Ducommun Incorporated (DCO) Q1 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Ducommun Q1 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this call will be recorded. I'd now like to introduce your host for today's conference, Mr. Chris Witty. Please go ahead.

Thank you and welcome to Ducommun's 2016 first quarter conference call. With me today is Tony Reardon, Chairman and CEO; and Doug Groves, Vice President, Chief Financial Officer 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 indicated or implied 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 and Form 10-K for the fiscal year ended December 31, 2015. 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 now like to turn the call over to Mr. Tony Reardon for a review of the operating results. Tony?

Thank you, Chris, and thank you everyone for joining us today for our 2016 first quarter conference call. I'll begin by providing an overview of our operations including some market color after which Doug Groves will go over our financial results in detail. First, as our investors know we've made many changes to our company over the past year to improve overall operating performance. We've cut cost, streamlined operations and most recently shed non-core assets such as our Pittsburgh and Miltec businesses. We did this to focus Ducommun on the core aerospace and defense industry and improve margins and reduce the unpredictability inherent in certain industrial energy markets. We did sell these operations at attractive prices over 8x EBITDA resulting in a gain on the sale that Doug will speak to in a moment. Most importantly the sales generated net proceeds of approximately $50 million, which we used to pay down debt. At the end of the quarter total indebtedness stood at just $190 million a far cry from where we were a year ago at $280 million. As you know we are serious about delivering the company to strengthen our balance sheet and reduce interest expense and we've accomplished a great deal in this regard over the past year and a half. At the same time, our gross margins have rebounded nicely, testimony to the many initiatives taken to reduce cost and improve the efficiency of our operations. Gross margins reached 19% this quarter versus about 15% last year and in Q4. So, while revenue was down year-over-year as expected primarily due to lower military spending the actions we've taken have boosted our underlying operations and focus the company for better growth going forward. Our backlog at $564 million is the highest it's been over a year with the primary driver being increased military backlog which bodes well for the stabilization of that market. We believe the performance we saw in the first quarter will also lead to improved results as the year plays out. We will continue to focus our streamlining initiatives such as the previously announced changes to reduce our administrative office in St. Louis, which we concluded early in Q2. In addition, we will be closing a small integrated electronics facility serving the oil field service industry in Tulsa, Oklahoma within the coming months. As we look to further increase the operating leverage at our core manufacturing locations and focus our capabilities on the markets we serve. Now, let me provide some additional color on our end markets, programs and products. I'll start off with the commercial aerospace business, where quarterly revenue once again was very strong nearly $67 million, we saw strong shipments across our large aircraft segment slightly offset by weakness in the commercial helicopters and the regional and business jet markets none of this was unexpected. We ended the quarter with the backlog of $268 million near record highs for another sign that we believe there is further growth in these areas going forward will be strong. Ducommun has content on some of the best platforms in the industry including the Boeing 737, where we'll see an acceleration of revenue due to higher content and production rates as this transition to the 737 max in the coming years. We also have a strong position on the 777 and the 787 as well as content on the Airbus A320neo and the A350. As a matter of fact, we recently announced a new contract with Airbus to provide titanium structures for engine support on the A320neo. And with Airbus also awarded us the first work on the A330neo, an engineering design contract in which we will collaborate and improve the manufacturability, cost and function of certain metal structures, applications for Airbus. These are great wins to Ducommun that will expand our support to the Airbus across the A320 and A330 family allowing us to demonstrate our manufacturing design expertise and potentially pave the way for other opportunities with this OEM as we go forward. As a reminder, we currently have over 30 new development programs underway across Ducommun, many of which will begin positively impacting top line results later this year and into next year. To support this growth, we will be investing in certain operations during the second half of this year to cover our titanium composite and electronics product line. The expansion in these three areas has been an integral part of our strategy and as a result we need the appropriate facility upgrades, equipment and personnel to support the contracts already in place and ensure the capacity for additional new application. We will continue to focus on these strategic imparities and see many opportunities for future growth. Turning to our military and space sector, revenue fell to $58 million this quarter versus $71 million last year. This was not really a surprise given what we've said in the past about overall budget curtailments and reduced spending on certain platforms. However, some of this decrease was related to shipment timing. As we said at the beginning of the year, we expect the current run rate for our military business to be in that $60 million to $70 million range for the foreseeable future, so the first quarter was obviously shy of that. However, our defense backlog rooted $261 million this period the highest level in over a year this reflects needed electronic upgrades on many platform we serve and demand for the missile defense -- in the missile defense business. So while we're not bullish on this part of the business just yet, the stability I spoke about is clearly there and we anticipate [for roll] [ph] going forward. We are in a much shape operationally as evidenced by this quarter for the lower run rates currently in place as we look to take advantage of shifts in the budget spending. With that, I would like to now turn the call over to Doug to go through the financial detail. Doug?

