Ducommun Inc (DCO) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2010 Ducommun earnings conference call. My name is Jasmine, and I'll be your operator for today.

(Operator Instructions).

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. Chris Witty. You may proceed, sir.

Thank you, and welcome to Ducommun's fourth quarter conference call. With me today is Tony Reardon, President and CEO; and Joel Bellino, Vice President 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 than the performance indicated or implied by such events, 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 in Form 10-K for the fiscal year ended December 31, 2010.

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'd now like to turn it over to Ducommun's President and CEO, Tony Reardon, for a review of the operating results. Tony?

Thank you, Chris, and thank you, everyone, for joining us today. I'd like to give you a brief overview of the quarter and the year, after which I'll turn the call over to Joe Bellino to discuss our financial results in detail.

Let me start out by saying that we were disappointed with Ducommun's overall performance in the fourth quarter. While pleased that the revenue rose sequentially from the third quarter, some of the program delays that we had mentioned in our previous conference call continued to impact our top and bottom line during the period. I'm referring to specifically to the C-17 and the Chinook programs.

With respect to these programs, we're working hard to finalize some follow-on contracts with these customers and stabilize the revenue for 2011. We did, however, book strong shipments in this quarter for the F-15, the F-16, and the F-18 program, as well as the Black Hawk helicopter, which ended the year as our largest military program surpassing the C-17 for the first time.

Looking at the rest of our manufactured products, commercial aircraft shipments were solid. And as we expected -- and we also experienced increasing demand with our regional jet market, led by the RUAG fuselage assembly for Bombardier. The primary weak spot within our commercial business was the Carson helicopter. This rotor blade is being qualified for a new application and experienced some shipment delays due to engineering issues that have since been resolved. Shipments will resume in the first half of 2011 for this program.

In addition, sales of our manufacturing technology products led by the replacement radar racks and electronic components were up quarter-over-quarter reflecting continued strong demand. The engineering services, however, experienced further funding delays in Q4, partially due to the lack of the federal budget as the government operates under continuing resolution. This issue is yet to be resolved and we would expect that late in the first quarter or second quarter we ought to see some resolution on that.

Ducommun's overall operating income did not come in as high as we had hoped for the quarter, primarily because of the delays previously mentioned on the facts and the programs that I mentioned above and also that impacted our margins. We also had the fact that we continued to invest in new programs during the quarter, which impacted some of the margins for the short term but will pave the way for solid growth going forward.

We had initial startup builds during the quarter and a series of new business awards that were announced in 2010, including the Embraer Legacy program, the 77 -- Boeing 777 tip assemblies, and the 737 engine start switch. We also hit steady rate of production for the fuselage program for Bombardier with RUAG and the Black Hawk UES during the quarter and had some investments here as well.

Overall, looking back on 2010, the year played out largely as we expected it to do. Ducommun faced challenges on certain legacy military programs, but as the months progressed we saw stabilization and then growth across many of our commercial platforms. At the same time, the Company continued to invest in new program developments, laying the foundation for improved performance in the years to come.

Revenue for 2010 fell 5%, reflecting a decline in the shipments on the C-17, Apache, and Chinook programs, along with the significant drop in our engineering services business. The shortfalls were only partially offset by gains elsewhere. Even with our top line impact, the Ducommun posted net income at $19.8 million, or $1.87 per diluted share in 2010. This was supported by the benefit received from R&D tax credits, which were available because of the past development efforts that we put forth to grow our business. We also once again generated strong operating cash flow, at $26.5 million last year. This is the eleventh time in the past 12 years that included very positive cash flow.

With Ducommun AeroStructures, our performance reflected the ongoing softness in the two legacy programs, the C-17 and the Apache, along with delays in the Chinook shipments at the end of 2010. And I talked about the Chinook last quarter, about the retooling of that program, and that was an issue that was raised in the third quarter and continued the softness in the fourth quarter. We currently forecast that both the Apache and C-17 will have lower revenue in 2011 than was posted in 2010, but expect this to be offset by stronger commercial and other military programs, particularly in the second half of 2011.

The decline in these two legacy programs is playing out as expected, and we've been driving new business growth over the past few years to offset the substantial overhang. As for the Chinook program, we will resume shipments in the first half of this year, and we see stable shipments during the second half of 2011.

