LMI Aerospace Inc Q2 2009 Earnings Call Transcript

LMI Aerospace Inc (LMIA)

Q2 2009 Earnings Call

August 7, 2009 11:30 am ET

Executives

Ron Saks - CEO

Ed Dickinson - CFO

Analysts

Gary Liebowitz - Wells Fargo

Tyler Hojo - Sidoti & Company

Stan Manny - Manny Family Investment

Chris McDonald - Kennedy Capital

Tyler Hojo - Sidoti & Company

Presentation

Operator

Good day, and welcome to the LMI Aerospace Incorporated second quarter 2009 conference call. This call includes forward-looking statements related to LMI Aerospace Incorporated outlook for 2009 and 2010, which are based on current management expectations. Such forward-looking statements are subject to various risks and uncertainties many of which are beyond the control of LMI Aerospace Incorporated. Actual results could differ materially from the forward-looking statements as a result of among other things the factors detailed from time-to-time in LMI Aerospace Incorporated filings with the Securities and Exchange Commission.

Please refer to the risk factors contained in the company's annual report on Form 10-K for the year ended December 31, 2008 and any risk factors set forth in our other subsequent filings with the Securities and Exchange Commission.

At this time, I'd like to turn the call over to Mr. Ron Saks, Chief Executive Officer of LMI Aerospace. Please go ahead, sir.

Ron Saks

Thank you, Christine, and good morning to all of you. I'm Ron Saks, CEO of LMI. And with me today is Ed Dickinson, our Chief Financial Officer. Jim McQueeney, who joined us in July as President and Chief Operating Officer, is in Wichita joining us as well and Ryan Bogan President and CEO of D3 will be joining Jim in Wichita also in a few minutes.

Since our last conference call on May the 7, volatility in our markets is continued to be very high. Just the week prior to that call, you may remember my positive optimistic comments about production rates of winglet modification kit and winglets for the Boeing 767 model remaining at very high levels.

My opinion was based in part on comments made in an event in Seattle and it seems that production constraints of the key supplier were the only barriers to increasing rates further. However, our larger customer later decided to defer some deliveries into 2010 and '11 and in two separate stages within a period of about 30 days, production rates for 2009 and 2010 were reduced by 25% to 30%.

A combination of reduced passenger traffic with airplanes being placed in storage and tightness of credit combined with fluctuating fuel prices, all impacted the production of these winglets.

A reduction in expected revenue that we reported for 2009 in our press release this morning was caused by the continuing erosion in demand in the case of some commercial aircraft and business jet customers and by inventory destocking in order to raise cash at others.

Our first half of 2009 was not affected by the winglet production orders but our second half will be. Certainly, we are disappointed with that outcome, but our marketing efforts for 2010 and beyond have recently begun to favorably impact our future operations.

I will discuss in more detail our current expectations for revenue in 2009 and '10 and organizational changes and investments in new technology to support our design-build program.

At this time, I'll ask Ed Dickinson to review our financial results for the quarter with you and then I'll be back to talk with you.

Ed Dickinson

Good morning, everyone. Just to get started, I want to let you know there will be an amended release crossing the wire shortly. There was a correction made to the free cash flow calculation on the last page of the non-GAAP disclosures and that should be crossing the wire shortly.

This quarter was a bit more of a challenge for us, especially in the structure segment. I'll go through the financial results and would be glad to take any questions in the Q&A session.

Sales for the second quarter were $62.8 million, down from $64.9 million in prior year. Gross profit was 21.3% of sales compared to 25.7% in the prior year. SG&A was $7.9 million down slightly from $8.3 million in the prior year. And net income was $3.2 million or $0.28 a share compared to $5.45 million in the second quarter of '08.

In Aerostructures, sales in the second quarter were $40.3 million compared to $41.7 million of prior year, down 4%. Sequentially, sales were down 7% from the $43.3 million we reported in the first quarter. Parts for large commercial aircraft reflected growth, reaching $18.2 million up from $12.4 million in 2008. These sales included the benefit of our aftermarket 767winglet kits leading edges of $7.6 million which generated no measurable revenue in the prior year.

Excluding this item, large commercial aircraft generated $10.6 million compared to $12.4 million in prior year. Sales of 37 components were $6.1 million, up 14% from the prior year, but up from $4.7 million in the first quarter. Some residual impact of the Boeing strike was evident as we've sequentially gained revenue on this program, but fell short of the prior year, as Boeing and their Tier 1 align their inventories and deliveries.

Net sales of the 747 generated $2.1 million in the quarter, down slightly from $2.3 million in prior year. Sales were less than $100,000 on 787 this quarter, down from 800,000 in the prior year.

