The federal budget crisis hit home for aerospace and defense company Ducommun Inc.

The Carson company’s contracts to supply basic parts for F-15 and F-18 fighter jets were held up as partisan wrangling forced the federal government to the brink of a shutdown. That was a key factor in the company’s lower-than-expected first quarter earnings announced last Monday, which in turn led to a share selloff.

The prospect of future defense cuts has prompted at least one analyst to lower earnings estimates for Ducommun and is forcing the company – California’s oldest business – to reduce its reliance on defense contracts.

“The (federal) funding profile is not as robust as it had been in the past,” Ducommun Chief Executive Tony Reardon said last week in an earnings conference call with analysts.

In response, Ducommun has already reduced the proportion of defense contracts in its overall portfolio. The company also is acquiring a competitor and retooling in order to build a bigger customer base and deliver a broader array of products to both military and commercial customers.

“We are making strategic and sound investments in our portfolio that will make us a more critical supplier to our customers across the board,” Reardon said.

So far, however, investors have been more focused on the short term in Ducommun’s performance and how the company can work through this rough patch.

Last week, Ducommun announced first quarter net income of $2.9 million, a drop of 31 percent from first quarter 2010. The earnings equaled 27 cents a share, well below the 41 cents analysts expected.

The company also announced last week it was suspending its quarterly dividend in connection with the pending acquisition.

Ducommun executives said delays in orders for radar systems and other parts for the F-15 and F-18 military aircraft were a major reason for the earnings shortfall. They also cited $1.4 million in unscheduled legal and accounting expenditures stemming from its acquisition agreement with St. Louis-based aerospace parts supplier LaBarge Inc. Another factor was spending on plants and equipment, which drove up expenses for the quarter.

Investors reacted harshly to the news May 2, sending Ducommun’s share price plunging 9 percent to $20.18. Thereafter, the stock drifted down further, closing Thursday at $19.79. The company was on the list of the Business Journal’s Top Ten Losers of the week. (See page 22.)

Furthermore, one analyst lowered his earnings estimates for Ducommun for both 2011 and 2012. Troy Lahr, aerospace-defense analyst with St. Louis-based Stifel Nicolaus & Co. Inc., cited additional costs associated with the LaBarge acquisition and expectations of lower defense spending through 2012.

Ducommun is the oldest continually operating company in California. It was founded in 1849 as a general merchandise store in downtown Los Angeles to serve prospectors heading north for the gold fields. In the 1930s, the company launched its aerospace-defense business, providing aluminum for aircraft manufacturers.

Ducommun executives told analysts last week that they see defense spending stabilizing, at least for the rest of this year. They said the orders for radar systems for the two fighter jets have resumed and could even pick up as contractors rush to make up for time lost due to the funding delays. They also expect to finalize a follow-on contract with Chicago-based Boeing Co. for parts for the C-17 cargo transport aircraft.

Company representatives said they wouldn’t comment for this article.

Defense versus commercial

Yet one comment made in passing during the conference call with analysts indicated that Ducommun executives have been grappling for a while with their heavy reliance on defense spending, with an eye toward balancing the mix of defense and commercial.

“Our business has changed a little bit,” said Chief Financial Officer Joe Bellino. “We are now 54 percent military and 46 percent commercial. A year ago it was 60 percent military and space and 40 percent commercial.”

Reardon said a major factor behind this shift has been a pickup in orders for parts from commercial aircraft manufacturers. He expects this trend to continue as the commercial aviation industry continues to rebound from the recession.

“There are healthy backlogs at Boeing and Airbus,” he said.

The acquisition agreement with aerospace electronics parts supplier LaBarge is also an attempt to broaden the customer base. LaBarge posted $324 million in revenue last year, almost as much as Ducommun’s $408 million. The deal is slated to close next month, unless it is stalled by a lawsuit filed last month by a major LaBarge shareholder who claims the purchase price is too low.

Executives are also seeking to reposition Ducommun higher in the aerospace and defense supply chain. They want to move the company from a third-tier supplier of basic parts such as ball bearings or radar detection sets to a second-tier supplier that can assemble substantial parts of an aircraft fuselage or an entire bank of electrical components within an aircraft.

To that end, Ducommun has been retooling some of its plants with more complex machinery, which added to cost outlays during the first quarter and will likely continue for the next quarter or two.

“Part of their miss on earnings was due to the higher-than-expected investment costs,” said Jonathan Richton, associate analyst for aerospace-defense with Imperial Capital LLC in Century City.

Eventually, though, executives hope this will translate into increased sales volume and revenue per order.

“Some of the new programs that we won in the last quarter of last year and the first quarter of this year are a result of having that (additional) capability in-house,” Reardon told analysts last week. “So it’s doing exactly what we thought it would do.”

For reprint and licensing requests for this article, CLICK HERE.