The rest of our military programs remain solid, and we're pleased to say that the Black Hawk, and as I had mentioned earlier, is now our largest military program with revenue up 13% over 2009. We expect similar strong performance for Black Hawk in 2011, and see the Joint Strike Fighter as continuing to be funded and anticipate solid sales on the F-18 and F-15 spares. We expect our commercial business to post further growth in 2011. As you may have noticed, we ended out the year at 40% of our business being commercial platforms, versus 60% in military and space. That's up from 36%, and to 64% split in 2009. And we expect the trend to continue in 2011, the commercial business improving to close to 45% of our total sales for that year.

In fact, our commercial business, which will start making a substantial impact on our results during the second half, will drive overall revenue gains in Ducommun AeroStructures this year. We expect to benefit from increased shipments to support the higher build rates on the Boeing 777, 737 and 787 programs, along with the Airbus A330, A340, and A380 platforms. And we have invested in several new important programs that will drive further expansion in 2011. As noted earlier, the new growth will come from programs that include the RUAG Bombardier fuselage assembly, the Airbus A350 nose fairing assembly panels, and the Embraer Legacy airlines and spoilers, and the Boeing 777 empennage vertical and horizontal fin tip stabilizers.

With Ducommun Technologies, we experienced a very challenging year in terms of our engineering services business but saw really solid performance out of our manufacturing group. While overall DTI, the Ducommun technologies group, our revenue fell 5%, operating margins were stable, reflecting the strength of our manufacturing group. Engineering services saw revenue fall as a result of reduced government spending and certain order delays, but we realigned the business during the year and we're focusing on other key growth areas, such as nano satellite markets, and we're seeing some recent successes in those areas.

We believe the engineering services unit has stabilized and will see room for improvement in the second half of 2011. Excluding the engineering services business, DTI actually experienced nice top line growth last year driven by strong performance in the manufacturing technology products, which include radar racks and other electronic components. We were very pleased with the performance of the Ducommun Technology manufacturing group during the second half of the year.

Before turning the call over to Joel, let me just summarize some major points regarding 2010. The total revenue declined in our 2 leading legacy programs, the C-17 and the Apache, plus the revenue decline in our engineering services business, amounted to an aggregate of over $35 million last year. We also estimate $3 million to $4 million of the Chinook business was pushed out into 2011.

Going forward, in the first half of 2011, the C-17 and the Apache will stabilize, although at lower rates, and we anticipate that our engineering service unit will be stable as well. Given these facts and what we see as an overall strengthening in the commercial end markets, we feel good about the coming year, particularly as more programs ramp up in the second half of 2011. Now I'd like to turn the call over to Joel Bellino to discuss the financial highlights.

Thank you, Tony. And welcome, everyone. For the fourth quarter results yesterday, we reported results of net income of $4.2 million, or $0.39 per diluted share, versus a loss of $3.2 million, or bracketed $0.31 per diluted share a year ago. The fourth quarter 2009 net income results include a non-cash after-tax goodwill impairment charge of $0.74 per diluted share. Our sales for the fourth quarter of $102 million were off nearly 4% year-over-year, but within that, our commercial business increased 4%, but this was not enough to offset the 8% decline in our military and space business that Tony talked about.

We look at it another way, our manufactured product sales were just off slightly, just 1% off a year ago, and our engineering services were off 26%, primarily as a result of reduced government funding. If we look at it even another way, look at our revenues by our two reporting business segments, Ducommun AeroStructures, or DAS, sales decreased for the quarter by 6%, we had softer sales in aggregate in the military helicopter products area as well as military fixed wing products. But this was offset partially by continued growth that we're seeing in the large and regional jet commercial aircraft programs.

In the technology segment, DTI, we saw a nearly 2% increase in revenues overall as our manufactured technologies products group realized a 15% increase in revenues, with higher shipments of replacement radar racks and electronic components, which more than offset the 26% decline in engineering services. Taking a look at operating income, overall and then by business segment, our operating income for the quarter decreased to $4.4 million and it was 4.3% of revenues from an adjusted $7.2 million in last year's fourth quarter, if we excluded the goodwill charge or 6.8% of revenue. In this year, our lower margins were driven by lower operating income in our DAS segment and slightly higher corporate expenses, which I'll discuss a little bit further.