Corporate and regional sales were less than 100,000 on the 787 this quarter, down from 800,000 in the prior year.

Corporate and regional sales were $11.8 million, down 16% from the prior year. Sales of large Gulfstream product were $9 million, down from $12 million in the prior year due to a lower production rate, and then customers' resulting inventory management activities.

We did generate revenues of $1.6 million on the new G250, the bulk of which was for tooling for our leading edge wing assembly. Bombardier product also declined generating $1.1 million in the quarter, down from $1.4 million in the prior year, also due to lower production rates.

Military products produced revenue of $8.7 million in the second quarter of 2009, down from $11.7 million in the prior year. Blackhawk revenue was $6.2 million, down from $8.9 million in the prior year. We continued to work through inventory destocking issues with our customers as they increasingly tightened their inventory management policies.

This activity has made it quite difficult for us to forecast revenues and manage our inventory reduction plans. Apache helicopter revenues generated at our Sun Valley California location were $900,000 down from $1.5 million in the prior year. Also sourced at our Sun Valley location are technology products, which continued to be depressed, generating $400,000 in the quarter, down from $2.2 million in the prior year.

This market is suffering through a dramatic downturn, and is expected to turn up either late this year or early 2010. Gross margins in the quarter were 22.4% of sales, well below the 25% mid-point of our guidance.

The weakness in volume primarily in the military market provided a lesser coverage of fixed cost. Additionally, as disclosed in the press release, we incurred an obsolescence charge of a $0.5 million, primarily due to certain customer settlements.

We delivered the first in-board leading edge on G250 aircraft during the quarter, one of the most complex assemblies we have ever produced. We are also early in the production of our CRJ-1000 leading edges. Both of them are expected to be solid profit generators in the future, but the early shipments reflect our lending curve and resulted in 300,000 less in gross profits than they expected.

Lastly, we also have mentioned a shortfall in gross profits at our Sun Valley location of approximately $300,000. If you recall, we incurred an impairment charge in the fourth quarter of 2008 related to this business, which provides machine products to the aerospace and technology markets.

We also incurred a restructuring charge in the first quarter at this location as we reduced employment by approximately 30%. We continue to believe the long-term prospect of this business are sound, but we are analyzing the options we have at this location given this near-term weakness in demand, and our inability to properly execute operationally.

We could encounter additional restructuring charges or goodwill impairment at this location in future quarters. Selling, general and administrative expenses for this segment were $6 million, unchanged from the prior year.

Moving onto the Engineering segment, revenues were light when compared to last year. Sales were $22.6 million, down from $24 million in the prior year. Headcount in this segment at the end of the quarter was 381 people compared to 414 in the prior year, and the percentage of overtime was slightly lower than in the prior year.

Corporate and regional work was down 45% to $4.6 million from $8.4 in the prior year as design for the G650 matures. Most of these engineers have moved to military programs. Somewhat softening the decline on the G650 was support of the Bombardier Lear 85 program.

Large commercial aircrafts generated $10.2 million in the quarter, down from $11.2 million in the prior year. The 747-8 and the 787 continued to be large programs, but are not expected to remain at this level the balance for the year. Follow-on derivative work on the 787 has also been slow to develop.

Services to military programs generated $7.1 million in sales, up from $3 million in the prior year as engineers were shifted to the CH53 and F-35 programs. Tooling sales in the quarter were $700,000, down from $1.4 million in the prior year. Gross profit was $4.4 million or 19.5% of sales in the Engineering segment, down from 20.4% of sales for the prior year, with a nice redound from the 16.8% generated in the first quarter as over time hours increased.

Approximately 100 basis points of the decline from the prior year was related to a re-class of expenses considered overhead in 2009, and they are now recorded as overhead and were SG&A in 2008. SG&A for the segment was $1.9 million, down from $2.3 million, primarily a result of lower payroll cost, and the re-class as I just mentioned

Non-segment interest expense was $413,000, basically unchanged from the prior year. Lower interest rates offset the higher borrowings related to the purchase of Intec. We continue to lock in LIBOR rates to take advantage of the current low rate environment. Income taxes were 36.4% in the quarter compared to 36.5% the prior year.

Before lining up the income statement, I will mention a little about Intec. We experienced another weak quarter for Intec as suggested in the last call. The new contract mentioned in the last quarter did materialize, but did not start in June as expected. We now expect it to begin contributing this month or early next.

Sales for the quarter were $1 million for Intec, and they lost approximately $100,000. We expect the second half to be profitable for Intec.

