Ducommun Inc (DCO) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2014 Ducommun earnings conference call.

(Operator instructions)

As a reminder, this call is being recorded for replay purposes.

I would now like to turn the conference over to your moderator, Chris Witty. Please proceed.

Thank you, and welcome to Ducommun's third quarter conference call. With me today is Tony Reardon, Chairman and CEO; and Joe Bellino, Vice President, CFO, and Treasurer.

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 [idiquated] or implied by such statements. All statements other than statements of historical fact 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, 2013.

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 to now to Tony Reardon for a review of the operating results. Tony?

Thank you, Chris, and thank you, everyone, for joining us today for our fiscal third quarter conference call. I will begin by providing an overview of the quarter, including some market color, after which I will turn the call over to Joe Bellino to go over our financial results in detail.

The third quarter was one the continued the themes we discussed earlier this year, as strong aerospace shipments once again drove overall top-line growth. Ducommun's commercial aircraft revenue grew 21% year-over-year, with higher demand seen across many platforms we serve in this sector. This help offset some mix performances within our military and space programs. Our cash flow was once again noteworthy, as we generated $5 million during the quarter and $21 million in the first nine months of 2014, up from $15 million last year.

However, we had a few unusual items negatively impact bottom-line results, as Joe will review in a moment. And, we were disappointed with operating margins from the shift in our product mix. We also booked a reserve related to shipments affected by delivery delays and freight costs, primarily due to supplier constraints. But, we are diligently working to address these issues along with anticipated changes to the defense side of our business, including platform modifications, and are focused on growth opportunities across our addressable markets.

We ended the quarter with a backlog of $569 million and continue to use our free cash flow to strengthen the balance sheet, paying down another $7.5 million of debt during this quarter.

Now, let me provide some color on our end markets, products, and programs. Our military and space markets -- Ducommun's revenue fell 3% year-over-year in the third quarter, primarily reflecting the program changes we have previously discussed, including lower C-17 run-rates as this platform nears its end, and the timing of military helicopter shipments, and the impact of lower defense spending related to the draw-down of military operations.

Our backlog reflects these issues, as well as lower defense technology sales, primarily due to the decline and slowdown in follow-on radar rack orders. These situations are constantly evolving; it is too early to say how current global events and budget constraints in Washington will impact of quarters to come. That said, the outlook for missiles and defense and certain other military upgrades appears steady. And, we are bidding on a number of high-profile programs in the defense arena, some of which may not have yet have been publicized.

One program recently announced by Raytheon is for Israel's Iron Dome missile defense system. We will be working with Raytheon to advance the development of this important defense application, supplying both missile equipment and engineering expertise. We expect programs like this will help fuel growth for years to come, as will other new business opportunities exemplified by the recent announcement of Sikorsky on their S-97 Raider helicopter, on which Ducommun was a key partner in its development.

We are also partnering with leading military engine manufacturers and aerospace OEMs alike on even more demanding advanced technology applications which will require our unique set of skills. Such wins, along with the expansion across other product lines of our business will be critical to offset changes in certain military platforms already underway.

For Ducommun, this primarily means the end of the C-17 program this quarter, and the Apache switch to an all composite main rotor blade, which reduces somewhat our role in the blade manufacturing process. We expect these two items will impact near-term revenue within our DAS segment. Given our long-term supplier status of these programs, there will also be short-term impact on the overall operating margins. We are adjusting our cost basis accordingly to reflect these mix changes and to position Ducommun to win new attractive programs that will, over the long-term, counteract the inevitable changes in military spending.

The outlook for our Non-A&D end-markets continues to show improvement. Our backlog grew sequentially to $71 million from $62 million at the end of the second quarter, and once again represents the highest level of booked business in several years, even as the sales were down slightly versus 2013. We believe our efforts to penetrate new customers, particularly within the industrial and energy markets are bearing fruit as we invest resources into new business development activities within these sectors. Due to our ongoing strategic initiatives, as well as overall economic conditions, we continue to be cautiously optimistic with regard to the level of sales momentum. Processes are in place to connect Ducommun's high-value technology solutions to customers who find them a cost-effective and strategic advantage to their operations moving forward.