During the quarter, we absorbed, and then what we disclosed in our earnings release yesterday afternoon, we absorbed $1.3 million or nearly 1.8 percentage point in startup and development costs for several new programs which were started earlier in 2010. We expect these to be reduced sequentially quarter-by-quarter in 2011. If we break down the operating income by business segment, DAS's operating income declined to $5.4 million, or 8.2% of revenue, compared to $7.7 million, or 11% of revenue a year ago.

The lower operating income reflects a more unfavorable product mix, namely those items that Tony talked about, a mix shift related to the C-17, Apache, and delayed shipments of Chinook. And, in addition, the bulk of the development cost that I noted earlier were all attributable to the DAS segment. Adjusting for that, the development costs, and looking at it on a more normal run rate basis, the adjusted operating margins for the DAS segment would have been approximately 10.6% versus the reported 8.2% in the fourth quarter of 2010.

Turning to DTI's operating income, it reported a $4.2 million OI or 11.7% of sales versus $4.2 million or 11.8% of sales last year, again, excluding the goodwill impairment charge. We were pleased to see those operating margins improve 100 basis points sequentially from the third quarter's results, primarily as a result of increased shipments of radar rack products, increases in several product lines in the technologies area, and continued efficiencies that we're enjoying from our lean manufacturing practices.

Selling, general, and administrative expenses increased to 13.9% of sales, compared to 11.4% of sales last year. But the differential is primarily attributable to a reversal of a $2.2 million environmental reserve that occurred in the fourth quarter of 2009. Otherwise, expenses were similar and cost controls remain in effect here at Ducommun.

In terms of our backlog, we were pleased to see improvements in our backlog, both sequentially and improvements in our bookings year-over-year in the fourth quarter as well as we enjoyed a 14% increase in 2010 versus our 2009 bookings. Tony talked about the mix in the commercial business as we moved toward more toward a 45% commercial, 55% military, and just a year and a half ago military that was 65% and commercial was 35%.

We are pleased that we have no major program losses, and while our backlogs did increase and reported our fourth quarter for the 737, the 777 and the Carson helicopter, we still have experienced delays in follow-on orders from Chinook and the C-17. We expect these follow-on orders to be booked in the first half of 2011. We're also optimistic with regard to additional recent program wins, and with new programs announced last year that are ramping up in 2011, we expect our increased backlog and increased bookings going forward.

Turning to the full year results, our net income of $19.8 million, or $1.87 per diluted share compares to $10.2 million, or $0.92 per diluted share last year. In 2009, we did have that non-cash after-tax goodwill impairment charge of $0.74 a share, but overall even when adding that back in, we increased our earnings per share by about 6% to 7%. In 2010, our net income was favorably impacted by approximately 20% effective tax rate as compared to 26% in 2009, as a result of a change in provisions for our unrecognized tax benefit, and this benefited us for about $0.19 per fully diluted share which we recorded in our third quarter.

Important to us are our development activities in the research and development area, and we are pleased to see that the federal government approved the R&D tax credit for not only 2010, but for 2011, where we estimate our overall tax rate in 2011 will be approximately 31%.

Looking at our full year 2010 sales of $408 million, they were down 5% from last year, but commercial sales overall were up 5%, and it was not enough to offset military space sales declines of 11%. Again, when we look at it from a manufactured products standpoint, we were down just slightly, again, just down 1%, and our engineering services were off 30% overall, or approximately $17.5 million was the adverse impact of the declines in our engineering services business, as we had year-long challenges of reduced or delayed government funding.

Looking at our revenues by business segment for the full year 2010, DAS's sales decreased by 5%, primarily for the reasons we discussed before, although we continue to enjoy growth in the large commercial aircraft and the jet commercial aircraft programs. The technology segment full year revenues were down also 5%, reflecting the shortfalls in the engineering services, but the overall DTI manufactured product technology services area increased 11%, continuing the momentum that we had enjoyed in the fourth quarter of 2010.

Our full year operating income of $26.5 million for fiscal 2010 compares to a reported $29.2 million for 2009 after we take out the impairment charge of 2009. The reported operating margins of 6.5% compares to an adjusted 6.8% in the comparable period of 2009. For all the reasons that are in the disclosures, in both our press release and in our 10-K which was issued this morning, on a normal run rate basis, the story line really that's most important is our operating margins ran about 7.6% of revenues versus in last year's adjusted of about 7.6% of revenues.

