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Edited Transcript of DCO earnings conference call or presentation 30-Oct-19 9:00pm GMT

Q3 2019 Ducommun Inc Earnings Call

CARSON Nov 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Ducommun Inc earnings conference call or presentation Wednesday, October 30, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher D. Wampler

Ducommun Incorporated - VP, Controller, CAO, Interim CFO & Treasurer

* Stephen G. Oswald

Ducommun Incorporated - Chairman, President & CEO

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Conference Call Participants

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* Aman Raj Gulani

B. Riley FBR, Inc., Research Division - Associate Analyst

* Edward James Marshall

Sidoti & Company, LLC - Senior Equity Research Analyst

* Kenneth George Herbert

Canaccord Genuity Corp., Research Division - MD and Senior Aerospace & Defense Analyst

* Michael Frank Ciarmoli

SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst

* Chris Witty

Darrow Associates Inc. - MD

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and welcome to Ducommun Third Quarter Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Chris Witty, the moderator. You may begin.

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Chris Witty, Darrow Associates Inc. - MD [2]

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Thank you, and welcome to Ducommun's 2019 Third Quarter Conference Call. With me today are Steve Oswald, Chairman, President and CEO; and Chris Wampler, Vice President, Interim Chief Financial Officer and Treasurer, Controller and Chief Accounting Officer. I'm going to make or discuss certain limitations to any forward-looking statements regarding future events, projections or performance that we may make during the prepared remarks or the question-and-answer session that follows.

Certain statements today that are not historical facts, including any statements as to future market conditions, results of operations and financial projections are forward-looking statements under the Federal Private Securities Litigation Reform Act of 1995 and are, therefore, perspective. These forward-looking statements are subject to risks, uncertainties and other factors, which could cause actual results to differ materially from the future results expressed or implied by such forward-looking statements.

Although we believe that the expectations reflected in our forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. In addition, estimates of future operating results are based on the company's current business, which is subject to change. Particular risks facing Ducommun include, among others, the cyclicality of our end-use markets, the level of U.S. government defense spending, legal and regulatory risks, management changes, the cost of expansion and acquisitions and competition. These risks and others are described in our Annual Report on Form 10-K filed with the SEC, and our forward-looking statements are subject to those risks.

Statements made during this call are only as of the time made, and we do not intend to update any statements made in this presentation, except if and as required by regulatory authority. This call also includes non-GAAP financial measures. Please refer to our filings with the SEC for a reconciliation of the non-GAAP measures referenced on this call to the most similar GAAP measures. We filed our Form 10-Q with the SEC today, and you'll find a link to all our filings on the company's website under the Investor Relations tab.

I would now like to turn the call over to Mr. Steve Oswald for a review of the operating results. Steve?

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Stephen G. Oswald, Ducommun Incorporated - Chairman, President & CEO [3]

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Okay. Thank you, Chris, and thanks, everyone, for joining us today for our third quarter conference call. As usual, I'll begin by providing an update on recent developments at the company, after which Chris Wampler will review our financials in detail.

As mentioned in the press release this afternoon, I'm very happy with our third quarter results and continued strong performance of the company. Now having as well 5 straight quarters of double-digit revenue increases, averaging 15% with over 85% of the gains organic.

Ducommun's revenue for the third quarter also grew at 13% year-over-year to $181 million, driven by increased shipments on large narrow-body aircraft platforms, including the Boeing 737 MAX and the Airbus A320 family, and our defense businesses. Ducommun's commercial fixed-wing business grew in aggregate over 26% versus last year, underscoring our position to both Boeing and Airbus, where we provide important content.

On the MAX, we've continued to ship and support the monthly rate of 42 for Boeing and 52 for Spirit. We currently see no change in the current build schedule and I stated in the past, the Boeing reduction is not material to Ducommun. We also continue to work closely with them and currently have the manufacturing capacity and ability to support the ramp-up of any increase in the build schedule in the future.