Cash flow during the quarter was strong, generating free cash flow of $7.5 million, offsetting the negative first quarter, bringing our year-to-date free cash flow to a negative $1.4 million.

As mentioned earlier, our customers are managing their inventories tightly which will put pressure on our ability to manage our inventories.

Additionally, we are being approached by several customers for extended payment terms and we are doing the same with our suppliers. Payables showed a large $4 million reduction in first six months, primarily related to 2009 raw material and supply chain payment that were part of our late 2008 run up in the inventories. We've announced sold our product from the supply chains.

As we look forward to the balance of 2009, we still expect to generate a good bit of cash with free cash flow of about $15 million to $20 million. We expect depreciation and amortization of about $8 million, surpassing our CapEx with about $5 million.

With that, I'll turn it back over to Ron for his comments.

Ron Saks

Thanks Ed. In my opening remarks, I described the production rate cuts on our Boeing 767 winglet program. In addition, the other major contributor to our guidance reduction was the continuing impact of inventory destocking in our Blackhawk customers.

We've now changed our forecast for this work to include only orders in our customers in [controlled demand systems] recognizing that full-year production may not be entered in the systems at times, but we want to be conservative.

Our forecast has been based on production rate. One of our Tier 1 customers in the last few months, for example, scheduled 20 units of one Blackhawk model, increased demand of 32 units and then a monthly reduced it to 17. That type of volatility reached a potentially significant variation in our estimates as well as on this inventory build.

We've arranged meetings earlier this month with our largest customer on the Blackhawk to review demand for our Blackhawk product which were used with new computer models, believe we can do a better job of forecasting demand for this product in the future.

Our inventory reduction goals as well as our obligation to our suppliers to provide good forecast data require that we continue to improve this process and our customer is very forecast data require that we continue to improve this process and our customer is very supportive.

In addition, as mentioned in our press release our Sun Valley, California machine shop has endured a lengthy period of very low demand from this customer in the semiconductor industry, as I had mentioned. The 2009 guidance reduction announced today includes the decline of about $2 million of annual revenue for this plant.

We do expect sales of this division to improve by the first quarter 2010 and are working to right size the plan, strengthen it's management and plan for changes in some equipment to convert it from its dependency on a few customers who diversifying its product mix to include build the components and assemblies for other LMI plant. We are performing a thorough review of its customer relationships and will be evaluating it's ability to successfully carryout this transition.

Now, I will return to our revised revenue estimates. In the June quarter, our Aerostructure segment revenues decreased because of reduced demand for large-cabin Gulfstream aircraft caused by production rate cuts announced in March 2009 and our Bombardier aircraft orders also declined during this period.

In addition to raising development of the Boeing 747-8 passenger model plus customer leases of newly designed product to fall below our plan in the quarter. In fact, we are experiencing considerable additional orders on the 747-8, and many of them now are requiring only small quantities in 2009, larger quantities spread out into 2010 and 11.

Given the current rate state of the aerospace and defense industry and the continued uncertainty of demand for commercial and business jet products, our marketing efforts continued to be pointed to building market share with new program awards which will affect 2010 and beyond.

Recently, we signed a letter of intent and begun engineering work in July on our first meeting for design-build project. We expect to finalize our contract for this assembly next month and anticipate that the engineering effort will continue well into the program with tooling and production commencing in the first half of 2010 and continuing for the balance of the year.

The non-recurring revenue on this project, which will be paid as we complete agreed milestones will provide about $8 million in tooling to Aerostructures and $15 million to the Engineering Services division.

In addition, in May 2009, we reached an agreement on a 300 shipset [purchase] products currently assembled on the UH-60M model Blackhawk. This is an authorization to proceed on tooling for a project to build not to only tooling but production for several hundred components for large commercial aircraft program.

We received orders for about 60 small assemblies to be produced on the old model Blackhawk and we're pricing negotiations with 36 large and small old model assemblies as well. These orders will provide some limited benefit to 2009, ensuring increase in Aerostructure sales in 2010, $10 million to $15 million with production continuing on development programs in future years.

Our 2010 forecast for Engineering Services segment is based on the decline and demand for engineers on Boeing 747-8 program which began last month. Continuing delays in the end-service states of the Boeing 747-8 and 787 models has likely delayed the need for outside engineers on new derivative programs in the short-term and the resulting lack of visibility in future demand has caused us to reduce our forecast at this time.

The design-build project we described which began last month is a game changer for us and we are still in discussions on two other design-build programs although smaller in size, which will quickly impact this outlook. Since LMI and D3 combined in July 2007, we have been working actively to prepare for design and build projects, aligned their IT systems and project management organizations, and began the selection process for a productive management system, which could be used to help us manage design-build projects. We have purchased the Siemens System called [Time Center]. We had been using outside consultants together with a combined LMI-D3 project team to install it.