Thank you, Tony, and good day to everybody. Net sales for the first quarter of 2016 were approximately $142.1 million compared to $172.9 million for the comparable quarter of 2015. The revenue decline reflects 19% lower revenue in the company's military and space markets mainly due to a decrease in U.S. defense spending as well as procurement delays in the shifted program priorities that impacted both our fixed wing and helicopter programs. In addition, the overall year-over-year top line shortfall reflects in aggregate a 43% decrease in industrial revenue due to the divestiture of our Pittsburgh operation in January 2016 and the closure of our Huston operation in December 2015. Going forward as a result of the Huston closure and the divestitures of Pittsburgh and Miltec, electronic systems revenue will be reduced by approximately $20 million per quarter. Commercial aerospace revenue was nearly $67 million during the first quarter. In addition, the company's overall backlog rose to $564 million versus $546 million at the beginning of 2016, the highest level in over a year and this also included a very nice pick up in our military and space orders. Moving to gross profit, our gross margin was 19% in the first quarter compared to approximately 15% last year's comparable quarter in the fourth quarter of 2015. This reflects improved product mix and the various cost initiatives over the past year including supply chain cost savings and other efficiency improvements. SG&A was down slightly year-over-year as the impact from cost cutting initiatives reduced headcount and the sale of our Pittsburgh operation are offset by one-time retirement expenses as well as higher professional fees and the timing of certain research and development cost related to new program wins announced last year, such one-time items totaled roughly $1.8 million in aggregate in the quarter. Ducommun's operating profit for the current quarter was approximately $4.3 million or 3% of sales compared to operating income of $3.6 million or 2.1% of sales for the comparable period in 2015. This year-over-year increase was primarily due to the higher gross profit margins achieved in 2016. The interest expense decreased to $2.4 million in the first quarter of 2016 compared to $6.7 million in the previous year's first quarter. This was primarily due to lower outstanding debt reduced interest rates as a result of the company's refinancing in July 2015. The company also reported a pretax gain on sale of $18.8 million during the first quarter of 2016 in connection with the previously announced divestures of our Pittsburgh and Miltec operations. Our effective income tax expense during the quarter was $7.2 million or 35% compared to a 35% income tax benefit for the comparable period last year. The higher rate this quarter was a result of the net gains on the divestitures, this is purely just the timing issue and the tax rate should normalize to approximately 29% for the full year. We reported net income of $13.6 million or $1.21 per diluted share compared to a net loss of $2 million or $0.18 per share in the first quarter of 2015. The increase in net income was primarily due to the pretax gain on the divestitures of Pittsburgh and Miltec of approximately $18.8 million and lower interest expense of approximately $4.3 million. Adjusted EBITDA for the first quarter of 2016 was approximately $11.1 million or 7.8% of revenue compared to $12.2 million or 7% of revenue for the comparable period in 2015. Now, let me turn to the segment results; structural systems, our structural systems segment posted revenue of $64 million in the first quarter of 2016 versus $72.1 million in the prior year period. The lower revenue was primarily due to a 23% decrease in military and space revenue reflecting a decline in the U.S. government defense spending as well as shifting priorities that impacted certain platform deliveries. Structural systems operating income for the first quarter was $2.7 million or 4.3% of revenue compared to operating income of 2.1% or 3% of revenue in the first quarter of 2015, this primarily reflected our improved operating efficiencies related to the company's ongoing cost improvement initiatives. Adjusted EBITDA was $4.8 million for the current quarter or 7.5% of revenue compared to $4.7 million or 6.5% of revenue for the comparable quarter on 2015. Now, turning to electronic systems, our electronic systems segment posted revenue of $78.1 million in the first quarter of 2016 versus $100.9 million in the prior year period. The divestiture of our Pittsburgh operating, closure of our Huston facility, which I previously mentioned reduced revenue by about 15% in addition there was a 17% decrease in military and space revenue mainly due to the decline in defense spending and shifting spending priorities as previously discussed. The impact of these items was partially offset by 28% increase in the segment's commercial aerospace revenue where we continue to gain traction. Electronic systems posted operating income for the first quarter of $7.1 million or 9% of revenue compared with operating income of 6.3% or 6.2% of revenue in the first quarter of 2015, again, reflecting operating efficiencies related to the ongoing cost improvement initiatives. Adjusted EBITDA was $29.6 million for the current quarter or 37.9% of revenue compared to $10.6 million or 10.6% of revenue in the first quarter of 2015. Excluding the gains in the divestitures of $18.8 million this year adjusted EBITDA would have been 13.8% of revenue for the first quarter. Looking at corporate general administrative expenses CG&A, CG&A expenses for the first quarter of 2016 were $5.5 million or 3.9% of total company revenue compared to $4.8 million or 2.8% of company revenue for the comparable quarter in the prior year. CG&A expenses increased primarily due to higher R&D expenses related to new program awards announced in 2015 and one-time retirement charges of approximately $900,000 partially offset by approximately $700,000 and other cost reduction initiatives. Now, turning to backlog, backlog at the end of the first quarter was $564 million versus $546 million at the end of the fourth quarter, which reflects a significant increase in the military and space bookings. Liquidity and capital resources, we generated approximately $5.5 million of cash from operations in the first quarter of 2016 compared to $3.5 million in 2015. We remain diligent in effective working capital management and expect our net cash profile going forward to reflect the historical seasonal patterns. We use the net proceeds from divesting of Miltec and Pittsburgh of roughly $50 million to pay down debt as Tony mentioned and we continue toward our goal of delevering to targets of 2x in a quarter to 2.5x debt to EBITDA over the next few years. Capital expenditures were approximately $3.8 million in the first quarter and we now expect CapEx to be in a $18 million to $22 million range for the full year as we continue to invest in new programs and prepare for the next generation platforms ramping up later this year. In closing, we've taken decisive steps this year and last to right-size our operations to reflect lower defense spending as well as focus on the core aerospace and defense markets we serve. Our margins illustrate the results of our actions taken this far and we believe further performance improvement should be forthcoming as the year progresses. Given our current backlog in demand trends, we anticipate higher growth in the second half along with a stronger balance sheet, lower debt and streamlined operations which should show better returns heading into 2017. I'll now turn it back over to Tony for his closing remarks. Tony?

