Ducommun Incorporated (DCO) Q1 2021 Earnings Report, Transcript and Summary

Welcome to the First Quarter 2021 Ducommun Earnings Conference Call. My name is Anna, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] I will now turn the call over to the investor relations advisor, Chris Witty. Chris, you may begin.

Thank you, and welcome to Ducommun's 2021 first quarter conference call. With me today are Steve Oswald, Chairman, President and CEO; and Chris Wampler, Vice President, Chief Financial Officer, Controller and Treasurer. I'm going to discuss certain limitations to any forward-looking statements regarding future events, projections, or performance that we may make during the prepared remarks or the Q&A 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 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 have been correct. In addition, estimates of future operating results are based on the Company's current business, which is subject to change. Particular risk facing to common include among others, the cyclicality of our end-use markets, the impact of COVID-19 on our operations, our customers, the level of U.S. government defense spending, timing of orders from our customers, legal and regulatory risks, management changes, the cost of expansion and acquisitions, competitions and disasters, natural or otherwise. These risks and others are described in the 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 GAAP to non-GAAP measures referenced on this call. We filed our 2021 first quarter form 10-Q with the SEC today. I would now like to turn the call over to Mr. Steve Oswald for review of the operating results. Steve?

Okay. Thank you, Chris, and thanks everyone for joining us today for our first quarter conference call. As in our prior quarter calls, I hope you and your families are healthy, for those that have received vaccines that have went or is going well. And we all get through this pandemic as best and fast as possible. Today and as usual, I will give an update on the current situation at the Company, after which Chris Wampler will review our financials in detail. Company ratings focus first and foremost on the health and safety of our employees. Team has done an excellent job with the safety protocols put in place since March 2020. We continue to work with authorities on best practice throughout our operations. Now, the cases at Ducommun is roughly 200. Since the beginning of the pandemic, we have seen a significant drop-off starting in February of this year, and we remain diligent on communication with weekly updates through our human resources team. As mentioned in the press release two comments, First quarter results are strong despite the continued challenges and the commercial aerospace markets, which we're all aware of. All the actions, initiatives, and hard work since we began this journey in 2017 have shown strong operating results, especially since last March and again, in Q1. Our defense business continues to be the major contributor as we build out this important segment of the Company for scale, which includes having the right product portfolio, strong operating metrics, leveraging our lean, highly focused performance center concept. This particularly evident to continue margin strength for gross profit and adjusted EBITDA, despite the significant year-over-year headwind. The team also posted adjusted operating income margins of over 7%. Quality of earning too was very high, with the Company reaching GAAP, diluted EPS of 55 cents a share versus 67 cents a share for Q1, 2020 and adjusted diluted EPS of 58 cents a share versus 67 in 2020. These numbers are reads despite overall revenue down 9% from Q1 last year. It's a job well done. This is also a great story for our investors. As we see a return to revenue growth overall in 2021 with commercial aerospace recovering, solid results in Q1 will benefit the rest of the year. The Company's first quarter revenue was lower due to the commercial aerospace markets. However, Ducommun's business again showed strengthening of 12% versus prior year. And again was the result of many improvements starting back in 2018. Do not ever want it to show a negative growth. The overall river revenue numbers are impressive despite the pandemic impact on commercial aerospace in the quarter, we're looking forward to Q2 and posting year-over-year growth for the first time in a while, Ducommun's defense business revenues continue to show excellent progress on shipments and robust business development. Majority of gains in Q1 include the Raytheon TOW program, radar systems for Northrop Grumman, UAVs at General Atomics and other missile programs. Again, as we have stated in the past, We are thrilled to be a strategic supplier with GA and reached $1 million in revenue in March this year for the first time. And shipments in 2021 will be able over 4X versus 2020. I also want to mention Raytheon Missile and Defense, and the progress in signing the strategic supplier agreement with them in July of 2019. we've been hard at work with new programs and share shift where we can provide value and I'm happy to report 2021 will be a record year overall with the legacy Raytheon businesses grind from less than 90 million in 2020 to over 125 million in 2021, in increases almost 40%. Regards to the defense backlog, it remained strong, ending Q1 with a backlog of 516 million. Total