In our commercial aerospace operations, we again posted strong topline growth on the back of record sales of large aircraft components and systems. Rising build rates reflected -- and reflecting increased customer demand, new business opportunities continue to be major factors driving higher shipments. While we are benefiting from current end-market trends, we're also winning new content on next-generation platforms from both Boeing and Airbus. We have already announced several 737 Max awards and have captured many additional wins, including on various Airbus programs.

The bottom line is that our unique and broad set of skills with structural components and advanced electronics is leading to more opportunities than ever before. Our team is continuously bidding a new content, while at the same time working on the timely delivery of product to support current customers and platforms.

Overall, commercial aerospace revenue climbed 21% year-over-year to approximately $62 million. The highest level in Ducommun's history. Recent wins point increasing platform content going forward, which demonstrate both the talent of our engineering and our unique set of capabilities we bring to the leading OEMs today. Our commercial aerospace backlog remains strong at approximately $225 million, and Ducommun's long-standing relationship and broad product and processing capabilities will expand this level going forward.

In summary, the third-quarter's top-line clearly illustrates our leading role in providing state-of-the-art components and systems to the top-tier global Aerospace OEMs. While margins were softer than we would like, primarily due to specific program-related issues, we are focused on getting back to sustainable profitability levels in keeping with leading world-class industrial organizations. We are committed to winning new business and improving margins in every way possible to address the near-term impact of changes in certain defense programs. We remain on the right path for long-term top-line and sustained growth in our margins, and we will generate additional shareholder value.

With that, I will now turn the call over to Joe for our financial results. Joe?

Thank you, Tony, and good day, everyone.

Earlier today after the market closed, we reported results for the third quarter and the nine-month fiscal 2014. A review of the third quarter 2014 results, starting first with sales, which were $188 million, a nearly 4% increase versus the $181 million that we recorded in last year's third quarter. The revenue increase year-over-year was primarily driven by 21% higher sales in our commercial aerospace operations, somewhat offset by 3% lower in our military and space markets.

Within commercial aerospace, we saw increases in both aerostructures and electronic solutions. And we continue to benefit from higher airframe production rates, as well as increased content. While backlogs in our military and defense sectors have softened, we have seen significant growth in our non-aerospace and defense bookings. Typically, we see lower bookings at the end of the third quarter. So, we do expect a higher backlog sequentially at year end.

Ducommun's net income for the quarter was $2.6 million, or $0.24 per diluted share, compared to $4.6 million or $0.42 per diluted share for the third quarter of 2013. As detailed in our earnings release, our pre-tax income expanded 9% to $5 million for the quarter from $4.6 million in the third quarter of 2013.

Third-quarter net income was negatively impacted by a 47.2% effective tax rate, which included $0.9 million of additional tax expenses or approximately $0.08 per fully diluted share as a result of income tax returns filed or to be filed. Additionally, as legislations for the federal R&D tax credits have not yet been passed for 2014, but were passed in 2013, we did not record a benefit during the quarter. Last year, as a result of the credit, we recorded an effective 2% tax rate benefit for that period.

We reported a decrease in operating income to approximately $10 million in the third quarter, compared with $12 million in the comparable period last year. The decline was primarily due to additional costs related to product delivery delays from a supplier, and higher accrued compensation and benefit costs. I would add that the supply chain issues are not related to any of our large commercial airframe programs, and we expect to have these supply issues resolved by year-end.

Our gross margin of 17.7% was similar to last year's comparable period, but was lower than the 19.1% gross margin we have recorded year to date. We are addressing the impact of mix shift and gross margin declines by right-sizing our manufacturing cost structure to adapt to these changes. The higher accrued compensation costs resulted in SG& A running at 12.2% of revenue, and as a result, our operating margin was 5.5% for the quarter, as compared to 6.6% in last year's third quarter. In addition, we recognized as additional income $1.6 million from insurance recoveries related to property and equipment and this was recorded on the income statement as other income. EBITDA was $18.6 million, or approximately 9.9% of revenue in the third quarter of 2014, as compared to $19.2 million or 10.6% of revenue last year.

Looking at results by segments, first starting with the Ducommun AeroStructures business segment, DAS. In reviewing these results, DAS reported net sales of $81 million for the third quarter, compares favorably to the $78 million in last year's comparable period. DAS's sales were favorably impacted by a 15% increase in commercial aerospace revenues, partially offset by an 8% decrease in military and space sales, reflecting the end of the two military applications, as Tony indicated.