Thank you, Doug. Before turning the call over to questions, let me just reiterate how pleased we are to see the fruits of our labor coming together this year. We posted higher gross margins, paid down a significant portion of debt and sold off non-core assets and focus the company on markets that we know best. We're winning new business on some of the most well known marquee platform in the industry and so our backlog grow on rebound across our military program. Ducommun remains an unique position; we believe to provide advanced Electronics and Structural Solutions in the aerospace defense and high technology markets. In addition, the current macro economics trends and commercial aerospace demand as well as platform transitions will benefit the company in the quarters and years to come. We continue to -- invest in innovative applications aggressively manage our working capital and drive operating cash flow to strengthen the company. So we will position ourselves for faster growth and reduce our debt going forward. With that Katherine, I would like now to turn the call over to questions please.

Thank you. [Operator Instructions] And our first question is from Mark Jordan with Noble Finance. Your line is open.

Good afternoon gentlemen. Question relative to structures, still while starting to improve 4.3% operating margin, still well below historical goals that you have. I guess my question, do you see that margin rate improving sequentially as you move through the year and do you have a sense of what order of magnitude should it be as you exit the year, is it still on the 8% to 9% range?

Yes, Mark thanks for the question. Yes, it should improve sequentially quarter-over-quarter as we mentioned in the remarks we begin to really gain momentum as we get into the second half you saw it obviously improve over the fourth quarter and we would expect to continue into the second, third and fourth quarter as the volume picks up given the nature of the programs that we're on and the new ones that we're working on as they come online. So those margins do get back to that sort of historical level as we get through the year into 2017.

Okay. The corporate expense levels you should -- obviously, there was a retirement expense $900,000 from -- I thought you mentioned other items that total that were abnormal or not potentially non-recurring that in aggregate all of them at $1.8 million. So should we look at that $3.7 million or $3.8 million quarterly corporate expense rate as what we should see moving forward or is there something else we should hear or attune to?