As you know, we're also broadly diversified across numerous commercial platforms, including now Airbus. Our business with them, again, posted strong gains year-over-year. We now have a long runway of opportunity ahead of us. Gulfstream is also growing, another bright spot in the quarter with the production increases on the G series aircraft. Our defense business had an excellent quarter as well, with a 13% increase in revenue. Ducommun had strong performance on many of its key missile programs, aircraft platforms such as the F-35 and the Apache helicopter. We remain confident in continued growth in this important segment, which provides great balance to the overall company, combined with our commercial aerospace business.

We also ended the quarter with a backlog of $835 million, near-record levels, with a healthy balance of both commercial and military orders. The strength of our backlog certainly underscores the diversity of our product offerings and the long-term demand for the platforms we serve.

Another highlight in the quarter was continued strong margin expansion, with gross margins rising 170 basis points year-over-year to 21.2% compared to 19.5% in the third quarter of 2018. Ducommun's operating margin also expanded 160 basis points to 8.1% versus an adjusted 6.5% last year. That's excluding restructuring charges and inventory purchase accounting adjustments. This performance was driven by our Structures segment, where operating margins expanded to 14.2% due to improved operating leverage, successful implementation of our performance center strategy, Ducommun's operating system and pricing discipline.

We also posted a strong increase of 31% of adjusted EBITDA to nearly $24 million for the quarter over the comparable period in 2018. I'm obviously thrilled by the many meaningful accomplishments of our team and the company's overall operating results as I will finish with my third year at Ducommun in January.

After the quarter ended, we also announced the acquisition of Nobles Worldwide, a global leader in the design and support of ammunition handling systems. This company has been in business for over 70 years, supply advanced tactical products for a variety of aircraft, naval vessels and military vehicles in the U.S. and overseas. It's a great fit for Ducommun's business platform, opening new market opportunities with aftermarket support.

In addition, roughly 43% of the revenue is from international sales, expanding our presence abroad. Nobles is just the latest transaction that accomplishes the strategy I've discussed in the past, to acquire proprietary engineered product companies with intellectual property who our market-leading with aftermarket support and future growth opportunities.

I do also want to mention at this time that the purchase price of Nobles and the other 2 acquisitions completed since 2017 were below a 10x EBITDA multiple for each one, based on the LTM at the time of the purchase.

As we've communicated in Investor Day last year, we disclosed the information required by regulations along with some other selective details but limit certain data for competitive reasons. However, I thought it was best to share this with investors and analysts today due to recent speculation in the press that we paid a much higher multiple for Nobles on an EBITDA basis, and we did not.

I also want to reiterate, and as I've spoken in the past, Ducommun leadership team are senior executives with both Fortune 100 and top 5 private equity backgrounds. We have a strong acquisition process, significant experience and discipline.

Now let me provide some color on our markets, products and programs. Beginning with our military and space sector, we posted third quarter revenue of $80.5 million, up 13% over 2018, reflecting stronger sales across a number of missile and defense programs.

For example, we saw a double-digit growth in shipments for the F-15, F-16, F-18, and the Joint Strike Fighter, along with the Apache helicopter program and several missile defense applications, including the Patriot, MIR, JSOW and Phalanx. The sheer number of such strong performing platforms exemplifies the demand for our products across the defense market for which we're proud. We ended the quarter with a military space backlog of approximately $372 million, continuing a steady trend of growth in this area, which we expect will continue into fiscal 2020.

Our commercial aerospace operations, third quarter sales rose 16% year-over-year to $88.9 million. As I mentioned earlier, growth was again fueled by large, fixed-wing, narrow-body aircraft such as the Boeing 737 and Airbus A320 family. In fact, most of our Boeing and Airbus platforms grew double digits. And for the second quarter in a row, the A320 was our second-highest revenue-generating commercial platform after the 737. Our rapid growth with Airbus reflects the strength of Ducommun's portfolio and the value provided to this customer. We also continue to see strong growth with Gulfstream this quarter as well as on other commercial helicopter platforms.

The backlog within our commercial aerospace sector stood at roughly $430 million at the end of the quarter, declining from earlier levels in the year due to order timing. We remain optimistic about the commercial market, given the breadth of our product lines and key platforms we serve heading into 2020.