Combination of our advanced products groups lead by Dave Martin and [Paul Sule] has provided the needed structure to develop this PDM System quickly, and the program win has given us the opportunity to use it quicker than we’ve thought. We have an integrated project team comprised of both D3 and Aerostructures employees at our customer site, and we'll be supporting this program at three D3 sides, and multiple Aerostructures plants.

Tier 1 and OEM customers continue to engage us in meaningful opportunities for design-build programs, and we remain optimistic that more project wins occur in the coming months. On the Aerostructures plants, the major contributors to our earnings, those plants leased to our major contributors have managed to hold gross margins, and achieve some inventory reduction despite some of the declines in revenue in the second quarter and the volatilities that we’ve been experiencing.

Overall, net income in Aerostructures was below expectations in the quarter, some of which was caused by lower revenue, but most was from obsolescence startup cost in our Sun Valley plant as I had described. It seems that each quarter, we have some of these events but our base business remains strong. The Engineering Services division performed well in the quarter. It was able to adapt to reduce if it does occur. We expect that this segment will maintain gross margins through the balance of the year.

To conclude, we also expect in the near-term that suppliers in our industry will encounter financial problems, and work statement will transfer to stronger competitors. We've had several recent discussions with customers about the possibility of assisting with transfers of this type.

We do expect supply affiliates to increase as the industry downturn continues, and we do continue to discuss the purchase of customers work statements which can be transferred to our current plants without investment in equipment, facility and workforce. We believe LMI is an excellent position to grow our market share during the balance of this downturn, and we are actively preparing our organization to do so. Christine, we'll now take questions for people listening in.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We'll take our first question from Gary Liebowitz with Wells Fargo.

Gary Liebowitz - Wells Fargo

Lawrence, can you give us a little more color on the Sikorsky Blackhawk destocking issue. How much visibility you have with the customer's inventory? I think this quarter your revenue rate, going back to 2007 levels, when fairly, we are building many more Blackhawks today then we did then. Do you think this gets resolved by calendar year end or how does this play out?

Ed Dickinson

We had a meeting at Sikorsky in July, and not all of this is Sikorsky, not all of that declined, another piece of it is, one of their major Tier 1s that is involve in the program is also doing destocking. With regard to the tier one, we don’t have an answer right now, but that is something that our demand management people are working with the customer on. That has to do with the question of how many of these models, the M model in particular, Sikorsky is going to build, and how much the Tier 1 supplier is going to build them. As it's turned out, Sikorsky is building more of the product in 2009 than expected.

With regard to direct discussions with Sikorsky, we've had these at high levels within Sikorsky, and during this meeting in July, we set up meetings later this month with our demand management people and theirs, and in the meantime we've been exchanging data to try to determine what's behind the volatility. We've been assured that the product that we build and we certainly believe this to be the case, we are source on at this time. So, it's not a question of a product being purchased elsewhere, but rather the fairly aggressive inventory reduction plans that they've put in place.

What we've received from them is their current inventory, their expected demand for this year as well as for the next year. We do believe that it's basically cleared up now in terms of our estimates, because we are looking at their inventory system directly. In the past because of the volatility in the demand in their system, we've chosen to use production rates, but the inventory destocking really diverted us.

Due to the inventory destocking, sometimes at the end of the year, often times in November and December, there has been, and we experienced this in 2008 you may recall when we were also going through a Boeing strike, we had some decline in our Blackhawk product back then, when they adjusted their inventories to minimize them by year end.

This process that they've been going through, they believe and we believe has brought their inventories now to a level where it's unlikely that they are going to do any of that year end type adjustment. Their forecast for next year is strikingly higher than our actual experience in 2009. So at this stage without the benefit of the results of the meeting that our demand management people will have this month, we believe that 2010 will return to the run rates that we expected in 2009.

We certainly didn't expect and as mentioned, the guidance reduction that we made in 2009 was $6 million. We didn't expect anything like that or we would have adjusted before this, but the increase in volume in 2010 well exceeds that amount based on the expected production rates.

So I feel confident that we've gotten the best information from the customer and as I mentioned they are very interested in helping us with this because there are similar issues with some of their other supply base. And we've got suppliers that we turned on to produce product for us, so they could level at their shops and we could level at ours.

We've ended up with some extra inventory that we now expect to burn down by the end of the year, but the whole supplier base at least as related to LMI has been impacted. So, as I said in my comments, we feel obligated to the supply base also to give them the direction and that's what we're striving to do and we think we are about there.