Yes. No, that's right. We did have some one-off items in the first quarter as mentioned as outlined in our 10-Q. So if you subtract that aggregate out of that that corporate line probably getting back, yes, closer to sort of $4 million number as we move forward is what we would expect.

Okay. Final question for me, if you were to -- if the gains on the asset sales had not occurred and you had a more normalized tax rate, do you have what the earnings number would have been without, again, without that transaction?

Sure. So if we normalize the quarter and take out the divestiture gains and even the $1.8 million and one-time SG&A cost at the 29% rate that we expect to be at for the full year that would have came to about $0.23 a share on the EPS line.

Okay. Thank you very much.

Thank you. And our next question comes from Edward Marshall with Sidoti. Your line is open.

Hey guys.

Hi, Ed.

Hi, Ed.

So I wanted to touch on the structural systems again if I could, the margin in particular around the operating line and -- it's quite noticeable that your gross profit, the gross margins were down. But, that's not really translating too much operating profit, what's going on in the operating expense line that's really dragging that number down, Q1 looks pretty high there from an operating level just curious to get your thoughts?

Ed, is your question specific to the structures business?

Well, its structures -- yes, to the structure system in particular, but then looking at the core business as a whole I mean 19% is one of the better gross margins that you put up in several period. So it looks like your business is rebounding at the gross margin level, but then you're not translating that to higher operating income.

Sure. So we've got a couple of things going on. We've met -- we've talked about our supply chain initiative and the initial rollout of that was to really go after the electronics business that we have because we saw that we had a quicker win. So a lot of the supply chain savings, structures doesn't start to show up for another couple of quarters or two. And with structures, the volume as that picks up because we've got a lot of investments that we've made last year and even early into this year we'll see that start to -- the operating margin start to improve. I mentioned some R&D in the first quarter that was in -- all really related to the structures business itself. Again, more of a timing issue year-over-year, but expect to see the benefit of that as we get into the second half of this year. So that -- we should see sequential improvement in the operating margin for our structures.

You think that's 8% or 9% margin business, or do you think it gets backs to the legacy double-digit range?

Yes. I think we've said it gets back to 8% or 9% as we walk out of this year and into early next year.

Got it. And then the tax rate -- was it higher on the divestitures for a reason, I mean was there a portion that was not subject -- was all taxable?

There was a portion of it the way that the gain got a portion particularly on the Pittsburgh sale because when you looked at the total gain of 18.8, 18.3 was related to the Pittsburgh operation. So that's what drove it up just in this quarter. But, again, we'd expect the full year rate to normalize back down at around 29%. So it's just a timing issue obviously the more money you make in the quarter the more taxes you pay.

When you talk about for interest expense for the full year now you've paid down a bulk in Q1 that was originally slated for later in the year?

Yes. So, that will come back down to probably the $2 million range as we continue to pay down. It was slightly higher than this quarter because under the accounting standards you have to take your deferred financing fees off using the effective interest method, you can't just straight-line them. So, as we pay down a big chunk of debt, we had to write-off a little bit more of the interest expense -- deferred financing fees and the interest expense. So, it should be coming back down to that range as we come into the next quarter.

What range, $2 million a quarter, I mean, excuse me, given that you've paid down, entered the quarter -- probably mid-way through the quarter?

Yes. Well, it will step down. I mean we've said that we'll continue to pay down that sort of $7.5 million in debt for quarter, which is what we've historically averaged. So we can -- depending upon what happens with LIBOR, which is what the debt is tied to, it should come down.

So what's the marking off 3.5 LIBOR plus?

No, it will come down to 2.5.

Your LIBOR plus 2.5?

Yes.

Got it. Thank you.

Thank you.

Thank you. And our next question comes from Christopher Van Horn with FBR & Company. Your line is open.

Hi, guys. This is Dan Drawbaugh on the line for Chris. I was just wondering, if you could take a minute to talk about the end markets. So, first of all, can you give me a sense of what industrial organic revenue growth would have been? I know that given divestiture was down pretty significant year-over-year?

Yes. So that I mean -- that the businesses that we've got left there are really heavy industrial and in medical. And those peak and valley, but they've generally been in the sort of 1% to 3% range. So there -- we've got the very good strategic customers that were focused on as we move forward, but that's historically what those markets. I mean obviously, have been masked by our exposure to energy in oil and gas over the last several quarters. But with all the actions we've taken with Huston, with Pittsburgh and as Tony mentioned, a small facility we had in Tulsa, we really have no exposure to that going forward. So we'd expect those industrial businesses to be sort of in that range.