DAS's operating income was $7.2 million or 8.8% of revenue, down from $7.6 million or 9.8% of revenue in last year's comparable period. Segment operating income was impacted by the outside supplier's delay in deliveries, which caused us to incur additional expenses in servicing our customers. EBITDA was $11.1 million or 13.6% of revenues, compared to $10.3 million or 13.2% of revenues for the comparable period in 2013. EBITDA results included the $1.6 million of insurance recovery I previously mentioned.

Now turning to Ducommun LaBarge technologies, DLT. In reviewing DLT's segment sales, they were $107 million for the quarter, a 3% increase as compared to last year's comparable quarter. That said, we have seen a modest shift, as commercial aerospace electronics revenues increased $4 million year-over-year, partially offset by a slight decline in defense electronics sales. We attribute the decrease in defense technologies revenues to timing differences and softer backlogs.

We were pleased to see, in that sector, higher demand as reflected in backlog growth during the quarter for our commercial aerospace electronics applications, as well as our non-aerospace and defense offerings. Both a result of recent marketing development efforts.

DLT's operating income for the third quarter was $8.3 million, or 7.8% of revenue, compared to $7.6 million or 7.3% of revenue in last year's comparable period. The increases reflect the benefit of higher sales and improved operations. EBITDA was $12.7 million in the quarter, or nearly 12% of revenues, compared to $12.1 million, or 11.7 % of revenues in last year's third quarter. Corporate, general and administrative expenses, CG&A, for the quarter were $5.1 million or 2.7% of revenue. It was an increase from $3.3 million, or 1.8% of revenue in last year's period, and it was primarily due to higher accrued compensation and benefit expenses in the period.

Our overall backlog at the end of the quarter was $569 million. This reflect a decrease in defense, aerostructures, and technology backlogs, along with a modest decline in overall commercial aerospace products, which we consider mainly timing differences. We did see our non-A&D backlogs grow, reflecting market development efforts gaining traction. We expect to finalize additional orders on various commercial aerospace and defense technologies platforms in the upcoming quarter, consistent with normal seasonal patterns.

Looking at liquidity and capital resources during the first nine months of 2014, we generated nearly $21 million in cash from operations, compares favorably to the $15 million in cash flow from operations in last year's third quarter. As Tony mentioned, we continue to delever our balance sheet. We expect our net cash generation for the fourth quarter to be similar to historic seasonal patterns, and as a result of the strong cash flows year-to-date, we have just paid an additional $17.5 million here in October, bringing total prepayments for 2014 to $40 million.

We have sufficient cash balances and expect future free cash flow generation to de-lever the balance sheet. At quarter end, our net debt to EBITDA was 3.2 times, and we continue to target a leverage level of 2.75 to 3 times by year end 2015. We anticipate capital expenditures for 2014 full-year to be the range of $16 million, with capital used to support the expansion of our manufacturing capabilities and new contract awards.

In closing, we continue to focus on achieving sustained operating and EBITDA margins, which along with diligent expense management and continued focus on working capital efficiencies, should permit the company to reach our deleveraging goals.

I will now turn it back over to Tony for his closing remarks.

Thank you Joe.

Before opening the call to questions, I would like to say that, while Ducommun has certainly made great strides these past few years, we know where further focus and improvements are required. To be a leading solutions provider, we must continue investing in innovation, engineering, and manufacturing excellence. But, this is not enough. We need to constantly scrutinize the programs we have in-house and the new opportunities being pursued to ensure that they are the right fit with our capabilities and profitability requirements.

At the same time, we must address product mix changes and end-of-life program wind down. We, along with most defense suppliers, are currently seeing a sizable shift to demand driven by military priorities, budget considerations and technology adaptations. In some ways, this serves as an opportunity for Ducommun, opening up new paths for sales of advanced applications suited to our strengths and unique capabilities. But, we are also working through specific program changes and reductions, which will impact both near-term revenue and operating margins.

We continue to aggressively pursue value-added opportunities in the commercial aerospace and industrial markets that can help offset the variability inherent in the defense spending. We feel we are making good progress here, even as positive impact of these efforts may take a few quarters to play out. We believe the environment for the remainder of 2014 will be similar to the third quarter, meaning strong commercial aerospace shipments and shrinking military revenue, with margins in the short-term being impacted accordingly.

