Ducommun Incorporated (DCO)

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Ducommun Inc. (DCO)

Q2 2008 Earnings Call

July 28, 2008 10:30 am ET


Joseph Berenato - Chairman and CEO


Troy Lahr - Stifel Nicolaus

Michael Lewis - BB&T Capital Markets

Alex Hamilton - Jesup & Lamont

Edward Marshall - Sidoti & Company



Good day, ladies and gentlemen, and welcome to the Ducommun Second Quarter 2008 Earnings Call. My name is Silvana. I will be your coordinator for today. (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. You may proceed, sir.

Joseph Berenato

Thank you, Silvana. Good morning. I am Joe Berenato, CEO of Ducommun and I want to welcome you to Ducommun's second quarter 2008 conference call. Actually, we had two press releases today. The first be the second quarter earnings release and the second was the press release initiating a quarterly cash dividend. I will cover the earnings report first, then the new quarterly dividend and then take questions on both.

As reported earlier today, Ducommun had sales in the second quarter of 2008 of $102.9 million, up 13% from the $91.1 million of the year ago quarter. Gross profit margin was 21.1% in '08 versus 21.7% in the second quarter of '07, which was a slight drop of 0.6%.

Operating income was $9.6 million versus $7.7 million in '07, an increase of 25%. Net income was $5.8 million versus $4.6 million in the year ago quarter or an increase of 28% and EPS came in at $0.55 per diluted share versus $0.44 per diluted share a year ago or an increase of 25%.

As a side note we have talked previously about our goal to try to get operating income as a percentage of sales back to double-digits over the next several years. In the second quarter of '08 our operating income has a percentage of sales was 9.4% versus 8.5% from the year ago period.

In terms of mix, we see a continuing slow shift to commercial, so that our mix was 58% military, 40% commercial and 2% space versus the year ago quarter of 61% military, 37% commercial and 2% space. Sales in both military and commercial were up, but commercial is growing at a faster rate in military sales. And out tax rate for the second quarter was 36.8% versus 33.7% in the second quarter of 2007.

For the six months period, sales were $201.5 million versus $179.2 million, an increase of 12%. Gross profit margin for the half was 21.1%, steady with the first quarter and compared to a year ago's first half of 21.4%, down slightly 0.3%.

Operating income at $18.1 million was 30% higher than the $13.9 million for last year. And net income of $11.1 million was 32% higher than the $8.4 million for the last year's first half.

Diluted EPS was $1.04 versus $0.80 for the prior period, which is an increase of 30%, and operating income as a percentage of sales for the first half was 9% even, versus 7.8% for the first half of last year.

The mix exactly the same as for the half as it was for the second quarter 58% military, 40% commercial, 2% space versus again 61% military, 37% commercial and 2% space.

The tax rate for the first half was 36.8%, versus 33% for the first half of '07. I should note that Congress has not yet passed the R&D tax credit for 2008, which was also the case a year ago. So, a year ago the R&D tax credit was passed in the fourth quarter and we saw the benefit in the fourth quarter of that and we hope that, we will see the R&D tax credit passed again this year. But, we are not counting on that in any of our financials. So we continue our solid performance in 2008.

As we look forward, commercial markets continue to look strong to us. Build rates remain high and occasionally growing. Our own backlog at the end of the second quarter was $382 million versus $353 million at year-end. So we continue to see our backlog increasing, and we expect to see it to continue to gradually increase as we go forward.

Military is at a high level of activity, but as I've talked before there is program risk within the budget. But we expect the military budget to stay in the $500 billion dollar range going forward, with winners and losers with respect to particular programs.

Our internal reorganization has now had six months of life to it, and we believe it's going very well, well received by our people. We really do believe it's unleashed a lot of creativity and effort. We look forward to continuing benefits from that reorganization as we go forward.

We continue to drive our three major goals of operational excellence which is Six Sigma and Lean for us. We've already conducted over 100 Kaizen events in the first half of this year. Our second goal of profitable growth where we try to grow internally from capital expenditures and R&D expenditures and externally from acquisitions, over the last 18 months the acquisition landscape has been pretty tough.

In '07 the prices in the first half of the year were very high, and we wouldn't go there. In the second half of the year not much was available for sale. In the first half of '08 we've gradually seen better acquisition candidates at least for us starting to become available. For the first time really in 18 months, I think we're starting to see something's that could be a good fit for us. Now, of course, you always have the issue of whether you can find the deal acceptable to both sides.

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