Okay. Thank you. That's helpful. Specifically on medical, are there any particular growth opportunities there that you want to highlight, just give us some more color?

Well, it's now such a smaller part of the business, I mean we do think that there is growth there and we've got some few key strategic customers of that -- we're really focused on with some unique applications.

Yes. I think the important thing Dan is the growth that we're going to see there is probably not going to move the needle on the top line. But, its -- there are couple of major customers that we're doing some significant development work for that we think will turn into some production programs. But, I think all-in-all, it's at a level where the revenue base would not significantly move the needle as we moved up 1 million or 2 million.

All right. Thank you. Then, moving to I guess just moving down to the defense section. Can you speak to -- if there were any, I guess delays in terms of spending in the quarter that might -- we might see have been pushed out into second quarter, or can you just talk about how the cadence looked in the first quarter and I guess how things are looking so far in the second quarter?

Sure. I think that when you look at the first quarter, we did have some schedule slides or delays in release on two missile programs in particular. And we have picked those orders up and where we had anticipate the revenue base to be in the third quarter will probably be late third quarter to the fourth quarter because the delay in the release. But, still the program looks strong, one of them in particular is on the pave way missile. So, we've seen a nice up tick on that, there were some schedule slides on the military helicopters as well, on some spares applications, but they just moved to the right by a quarter. So, I think the change is on the military side and some of the late releases caused a little bit of dip, but we should see some stabilization in the second and third quarters going forward.

All right. Thank you. Finally, on the 30 development programs that you've got in the works there, is there any kind of incremental color you can give us, some kind of -- how that breaks out around the second phase, may be I know you probably don't want to quantify, but you said that they are going to be positive for the top line later in 2016, is there anything to think about, does that just offsetting roll offs or is that potentially -- so then you see rolling off?

I think the pick up that we'll see at the end of the year will be on the commercial side, the aerospace and mostly I think its the primarily are going to be driven by the tooling, so the customer buys off the tooling sales. So we should see some tooling sales come up with some initial production deliveries. And I think we'll see more production deliveries in the second half of the year and that pertains to the 737 max wins as well as the Airbus wins that we have announced recently. There are other wins that we have in place that we haven't announced, but primarily on the commercial side. But we had a nice pick up on the military side on our program that we haven't announced as well.

All right. Thank you. I'll jump back in queue.

Thank you.

Thank you. [Operator Instructions] Our next question comes from Mike Crawford with B. Riley & Company. Your line is open.

Thank you. Off the $27 million in revenue from Boeing, how does that break out between commercial and military roughly?

For military it's obviously -- mostly the helicopter platforms that we're on. So, it's about 60% plus commercial -- 65% commercial and 35% or so in the military -- in there as well, yes.

And then, I think Airbus, I think on the last call you mentioned that you'd had around, correct me if I'm wrong, $15 million of Airbus revenue last year, is that something you expect to grow sequentially throughout 2016, or how should we review the Airbus ramp as you ramp up on some of these new platforms?

I would expect that the Airbus would grow about 3% this year and a little bit higher next year as we ramp up on A320 and A350, so in that order 4.5% range.

Okay.

That helped you?

Yes. Thank you, Tony. And then, on the backlog, you had the military and space backlog, not only in structures, but also in electronic systems. So are those related to same program or are those different programs, different sets of programs all growing?

No. It's a mixture of programs that are growing. So we had a nice pick up on the missile in the same side. We picked up follow-on orders on the radar systems particularly on the F18 programs that was a nice boost. And then, on the structure side, it was primarily some military follow on orders.

Okay. And then, just to clarify the $1.8 million of one-time expenses that affect your EBITDA -- if you -- for your bank agreement, do you add that back in and you say that your adjusted EBITDA was more like $12.9 million for the quarter or…

The answer is, yes. Through the bank covenant agreements, we are allowed certain add backs for one-time type of expenses like that whether there are restructuring charges or in this case retirement charges.

Right. Okay, Doug. And then, as far as charges related to closing say the Tulsa office in Q2, what level of one-time charges shall we look for in Q2?

Yes. That was a very small operation, so it will be a few 100,000 dollars, so it's not very big.