Gary Liebowitz - Wells Fargo

Does your 2010 guidance assume that Gulfstream is going to keep producing the large-cabin aircraft at the current rate? I think it is something in the low 70s annually. And how comfortable are you, if that's the case with that forecast?

Ron Saks

Our current forecast anticipates about 75 large-cabin aircraft in 2010. We believe that may prove to be a bit optimistic, but we have a different shipset value between the 450 and 550. And when we look at other alternatives for example, were we to pull five aircraft out of that number, the impact on us based on the mix that we anticipate would likely be in $1 million to $2 million range. And because of the way we put together 2010, we think we've built enough conservatism to account for that. Were they to go below 70 units, then it would start to impact this further on an average for each unit we run about $0.5 million a unit.

Operator

We'll go next to Tyler Hojo with Sidoti & Company.

Tyler Hojo - Sidoti & Company

First question, just on the comments on the design-build win in the quarter, I think you said $8 million in tooling and $15 million in engineering. What kind of timeframe you were talking on? Was that all before 2010?

Ron Saks

No, there will be some revenue in 2009. We estimate about 20% of that will be earned in 2009 and the balance in 2010.

Tyler Hojo - Sidoti & Company

Okay. And could you may be talk a little bit about the other opportunities that you have on the design-build side?

Ron Saks

In terms of what we can describe, generally I would say this; our customers look towards increasingly for products that are built on the wing. And although the large design-build project we have is not a wing program. I would say that the programs that we are looking at are for winglets and other assemblies associated with wing product on both commercial and business jets.

Tyler Hojo - Sidoti & Company

Maybe a question for Ed, how does the SG&A expenses break per segment in the quarter?

Ed Dickinson

I think their structure's piece was flat at $6 million. It was $6 million in both the quarters. Second quarter last year and this year, there was some [flip-flop]. We had TCA in last year's numbers and not in this year's numbers. We had intake in this year's numbers, they were not in last year's numbers and they were both about $400,000. So, even with those outliers, it was basically unchanged. When I look at D3, I believe it was $2.3 million last year and $1.9 million this year and the difference really got to do with about a $0.25 million request and just lower payroll cost.

Tyler Hojo - Sidoti & Company

On the Integrated Technologies acquisition, what is your expectation for revenues out of this year. I know it was quite a bit lower than, at least, what I was looking for in the quarter, but what's your expectation for the year there?

Ron Saks

Again, we still expect this contract that they won to kick-in in the second half, and it will be quite sizable for them. So, we would be looking somewhere in the neighborhood of $6 million for the year.

Operator

(Operator Instructions). We'll take our next question from Stan Manny from Manny Family Investment.

Stan Manny - Manny Family Investment

Ron, I have a couple of questions. You mention significant restructuring and consolidation. You did mention Sun Valley. Can you give us a little more detail about what you're evaluating, what you're thinking? Are you going to close some plants and consolidate et cetera?

Ron Saks

What we are looking at is, in the case of consolidation, we're primarily looking longer term, and what make sense for the organization as a whole. That could include a plant closing or two, and certainly we're discussing that possibility and shifting work statement to plants that either can produce that work or whether work fits reasonably well. I don’t expect that to impact us in the near-term at consolidation fees. In terms of restructuring, we're looking at trying to fill the plants as I mentioned earlier in my comments.

The high contributor plants are maintaining margins despite the lower revenue they have. We haven't had workforce reductions at those plants. We had workforce reductions at plants earlier, and what we are trying to do with the new wins coming together with this possibility of acquiring work statement which we're currently negotiating. We'd like to keep the plants intact so long as we have a reasonable expectation that that work is going to come in until then backup and allow them, even at their existing margins which are quite high to be very profitable.

In the meantime, we're working on projects where we have excess people, primarily efficiency projects, and in those plans as I say where we've been doing that, dedicating some people to it. They've managed to maintain margins, so we know they are being effective at doing the work they are doing. I would say they were not successful at finding work statement to put in the plants either from failing suppliers or from the company's we're talking to about acquiring the work statement.

In the next few months, we will be looking at other work force reduction but at the same time studying consolidation. Why we studied the consolidation, part of that analysis also includes the investment in composite manufacturing. We are looking, as I mentioned in the last conference call, I didn't this time, that I made a visit to Intec last Friday.

In fact, we have plans now to increase the size of a clean-room at that facility which will make Intec eligible for production of composite components and assemblies for our customers. At our Auburn plant we're considering giving them some capability to manufacture composites as well. So, as part of this overall consolidation, we'll also be looking at expanding our investment in that area, and perhaps moving product from the Auburn plant to others as we add composite product manufacturing to it. So, it is a very comprehensive work yet, how we're going to structure the company the coming upturn, whenever that may be in our segments.