Turning to liquidity and capital resources, as a reflection of our normal cash flow and business cycle, we generated $29 million of cash flow from operations in the fourth quarter, bringing our full year results to over $26 million. When we factor in our dividends that we pay and our CapEx, we ended up with $16 million in free cash flow, which is similar to what we have experienced in the past several years.

We continue to focus on working capital improvements, things like inventory turnover and cash collections, and we have done a very good job in those areas in the last few years. The solid cash flows allowed us to retire all of our bank debt, and it leaves us with well positioned to take advantage of both organic growth initiatives and our inquisitive growth opportunities.

Looking at CapEx, we expect it to be about $12 million this year. It's a little bit higher than the $7 million in 2010. And these are primarily reflects new program growth, and we are making some additional investments in equipment to expand our product line capabilities.

Now I would like to ask Tony to make some additional remarks. Tony?

Thank you, Joel. Before turning the call over to questions, let me just reiterate a couple of key points. We see 2011 as being a year of growth in many of our core commercial end markets driven by the general strengthening of the global economy. We should also see growth in the regional jet deliveries. We expect that this will occur while the military business remains somewhat stable. Growth in areas like the Black Hawk and F-15 and elsewhere should offset the softness that we're going to see in the C-17 and the Apache.

We think the environment in the first half of 2011 will look a lot like the last half of 2010, with a solid pickup coming in the second half of 2011. We continue to streamline our operations and generate solid cash flow.

At the same time, the Company's strong balance sheet, we look for strategic acquisitions that can bolster our presence as a tier 2 supplier on critical programs in the US and abroad. We look forward to the challenges of 2011, and we're confident that the investments and the initiatives undertaken in 2010 will lead to growth in both revenue and operating margins going forward, with noticeable improvements in the second half of 2011.

Now, Jasmine, I'd like to turn the call over to any questions that we may have.

(Operator Instructions). Your first question comes from the line of Troy Lahr, with Stifel Nicolaus. Please proceed sir.

Yes, I'm wondering if you can talk a little bit about the investment spending that you had in the quarter, just maybe give a little more detail on why that was so high. And then kind of what level of confidence you have that that's going to start coming back down again in the first quarter.

Okay, Troy, this is Tony. The fourth quarter investment was higher than we had expected, but it was set up by a couple things. One, on the RUAG program, we had -- we changed out some supply base and we had some nonrecurring associated with doing that, and that moved us in a little bit more of an investment than we anticipated but we expect to see significant efficiency from that going forward.

But the other part of it was we had several startups that occurred in the fourth quarter, some of which we had planned for the third quarter that moved into the fourth quarter. Most notably we did first articles on a number of new programs like the 777 Empennage Tip assemblies was fit checked in the fourth quarter as well as we did our first lay-ups on the Embraer program for the airlines and spoilers.

But I think that going forward, we have a pretty solid plan. We probably will see a little bit more investment in the first quarter, but we think that most of that's behind us now and we should start seeing some solid performance going forward.

Okay. Is there a dollar amount on how we should think? Does that get kind of back down to the $500,000 range or, I mean, you did like around $1.3 million, kind of what range should we think about?

Yes, Troy, as we were reporting quarterly and tracking that number, we look at the fourth quarter as a blip on the screen and it will continue on. It will probably be the $500,000 to $600,000 level here in the first quarter and then continue to abate to, eventually where we get to the end of the second quarter, those expenses should be minimal, start rolling into the third quarter.

Okay. Thanks. And I think last quarter you mentioned that there was military delays that you thought were going to get shipped in 2010 or early 2011. Is that now pushed out even further? Looks like you got some of the fighter work coming through but you're still waiting on the other stuff. Is that -- ?

Let me address that. So the big slide, the C-17 was an issue where there were 2 things going on. We had not finalized the follow-on contract with them. We are in negotiations with them. So that delayed some shipments. And also they never actually recovered on the production line from that strike in July. So we lost the ship set that we had planned on. That will be smoothed out over the next couple years, so we probably would not pick up the C-17.

On the Chinook program as I mentioned earlier, they retooled on the rotor blade line and we supply components to that and we should see that picking up in the first half of the year and so they've started back in production. There's pretty high demand on that, and we think that will -- may not see the peaks that we saw in 2009 but should be pretty solid pickup. We expect to pick up that $3 million to $4 million this year.