Okay. That will do it. Thank you very much.

Okay, Mike. Thank you.

Thank you.

Thank you. And we have a follow-up from Edward Marshall with Sidoti. Your line is open.

So, I wanted to just ask a follow-up, talk about, you had some small awards with Airbus, you increased content on the Boeing plane and military seems to be, may be a better atmosphere for you in 2016 than it was in 2015 arguably. But, when I think about may be kind of projects that you're going out to bid on, can you kind of talk about maybe your hit rate, is there some way to measure kind of the success of winning new businesses and kind of just I guess that's the first question?

Okay. So, let me, I'm not going to give you a hit rate right off the top. And so, that kind of competitively sensitive data. But, we will tell you that we're pretty laser focused on certain applications that we've been very successful at. We are doing a lot more upfront development work for customers as evidenced by our contract with Airbus and the A330neo, which has given us the better hit rate on applications that are coming out. So, I would say that we've got improved hit rates over let's say the 2014 and early 2015 time period and that keeps expanding. So there is a number of applications that we're winning, this is both on the military and the commercial side of the business where we're spending a lot more time upfront there is a lot more work with the customers direct early on a number of applications that are boarding well for the follow-on orders. So, the hit rate is improving.

Got it. And so what's driving that improvement? Is it driving by the new leader Ducommun and that's getting -- is the available capacity, is it pricing, what's driving your customers? I mean it sounds like you're doing some engineering work, it doesn't make sense I guess you just sold the engineering, but how are you getting more upfront than kind of the…

Well, the engineering that we do is more manufacturing engineering but basically essentially we've been doing this for the last three years or four years really. We're just trying to be more innovative with our solutions to our customers. So we have our -- we have set up labs in most of our businesses where we sit down with the customers and walk through the issues that they're having on the manufacturing side. And then, spend some time with them, so that we can develop solutions that you can use from the manufacturing process to solve their problems. So we had a couple of pretty nice wins in the last two years that our direct result of us just being working closer with the customers and helping them solve the problem. So the engineering is more along the lines of how we're going to manufacture it and ease of manufacturing and also in some cases some electronics reducing the size of the application shrinking the boards, things of that nature.

Got it. So you're gaining traction there. When I think about your gross margin, there has been so many changes in your business over the last year whether its head count or just divestitures and so forth. Does this follow the same orderly -- the same trends that we've seen historically, Q1 is probably, is one of the highest, Q2 is a little bit higher then it tails off in the back half of the year kind of how do I think about the gross margin for your business, give me some direction with all the changes?

First of all, I think, go ahead Doug.

No. I would just say -- I think as we mentioned in our last call, our goal has been to get back to this historical margin. So I think we see sequential improvement in the fourth quarter just because the number of work days and holidays is always a little softer. So there is a little bit of seasonality in there. But, depending upon the product mix in the given quarter, we think there is, there will be continued very, very modest improvement at the 19% we are at right now.

I thought 19% was pretty good, are you saying you're not satisfied?

No. Well, we are satisfied. That goes without saying. But, I think that one of it is -- look we did exactly what we said, we would do last year and that is, we got after the cost basis. And we think that from a gross margin standpoint last quarter, we talked about moving back to that 18% to 19% range. So we think that we can be in that range. And then with what we're doing on the supply chain, we're hopefully that will get a little bit of a boost going forward. But we should be in a position where we're pretty steady state in that 18% to 19% range and hopefully we get a pickup as we walk through the rest of the year.

So it wouldn't be unnatural to see you kind of hit that 20% range at some point, not -- I won't hold you to it now, but eventually…

Yes. That's the goal. I mean that's really what we would like to see happen. So we're moving in that direction. I won't say that we're going to hit that. Look we were very pleased with the performance that we had in Q1. And the team is really focused on maintaining improved margins as we go forward. We still have a little work to do on the SG&A side, but from a gross margin standpoint I think that we've got some -- we had the cost reduction in place. And as Doug talked about earlier the supply chain improvements we're starting to kick in a little bit.

Good. Thanks guys. I appreciate it.

Thank you.

Thank you. And I'm showing no further questions at this time. I would like to turn it over to Tony Reardon for any further remarks.

Thank you very much, Katherine. And thank you everybody for joining us today. And we look forward to talking to you in the second quarter. Thank you very much. Bye now.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.