backlog for the Company was 810 million. And this is a great number based on the environment. The defense business grew year-over-year by 8.8%, bolstered by strong revenues and some key defense platforms, which included the TOW missile, UAV and other programs as part of Ducommun continues to deliver. Obviously the strength help offset commercial aerospace order pressure, but we anticipate that to start increasing in the second half of 2021. So the press results also show great opportunities when we leverage our structural product lines with defense OEMs, as mentioned previously, we have wins now on the TOW missile, which was a share shift from another supplier and other new programs such as the Standard Missile to dorsal fin assembly. Along with our acquisitions, this part of the business will be worth of a 110 million in revenue for 2021, where it was under 80 million in 2019. I also want to mention that we are optimistic about defense going forward, despite concerns regarding the budget and change in administration. Ducommun's defense segment has been under managed in the past, as I've mentioned, but now its structural applications going full speed ahead, along with a long track record and value off any of our electronic systems business. We see a strong future. One other very important metric is that our defense portfolio currently has 48 programs at the end of Q1, above a million in yearly revenue. Up from 34 in 2017, there were 40% increase. The Company's cost actions through Q1 2020 are also paying dividends. You can certainly see the effect of this, our actions in the continued strong, gross profit margins year-over-year, and the solid operating income percentage along with diluted EPS. Team did a great job in 2020 on costs and is now extending into 2021 in Q1. In regards to the outlook, our significant backlog in defense, the many growth programs mentioned earlier will provide strong revenue for the remainder of 2021. Provide strong revenue for the remainder of 2021. We estimate that revenue will be led by defense, but over the quarters and years ahead we see more commercial aerospace volume return to the Comet. We have the capacity, a strong operating team, and are prepared for the rate increases, especially in single aisle aircraft. We stand ready as well with our strong narrow-body platform positions, which Comet's titanium businesses, a platform and super plastic forming leading the way. As I've mentioned the past, we are the world leader in this area and have strong positions already at Airbus, Boeing, Spirit AeroSystems, Gulf Stream, and among other OEMs. Comet also has recognize as now included in the Boeing Premiere Bitters Program, meaning all of this OEM's criteria. And I also want to send my congratulations to our team supporting Airbus, by reaching 100% on-time delivery performance for two years straight in April 2021. That's a real achievement. As mentioned in our last call, we will returned to growth in 2021 with the first quarter being down year-over-year, but now that is behind us. The other three quarters we'll see good momentum versus 2020. And we anticipate overall revenue for the year to come is growing low to mid-single digits. Comet also has a great mid-term and long-term future. This will be accomplished by leveraging our new built out defense business and strong position in commercial aerospace, especially on narrow-body revenues, as we have a 2:1 ratio versus double aisle aircraft. Our engineered products portfolio and recent acquisitions will provide opportunities as well. Finally, we also remain active in the market for M&A and believe this will only be an accelerator to higher results in the future. Now let me provide some additional color on our markets, products, and programs. Beginning with our military and space sector, we posted first quarter revenue of 114.1 million. Once again representing strong growth versus 2020, up 12%, built revenue on some key defense platforms. I mentioned earlier, we saw our increases in demand on our tow missile, UAV, and other missile programs. First quarter's military and space revenue represented 73% of the Comet's revenue in the period. We also continue to be very well positioned for further growth across our defense platforms over the next several quarters in all sectors, especially at Raytheon and GA. And again, ended the first quarter with a strong back look at 516 million, which is up 8.8% year-over-year, represents almost 64% of the Comet's backlog. Then our commercial aerospace operation first quarter revenue declined year-over-year to 35.4 million, as expected driven by build rate declines on a number of commercial aerospace platforms impacted by the COVID-19 pandemic. Comet also has effectively adjusted costs and managed downturn as well-positioned once rates stabilized and increase over the long term. Comet will begin to recover in this market in the second half of 2021. As mentioned earlier, it has a very bright future. The backlog within our commercial aerospace sector, spans at roughly 266 million at the end of the first quarter, for the majority of the clients due to the 737 Max program. We do, however, stand ready with the team, processes and capital in place, to support the bill rate increases in the next few years. And we're anxious to get started. With that I'll have Chris review our financial results in detail. Chris?

