Q3 2019 Earnings Call
Good afternoon, ladies and gentlemen, and welcome to the common third quarter earnings Conference call.
They Stein.
All participants line.
Are you made me that only called.
Meter we will then that's a question and answers fashion.
And instructions will follow what that time, if anyone should require assistance. During the conference. Please press Star then zero on your Touchtone telephone as a reminder, this conference call is being recorded I would know life to turn the conference over to your host.
So we greased we'd be the moderate Sir you may begin.
Thank you and welcome to do come into 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.
Going to make or discuss certain limitations to any forward looking statements regarding future events projections or performance and 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.
Forward looking statements on this.
Well the federal private Securities Litigation Reform Act of 1995 and.
Therefore perspective.
These forward looking statements are subject to risks.
[noise], uncertainties and other factors, which could cause actual results to differ.
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 acquisitions and competition. These risks and others I described or annual report on Form 10-K filed with the FCC and I've.
Forward looking statements are subject to those risks.
Statements made during this call our 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 authorities.
This call also include non-GAAP financial measures. Please refer to our filings with the FCC for a reconciliation of the non-GAAP measures reference on this call. The most similar GAAP measures.
We filed our Form 10-Q with the FCC 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.
Okay that your Chris and thanks, everyone for joining us today for a third quarter conference call as usual I'll begin by providing an update on recent developments at the company.
After which Chris will review our financials in detail.
As mentioned in the press released this afternoon I'm very happy.
Third quarter results I continue to Trump performance of the company now, having as well five straight quarters of double digit revenue increases averaging 15%.
With over 85% of the gains organic.
The comments revenue for the third quarter also grew at 13% year over year 281 million driven by increased shipments on large narrow body aircraft platforms, including the Boeing 737 Max.
And the Airbus Athree hundred 20 family and our defense businesses.
The conference commercial fixed wing business grew an aggregate over 26% versus last year.
This quarter, our position, both Boeing and Airbus.
Well you provide important context.
On the Max we've continued to shipments for the monthly rate of 42 for Boeing and 52 for spirit.
We currently see no change in the current build schedule and I stayed in the past.
The Boeing reduction is not material to the comp.
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.
I 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.
Okay.
After the quarter ended we also announced the acquisition of Noble's worldwide.
Global leader in design in support of ammunition handling systems.
This company has been a business for over 70 years.
Supply advance tactical products for a variety of aircraft naval vessels.
Military vehicles in the us and overseas.
It's a great fit for to comment on this platform.
Opening new market opportunities with aftermarket support.
In addition, roughly 43% another revenue.
It's from international sales.
Spanning our presence abroad.
No it wasn't just.
As the latest transaction that accomplishes the strategy I have discussed in the <unk>.
Yes.
For proprietary and generic product companies.
Actual property for our market leading.
With aftermarket support.
And future growth opportunities.
I do also what I mentioned that this.
Time that the purchase price.
Of Noble's.
And the other two acquisitions completed.
Since 2017.
We're below.
10 times EBITDA.
Multiple.
For each one.
Based on the LTM at the time of the purchase.
As we communicated Investor day last year.
We disclose the information required by regulations.
Along with some other selective details.
But limit certain data.
For competitive reasons.
However, I thought it was back to share this with investors and analysts today.
Recent speculation in the press that we paid a much higher multiple for low levels on the EBITDA basis, and we did not.
I also want to reiterate.
As ive spoken in the past.
I'm a leadership team are senior executives with both fortune 100, and top five private equity backgrounds.
We have a strong acquisition process.
Don't forget experience and discipline.
Now, let me provide some color on our markets products and programs.
Yeah. It was on military and space sector, we posted third quarter revenue of $80.5 million of 13% over 2018, reflecting stronger sales across a number of missile defense programs.
For example, we saw 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 near Jay Sal and facts.
Sure a number of such strong performing platforms.
Exemplifies the demand for our products across of the fence marketed.
For which were proud.
We ended the quarter with a military space backlog of approximately 372 million.
Continuing a steady trend of growth in this area.
Which which we expect will continue into fiscal 20 twond.
So 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 Athree hundred 20 family.
In fact, most of the more Boeing and Airbus platforms grew double digits and for the second quarter neuro. The Athree 20 was our second highest revenue generating commercial platform. After the 737.
Our rapid growth with Airbus reflects the strength of Ducommuns portfolio.
And the value provided to this customer.
We also extended to see strong growth with gold stream 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.
Decline 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 of Chris review, our financial results in detail, Chris. Thank you, Steve and good afternoon, everyone.
As a reminder, please see the company's filings in 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 that themes of favorable year over year trends in certain key metrics, including topline growth margin expansion and adjusted EBITDA, Our ducommun operating system and its performance Center focus factory approach has been a key and helping drive continued.
Crewmate over the year over year operating results, including areas, such as cap customer satisfaction and scrap as well is performing in a more consistent and predictable manner.
Now I'll move to the details of the overall results.
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 Athree 20, as Steve mentioned.
Commons 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 defined backlog as potential revenue and is based on the customer place purchase orders and long term agreements with from 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 years 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.