With that, I'll have Chris review our financial results in detail. Chris?

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Christopher D. Wampler, Ducommun Incorporated - VP, Controller, CAO, Interim CFO & Treasurer [4]

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Thank you, Steve, and good afternoon, everyone. As a reminder, please see the company's filings and today's press release for further description of matters under discussion during the call.

During 2019, we have seen the performance of the business continue the themes of favorable year-over-year trends in certain key metrics, including top line growth, margin expansion and adjusted EBITDA. Our Ducommun operating system and its performance-center-focused factory approach has been a key in helping drive continued improvement of the year-over-year operating results, including areas such as customer satisfaction and scrap as well as performing in a more consistent and predictable manner.

Now I'll move to the details of the overall results. A review of the third quarter. Revenue for the third quarter of 2019 was $181.1 million versus $159.8 million in the third quarter of 2018. This performance includes $9 million higher sales within the military and space sector, primarily reflecting strong demand for various missile programs and $12.6 million of greater revenue from our commercial aerospace customers due to increased shipments for key narrow-body platforms such as the Boeing 737 and Airbus A320, as Steve mentioned. Ducommun's overall backlog as of the end of the third quarter was approximately $835 million, which is still near record levels. As a reminder, the company defines backlog as potential revenue and is based on the customer-placed purchase orders and long-term agreements, with firm fixed prices and expected delivery dates of 24 months or less.

Moving to gross profit. Our gross margin was 21.2% in the third quarter versus 19.5% in the prior year's comparable period. The increase year-over-year was primarily due to improved operating leverage at the performance centers, driving enhanced operating performance. This resulted in favorable production volumes, favorable product mix and increased manufacturing efficiencies.

SG&A was $23.7 million in the third quarter versus $21 million in the third quarter of 2018, with the increase primarily reflecting higher other corporate-related costs and higher compensation and benefit costs. The company reported operating income for the third quarter of $14.6 million or 8.1% of revenue compared to $6.8 million or 4.3% of revenue in the prior year period. The year-over-year improvement was due to higher revenue, higher gross profit and the prior year included an aggregate total of $3.7 million of restructured charges and inventory purchase accounting adjustments. On an adjusted basis, operating income was $10.5 million or 6.5% of sales in the third quarter of 2018.

Interest expense was $4.4 million in the third quarter of 2019 versus $2.5 million last year due to higher interest rates. As a result of utilizing our credit facility to fund the company's Nobles acquisition subsequent to quarter end, we do expect interest expense to increase accordingly going forward.

The company reported net income for the third quarter of $8.3 million or $0.70 per diluted share compared to net income of $4.2 million or $0.36 per diluted share for the third quarter of 2018. The year-over-year increase was primarily due to $7.2 million of higher gross profit. Restructuring charges and other adjustments were also lower year-over-year by $3.7 million, offset by $2.8 million in higher SG&A, $1.9 million of increased interest expense and higher income taxes of $1.8 million.

Adjusted net income was $7.2 million or $0.62 per diluted share in the 2018 third quarter. Adjusted EBITDA for the third quarter of 2019 was $23.6 million or 13.1% of revenue compared to $18.1 million or 11.3% of revenue for the comparable period in 2018, an increase of 180 basis points.

Now let me turn to our segment results. Our Electronic Systems segment posted revenue of $90.6 million in the third quarter of 2019 versus $85.7 million in the prior year period. These results reflect a $5 million increase in sales to our military and space customers. Commercial aerospace shipments were relatively flat year-over-year. Electronic Systems posted operating income for the third quarter of $9.7 million or 10.7% of revenue versus $9.1 million or 10.6% of revenue in the prior year period. Excluding restructure charges last year, electronics adjusted operating margin was 11.9% for the 2018 third quarter with the year-over-year decline reflecting product mix.