Okay. And then last question, I'll jump out. If you look at Boeing starting to ramp up to some of these higher build rates in 2012, do you have the capacity in and the tooling in place to handle that or are we going to see some spending towards I guess sometime in 2011 to support that? How should we think about that?

The big question that we have is what rate does Boeing hit on the 737. So if they go to the 42 ship-sets, I would anticipate that not to be probably until about 2012. At that point in time, we may have some investment to hit that rate. Anywhere under 38 ship-sets we should be in pretty good shape going forward without any significant investments to capitalize that.

Okay. But the plan is to get to 38, though, in 2012; right?

I believe so.

So you're comfortable with 38?

We're comfortable with the capacity that we currently have and the tooling in place.

Is 42 the discussion that you're roughly having with Boeing, on can you get up to that?

That's right, yes, that's where they're at now.

Okay. Great. Thank you.

Your next call comes from the line of Edward Marshall, with Sidoti & Company. You may proceed sir.

Hi Guys. So I'm looking at the regional and business aircraft, it's broken out by year and 2010, and 2009, and 2008 in the queue. And it looks like despite the fact that total Company sales were down 4%, the regional business picked up 10% in 2010. And I thought it was a pretty tough year for regional business. So is this the new work that you're working on that's helping contribute to that, and if so, as I look out into 2011, and 2012 when you kind of see that market coming back, what kind of percent of sales would that be, would that account for of the whole?

Let me answer the first part first and then the second part will be a guess. But yes, the step-up in the regional Jet business is a function of the new programs coming on, specifically RUAG. That was partially offset by some declines in some of the other regional Jet business that we have. But on a whole, that looked pretty solid and we expect that to hit steady state -- well, we are at steady state production right now going forward and that's about 4 ship-sets a month.

We also picked up a couple other programs on the regional Jet side, so we're working on those as well. I would expect the business to stabilize. We're looking at this year to be relatively flat in terms of aircraft deliveries on the regional Jet side. So our business would -- should stay at the same level that we saw in 2011, and as the market picks up we would anticipate that we would pick up with it.

It makes up about 8% to 10% of our business currently and to add to what Tony said, what we've seen, there's still softness in the regional Jet markets. After the peak of 2008, it's been down sequentially the last couple years and forecast for 8% to 10% growth in that segment this year overall, it's still going to be down substantially from 2008, probably get to 2013 before it exceeds the 2008 peaks.

But the business segment, the business line as a whole, could that make up 12% to 15% of your revenue once it's up and running at full click?

If it goes -- let's put it this way, depends on how the market reacts. I would say we'll grow in other areas, so it may not make that jump. We're going to be growing on the large Commercial side. There's -- we've got quite a few things going on internally right now that it would be very difficult to pinpoint that percentage.

We think our growth rates for the large Commercial aircraft are in the 20% to 25% within 2 years from now and certainly those -- the growth of that will keep the regional Jet portions about the same where they are now.

Okay. And so that brings me to my second question, I guess. Sounds like the pipeline then that you guys are working on for new business sounds pretty deep, is that right?

Yes, it's still -- we have lots of activity out there and we have a couple of wins that we have not announced that we're waiting for approval on from the customer that will flow through hopefully during the first quarter and then -- that we're actually working on the programs right now and then we've got a couple pretty solid programs that we're bidding on that we look very favorable for us. So I would say the pipeline is pretty solid all the way across the business. We're seeing a pick up in the Technologies market as well and some opportunities there. So we're optimistic that we have a good platform in place.

So without diving too deep, maybe we could -- would any of these programs that you're discussing kind of make it to your top -- one of your top 10 programs for either new sign up business or something that you're working on?

Well, for sure on the 787, we keep trying to add on that program and I think that would clearly be a program that as we see going forward that will jump up there. And then depends on how the rest of the programs play out as we go forward, but we have a couple that we're working on right now. As a customer base it may happen but not particularly from an applications standpoint if that makes sense. Maybe on various applications we may see 1 of our current customers jump into the top 10 that's not there now.

They're potentially material wins, maybe not just for the program but for the customer?

Primarily for the program. And then for the customer, we're already in place on a couple of those customers so it's -- it would be whether or not we get the full boat on what we're bidding on.

Okay. And then finally, if you could kind of talk about what you've been seeing going on in the acquisition place, I'll continue to come back to this question but I've seen some of these acquisitions going off at 14 times forward EBITDA. Is that kind of the multiple? I mean, you said before that you would pay up but I mean, is that kind of the multiple that you're expecting to pay? And if you can comment or elaborate any further on that, that would be great help.

