Ducommun Incorporated (DCO)

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Ducommun Inc. (DCO)

Q3 2008 Earnings Call

October 27, 2008 10:30 am ET

Executives

Joseph Berenato - Chairman, President and CEO

Joe Bellino - VP and CFO

Analysts

Edward Marshall - Sidoti & Company

Michael Lewis - BB&T Capital Markets

Bobby Melnick - Terrier Partners

Troy Lahr - Stifel Nicolaus

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the third quarter 2008 Ducommun earnings conference call. (Operator Instructions).

I would now like to turn the presentation over to your host for today's call, Mr. Joseph Berenato, Chairman and Chief Executive Officer. Please proceed.

Joseph Berenato

Thank you, Madge. Good morning. I am Joe Berenato, CEO of Ducommun. And joining me this morning is Joe Bellino, our Chief Financial Officer. Welcome to Ducommun's third quarter 2008 conference call. Actually we had two press releases today, our third quarter earnings and a $15 million Carson all-composite helicopter blade contract announcement. Joe Bellino will cover the earnings report and then I will make some comments on the business environment.

And at this point, I'd like to introduce Joe Bellino, our Chief Financial Officer.

Joe Bellino

Thanks, Joe. Good morning. Q3 was the strongest financial performance in Ducommun's 159-year history. As reported earlier today, our net income was up 7% to $6.3 million or $0.59 per diluted share versus $5.8 million or $0.55 per diluted share a year ago.

The company had sales of a $101 million that was up 7% from the $95 million in last year's third quarter. Both segments of our business, AeroStructures and Technologies showed sales gains quarter-over-quarter. AeroStructures grew by 7%. It was being driven by higher commercial sales. Ducommun Technologies grew 3%.

In terms of mix, we continue to see a gradual shift to commercial sales. The mix of business that we had in the quarter was 56% military; 41%, commercial; 3%, space. And it was compared to last year's same period: 60%, military; 38%, commercial; and 2%, space.

Our commercial sales during the quarter grew by over $6 million due mostly to aftermarket commercial sales and Sikorsky sales and were offset somewhat by decreases in some other programs. The ongoing strike at Boeing affected our sales during the quarter by approximately $850,000. As of quarter-end, the company's backlog is approximately $444 million, and this compares to $353 million as of last December 31st of '07.

Operating income increased 7% to $9.4 million for the quarter, and that compares to $8.7 million a year ago. Our operating income was 9.3% of sales in the third quarter. We have set goals of getting our operating income as a percentage of sales to double-digit figures on a sustainable basis over the next few years.

Our combined income tax rate for Q03 2008 was 30.3%. This compares to 27.7% in Q3 2007. The good news is that due to the recently enacted legislation regarding R&D tax credits, we will record these R&D tax credits in the fourth quarter. As a result, we estimate that our effective tax rate in the fourth quarter will be in the 20% to 21% range, and for the entire year, it will be in the 30% to 31% range.

Looking at year-to-date results, our year-to-date net income was up 22% to $17.3 million or $1.63 per diluted share. This compares to $14.2 million or $1.36 per diluted share for the first nine months of last year.

On year-to-date basis, our sales were up 22% to $302 million, this compares to $274 million for the same period last year. Operating income increased 9% year-to-date to $27.5 million and rose $5 million as compared to the same 2007 period, reflecting stronger operating performance in AeroStructures.

Another area of liquidity and capital resources, during the quarter we continued to generate positive cash flows from improved earnings, our focus on continuous improvements and effective working capital management. This has allowed us to continue to strengthen our balance sheet and expand our financial flexibility for further growth initiative.

While the low 9% debt-to-capital ratio that we have is still below our longer range target of 30%, we feel that given today's economic and financial uncertainty that is a good position for us to be in. We expect CapEx for the entire year of 2008 to be $11 million through the first nine months we've invested $9.5 million.

With that I'd now like to ask Joe Berenato to make some overall business comments. Joe.

Joseph Berenato

Thank you, Joe. In our military markets, we're expecting some softening of the defense spending driven primarily by a lower level of activity in the middle-east and the need to find money to support the government intervention in the financial markets.

We're seeing a reduction in our Apache blade build rate sooner then we had expected, on the other hand we're seeing more orders for C-17 Chinook helicopter, which is now in our top five programs and the Carson helicopter blade, where we announced additional orders in the press release today. So, while there may be some softening to the DOD budget, going forward, I don't foresee a major shift since terrorism, Iran, China and Russia are all still out there.

In the commercial marketplace, my expectation and I hope I am wrong about this, is that the Boeing strike probably goes to January. We have been building at lower rate since early September, and of course Boeing has only been warehousing the product that we send them. And we will continue to build at those lower rates for some time after the strike ends as Boeing uses up what we're currently shipping to them. So, certainly Q1 2009 will have some impact of the lower build rates.

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