Our Structural Systems segment posted revenue of $90.5 million in the third quarter of 2019 versus $74.1 million last year. The year-over-year increase was due to $12.4 million of higher sales across our commercial aerospace applications, primarily large airframe single-aisle platforms and a $4 million increase in revenue within the company's military and space markets. Structural Systems posted operating income for the quarter of $12.9 million or 14.2% of revenue compared to $4 million or 5.3% of revenue last year. Excluding restructured charges and inventory purchase accounting adjustments, Structures adjusted operating margin was 7.9% for the 2018 third quarter. The year-over-year operating margin improvement reflects improved operating leverage at the performance centers, driving elevated operating performance. These resulted in favorable production volume, favorable production mix and improved manufacturing efficiencies, along with lower restructure charges in the current year.

Corporate, general and administrative expense for the third quarter of 2019 was $7.9 million or 4.4% of revenue versus $6.2 million or 3.9% of revenue in 2018. The year-over-year results reflect higher other corporate expenses of $1 million and higher compensation and benefit costs of $0.7 million, partially offset by lower restructuring charges of $0.6 million in the current year.

Turning to liquidity and capital resources. We generated $12 million of cash flow from operations in the third quarter of 2019 compared with $7.2 million during the third quarter of 2018, reflecting our higher net income this year. In terms of capital expenditures, we spent $4.5 million during the third quarter and are on track to spend $16 million to $18 million during 2019 to support new program wins. We're, again, pleased with our quarterly performance and remain positive about the future results.

I'll now turn it back over to Steve for his closing remarks.

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Stephen G. Oswald, Ducommun Incorporated - Chairman, President & CEO [5]

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Okay. Thanks, Chris. Okay, before turning over for questions, just to close on a few comments for saying, I think the company remains in great shape as we near the end of the fiscal year. And I see a strong finish to 2019. I also expect continued momentum into 2020 on both the top and bottom line for the company as the team continues to drive excellence in many areas, such as customer satisfaction, operational performance and the development of our organization's most important asset, our employees.

In closing, we're certainly energized and excited about the year ahead. And as always, I want to thank Ducommun's shareholders for their support and trust.

With that, operator, we'll now open up the call for questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question comes from the line of Edward Marshall from Sidoti & Company.

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Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [2]

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So I was looking at the Structures margin, in particular, the $14.2 million you put up. Looking at the subsequent 2 quarters this year, you had a very similar revenue basis yet we saw a significant increase on the margin profile, especially sequentially. Can you talk about some of the steps that you're taking kind of intrayear to see that type of margin improvement? Is this more than mix? Or what could you tell me?

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Stephen G. Oswald, Ducommun Incorporated - Chairman, President & CEO [3]

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Okay. Let me handle that. So it's just continued operational improvements. It's like I said earlier, it's the performance center strategy. It's the Ducommon operating model. It's our pricing discipline. It's reducing scrap. It's all the things that since I came here and we finally got the things going that we're starting to really kind of see pickup. So it's a mix. You're absolutely right. Sequentially, it's getting better, and we're happy with it.

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Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [4]

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Do you think this is a sustainable number? Or do you think you grow from here? Or is this -- I mean is this -- do you think this is kind of an overachieving number?

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Christopher D. Wampler, Ducommun Incorporated - VP, Controller, CAO, Interim CFO & Treasurer [5]

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No. I mean, Ed, this is -- it's Chris. Yes. And I don't -- we don't see it as an overachieving number. I mean it's been a journey to get it back from low-singles to mid-singles up to where we're at now, but this is our platform to keep moving forward with. And again, we're looking to continue to grow the top line, get the things that are -- get the drop-down that will certainly help from there as well as just continue to execute a little cleaner and keep moving it north.

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Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [6]

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Got it. I wanted to discuss the MAX. Obviously, Boeing's missed early fourth quarter with a return to flight, FAA and the equivalent European organization still haven't approved. And we're seeing continued pushouts from airline expectations. As we look at the MAX, and I looked at your revenue for both Boeing and Spirit, it looks like Spirit's hanging in there but Boeing has declined 8% year-over-year. Maybe you can kind of talk about what you're hearing from Boeing versus what you're hearing from Spirit.