Stan Manny - Manny Family Investment

Okay. You mentioned the free cash flow for the rest of 2009 and 2010, can you clarify, I thought you said $20 million more this year, and I thought the write-up said $20 million next year of free cash flow.

Ed Dickinson

It was an attempt to address it for this year. I think at about $1.4 million negative through the first six months, so I think it would by coincidence be about [$20 million] both year-to-date as well as for 2009.

Stan Manny - Manny Family Investment

What the rest of the year.

Ed Dickinson

It would be about $20 million, because for the full year it's going to be about $15 million to $20 million, that we would generate roughly $15 million to $20 million in the second half.

Stan Manny - Manny Family Investment

For 2010?

Ed Dickinson

We did not. We didn't draw a number out.

Stan Manny - Manny Family Investment

Do you expect to use the majority of that for debt pay down or do you have some acquisitions in the near-terms works?

Ron Saks

We intend to use for it debt pay down, but we are looking at acquiring work statement. We are now booking at acquiring other businesses today. I shouldn't say that, we are always looking. But we don't have anything that we are currently engaged in today that we think fits to us. There is not a week that goes by when there aren't couple of opportunities that we do review, and we are actively doing that. So, that could change next week. We believe that with the cash flow generation expected, we could go through the elements of that but we feel pretty comfortable that we would at or close to the $20 million level for the full year 2009.

Our current debt level is around $33 million net and it's been coming down pretty dramatically since the end of the first quarter as we expected. As we go through the balance of the year between inventory reduction and number of other things that are going to occur with limited CapEx expenditures. We are going to be at a level where we have little debt and we will have a capability to make some meaningful acquisitions if we find the right partner.

Stan Manny - Manny Family Investment

Okay. Last question is, can you give us kind of your framing of what you see on the 787 in the Boeing business. Do you see any changes coming or any encouragement of sooner production and delivery for you?

Ron Saks

During the meeting last week with Boeing people I can only mention to you what was it related to me by. One of the more senior people we normally deal with it at Boeing and this was not the top senior leadership. The statement made was that the 787 certainly is problematic that there will be an announcement relatively soon. I don't know what that means, but imagine in the next 30 days to 60 days as to the cure for the most recent problem was that the public expectations of the severity problem are likely exceed it's actual severity and the delays will not be as long as people fear today, but that's about as specific as I can be and that's the only real input I've had from the company, recently other than what we read in the financial journals.

Stan Manny - Manny Family Investment

Then my question is for 2010, the forecast that you've made, does it include the significant amount of 787 work?

Ron Saks

It includes very little 787 work.

Stan Manny - Manny Family Investment

And what would be the upside if there was a breakthrough?

Ron Saks

I would tell you, I would not anticipate that because of the current delayed first flight, it is likely not to generate meaningful volume in 2010 in advance of ramped-up production, although things could change, but I will tell you that because of the delays, we also haven't been receiving many purchase orders on that product. Just in the last two weeks, reviewing our daily purchase orders entry reports, we are seeing some orders coming from Tier 1s in particular on 787 that we haven't seen before. I am always talking about maybe $200,000 to $300,000 in the last couple of weeks, but we went through a period where there wasn't much at all.

Stan Manny - Manny Family Investment

So, you are encouraged actually?

Ron Saks

There is a little bit of up movement there, but we are not anticipating much in our forecast at all.

Operator

We'll take our next question from Myles Walton with Oppenheimer.

Unidentified Analyst

Actually this is Ed in for Myles. I am sorry as I wasn't able to get on the call until just now, but if you could walk me through the pieces on the aero 2010 guidance, the increase there and also any implications for margins versus 2009?

Ron Saks

In terms other than a comment was made when we were talking about the Blackhawk tiers we have. And with the decline in production in 2009 as a result of inventory destocking we mentioned that there was a fairly significant increase in production on the Blackhawk aircraft generally together with an anticipated increase resulting from new orders that we are receiving on some assemblies and we're in the final negotiation on pricing on other assemblies that will also meaningfully impact that number.

Looking through the forecast, the level of increase on aircraft next year is in $12 million range, including all of those items. We want some new programs also including the design-build contract, which is adding about $7 million to Aerostructures in 2009. It's also adding militaries revenues, but as you'll see militaries revenues are projected to be down during 2009 based on our current visibility, and that's where the bulk of that income is coming from. There is a new contract for out Mexicali plant. That was about $2 million.