Heading into 2015, we believe that the growth drivers will be the commercial aerospace demand, and higher demand within our Non-A&D end-markets as our military and space programs stabilize. The Company is clearly more diversified today and technologically superior than we were several years ago, which makes us confident we can post attractive results going forward, even given current economic uncertainties.

With that, Whitley, we would like to now open up the call for questions.

(Operator instructions)

Edward Marshall, Sidoti and company.

Good afternoon.

So the supplier delays that caused -- I guess you said higher shipment costs for you in the quarter? Was there any revenue attributable to that, or loss revenue attributable to the supplier delays?

And then I guess as well, what about the cost side and EPS? Can we quantify and put some numbers to the page? Talk about what the impact was for the quarter?

Okay, Ed.

The supplier delays did impact revenue for the quarter. The revenue was down to what we should have attained. The impact was around $1 million. Slightly over $1 million.

So that was the cause of the supplier delays to us, that we were impacted. We anticipate that the deliveries will pick up in the fourth quarter, but we still have to work our way through the inefficiencies caused by those delays.

Okay. So it was $1 million of pre-tax operating profit in the segment?

Yes.

That was for DAS. Okay. And did you say booked a reserve? Did I hear that right?

Part of the $1 million charges in the quarter -- half of that was probably a reserve on the program.

Okay, wait. There was a booking of a charge in the quarter?

There was a booking. We incurred $1 million of costs normal over what we normally would have incurred. And half of that was the delivery costs and half of it was a reserve to cover us through deliveries for the balance of 2014.

I see. So that $1 million was a charge, not lost operating profit. It was higher expenses related to it.

Half of it was cash, Ed, and half of it was a $0.5 million reserve that we will incur here in the fourth quarter.

Did you have to pay premium freighting? I mean, what was the cash charge?

Yes. That was the charge. Premium expediting costs.

Okay. And what about the tax rate? I understand the $900,000 charge off in the quarter. I look at that as onetime. But still ex that, that number was still close to 43% in the quarter. What else flowed through that number that caused that tax rate to be slightly higher than normal?

$0.9 million is about $0.08 per share, so I would suggest you go back and look at it. We have no benefit of R&D tax credit as we have in several preceding years. So our normalized tax rate, and what our year-to-date tax rate is -- it was running 32%, and at year-to-date, now, it's 35%, and --

I forgot to mention it, it will be 32.1% in the fourth quarter. So we'll wind up with 35% for the year. It's higher. The benefit to Ducommun is significant when we get this $2.5 million R&D tax credit if legislation is approved. So we're having timing differences.

And when you look at it to last year's full-year rate at a 5% year-to-date for the nine months, that included a full year of 2012 legislation passed that was recorded in 2013, plus three quarters of a year of, in 2013, the $2.5 million recorded pro rata. So, as I mentioned, we are up 9% on the pre-tax income and for the full year, we're up [50%] in pretax income.

Obviously, clearly, the tax impacts of this R&D legislation do make a difference.

Right. But even ex that $900,000 charge, you are still well above where you were first half. So what is going on there?

Well, we were 32%. 32.5% in the first half. And again, which we will be in the fourth quarter.

But with the way we look at the reconciliation, the $0.9 million add on a $5 million basis does when you run the numbers, that gives you the differential of about 18% additional for the quarter.

Okay. When I look back at the 2Q call, we talked about the DAS segment sustaining EBITDA margins around 16.5%. You came in at 13.6%. We could talk about the outside suppliers being the variance there. But you should have already known about the C-17, the Apache mix shift, which I don't think was really attributed to the loss of the quarter as much as the outside suppliers.

But secondly, I also wanted to also say that the DLT operating margin you said was going to be in the range of 8.6% to 10%, you came in at 7.8%. Between those two things, what really is -- I mean, do you go back to the old guidance and say that that was accurate? Or do you want to revise that discussion point that we had on the Q2 call?

I think that we need to revise it. I think what we saw, Ed, was a shift.