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Stephen G. Oswald, Ducommun Incorporated - Chairman, President & CEO [7]

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What we're hearing is, no change. We're still, as I said in my remarks, we're at 52 for Spirit. We're 42 at Boeing. And you're absolutely right. The Spirit's been hanging in there, and that's been helping us. And Boeing is declining a bit, but you expect that with going down to 42.

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Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [8]

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Right. And so when you ship 10 ship sets a month now, I guess, for 5, 6 months ahead. I mean I'm assuming that [deters] the growth as we move into 2020 and so forth. I mean if Boeing goes back to 52, and ultimately 57, there's some inventory to kind of bleed out of the system. How should I think about that?

And then, ultimately, if there is a shutdown or a slowdown in that production rate at Spirit, it's -- how are you prepared to kind of flex the employment base?

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Christopher D. Wampler, Ducommun Incorporated - VP, Controller, CAO, Interim CFO & Treasurer [9]

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Yes. No. I mean, Ed, I think our view is still relatively similar to where we've been in the last couple of quarters as -- the longer it drags, certainly, that's going to change what happens as far as the curve and how we sort of get back to getting them fully supported at a point in time. But as long as the orders are there, we'll get back there eventually on that.

In the meantime, it's the rest of our Structures business that really is going to sort of carry the day. And that's what gives us the options and gives us the confidence to say that we're going to continue to grow the business in the fashion that we laid out for you guys.

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Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [10]

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Got it. And then when I looked at the receivables, once you broke out kind of in the Q, seeing that Boeing's receivables now are 14% up from about 8 so there's 600 basis point improvement there or increase there. Is there any delays in payments from, I guess, your largest customer?

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Christopher D. Wampler, Ducommun Incorporated - VP, Controller, CAO, Interim CFO & Treasurer [11]

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Yes. No. No issues there. I mean we've got a -- number one, there's been no signaling of any sort there. And number two, we've got most of our program -- most of our sales at Boeing goes through a program where we've got options to pull-through supply & chain finance agreement as well. So we've got multiple ways to keep cash flow moving.

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Operator [12]

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Next question is from Ken Herbert of Canaccord.

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Kenneth George Herbert, Canaccord Genuity Corp., Research Division - MD and Senior Aerospace & Defense Analyst [13]

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Steve and Chris. Steve, really nice quarter. I just wanted to first follow up on that last question. I mean it seems like the free cash flow is sort of clearly running down this year compared to last year. Is it fair to assume that a lot of that is really just maybe some inventory build or stretched payments? Or is there anything else unique on sort of working capital as we think about that?

And then, how do we think about that maybe in the fourth quarter or into 2020? And do you start to reverse and see a nice acceleration in the cash outlook?

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Christopher D. Wampler, Ducommun Incorporated - VP, Controller, CAO, Interim CFO & Treasurer [14]

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I mean, Ken, this is Chris. So the year-to-date cash, we had sort of the onetime negative hit in the first part of the year related to the cash, the bonus payments that were in the first half. So that put us a little back from where we would -- normal trend would be. Q3, we got back sort of on pace and outdid last year's Q3. As we look to Q4, we're expecting -- it's usually our strongest cash quarter. We're looking for that to be the case as well. The impact of anything related to inventory slowdown with Boeing or anything else is I'd call negligible, and we're working through that and expect to finish a good Q4.

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Stephen G. Oswald, Ducommun Incorporated - Chairman, President & CEO [15]

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Yes. We think it's going to get better, Ken.

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Kenneth George Herbert, Canaccord Genuity Corp., Research Division - MD and Senior Aerospace & Defense Analyst [16]

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Okay. And to that point, I guess, are you comfortable with maybe committing to a number on -- or sort of what this -- what do you think this business can generate in terms of a conversion basis or maybe some way we should think about -- I mean, you've got a great growth on the backlog, obviously, you're translating this into revenues, and the margins are phenomenal. So I would imagine, eventually, the cash here starts to really catch up. So how should we think about that in terms of that opportunity?

