply-chain cost savings and other efficiency improvements. Given the rightsizing initiatives being implemented at the company, we expect to see gross margin improve as the year plays out and return to the historical levels in the 18% to 19% range particularly as our customers new platforms gain momentum in later 2016. Ducommun's operating loss for the current quarter was approximately $88.6 million compared to an operating income of $10.1 million or 5.4% of…

Before turning the call over to questions, let me briefly summarize our strategic priorities as we begin 2016. If last year was the year of transition exemplified by lower debt, the strengthening of our balance sheet and cutting costs and strategic assessment of our operations, then the coming year is one of action and growth. We've already taken decisive steps to shed non-core underperforming assets and will as I have stated close an additional facility this quarter. The company is focused on providing unique value-added electronic and structure solution to the aerospace, defense and other high technology markets and will continue to benefit from the strong commercial aerospace cycle and increasing build rates going forward. We paid down debt and we will continue to do so based on our solid cash flow projections leaving us with an even stronger more flexible balance sheet this year. We will also strive to reduce working capital, increase asset utilization and expand margins as we review our operations and product portfolios for additional efforts to focus the company and drive increased shareholder value. The bottom line is that we did what we said we would do in 2015 and position the company for stronger growth and improved bottom-line results going forward. With our commercial aerospace program is on track for continued expansion and stability across our defense markets, we believe the company is in good shape to take advantage of the numerous opportunities across old and new customers alike. We are a focused unique provider of cutting-edge aerospace technologies with strong client relationships and a reorganized business development team dedicated to executing on a variety of growth initiatives. And with that, Karen I would now like to open up the call for questions please.

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

Good afternoon gentlemen. First I wanted to clarify, did you say a few eliminate all the non-normal items to structures fourth quarter operating margin was at 4.4% you said?

Yes, I think that’s the number Mark.

Okay, now in the past we had looked that within that structures group was running the way you wanted to that operation should show, sort of 9% operating margins plus or minus given where you were on an adjusted basis 4.4% in the fourth quarter and you are looking for relatively flat sequential structures revenues for the first couple of quarters. Should we assume that operating profit number would be in that sort of mid single digit range for the first couple of quarters and then improve as your volume improves in the second half and going into 2017 towards that sort of 9% goal that might be a 2017 target?

Yes, no. Mark, we had a couple of things in the fourth quarter that drove quite a bit of unabsorbed overhead, one of which was all the move activity of our New York operations to, consolidate those facilities and then we had another facility that shutdown for a longer than normal period of time to make some required repairs and maintenance. So, we fully expect that as we walk into 2016 for our structures business we're getting back to that 8% to 9% range.

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

Yes it will ramp through the year because as we mentioned lot of the growth that we see comes in the second half and the latter part of 16. So, it will start lower in the first quarter and continue to gain momentum through the year.

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

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

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

Well, very, very small piece, because the vast majority of the goodwill and the trade name were indefinite lived [ph] assets, so they weren’t amortizing through to the P&L.

Okay, thank you very much.

Thanks Mark.

Thanks.

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

Good afternoon.

Hi, Ed.

Hey. So I wonder you made a comment about the commercial business and the decline and you see that as the run rate for the next couple of quarters. I wanted to get the same kind of response from you may be on the military, do you think this is the run rate on a go forward for the next couple quarters as the military as it is for the commercial aerospace?

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

There are no additional step downs, I know you said the military business was somewhat stable at this point?

Yes, we don’t see any additional step-downs right now. We see its steady state in Q1 in particular, since steady state from Q4.

Okay. You had a bunch of cost revisions and you mentioned the $6 million to $8 million, but there was some additional restructuring I think in the fourth quarter here. Can you add up for me kind of the episodes, the events that you did in 2015 and what that new cost structure, the cost that you actually took out in 2015 in total, is that I think its higher than $6 million to $8 million, can you just kind of walk me may be through that?

Sure, Ed. So we announced at the end of the second quarter that we were taking some headcount reductions and had kicked off our supply chain initiatives which was going to be in the sort of $4 million to $5 million range and then in the third quarter, we took a small restructure charge of about $800,000 and that was really aligned with closing the Houston operations in St. Louis for which we said we would see an annual cost savings of $2 million to $3 million on those facility closures. And then the restructure charge in the fourth quarter of $1.3 million was largely around the consolidation of the New York facility as well as some continued headcount reductions and we have said that would yield a savings of about $3 million to $4 million. So if you aggregate those numbers up, it’s about $9 million to $12 million on an annualized basis recognizing that we’re in various stages of implementing each of those things. So Houston just closed at the end of the year, the St. Louis operation doesn’t close till the end of this quarter. So once we flush through everything that would be the range that we’re expecting.