First of all, we did know about the C-17 and the Apache. We did know C-17 was coming down. The C-17, actually, they cancelled three ship sets as well, so that had some impact on inefficiencies in the program that we anticipate would leak into the fourth quarter. So, the third-quarter sales were actually little bit lower than we had anticipated on that program, and the program is really small going to the fourth quarter.

So there was some shift in the revenue base. Same thing on the Apache program. We thought the existing blade would run through the end of the year. So that -- lower margins on that program also were not anticipated going forward at the time.

So those two programs, plus we have some inefficiencies with regards to the shutdown in the C-17 program. So those are -- we're impacted the third quarter, and we have more work to do on the Apache in the fourth quarter.

So just to clarify when we look out to 2015, your previous comments are accurate that those margins are sustainable, just as we move into 4Q, we may see some impact from some of the stuff that hit in 3Q.

Is that accurate?

Yes.

Okay. And then, was there acceleration of options or anything that happened in the fourth quarter? Because the corporate expense line was much higher than normal.

The higher corporate expense lines were -- there were some additional benefit costs from actuarial truing up.

But, a larger one was that we're accruing our non-equity-based compensation at target levels this year, whereas last year, as our gaps were getting larger, we did not accrue anything the third quarter. So we're just accruing a normalized expense pattern for compensation for all of our team members, which is a little bit higher than what we were accruing last year.

You'll recall at the end of the year, after the charges, we totally reversed in the fourth quarter $5.3 million worth of accrued expenses to offset some of the -- and mitigate some of the expenses related to the $14 million of charges.

With the inefficiencies that you are planning for the second half of the year 2014, do you anticipate hitting your targets from an EBIT and EBITDA perspective? For 2014?

We don't disclose those kinds of things, Ed.

But they're in the proxy, right?

No. The proxy that is issued in May, it shows the performance relative to fiscal preceding year.

I see. Okay. Thanks guys.

Thank you.

Thanks, Ed.

Mark Jordan, Noble Financial.

Good afternoon, gentlemen.

A question going back to the impacts of what I guess you would call restructuring or rightsizing on the defense side and the aerostructures segment. Can you quantify the impact that the rebalancing of your expense structure relative to some of those defense contracts; what the impact was in the third quarter and what you expect in the fourth?

And do you, secondly, expect to have that all completed so that you enter into 2015 positioned the way you need to get more normalized margins?

Mark, this is Tony.

I think that when we look at the fourth quarter, we still anticipate that we will have some impact going forward on the shutdown of these programs. As we look at the impact of the shutdown, as I indicated earlier, we did have a cancellation on the C-17 and again the Apaches coming to a halt a little bit faster than we had originally anticipated.

So both of those programs, while they didn't catch us by surprise early in the quarter, we knew about it. We had to make adjustments for the normal shutdown of the program. And we are sustaining some higher costs.

So we ought to be able to improve the margins going forward into the first half of the year. And that's what we would anticipate doing.

So, there are going to be some impacts that carry into the fourth quarter that are very similar to the third quarter. And, as we move forward, we think that we will be able to boost this back up to where it belongs.

Okay. So you would say that, as you enter 2015, you should be looking at a more normalized operating environment for that segment?

Yes.

Going back to the second quarter, you did have -- in structures, you had 12.5% off margins. I think that you've said that those were probably a little bit better than could be expected. But, I think you kind of alluded to around-- rotating around a 11% operating margin out of the aerostructures segment was a reasonable longer-term target or a proxy and the ballpark you should be thinking about for 2015. Is that still the case?

Yes, I believe it is. We tend to look at the longer-term. We're averaging in DAS operating margins year-to-date 11.3%.

As Tony talked about, we will have a similar environment here in 2014 fourth quarter and work through that. But, that is certainly -- the 10.5% to 11% are certainly attainable and achievable on a sustainable basis.

Okay. And I would like to look into 2015 also on the corporate overhead expenses. If you annualized the third quarter, you're at $20 million. But, if you have taken an average of the four quarters, you're closer to a $16 million number. As we're thinking about 2015, the corporate overhead, is that -- where should we be thinking? In the $16 million range, or more towards the $20 million?

Well, the corporate overhead-- you are just talking about the unallocated corporate overhead, not the SG&A consolidated?

That's correct.

(Multiple speakers)

Yes. When we look at the year-to-date, last year at three quarters, we were $13.2 million and this year we are at $12.5 million. And then, you talked about it probably -- you're probably building some models, but probably, it's the run rate of about $16.5 million to $70 million. And we are very frugal about our expenses.