Okay. Well, let me say this, first of all, we are active in the marketplace and we're looking for a strategic acquisitions and I don't believe that a 14 times multiple is in our range, okay? So the answer to that is no, we would not pay -- especially given where our multiple is.

Good to hear.

That's a little bit outside the sweet spot for us. But we will continue to look at acquisitions and when we say we'll pay up, we also have an understanding that we have to have a solid way to make that accretive. So we always look in the acquisition front for opportunities for synergies and the ability to put the -- make those acquisitions accretive, much like we did in our last acquisition with DAS New York.

You haven't made an acquisition yet. We've talked about for almost a year, maybe a little longer. Is it price that's keeping you back? Is it the right fit? Obviously you'll probably say all of the above, but kind of help me out in thinking about what's keeping you from making a potential acquisition.

Well, I can tell you that we were at the altar a couple of times. And a couple of times it was price, and a couple of times it was things that didn't work out right.

Okay. Thank you very much.

Your next question comes from the line of Michael French, with Morgan Joseph. Please proceed sir.

Thank you. Good morning gentlemen.

Good Morning, Michael.

First question, on the CapEx moving from $7 million up to about $12 million, talked about a couple of things, new programs, new equipment and the expansion. Wondering if you could elaborate a little bit, particularly on the expansion, what types of products are you expecting to move into?

Well, there's -- we're actually -- Michael, there's a product line that we currently are supporting right now that we are expanding into full capability on. We had previously off-loaded some of the manufacturing for that, and from a customer standpoint they prefer to have us have the capability in-house and that's a major -- it also opens up a whole new marketplace for us in terms of competitive nature. So that's a big portion of the up-tick.

So actually, that's -- of the growth in the capital, that's I would say probably 60% of it. So it's related to one particular marketplace associated with the Titanium marketplace and puts us in a position where we feel that we can be very competitive and it's not something that we -- it's something that we've looked at for over 4 or 5 years and have been working very closely on from a growth standpoint. So we're actively -- we've actually committed some of that capital and some of that will be in by the June time frame. So we're moving into I think a very sound, stable marketplace and we should see some pretty solid growth going forward on that.

Okay. Very good. And if you're not going to be subbing out the Titanium work, could we expect margin expansion as a result of that?

We sure hope so. That's the plan. So it's work that we think that we can do a much more efficiently in-house and will improve flow. We've had several lean events with the customers in terms of implementation of the equipment and flow through the shop, so I would say that we will be much more efficient and, therefore, be more competitive, yes.

Okay. Very good. And how should we think about free cash flow for this year, given the increase in CapEx? Think that it would be offset or partially offset?

I think perhaps our -- it depends how you model what our net income is. But the additional use of capital, we've typically used $9 million. We generate -- our depreciation and amortization will be about $14 million. So of our $16 million of free cash flow, this past year, it will probably be down a little bit, Michael.

Okay. Very good. Thank you and good luck.

Thank you.

Thank you.

Your next question comes from Jeremy Devaney, with BB&T Capital Markets. Please proceed.

Good Afternoon, gentlemen. Thanks for taking my call.

Thanks, Jeremy.

Thanks, Jeremy.

Looking at the defense market in particular, we're under the CR right now, was wondering if you could talk a little about some of the specific headwinds that you're seeing, were there specific delays related to the CR that you were able to identify in the quarter?

In last quarter?

Yes.

Well, there were a couple of issues that delayed release of orders, and some of it on the Satellite side, and there were a couple of shifts in our work that were pushed out and then of course NASA budget has been renowned so that's been a fee change for us in terms of support there. We're still very solid there but it's just -- it's been a very fluid change. So we've been up and down there and right now we look like we're relatively more solid shape there. So when we look across the CR, it's -- it changes, it's fluid. But really what it does, it hurts the funding dynamic. As you know, the CR causes the government to maintain the current budget and the current budget rates, and so the issue is how do we change that to reflect what the actual needs are today, and that's what's been caused a lot of delays in the release of programs that we should be supporting today.

Tony, is there a specific program that would you be willing to share with us that's being pressured more than others?

It's actually -- the ones that are being pressured more than others are black programs.

