Ducommun Incorporated (DCO)

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Ducommun (DCO)

Q3 2013 Earnings Call

October 28, 2013 5:00 pm ET


Chris Witty

Anthony J. Reardon - Chairman, Chief Executive Officer, President, Acting President of Ducommun Aerostructures - Group and President of Ducommun Technologies

Joseph P. Bellino - Chief Financial Officer, Vice President and Treasurer


Mark C. Jordan - Noble Financial Group, Inc., Research Division

Edward Marshall - Sidoti & Company, LLC

Kenneth Herbert - Canaccord Genuity, Research Division

Patrick J. McCarthy - FBR Capital Markets & Co., Research Division

J. B. Groh - D.A. Davidson & Co., Research Division

Michael Crawford - B. Riley Caris, Research Division



Good day, ladies and gentlemen, and welcome to the Ducommun Third Quarter Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, October 28, 2013. I would now like to turn the conference over to the moderator, Mr. Chris Witty.

Chris Witty

Thank you, and welcome to Ducommun's third quarter conference call. With me today is Tony Reardon, Chairman, President and CEO; and Joe Bellino, Vice President, Treasurer and CFO. 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 and Form 10-K for the fiscal year ended December 31, 2012.

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 like to turn it over now to Tony Reardon for a review of the operating results. Tony?

Anthony J. Reardon

Thank you, Chris. And thank you, everyone, for joining us today. I'll begin by providing a brief overview of the quarter, including some market color, after which I'll turn the call over to Joe Bellino to go over our financial results and some detail.

Starting with the quarter, while our aerospace & defense sales rose 5% year-over-year, total revenue declined slightly, primarily due to the continued weakness in our non-A&D segments, similar to last quarter. Non-A&D revenue fell 25% compared to this third quarter of 2012, but was in-line sequentially with the second quarter and our non-A&D backlog has stabilized. We expect this portion of our business will be challenging for the next few quarters. However, we believe that we have a sound strategy in these areas and have positioned ourselves to grow when the market starts to turn around. In the meantime, our commercial aerospace business remains very strong, with a backlog near record levels, as we benefit from higher build rates, increasing content and numerous business opportunities.

Our business within the defense sector was also solid across both our structural and technologies platforms where we are clearly benefiting from being on a large number of key programs that we believe will stay funded into the future. Our backlog here, while sometimes variable quarter-to-quarter, remains in good shape. In fact, our total backlog of $609 million does not include or reflect additional DoD bookings we expect to receive in the coming months for follow-on orders across both DAS and DLT. And while there are still some uncertainties with our non-A&D segments, we're prepared to manage the business through these challenges.

Our operating income was $12 million this quarter, versus $14 million in the third quarter of 2012. The drop in income was primarily due to lower non-A&D sales, along with a $1.1 million inventory reserve allowance. Joe will get into more detail on this in a moment.

We posted solid cash flow from operations this quarter and payed down an additional $7.5 million of our term loan. We eliminated $22.5 million of debt year-to-date and are on track to pay up to $33 million of debt this year. This has been, and remains, a core focus for Ducommun, to reduce our leverage and further strengthen our balance sheet and lower the company's interest expense over time.

Now let me provide some more in-depth color on our markets and our platforms and programs. Starting with the commercial aerospace business, I'm very proud of Ducommun's performance over the past 2 years during a time of rapid demand escalation. Our business with Boeing continues to grow and we're experiencing higher shipments across its most popular platforms, the 737, the 777 and the 787 model aircraft. We're also working hard to expand our exposure with Airbus and enhance our current positions on the A319, A320, A380 aircraft, as well as the new A350 wide-body aircraft. We are bidding on a number of new business initiatives and believe Airbus offers a tremendous opportunity for growth over the long term.

Overall, our sales attributable to large commercial aircraft platforms rose 13% year-over-year this quarter, and revenues from regional and business jet customers were up slightly as well.

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