And so we will tend to squeeze those down some more to reflect the environment that we are operating within.

Okay. Thank you very much.

Thanks, Mark.

Thanks, Mark.

J.B. Groh, D.A. Davidson

Hello. Good afternoon, guys.

J.B

J.B.

Could you talk about things that you are doing to avoid these supplier delays in the future? Is there anything that you can do with that relationship to make sure that that kind of thing does not happen again?

Yes. We are working through that now.

It is not as simple -- because of the customer involved, it is not as simple is just moving to another supplier. Because what is unique with this particular customer is that the machine houses are approved as well.

So we have to work through that issue, and we have been working with the primary customer on that. So we're working our way through that. And we have also geared up in-house in our Mexico facility to be able to manufacture these products, and we anticipate that those will be online in the fourth quarter to supplement the problems that we have in front of us today.

So we have taken actions. We saw this late in the second quarter, and then it continued into the third quarter. And we geared up and put the capabilities together in Mexico. So I think that we will be able to start the production end of the fourth quarter assuming we get all the approvals we need.

Okay. And then, Joe, if I kind of net-out the insurance and this $1 million in costs associated with this supplier, it looks like you get about 70 basis point impact on the structures margins. Does that sound about right to you?

Yes.

Okay. And then, Joe, could you talk about the expectations for interest costs on a quarterly basis going forward and kind of update us on the refi plan?

Well, two questions.

Your first question on the interest is -- we reported we are $7 million in the quarter, compared to $7.4 million. The term loan B that we are paying down, the effective interest rate is 4.75%. So we were at $310 million total in the end of the third quarter, and by the fourth quarter with this $17.5 million payment that we made last week, we will be closer to $290 million.

So, all that being said, year-over-year on the fourth quarter, we should be about $0.5 million lower than last year's for the period. As far as our financing, refinancing in 2015, we expect that to occur in the third quarter. And we would take out the high-yield note of 9.75% and we would probably refinance the whole package.

And what we are targeting, given the market rates have moved a little bit and the volatile market, is somewhere between 5.5% and 6% would be the blended interest rate that we would factor in as a go-forward starting in the third quarter of next year. We are modeling a 32% tax rate to look at that -- when we are modeling our earnings per share impact. The benefits of it.

Okay, so the total amount of the refi would be -- projected in Q3 of 2015, would be how much?

The total amount of the refi would be, let's say we'll be at -- it will probably be, with some fees that we have to pay, it will probably be at $290 million, is what we'll refi. And it will be anywhere from 5.5% to 6%.

We anticipate that we will pay down in the first two quarters, and then the cost of the refi will take it back up to $290 million. In that area.

Great. Okay. And then from the queue, it looked like that natural resources was down a little bit sequentially or -- I'm sorry, industrial was down a little bit sequentially, medical was down a bit sequentially. Is that seasonal, or is there a weakening in those businesses, or how are you looking at those?

I think, when you look, especially on medical, that is pretty flat in that area. It has been kind of steady state flat from the first three quarters.

The industrial is just timing, we believe. And we're seeing a backlog pickup, as I indicated in my remarks.

So we think that that is starting to pick up. We really have some nice opportunities out in front of us. We have got some really nice quotes; we're seeing some nice pickup in a couple of different contracts. We have some really nice development programs that we have on that side of the business working.

So I think we talked about the strategy last year when we put it in place, and I think we are seeing the fruits of that right now. So anticipate those markets will start to steadily increase.

Okay. And then lastly, book-to-bill for the quarter was a little low. Is that the same sort of thing, timing issues there, related to some of the different markets?

Yes. We will see some decline in the military. As you know, a couple of programs will go away, so they would be rebooked on that. But we will see some pickup in the fourth quarter.

I think if you look at, historically, we have seen that type of opportunity. So it is seasonal, I think.

Okay. Thank you.

Thanks, J.B.

Ken Herbert, Canaccord.

Hello. Good afternoon, Tony and Joe.

Hello, Ken.

Just wanted to ask first off. For the Ducommun aerostructures, good top line in the quarter, all things considered, for almost 5%. How much of that was impact from new programs or contract wins versus just volume growth on sort of traditional programs like 737?