All right. That's fair. And then looking ahead as it relates to FY 2011, you said the first half's going to look much like the second half of '10 with an up-tick in the back half of '11. Is that primarily driven by build rates at Boeing or is it more related to the funding environment on the Defense side?

It's both. It's actually some of the funding on the Defense side. It's obviously on the Commercial side. We see a pick up in the second half, in particular on the 787. And then -- and also on some of the radar rack releases, we see those -- if you could look back at 2009, you saw a soft first half and then a solid second half on the radar racks. And that's kind of what we're experiencing today. So we see as we move through those programs a little bit of a shift there, but it's primarily from a funding standpoint on the Military side and then the build rate pickup on the Commercial side.

Alright. And then lastly on the budget, when we're looking at the first half being much like the second half of last year, are you currently baking in an expectation for the CR to be in place for the full government fiscal year or how are you guys thinking about how this --

What we're actually thinking about is that it gets resolved in the first half of the year.

Alright.

And that we have some pickup. But the Engineering Services business, we have not been sitting still on that and so I want to make that clear that we've kind of walked through this and really shifted the business model and done some real nice things in terms of how we're servicing the customer today and made some changes overall. If you look back 5 years ago, we lived off plus-ups. This year, that's a de minimis in terms of what that business is and we moved into other markets like the Nano satellite and we had a very successful flight with the United States Army in the last quarter of last year on some Satellite work that we did and that's positioned us well going forward.

Alright. And then my last question, and I'll get out of the way here. Cash flow was pretty strong in the quarter and just thinking about uses of cash as we move ahead, multiples earlier in the call were identified as being a little bit strong right now in M&A. You guys have been to the altar. Do you think we're going to consider possibly raising the dividend any time in the near future?

I think in our priorities, Jeremy, I think we look at re-investing in our business first and then acquisitions second and paying down debt, but we're out of debt right now and then fourth we would take a look at our dividend. But we think that those top two initiatives can generate better shareholder returns than just increasing our dividend.

Alright. Given that some of this investments going to start to roll off, though, in the -- if there is not an M&A possibility imminent and we have no debt now, or little debt now, is it something that's in consideration?

Well, we feel that -- if it's minus the two Military Sunset programs, we have on a sustained basis been able to grow this business 6% to 8% and that does require working capital and other things and we would really prefer to reinvest in the business and even reinvest in new programs as a continuing pipeline as we really change our portfolio of products. We have some exciting opportunities on the technology side and our platform for Ducommun Aero Structures is solid with the brand name we have in the marketplace. And as a result of some of these newer programs we're getting more opportunities and are positioned better on a bidding standpoint to get awarded new business and that's really where we prefer to go until we ever got to a point where we didn't see any growth, unless flat growth and then we would probably look a little harder at returning more cash to the rightful owners of the business, the Stockholders.

All right. Great. Thank you very much for taking my calls and good luck this year.

Thank you very much, Jeremy.

Your next question comes from the line of Jonathan Richton, with Imperial Capital. Please proceed sir.

Hi, good morning.

Good morning, Jonathan.

Hi, Jonathan.

Just in terms of expanding the Engineering business and getting I guess more complicated work, Boeing mentioned -- Boeing has been mentioning that on future programs they want to bring more stuff in-house. Do you see that affecting that side of the business in the long run or kind of the area that you're focused on isn't going to be as affected?

Are you talking about from the Manufacturing side or the Engineering Services side, Jonathan?

I'm actually from both, because it sounded like they want to take more of the design work in-house and manufacturing work.

When you look at Boeing, we're not a big Boeing supporter on the Engineering services side. We clearly are in the Manufacturing side. So our Engineering Services business is primarily government related and they're our primary customer, United States government, missile defense, Missile Defense Agency as well as Raytheon and Northrop are our primary customers there. But having said that, on the pull-in, from the manufacturing standpoint, I think you've seen pretty much what Boeing's going to do in terms of their build-up in the South Carolina plant. We're actually working on new business opportunities there. So I would see that what Boeing's doing from a pull-in on their Engineering side would be not effective to us, especially to the Commercial side, and on the Military side I don't see that as a big change.

Okay. And on the Manufacturing side?

Manufacturing side, I think that we're in pretty good shape and I think they'll continue offload -- look, when you look at our business, we are in the Manufacturing Services business. So to make a long story short, we compete basically with the capabilities of the OEMs, so what we do is try to offer a better solution than they have in-house and we've been pretty successful in that. I would say that you would not see a big shift in what Boeing's doing in terms of offloading.