And separate one on (inaudible) coming couple of million dollars and so it's spread throughout. There is no individual item that accounts for the entire increase, so maybe that'll give you a little color.

Unidentified Analyst

Were the increase on the military side, will that be generally accretive or diluted year-over-year on the margin side?

Ron Saks

Right. On the margin side, the margins on all three segments have continued to be roughly equivalent, and margins have generally been maintained except in special areas where we've had a couple of operating problems, and those plants generally aren't involved in the major segment projects we're dealing with. So margins should be maintained.

Unidentified Analyst

Could you take about the winglet program for 2010? How much is contemplated there in terms of the increase or the decrease?

Ron Saks

There is a modest additional decrease in 2010 over 2009, which is a result of potentially fewer winglets being built in 2010 and 2009 as best we can tell. We are our forecast for next year because of lack of visibility. So, we're talking in the range of a few million dollars reduction in 2010.

Unidentified Analyst

Could you provide a little bit of detail on your activity, both in D3, and also on the G-250 and the G-650?

Ed Dickinson

At least on the G-250, the changing shipset value, so it's kind of hard to quote it right now. Our expectation was about $130,000 an aircraft. We have delivered the first units, and did part of them in the first quarter, part in the second quarter. We'll be retooling some items here this quarter, and be shipping additional units in the third quarter. I think the engineering effort related to that was primarily last year, and not really significant as the G-650 effort for engineering. The G-650 continued to gain some level of growth in shipset value there. I am not exactly sure where the shipset value of G-650 is.

Ron Saks

The latest we have is in the $200,000 to $250,000 range, although there is a considerable amount of G-650 that’s currently being bid for future production.

Operator

We'll go next to Chris McDonald with Kennedy Capital.

Chris McDonald - Kennedy Capital

One thing I wanted to learn a little more about is on the new design-build program. Could you talk a little more about the production timeline? I think you mentioned it was like about $15 million of Engineering Services work, and then $8 million of tooling and kind of startup revenue opportunity. I understand there is probably limitation on how much detail you can provide, but could you talk a little bit about the production phase of that contract

Ed Dickinson

I can start and let Ron Finish up. The Structures contribution in that number is tooling related. So, they'll be providing their first product late next year. So, initially, it will be primarily engineering work and tooling design and fabrication and procurement, that’s what’s going to make up that initial phase of the revenue block and it will be spread through. We've started already and will spread through the end of 2010.

Ron Saks

We have a milestone schedule on a project, and basically, let’s call the critical design review is scheduled for late first quarter of 2010 with assembly of our product beginning in the middle of the year and delivery in late 2010. So, production itself won’t generate any significant revenue in 2010. First flight's estimated sometime in the second quarter of 2011, and then that production will ensue I would say in 2011.

As with development programs were a little reticent to, as you might imagine because new development programs seem to be delayed. So, we are getting the milestones based on current expectations, but we will say that our involvement in this program is a little bit later than some of the other partners involved in the project and the engineering for other elements of this aircraft have been developed for several months and so we believe that at least in terms of the time pacing for us are in a delay. We have a pretty good idea when this is going to occur.

Chris McDonald - Kennedy Capital

Ron you mentioned you have two more design-build opportunities that are in work right now, and are those both new platforms as well or other derivative opportunities, modification type opportunities up there as well?

Ron Saks

One of them is just an edge to an existing aircraft, although its new aircraft and I should restate that. That is a development piece on the wing, another one is on a derivative that is newly developed as well.

Chris McDonald - Kennedy Capital

How do you manage risk on a program like this relative to the more typical work that you've done in the past in '09?

Ron Saks

We certainly had to take a different path as we try to work out contractual issues related to these kinds of contracts and broaden some additional outside resources to help us work for the people that are more skilled and that type of work. I would tell you the way we've setup this one, is that the frontend cost will be funded, so it's not a question of taking all this cost to develop it and rolling it into a net and spreading it over bunch of shipsets. This is to be funded on the frontend.

Chris McDonald - Kennedy Capital

On the incremental Blackhawk work, is that largely increased outsourcing from the Tier 1 and a primer, this share gain from suppliers that are competitors or peers?

Ron Saks

It's primarily increased outsourcing. The old model that I mention is built in Troy, Alabama and it's a plant for which we already produce some components and sub assemblies, but given some increase in production rate on [AR] there has been a bit outsourcing on that product.

Another piece, it has to do with building assemblies on a model derivative. We currently build assemblies on the primary aircraft. So that derivative model the assemblies are being built in-house and we are requesting that those assemblies we built on our tooling in our shop.