Let me think about that for a second, Ken.

Across the -- If you're looking year-over-year versus sequentially, because that's how we are reporting it, on the commercial aerospace, we went from $42 million to $49 million in the quarter; it was across all applications in commercial aerospace.

It was large frame, primarily the [3 7]. And that was probably the biggest one, as 787 and 777 seem to have moderated their year-over-year growth from the production rates that Boeing publishes, and a modest increase in Airbus. But in our regional and business jets, we saw some nice revenue growth, as well as across some other commercial applications.

So it was broad-based. And we are pleased to see that diversification.

Also, it was -- you talked about the DAS side, but on the electronics side, I mentioned earlier that, as we are growing the commercial electronics side, Ken, we saw that grow nicely from $27 million last quarter to $38 million this year.

So that is a result of the work that our teams have been doing.

So a lot of the electronics side, Ken, is new programs.

Okay. That makes sense. Because I know you had a very focused business development effort there. But it sounds like specifically within DAS, that a lot of the growth would have been, for lack of a better word, legacy programs, and a lot of your recent contract wins aren't fully flowing through yet. Is that right?

Yes. What we would see in the contract, we're just getting started on the tooling development at this point in time. So we really have not seen-- We have some programs that we have picked up wins on that we're working on, but we have not seen the impact of any sales yet.

Okay. And just on the C-17 specifically, you mentioned there were three ship sets that were cancelled, it sounds like Boeing still has eight they plan to build between now and middle of next year. But you have any more shipments for the C-17, yet to make? Or is that program effectively done for you now?

It is effectively done. I mean, we have some minor shipments to make, but nothing that would amount to anything.

Okay. And similarly, with the transition on the Apache to the all composite blades?

Yes. There may be a few of the old main motor blades that we're shipping out in this quarter, but nothing, again, that is significant.

Okay. And the few times you have talked about it, clearly the C-17 gives you a pretty substantial absorption headwind here that we have talked about for a few quarters. But as you look into 2015, is there anything else you are considering to maybe address the cost structure?

I get the layering in of the new program certainly helps, and I know you have done a few things. But anything else you could talk about that you're looking at that might help with our confidence? Specifically, again, within DAS, on the 2015 margin ramp there?

Well, we certainly have a significant cost reduction program in place within DAS. So, we have to do adjustments because of the lower revenue base in a couple of business units, so we will make appropriate adjustments there. And those will be taking place in November.

So as we shut the program down and we just the cost base accordingly, so we are moving off that, and then in a couple of facilities we are realigning the facility to make sure that they get the most efficiency out of it. So there is some work going on in two major facilities to be able to accommodate the growth that we are anticipating but also to accommodate the changes in the revenue base.

Okay. And that's helpful. And finally, Tony, you mentioned in your opening comments, if you look specifically within the defense and space market into 2015, I think the word you used was stabilization. Do you, maybe 2015 -- the trough for that business, perhaps? And do you expect to see any growth in the latter part of the year, or is 2016 another down year? Maybe just longer-term, how do you think about that business?

I would say that we would see the trough in 2015. And, I think there are, as I mentioned a couple of them. One was the Iron Dome. I'm not sure how the revenue base is going to take off on that, but that is a program that we are working on.

And then we have a couple of other engine programs that we are heavily involved in that we should see some revenue pick up. So I would say in 2016 we will see maybe a slight pick up on that side of defense. Assuming all things being equal on some of the other programs.

So we did see a dip, as I mentioned, in the radar systems and some of that is just the lower build rates on the F-18 as well as some of the non programs slowing down.

All right, That's hopeful. Thank you very much. Good growth in the quarter.

Thank you.

Mike Crawford, B. Riley.

Thank you.

Just to build on that. So the slowing down of follow-on radar rack orders, you think, is mostly correlated with lower F-18 build?

Lower F-18 and lower aftermarket.

Okay. And then on the Iron Dome, are you supplying other ballistic missile defense components for Israel like Barack Arrow Sling and David Sling?

No. We are just working on Iron Dome. And that is primarily with Raytheon Direct.

And that is new for Ducommun?

Yes.

Okay. The backlog was up nicely in these -- Natural resources, industrial, and medical segments despite the revenue in this quarter. But, are there growth rates you can associate with those non-A&D verticals over the next few years that you are targeting based on the investments you are making?