Okay. Great. And then looking in terms of in the press release, I think you're quoted as saying just further streamlining the operations. Is the increase in CapEx, which I think it talks about going up more offshore, is that part of that initiative or can you kind of go more in depth on how you're viewing the streamlining during 2011?

I'm sorry, I didn't understand the question.

Well you spoke about further streamlining the operations. Can you maybe go a little more in detail about what you're doing there to do that?

Okay. Well, some of it is some of the Offshore business. We're building up there in some of our facilities offshore, primarily in Mexico and our facility in Thailand. And so that's one element of it. The other aspect of it is our continued drive for lean manufacturing and then the capitalization. We're also consolidating a facility that we have in -- two facilities in California, we're consolidating into one. I think I mentioned that in the second quarter last year and we're ongoing on that and we expect that to be done by the middle of the second quarter this year.

So those are the things we're doing in order to try and put more efficiency into the business and drive this out. So I think I mentioned in my comments that, look, we're investing in the business so we can improve it going forward and I think that's what we've actually -- that's our philosophical bent is to try to take the capital that we have at our hands and improve the base of the business so that we can grow this going forward. And the streamlining is anything from expanding capacity in our Offshore facilities to consolidating facilities here in California.

Okay. Great. And then 1 last question, just in terms of kind of the inventory build-up. I was looking through the 10-K and noticed that it's really more -- receiving less progress payments than it is burning off inventory. Is that more of an issue related to the Military side or to the Commercial side or kind of a little bit of both? I know some of -- some competitors have mentioned that some of the -- I guess the orders came in a little bit slower than they expected. How are you guys viewing that?

It's the same story. The progress billings are almost exclusively on the military side, so you would see -- if you go back to 2009, and then 2010, and then 2011, you'll see a pretty good decline in the progress billings. So it puts us in a position where obviously you see the inventory going up but working capital standpoint that's one of our focuses, trying to improve that going forward.

Okay. Great. Thank you very much.

Great. Thank you, Jonathan.

(Operator Instructions). Your next question is a follow-up from Mr. Ed Marshall with Sidoti & Company. Please proceed sir.

The comment that you guys made on the run rate increase of 20% to 25% on your large body aircraft, was does that entail? Is that just simply the production run rates that we're seeing coming out from the OEMs and stepping up from 5 to 7 to 8.3 a month on the 777 from what is now I guess 31.5 or 38 a month on the 737? How do you get to the 20% to 25% run rate? Also, does it include the 787 as well?

Yes, it's a combination of all those Ed, and we look at a that run rate middle of 2012 where we feel we're going to be with the combination of those things plus some Airbus business. We picked up more Airbus business, in Tony's remarks earlier we talked about the A330 and A350 programs that we're on along with those three Boeing applications. We do feel that the Dreamliner will actually receive certification in the latter half of 2011 here and it will start more modest build rates and it will start pulling inventory. That, along with the 37, 38 per month build rates of the 777, it's the cumulative effect which has us very excited and getting organization from a production standpoint position to be able to handle that, and deliver that and meet the requirements is where our focus really has been in planning all year.

Also, I read some comments you've guys have made publicly about the 777 program. And to me, based on what my original assumptions were, it looks like the content on that aircraft is literally jumped by about 50% with the empennage. Adding that empennage. Is that accurate?

Not yet. Because we're just seeing that revenue come out. So the pickup in the 777 was the increase in the build rate up to the 7 ship-sets from the 5 on our existing base. So we haven't actually seen the increase in the tip assemblies yet.

But that's coming. Am I right in that math, about 50% jump in content value on the 777?

I haven't run that analysis, Ed. We'd have to get back to you on that.

When it was the build rate of 7 in 2009 before it pared back, it was a $17 million, $18 million program. In 2010, it was about a $13 million program at 5 planes per month. Now that it's going to 7 and then 9, and with the additional content that we have on it, it should be a $22 million to $25 million program in 2012.

Okay. Thank you very much.

Okay, Ed, thank you.

At this time, there are no further questions. I would like to turn the call back to Mr. Tony Reardon for closing remarks.

Thank you, Jasmine. Well thank you everyone for joining us today. We really appreciate your continued interest and support and we look forward to talking to you next quarter. Thank you.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.