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Christopher D. Wampler, Ducommun Incorporated - VP, Controller, CAO, Interim CFO & Treasurer [17]

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Yes. No. I think that's fair. I mean I think what we've said before is still in play, which is our cash should outpace our net income. And we're sort of in that neighborhood, a little south of it at the moment, but that'll be where we move through. We expect to move through here in Q4. And then going forward, again, we will pick up some additional leverage as we continue to be -- as the margins expand a little more.

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Stephen G. Oswald, Ducommun Incorporated - Chairman, President & CEO [18]

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And Ken, this is Steve. As we talked about with the -- we mentioned in the call earlier about operational improvements and performance center strategy, Ducommun operating model, those type of -- that's all going to help us on the inventory side as we go forward.

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Kenneth George Herbert, Canaccord Genuity Corp., Research Division - MD and Senior Aerospace & Defense Analyst [19]

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Yes. Perfect. And I appreciate the incremental detail on Nobles. Is it fair to assume, I mean, the deal closed, I think, the first week or so of the quarter just around there. Does this business add sort of 4 to 5 points of top line growth in the quarter? Is that the right way to think about it?

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Christopher D. Wampler, Ducommun Incorporated - VP, Controller, CAO, Interim CFO & Treasurer [20]

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Yes. I mean I'd say that in that range. I mean it's in the -- it's somewhere in that range. But it's -- we're not going to give too much more detail, but that's the neighborhood.

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Kenneth George Herbert, Canaccord Genuity Corp., Research Division - MD and Senior Aerospace & Defense Analyst [21]

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Okay. No. I can appreciate that. That's helpful in and of itself. And just finally, Steve, really, I mean, Nobles looks like a great fit. Can you just maybe provide a little bit more color. You've only owned the business, obviously, now for less than a month, but how the integration is going? How you view the team and maybe where do you see the opportunity or the top line opportunity, I guess, for this business moving forward?

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Stephen G. Oswald, Ducommun Incorporated - Chairman, President & CEO [22]

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Sure, sure. First of all, I'm going to start with the team. We're thrilled with the team, the President and all his direct reports are staying. And we want them to stay. So like we had with LDS, and we had with CTP, we're 3 to 3 now with top flight executives staying with us and being able to help us create value as we go forward. So we're happy with that.

Our other 2 integrations couldn't have went any better. We're going to continue you the same plan. We bring a lot of -- as I mentioned in the past, we bring a lot of experience. We use a lot of the UTC processes for integration and lots of things that we learned in past jobs we bring in here. It's very detailed. So we feel good about that.

The market is nice -- certainly a nice niche market for us. It's defense. We like that. Obviously, we think that going forward, there's definitely top and bottom-line headroom. We'll have to see exactly what that looks like. But we certainly feel it's 5 to 10 at least next year upside.

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Operator [23]

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We have a question from Aman Gulani of B. Riley FBR.

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Aman Raj Gulani, B. Riley FBR, Inc., Research Division - Associate Analyst [24]

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And congrats on a solid quarter. Can you talk about some of the aftermarket opportunities now that you've acquired Nobles? And then, are you seeing any opportunity to capture some land and sea platforms? I know you're mostly in air platforms now, but I know Noble has a lot of content in land and sea platforms. Do you see opportunity to capture some business there?

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Stephen G. Oswald, Ducommun Incorporated - Chairman, President & CEO [25]

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Yes. We do, actually. So we're in great shape with Nobles on air. We're really in fairly good shape as well on sea, our big opportunity's on the land. So we're busy at that. The team is busy with that. So I think that there's more to come as we go forward here with Noble. As far as the aftermarket, that's a goal of ours. We continue to work hard to develop that. We'll have more information as we move into the future on that.

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Aman Raj Gulani, B. Riley FBR, Inc., Research Division - Associate Analyst [26]

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Got it. And now that you've completed the acquisition of Noble, how would you characterize the current M&A pipeline with what you're looking at today?