Thank you, Steve. Good afternoon, everyone. As a reminder, please see the Company's 10-Q and Q1 earnings release for further description of information mentioned on today's call. As Steve discussed, our first quarter results were very solid. During Q1, we continued to demonstrate our ability to perform well at reduced volume levels, which we have had since the onset of the COVID-19 pandemic over one year ago. We're looking forward to leveraging the expected increase in demand for our commercial aircraft components and systems, as well as the strength of our defense business as we return to growth in 2021. Now turning to our first quarter results. Let me review some of the highlights. Revenue for the first quarter of 2021 was 157.2 million versus 173.5 million in the first quarter of 2020. The year-over-year decline reflects 25.2 million of lower revenue across our commercial aerospace platforms and a decrease in our industrial business, partially offset by 12.2 million of higher sales within the military and space sector. Comet's overall backlog at the end of the first quarter was approximately 810 million. As a reminder, we defined backlog as potential revenue based on customer purchase orders and long-term agreements with firm, fixed prices and expected delivery dates of 24 months or less. We posted total gross profit of 33.1 million for the quarter versus 36.8 million in the prior year period. While gross margins were essentially flat year-over-year, 21.1% in the first quarter of fiscal 2021 versus 21.2% last year, the headwind from significantly lower manufacturing volumes was largely offset by improved product mix and lower compensation and benefit costs. SG&A was 22.5 million in the first quarter versus 23.2 million last year, reflecting the Company's ongoing cost controls with streamlined operations. Comet reported operating income for the first quarter of 10.6 million, or 6.8% of revenue compared to 13.6 million or 7.8% of revenue in the prior year period. Adjusted operating income, excluding expenses related to the previous reported Guaymas fire, was 11.1 million or 7.1% of revenue with the year-over-year performance, largely reflecting the impact of lower volumes. Interest expense was 2.8 million for the first quarter of 2020 versus 4.2 million in the prior year period, as the lower interest rates more than offset the impact from higher debt levels. The debt outstanding rose due to the Company's cash draw down of $50 million last year to have on hand as we worked through the impact of the pandemic. Of this amount, we paid back 25 million during the fourth quarter of 2020 and another 5 million in Q1, leaving 20 million outstanding. The Company reported net income for the first quarter of 6.7 million or 55 cents per diluted share. Compared to net income of 7.9 million or 67 cents per diluted share for the first quarter of 2020. Excluding one-time expenses, adjusted EPS for the first quarter of 2021 was 58 cents. Adjusted EBITDA for the first quarter was 21.1 million or 13.5% of revenue, compared to 23.2 million or 13.4% of revenue for the comparable period in 2020, reflecting the items I just discussed. Now let me turn to our segment results. Our electronic systems segment posted revenue of 99.1 million for the first quarter of 2020 versus 98.1 million in the prior year period. These results reflect a 7.4 million increase in sales with the Company's military and space customers, somewhat offset by 3.1 million of lower revenue across our commercial aerospace platforms along with lower industrial sales. Electronic systems operating income for the first quarter was 12.5 million or 12.6% of revenue versus 15.1 million or 15.4% of revenue in the prior year period. The lower margin was primarily a result of unfavorable product mix, partially offset by lower compensation and benefit costs. Our structural system segment posted revenue of 58 million in the first quarter of 2021 versus 75.4 million last year. The year-over-year decrease reflects 22.1 million of lower sales across our commercial aerospace applications, partially offset by 4.8 million of higher revenue within the Company's military and space markets. Structural systems operating income for the quarter was 5.1 million or 8.8% of revenue compared to 5.4 million or 7.2% of revenue last year. The year-over-year operating margin increase was primarily due to favorable product mix and excluding the Guaymas charges, first quarter adjusted operating margin was 9.7% in 2021. Corporate, general and administrative expense, CG&A expense, for the first quarter of 2021 was 7 million or 4.5% of revenue and 6.9 million or 4% of revenue in 2020. Turning to liquidity and capital resources. We have 17 million in cash on hand and 80 million available on our revolver, resulting in available liquidity of 97 million. We utilized 23 million of cash from operations this quarter compared to with utilizing 12 million in the prior year period. The first quarter typically results in a cash outflow from operations as we pay annual incentives and invest in working capital to support expected business growth. We expect to return to historical cash flow generation levels as we move through the rest of 2021. Our 12 month debt to adjusted EBITDA ratio was 3.4 at the end of the first quarter. In terms of capital expenditures, we spent 4.5 million during the first quarter, reflecting a return to more normal investment levels and aligned with our return to growth in 2021. We anticipate spending between 16 million to 18 million in 2021 to support ongoing product development and sustaining capital. In conclusion, we believe our performance this quarter was solid and stable, reflecting the Company's lean operations, diverse customer base and strong military demand. For 2021, we continue to be cautiously optimistic about a return to growth in commercial volumes during the second half, as Steve indicated. We'll discuss these trends further at our upcoming investor day on May 26. I'll now turn it back over to Steve for his closing remarks. Steve.