And what was the additional supply chain optimization?

Yes, so the supply chain optimization is what we kicked off and announced at the end of Q2 and that was $4 million to $5 million, but again bearing in mind a lot of this is just offsetting some of the volume reduction, so it’s not necessarily just additive to the bottom line.

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

Yes there was a small impact in our income tax expense for the books this year, but largely no, there weren’t a big taxable event for us.

Okay. And then the fully diluted share counts on adjusted basis, I’m assuming that isn’t fully dilutive at 11084 [ph] so closer to 11.30?

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

Okay. And then finally do you have anything on the MAX yet that you can kind of talk about from a content perspective, we mentioned that is a growth program for you, so I assume that there is something running through the lines?

Yes, so Ed on the MAX, first of all I won’t say 95% of the applications that we have on the 737 are transferring over to the MAX and then so we picked up new applications in the missile, the ducting system, we have a couple other applications that we’re working on. So we’ve increased the ships that rate on the 737 going forward with the MAX.

Could you kind of give me a for instance percent of maybe the old 737 was 100%, what was the – what is the new rate?

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

Sure, okay, great. Thanks very much.

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

Thank you. You talked about the military business being flat this year after being down 21% last year which was greater than you thought. Given the budget request for some potential severe reductions in helicopters, how do you position yourself to that given even though Congress is likely to mark up those numbers a little bit, is it fair to assume there should be some further military reductions in 2017?

You know maybe in 2017 we might see a small drop off we just, we are at a conference, the biggest helicopter hit is the Blackhawk and we have just added Sikorsky last week and they are reiterating what they believe will be the build rates which are not too far off the existing forecast that you have like say in [indiscernible]. So we think there may be a slight down draft, but I think that what we'll see coming out of Congress is something much stronger than what the President has asked for.

Okay.

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

So Tony, similarly you’re seeing reductions in F-15 and F-18 radar rack shipments, now with a third offset where future procurements are going to be more technological in nature and maybe low cost, high quantity platforms like drones are you positioning to comment, address that need or are you?

We are working with - on the drone side of the business we have limited ISR [ph] applications, but we have positioned the company to be more involved in that as we go forward, but I can’t point to any specific major applications that we picked up recently.

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

No, we’ve got it in there for sales in the 10-K.

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

Sure yes, we can give you that information. Q - Mike Crawford Okay. And then final question just relates to what you think your historical operating margin parameters should be for the whole business going you said you wanted to get back to that, so how do you view that now?

Well, I think again, this year clearly had a lot of noise in it but if you roll back to like 2014, that is what we would kind of say where the operating margins had been into the segments and for the business in general. So we’re as we think about our GP and our SG&A together getting back to that – the levels where we’re at in 2014, so that is 10% range for the company as our the right operating margin number for the company. We see it ramping up as the quarters go on. Historically the first quarter has been a little bit lower in revenue base and then they pick up going forward. So we think the margins will increase as we get towards the year end.

Okay. Great, thank you.

Thanks Mike.

Thank you. [Operator Instructions] Our next question comes from the line of Ken Herbert from Canaccord.

Hi good afternoon.

Hi Ken.

Hi Ken.

Hi Doug or Tony, if you could provide any more detail on, I know you don’t give official guidance, but how should we think about free cash flow in 2016 with obviously you’ve taken out a lot of cost, you closed facilities, you like you said Doug a lot of moving pieces, what is the profile of free cash into 2016 and maybe what is the upside and a few of other key moving pieces?

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

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

No, I think it’s, we've got most of it, but we are never done, I will just say that whether it is supply chain savings or looking at our cost bases as Tony referred to as we see volume starting to move around. We will do whatever we have to maintain those margins but for the initiatives that we kick off in 2015, we should start to really see the fruit of that labor in the second half of 2016.

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

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

Yes.