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Stephen G. Oswald, Ducommun Incorporated - Chairman, President & CEO [27]

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Sure. Well, look, it's -- everything is very competitive as everybody knows in the business world. So we see that, but we also see that -- we think there's still a lot of opportunities ahead for us. Obviously, though, we're -- this Nobles deal, we've spent a lot of time on it, and we've studied it and we made sure that it was the right buy for us at the right price. So these things take time, and nothing's really changed there either. We'll just have to see but the pipeline's been pretty good.

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Aman Raj Gulani, B. Riley FBR, Inc., Research Division - Associate Analyst [28]

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Got it. Okay. And then just turning to Raytheon. I know you've previously talked about capturing some Structures business at the Raytheon. I just wanted to see if there's any progress on that front.

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Stephen G. Oswald, Ducommun Incorporated - Chairman, President & CEO [29]

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Stay tuned. There is progress, but we're working with Raytheon. As I mentioned in the last call, we're thrilled to be the first RMS that is the first supplier they signed up for their strategic program. We're busy working with their teams. We'll have more information in future calls on the Structure side.

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Operator [30]

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(Operator Instructions) We have a question from Michael Ciarmoli of SunTrust.

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Michael Frank Ciarmoli, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [31]

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Nice quarter. Steve, just looking at sort of your longer-term growth projections, there's still 5% to 7%, I guess, 3-year CAGR in aero. Can you maybe just talk about what that's dependent on? I mean, does that -- is that contingent on the 37 getting up to 57? Does it -- we obviously saw that the 787 has taken a step down. I mean, it doesn't really look like there's a lot of growth in terms of production rates. So is it going to be more market share and content expansion for you guys?

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Stephen G. Oswald, Ducommun Incorporated - Chairman, President & CEO [32]

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I think it is that. I mean obviously, as I mentioned on my remarks, I mean, this Airbus relationship is still fairly new to Ducommun. So it's still early innings. We're doing -- I think it's a really great work for them on the 320 and some other programs. So I'm pretty comfortable right now with where we're going. And for Airbus, obviously, it was not in the P&L 3 or 4 years, I think, it's going to really help us get to our goals over the next 3 years.

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Michael Frank Ciarmoli, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [33]

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Got it. And then just on the -- back to the electronic margins. I'm assuming this was mix as well. But even on a sequential basis, you had a dip there from the second quarter, 11.1% to 10.7% on the higher revenue. Was that entirely due to the product mix in the quarter?

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Christopher D. Wampler, Ducommun Incorporated - VP, Controller, CAO, Interim CFO & Treasurer [34]

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Yes. No. That -- it was, Michael, it was mixed between last year -- compared to last year. We popped a mix that was in the more favorable for where we were at during the year. This year, it's sort of the opposite. But having said that, we anticipate that segment bouncing back.

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Stephen G. Oswald, Ducommun Incorporated - Chairman, President & CEO [35]

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We do. We feel good about next year too.

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Michael Frank Ciarmoli, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [36]

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Got it. And then just the last one on Nobles. I think you mentioned aftermarket. You disclosed, I think, how much was international. Did you -- would you be willing to disclose how much of the revenues are coming from the aftermarket and even maybe -- I'm assuming this new revenue stream would be accretive for the margins. Is that a reasonable assessment?

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Christopher D. Wampler, Ducommun Incorporated - VP, Controller, CAO, Interim CFO & Treasurer [37]

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I would say, no and yes.

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Stephen G. Oswald, Ducommun Incorporated - Chairman, President & CEO [38]

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Yes. That's right. No and yes.

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Operator [39]

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At this time, there are no further questions in queue. I will return the call to Mr. Steve Oswald for any closing remarks.

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Stephen G. Oswald, Ducommun Incorporated - Chairman, President & CEO [40]

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Okay. Let me just wrap up. Again, I want to thank everybody for joining us today. I just want to, again, mention, we feel great about where we are. We feel we're going to get a strong year behind us, closing it up in December. And we feel very good about 2020. I want to just also take this time to thank my team, my leadership and everybody else at Ducommun as well as our supply chain partners. Everybody is really pulling together now. We're looking forward to great things ahead. So I'll leave it there. Thank you, again, to our shareholders for your support and trust. Have a great evening.

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Operator [41]

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