Okay. Thanks, Chris. Certainly proud of the results this quarter, and we look obviously forward as everyone does to better market conditions in commercial aerospace later this year. We've met our commitments despite some very difficult headwind. And this is really due to our people and leadership at the end of the day. I would add as well that we do have the right footprint, operating system, cost structure and discipline. We intend to performing at a high level and feel very confident in the future. As in the Q4 call, I also want to thank our customers, shareholders and all our business partners for their continued support as we worked through these difficult times together both last year and in Q1. I'll take this opportunity as well as, Chris mentioned, to let you know that the investor day I mentioned earlier in the year will take place on Wednesday, May 26 and start at 9 a.m. Pacific Time. I'd like to invite everyone to this important meeting, where we discuss our plans for the future, and appreciate your support in attending. In closing, I'd like to, again, take this time to thank the common employees that I'm proud of them and all their efforts dealing with the many challenges from the pandemic that began in 2020 and now will continue in Q1 2021. Our team never showed up at the operations every day, and, though stressful, they get the job done for our customers, our nation and for one of them. So with that, let's go to questions please. And thank you.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And we have a question from Pete Osterland from Truist Securities. Please go ahead.

This is Pete Osterland on for Mike Ciarmoli. So it looks like your operating margins took a step back versus the fourth quarter instructional systems despite sales being pretty flat there on a sequential basis. So I was just wondering if you could give some color on what drove this, if there was anything specific in the first quarter or just a change in mix or just any help you can give there.

Yes, Pete. No. Q1 is really -- with structures, it's all about the mix. Again, year-over-year, it was a nice change favorably, but sequentially, yes, that's what caused us a little bit of headwind there.

Okay. And then it looks like your backlog has stabilized in commercial aero over the course of the last couple of quarters. So I was just wondering how order flow is trending there and if you could be expecting to see any meaningful increase for commercial aero sales on a sequential basis in the second quarter, or if you think it's really just going to be in the second half before that materializes.

Pete, this is Steve Oswald, and welcome to the call, by the way. And certainly we're optimistic about our order flow the rest of the year, probably more leaning towards the second half of 2021, but we definitely anticipate that we're going to see orders go up. And I think overall, the story is going to be a very good one, not only a near term, but mid-term.

Great. And then just one more. I was wondering if you could comment on how your M&A pipeline is looking, if there are any areas you'd call out that are currently a priority and just what you're seeing in terms of available opportunities and valuations.

Sure. Well, look, we're active. We've been active. When I came in and took this role, we stood up our BD team and we have some excellent people running that function, and we're highly engaged in the market. We're looking at things. There's certainly a little bit less on the commercial side you would anticipate versus on the defense side, but we like what we see as we've done three deals since we started here in 2017. I think they've all been real winners. So we're careful about what we do, but we're certainly leaning in and we hope for something to maybe happen this year and we continue to work hard at it.

And we have a question from Mike Crawford from B. Riley. Please go ahead.

Steve, what, if any, program capture goals do you have in '21 similar to what you did with TOW missiles in 2020?

Yes. Can you say that again? I'm sorry, man. I got to turn the phone up a little bit in this room. Can you say that again, please? I apologize.

Yes. Just as you captured the TOW missile program from another competitor in 2020, do you have any goals you can share regarding additional program capturing this year?

Yes. I can't share it as far as we're constantly. I will tell you this, is that, and I think it's good news for investors, is that there are opportunities for us for the share shift, but we're only going to do it where we can really add value. Okay? And that's a case of the TOW missile. I mean, the days of us just competing on price are over, because generally it didn't work out so well. So I will tell you that we are active, not only share shift, but also offloading. That's another theme we're going to see more and more to common, is offloading from defense primes that we can pick up. And the nice thing is that we're able to make the TOW missile happen, and that's a significant project and it's not an easy part to make. So I think all of it's pointing in the right direction. And when we have something more material or significant, we'll let you know.

Okay. And then as your commercial line spin back up, is there a delay on when margins pick up as well? Or is it just primarily just a function of scale?

Yes. Mike, it's primarily a function of scale. I mean, there should not be a “delay”. I mean, we're just going to pick up efficiency as we leverage up and we're looking forward to that, because we're clawing back from a pretty significant fall back last year Q1, Q2. Yes.

Great. And this last question is -- excuse me?

Go ahead. No. Just say with that, I mean, it's not happening just yet. So as we work through this year, as Steve and I mentioned, that's what we're looking to see as we work through this year.

Okay. And then just the final question is how many different programs are you on with GA? Is it just one unmanned platform? Or is it multiple…

I can only say so much, because I've got to be respectful of GA. And if you know them at all, they asked me to be sort of high level on things, but we're on multiple core ramps.