Yes okay and then Tony, on the portfolio, you've clearly done a lot, you have been pretty busy over the last few months certainly and it looks like the increased focus or mix of A&D should benefit as those markets churn on the defense side in particular. How should we think about the portfolio now and I know you’ve alluded to a few things, are you happy with the portfolio is more do you think you might want to look divesting or anything else you could say strategically how you think about the business now?

Sure, and I think that right now I think Ken, we are really happy with the portfolio we have in front of us. We are always taking a look at opportunities. I think that where we are focusing now is on the opportunities may be to consolidate that if we have that we are not going to be – applying that do any of that in 16, but as we look forward, but I think we’ll start looking for acquisitions probably later on at the end of this year to start looking to see if we can find complementary acquisitions to build the portfolio, but as far as the current portfolio we have, I believe we are pretty well set right now.

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

No, we will have incremental investments both in equipment and probably in facilities in order to be able to support the uptick and that also includes the pick up that we see with the Airbus programs that we won or are winning.

Okay, so is it fair to say that your you may be invested to support, because I know the 37 steps up again in 2017 or you so you’re looking at fairly steady I guess investment to support as the rate goes from 47 to 52 to 57 over the next three years is that a may be a fair way to look at it?

Yes.

Yes for sure. Now there will be heavy investment in 2016 and 2017 to ensure we get those rates.

Okay, that’s great. All right, thank you very much.

Thank you.

Thanks.

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

Good afternoon guys. This is [indiscernible] on the line for Chris. Just a quick couple questions on backlog, first of all is there any way you could give me a sense within the commercial aerospace breakout, which I know you mentioned is about $269 million. Is there any way you can give me a sense of what parts of that or sort of I mean, wide bodies and what's regional and maybe what's sort of single isle in there?

We don’t break out single aisle per se.

Sure, okay so how about can you, I mean I’m just sort of looking at the regional jet write off and I’m wondering what kind of activity you are seeing there in that specific market and how may be your sales mix might be changing going forward?

We anticipate if you just take Dan, if you just take 2015 revenue we should be pretty stable in 2016 and so – lot of change in any of the markets so, we did have some schedules like as we talked about on the regional jet market, but we think we will be pretty stable.

Okay, great. Thank you for that. And then secondly, in terms of again the backlog, I know you got about 16.1 here its I’m looking at 10-K, got about $16.1 million that’s left from the Pittsburgh and Miltec and do you think you could give me a little more clarity on what exactly is in the natural resource of industrial medical segments because I think that comes to about closer to $50 million so do you think you could just sort of talk me through what’s in there that’s not in Pittsburgh and Miltec.

Dan, may be sure I understand your question so, you’re asking how much in industrial backlog is not Pittsburgh.

Yes because I see that you've got $16.1 million and that includes Miltec and Pittsburgh right and then natural resource is about 8.5, industrial is about 17.4, medical is about 23, where does that 16.1 sort of breakout between those three is just I guess is my question?

Yes, so most of that comes out of industrial, the Pittsburgh business is about 70% industrial and say 20% natural resources about 10% medical so going to come out in those buckets?

Okay, Miltec was all military.

Yes, yes, great. Okay guys, thanks for that. I'll jump back in queue.

Okay, thank you.

Okay.

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

Hey, there was a change in the deferred tax, what was that related to?

That was, there's two things, if you look at the balance sheet Ed, we reclassed, we had in the prior year about $13 million as a deferred tax asset, there's a new accounting pronouncement that came out that said you could net it all down in the deferred tax liabilities. So the big change $13 million of that was just a reclass out of the deferred tax asset down into the deferred tax liability and then the other piece, call it about $30 million was related to the goodwill write off and the trade name impairment. So, about $30 million of deferred tax is related to that $90 million write off that drove down the deferred taxes.

And that's what ran through the – it was the goodwill in the impairment that ran through the cash flow statement?

Yes, it gets added back in the cash flow statement. So when you look at our net loss for the year, since it is a non-cash charge of that.

Okay, and what was the, what is your expectation for depreciation and amortization for 2016 as a total?

Yes, so we'll continue to probably have about $10 million in amortization related to the intangibles and then about $16.5 million in appreciation which is our sort of average CapEx amount that we incur from year-to-year, so about $26 million in total.

Okay and the inefficiencies that were related to the moving expenses in the extended shutdown for repair was that in the structure segment, could you quantify that?

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

Got it, okay thanks very much.

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

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