Well, we're working through that, and I think that we have used 3% year-over-year, and we are comfortable with that. We would like to see some stabilization so that we're getting consistent push and some of the new programs that we are seeing I think will help us get there.

That's a pretty modest growth rate, 3%, but we are targeting higher growth rates than that. But I think until we see some rebound in some of these other customer bases that we have on that non-A&D side, I think it is prudent stay within that rate.

And then, Airbus seems to be a growing customer for Ducommun. You still in your (inaudible) are reporting percent of revenue from Boeing and Raytheon, as well as your Top 10, but is Airbus into the Top 10 yet?

In terms of revenue, the Top 10 customers? They are moving closer to that. And when we say Airbus, some of that may not be Airbus direct; they are [Airbus] applications. I think it's easier for us to say -- Airbus direct, we are just getting started on that.

And we have a couple of nice wins that we have not announced yet, but that will pick up. But, on Airbus applications in general, we are seeing some nice growth.

And then final question relates to the continued mix shift toward commercial aerospace from military and space. Where, historically, the margins were lower in the one and higher in the other. But do think that you can -- do you still see a pathway to bring up the commercial aerospace margins?

Yes we do. We have a couple of major initiatives that we're working on internally.

One is on the supply chain side, and another one is on our organizational structure on new product introductions. So I think that those two will help support our opportunities to improve those margins on that side of the business.

Okay. Thank you.

Thank you.

Dan Whalen, Topeka Capital Markets.

Great, thank you. A lot of my questions have been answered here. If we could maybe just try and -- certainly a lot of moving parts here in the quarter, maybe just try and bridge this together a little bit.

It sounds like the incremental tax was about an $0.08 headwind. On a tax adjusted basis, the insurance recoveries were probably about $0.08 benefit. The supplier delays maybe sound pretty similar to the tax, maybe another incremental $0.08. How should we think about the accrued compensation benefit and I guess the mix headwind?

Just trying to gap things together here. Either on a sequential basis, or the best way that you view it.

Dan, I think your analysis and logic in bridging is really good. I would use probably about a 35% incremental rate when you take those pretax positives or negatives. Other than the tax effect which is -- that's, certainly, the $0.08 is after taxes. The accrued expenses are only maybe $0.5 million, so you're talking about $0.03.

And that is the rate that -- where it is, sequentially, the SG&A did not go up that much. Where the comparison, though, comes with a low SG&A consolidated last year's third quarter and it makes it look like it's more significant year-over-year and as how we reported, that the trending of it has really just been modest or moderate increases.

So you would look at that type of accrual in Q4 as well. So, as you compare it year-over-year, you would not see that last year.

Okay. And what about in terms of the mix? In terms of the incremental headwind from that perspective?

Can you clarify Dan?

Sure. I mean, it just seems like there were some mix changes in the quarter. Is there an easy way to kind of think of that from an EPS perspective?

No. There is not an easy way to think of it from an EPS perspective. I mean, when we look at our backlogs from a year ago, we put it up on the charts on the investor relations, our military and defense backlogs a year ago comprised 57% of our backlogs. And then this year, they comprised 48%. And we talked about the backlogs usually impact 9 to 12 months ahead of time.

We also spoke about that the third quarter is usually a trough during our business cycle of backlogs and we expect them to increase. That is a key metric to look at, and I think in an analysis of our significant change in commercial aerospace backlogs in total, which have grown from 34% to 40%. And the rest of our business, the non-A&D, is pretty much stabilized. But if you do some modeling, I think you have to look at that.

What we haven't talked about a little bit is the military program, but our commercial programs on the DAS side have a lot of complex titanium-form products, which we have such capabilities and those margins are very attractive. And we see that sector product line sector growing to offset some of the loss of military. So there are a lot of moving parts; no question about it.

Okay. Appreciate the added color.

Thank you, Dan.

There are no further questions in queue.

I will now turn the call over to Mr. Reardon for any closing remarks.

We would like to thank you again for your continued interest and support, and we really look forward to speaking with you in the next quarter. Thank you very much.

Goodbye now.

Ladies and gentlemen that concludes today's conference. Thank you for your participation.

You may now disconnect. Have a great day.