[Operator Instructions] And we have a question from Ken Herbert from Canaccord Genuity. Please go ahead.

Yes. And Chris, I just wanted to first ask about cash in the quarter. I know the first quarter is typically seasonally soft, but free cash flow was a little bit lower this quarter than we'd expected and it looked like working capital had some pretty significant investments. Can you just talk about any particular programs that may have been driving the use of cash in the quarter, or if there was anything in particular that stuck out in the quarter on a cash standpoint?

Yes. Thanks, Ken. It's Chris, when you look at the cash, I mean, you were hitting on the right themes for sure. And it's all to support our growth, and we're looking out over the next few quarters. We're trying to line up what we need to build, what we've got the ability to build and to meet that customer demand to hit the sales growth that we're talking about, now as we go sequentially quarter to quarter. So that's where it related to the inventory and the unbilled. That's where some of that investment is done at this point, so that we can manage through a little stronger and meet customer demands the next couple quarters.

Can you just comment, Chris? Is it maybe more on the commercial side in anticipation of maybe max bill rates or is it still predominantly on the defense side?

Yes, no, more on the defense side. I mean, if you think about, so just the great question, if you think about the structure side and the commercial side, we certainly had a quick stop to a lot of the bills last year. So that's what left us with a little inventory, more inventory on that side of the business. So we've got that sort of as our jump off point as we hit the growth rate. Defense wise is where we've got a little more of that build coming at us that we need to keep ahead of.

Yes. Ken, this is Steve. It's definitely leaning towards the sense, I mean we're busy. And we're building things up, we've got a lot of new programs coming online, we're pretty active, so yes, it's leaning a little bit towards that as far as the cash at least to get started in the year.

Okay. And Steve, you made a comment early in your prepared remarks as you're building defense towards the right scale. Can you just share, maybe you'll get the purchase later on in May, but what do you view as sort of the minimum threshold in terms of scale for your defense business? I mean, you clearly put up some pretty impressive growth numbers, but how do we think about what you view as the right scale for this business to really get the leverage out of the model?

Yes. Look, I think I'm going to basically talk a lot more in May. I think that's the appropriate time. But I will tell you this, that we have our performance center concept, right? So we have performance centers that make harnesses, performance centers that make assemblies, make cards, those types of things. And we have a pretty good idea, at least the game plan, a certain way to get those centers up to scale, which is going to be, I think, terrific for, for investors and for our margins. So stay tuned. We'll have more and May, I promise.

Okay. Well, just one final question for me. If we look at electronic systems segment margins, you were down quite a bit from the first quarter of last year and I know the first quarter of last year was particularly strong, but can you just remind us anything in particular relative to a year ago, and then how we should think about the margins in that segment, sort of get back to the run rate here in the second quarter, or is it maybe a couple of quarters out?

Ken, this is Chris. Yes. Let me jump in a little bit here. So, so you're right. I mean, when you look at last year's Q1, everything sort of clicked right in to get us to our north of 15% margin, with our electronic segment in that quarter. When you get to this quarter and we sort of, as we went through the year, started to say, historically, we were looking at 10%, 11%. And then as we continue the journey, now it's more 11%, 12%, 13%, even though 15 was sort of the outlier. You get to this quarter, it wasn't a perfect one in terms of mix, but it also, we did have some significant weather in the Midwest in the middle of the quarter one in February. And we had quite a bit of downtime that was there as well, that had an impact. So a couple of those things sort of led us to that point, but as we move forward, Ken, we should be thinking about that 11% to 13% is sort of the range. And like we've talked about with these segments, it doesn't take a lot to sort of move around. So that's why we've got that range out there.

Yes. Ken, this is Steve. Yes, so the polar vortex was real for Ducommun. Okay. So that was real for us in February, unfortunately, so, impacted a lot of our operations.

So I guess there is some trade off when you think about Kansas and other locations relative to Southern California. Right, Steve?

So there's a few that comes to mind, Ken, there's a few.

[Operator Instructions] And at this time, there appears to be no further questions in the queue. So I'll turn it back to Mr. Oswald for any closing remarks.

Okay. Well, let me wrap it up here. First again, I want to, I want to thank everybody for joining us for the first quarter call. We're certainly looking forward to better days and we know they're coming. In opening remarks here, our focus, through this whole thing has been employee safety first and foremost. And I think that for overall, we've done a really, really good job. I just want to thank you for your support. We're working hard here to comment and we're looking forward to better days. And again, we appreciate your interest and your time today on the phone.

Thanks, everyone.

Thank you.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.