Ducommun Incorporated (DCO)

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Ducommun Inc. (DCO)

Q3 2009 Earnings Call

November 2, 2009 10:30 am ET

Executives

Joseph Berenato – Chairman and Chief Executive Officer

Anthony Reardon – President and Chief Operating Officer

Joseph Bellino – Vice President and Chief Financial Officer

Analysts

Troy Lahr – Stifel Nicolaus & Company

Edward Marshall – Sidoti & Company

Michael Lewis – BB&T Capital Markets

Presentation

Operator

Welcome to the Third Quarter 2009 Ducommun Earnings conference call. (Operator Instructions). I would now like to turn the presentation over to your host for today's call, Mr. Joe Berenato, Chairman and CEO of Ducommun.

Joseph Berenato

I am Joe Berenato CEO of Ducommun and I would like to welcome you to Ducommun's third quarter conference call. Earlier today we actually issued two press releases. The first announced a $31 million follow-on order for the C-17 program which takes us through 2010, and the second release announced our strong third quarter results. Joining me on the call today are Tony Reardon our President and Chief Operating Officer, and Joe Bellino our Vice President and Chief Financial Officer.

And with that, I would like to turn the call over to Tony Reardon.

Anthony Reardon

I'd like to give a brief market overview and discuss the implications on Ducommun's performance in Q3. I will then review some of the major operating highlights for the quarter before turning the meeting over to Joe Bellino for the financial review.

In the commercial airline industry we're still seeing weak air traffic, although there has been some improvement since the first half of 2009, with continued consolidation of the routes. The domestic airlines have been delaying or pushing out new aircraft purchases and retiring older aircraft, while the international carriers seem to have been experiencing a slightly better trend.

Despite the airline trends, the commercial jetliner market is holding steady because of the robust backlog. And other than the already announced bill rate cuts on the Boeing 777, we expect a major program such as a Boeing 737 and the A320 programs to continue at the current rate, full production rates through 2010.

The regional jet market has been impacted to a greater extent by the airline industry trends, but we've seen some build rates stabilizing. The general aviation market has been hit hard, including being impacted by the lack of equipment leases, and we don't see any meaningful recovery in the near future.

The military defense market remains solid for 2009. We reported earlier today in our press release on the C-17, it will be fully funded through the fourth quarter of 2010, and the recent defense budget adds another ten new aircraft through 2011.

Ducommun's performance for Q3 was pretty strong. We had a shift in the mix as we moved to a higher military versus commercial mix quarter-over-quarter and year-to-date, primarily due to the acquisition of DAS-NY, which has heavy military helicopter mix which has been offset by a drop in our regional jet and general aviation market business.

Our military business remains solid as we increase sales on the C-17, F-18, and the Blackhawk program, although with a slight increase in our engineering services business quarter-over-quarter and year-to-date, these increases were partially offset by the previously disclosed drop in sales in the Apache program

We had a $5 million one-time pickup in revenue during the quarter on the sale of a development program for the Unmanned Combat Air Systems, acronym UCAS, engine components. It's a significant milestone for us in the pursuit of new business. Now we are well positioned on the future work as a result of our efforts on this program.

The commercial fixed-wing and rotary-wing markets were down quarter-over-quarter and year-to-date on lower sales in the regional jet and the general aviation markets despite being partially offset in the quarter by higher sales on the 737 program due to higher volume production spares, and higher sales on the Boeing 777 program achieved as a result of the DAS-NY acquisition. We also had an increase in 787 development and low-rate production work in the quarter.

Ducommun Technology sales were down quarter-over-quarter, but our ability to improve profitability remains strong through our efforts on lean and Six Sigma. We continue to invest in selected internal engineering development programs at DTI which will improve our design engineering product offering and meet customer expectations. We anticipate that some of these projects will be ready for the market in the coming year.

Ducommun AeroStructures had solid performance in the third quarter while managing several new development programs. DAS is investing in a number of new startup and development programs such as the RUAG assembly, the Embraer design and build program, and the UCAS development program and these are all paving the way for our future growth.

Looking ahead, the military markets remain solid through 2011, but we'll have some changes in mix and a possible reduction in the RDT&E spending and that may have an impact on the engineering development and services sector. The military helicopter market remains a bright spot and we continue to build our market presence here. However, we're seeing a lower usage of the Apache helicopter than anticipate and we expect that this will most probably lead to a further drop in production rate next year.

The regional jet and general aviation markets are down and still volatile as the aircraft manufacturers are seeking the proper build rates and their associated inventory levels. The commercial market remains stable and we look for the Boeing 737 program to stay at its current build rate and possible lower rate productions than the Boeing 787 program.

Read the rest of this transcript for free on seekingalpha.com