What we are looking at there is outsourcing. There are other opportunities which I mentioned in our forecast because it's too early to a major one where there is currently an outsource piece of a commercial military aircraft where the incumbent comment is no longer and it continued to do the largest sampling and the work is being worked at for the current supply chain and we are one of the supply chain members who is interested in that program and it's quite a large one.

Operator

We'll take a follow-up from Tyler Hojo with Sidoti & Company.

Tyler Hojo - Sidoti & Company

I was wondering what your CapEx expectation was for the year? Has it changed from that $8 billion number just provided before?

Ed Dickinson

I think we've been looking $5 million this year. I think at this point, Ron alluded to two projects that are currently underway, this PDM system to help this with design- build and as well as the clean room at Intec. I think right now that we will likely be a bit shy of a $5 million.

Tyler Hojo - Sidoti & Company

I know you went in a bunch of debt, just in terms of restructuring somebody's question, but just some clarification for me. Does the actual guidance contemplate any additional restructuring or not?

Ed Dickinson

No, it doesn't.

Tyler Hojo - Sidoti & Company

Ron your comments at the annual meeting a couple of months ago, you mentioned, kind of being a low cost supplier really helps in this kind of environment. So, in that sort of context, I was wondering how much capacity you have in the Mexicali facility and if you're seeing capacity increase because of those trends?

Ron Saks

In our Mexicali facility, we have quite a bit of capacity right now. We have two of our major customers who were going through the process of getting Mexicali qualified, so that we can transfer work down there and this is an amending discussion that we've had with you all for months and we keep working at. We do have some other work presently being produced down there, but there is a lot more that can go down. And we sized the Mexicali facility to handle a lot more work.

At the same time our marketing people are being pretty effective with the couple of customers at finding work one from customers that's actually located in Mexico and other in US doing aerospace related work, but unlike the work that we currently do in that side.

We see continued interest among our existing customers both from the standpoint of low cost as well as what are called record industrial, industry participations or offsets where Mexico is acquiring some aircraft both military and commercial, and so there is interest creating jobs in Mexico and making [credit flow] what we do, and as well as in the other US owned company with investments in Mexico. So, there is quite a high degree of interest, and that was one of the topics discussed in my meeting in Seattle last week.

Tyler Hojo - Sidoti & Company

On the 767 winglet program, how many ships have you actually shipped year-to-date and what kind of shipment number is baked into the guidance that you provided to us today?

Ron Saks

Through the end of June we shipped a few, five of six in 2008. In 2009, we shipped about 50 units may be a few more. We are looking at shipping 100 to 110 in 2009. So, we'll have about equivalent revenue in 2009 to that that we have in the first half of 2008, in first half of 2009. You may recall, we were ramping up considerably because rates were expected to grow dramatically in May, June and through August, September and then stabilize at a high rate. We didn’t end up having to ramp up as high as was anticipated, and next year we are estimating 10 to 15 fewer units in next year’s forecast, not knowing exactly what’s going to happen, but we think that’s a conservative number.

Operator

This does conclude today’s question-and- answer session. At this time, I would like to turn the conference back over to Mr. Ron Saks for any additional or closing remarks.

Ronald Saks

I would like to thank you all for the interest and we appreciate all the questions. I have to tell there is real excitement among our leadership about the new design and build program. I don’t want to overstate it, but if you came into our plants and saw the energy on the faces of the people who have been striving to get this opportunity you would understand how important this process is to us.

We look forward to really distinguishing ourselves on this project and growing our expertise and being able to handle many more of them. At the same time, what we are noticing is work packages to which we've respond have been delayed at our customers for a long time, and just in the last month, they are beginning to be awarded, some to us and some to others. However, what’s encouraging about that is that, there seems to be some growing optimism and I don’t want to overstate this at all, but at least that decision making can go forward now and projects can move along.

It’s been a frustrating period over the last six to nine months because of continued decisions with customers about programs that they intend to award and then there seems to be lengthy delays in making decisions, and we understand in the environment that we've been experiencing, but it has incurred in this seasons that’s happening.

We also recognize the overall economy of the world and the US economy show barriers and certainly we'll have to be concerned about possible double dips and other things we discussed regarding the overall economy, and the continuing reduced passenger and cargo traffic at the airlines who are our ultimate customers in many cases. Nonetheless, we remain optimistic that over the next year or so, as we make our way through this downturn and the industry begins then to turn-up with the advances that have been made in 2008.

In 2009, despite some of our disappointments in actual execution in the first six months, we satisfied with our strategy and believe we are positioning ourselves well for the future. So, hopefully we'll have increasingly better news for you as we have these calls in coming quarters. Thanks for your attention.

Operator

This concludes today's conference. We thank you for your participation.

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