As DNA 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 restructure 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 Noble's acquisition subsequent to quarter end, we do expect interest expense to increased accordingly going forward.
The company reported net income for the third quarter of 8.3 million or 70 cents per diluted share compared to net income of 4.2 million or 36 cents 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 SGN today.
1.9 million of increased interest expense and higher income taxes of 1.8 million.
Adjusted net income was 7.2 million or 62 cents 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 electronics 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 dollar 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 were 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 system 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 higher sales across our commercial aerospace applications, primarily large airframe single aisle platforms and a 4 million dollar 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 restructure 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 affiliate 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, a point sevenmillion, partially offset by lower restructure charges a point 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 are 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.
Okay. Thanks, Chris Okay before turning over for questions.
To close on a few comments was saying that I think company remains in great shape is as we near the end of fiscal year and I see a strong finished at 29 team.
I also expect continued momentum into 2020 on both the top and bottom line for the company.
As a team continues to drive excellence.
In many areas such as customer satisfaction.
Operational performance and the development of organizations most important asset our employees.
In closing, we are certainly energized and excited about the year ahead.
And as always want to thank to common shareholders for their support and trust.
With that operator, we'll now open up the cough questions. Thank you.
Ladies and gentlemen, if we add my question my Thanks, Brian . Please press Star then the number one key on your Gladstone telephone.
Your question is when are you still move yourself from the can you press the pound key.
Thanks question comes from the line of Adelaide Marshall from Sidoti and company. Your line is now open.
Hello.
Hi, Ed.
All right.
So I.
I was looking at the structures margin in particular, the 14.2, you put up looking out the subsequent to quarter is this year you had very similar revenue basis, Yes, we saw significant increase on the margin profile, especially sequentially.
Can you talk about some of the steps, you're taking kind of intra year to see that type of margin improvement is this more than Max or what could you tell me.
I'll give them how that so it's just continued operational improvements.
It's like I said earlier, it's that performance center strategy, it's our common 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 it things going that we're starting to really kind of see pickup so it's a mix.
Absolutely right sequentially, it's getting better and.
We're happy with it.
Do you think is sustainable number or do you think you grow from here or is this I mean is this do you think this is kind of.
And over achieving number thanks, no I mean, Ed. This is Chris Yes, no. We don't see it has an over achieving number I mean, it's been a journey to get it back from low 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 topline.
Get the things that are you get the dropdown that will certainly help from there as well just continue to execute excuse low cleaner and keep moving north.
Got it I wanted to.
Skus the into Max.
Obviously boeing's Miss early fourth quarter with returns slide FMC and the equivalent European organization still have an approved.
And we're seeing continued push outs from from airline expectations as we look at at the Max and I looked at your revenue for both Boeing and spirit looks like spirits hanging in there, but Boeing has declined.
8% year over year.
Maybe you can kind of talk about what you're hearing from buying versus wide, what you're hearing from spirit.
Thanks.
What we're hearing is no change we're still as I said in my remarks were at 52 for spirit for 42 at Boeing.
And so you're absolutely right the spirits been hanging in there and thats been helping us and.
Boeing's declining a bit but you expect that was going down 42.
Right and so when you ship 10 ship sets a month now I guess for five six months ahead, I mean I'm assuming that.
Peter is that the growth as we move into 2020, and so forth I mean, it falling goes back to 52, and ultimately 57, there some inventory to kind of lead out of the system. How should I think about that and then ultimately if there is a shutdown or slow down in that production rates, what what how are you prepared to to kind of flex.
Clement base. Thanks.
No I mean, I think our view is still relatively similar to where we've been last couple of quarters is.
The longer it drags certainly that's going to change what happens as far the curve and how we sort of get back to getting them fully supported at a point in time, but long as the orders are there we will 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 you know that we're going to continue to grow the business in the fashion that we laid out for you guys.
Got it and then when I looked at the receivables once you broke out kind of in the Q.
Seeing the following receivables in our 14% up from about eight sort of 600 basis point improvement there or increase there.
Or are there any delays and payments from from I guess your largest customer.
Yes, no no issues there I mean, we've got a number one there's been no signaling of any sort there number two we got most of our program most of our sales the Boeing goes through a broad program, where we've got options to pull through supply chain finance agreement as well. So we've got multiple ways to to keep cash flow moving.
Perfect. Thanks, guys, yes.
Next question is from Ken Herbert.
I was kind of record your line is now open.
Hi, Good afternoon, Stephen Chris, Yes, and again.
Hey, Steve really nice quarter I, just wanted to first follow up on on that last question.
It seems like the free cash flows sort of currently running down this year compared to last year.
Is it fair to assume that 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 do you start to reverse and see a nice acceleration in the cash outlook.
Yes, I mean, Ken this is Chris so the year to date cash we had sort of the one time 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 out out.
The last year's Q3, as we look to Q4 were 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 not called negligible and we're working through that and expect the finished good Q4, Yeah. We think it's got to its got to get better Ken.
Okay.
To that point I guess are you comfortable with.
Maybe committing to a number on on short worth this what do you think this business can generate in terms of conversion basis or maybe some way we should think about.
You've got a great growth of the backlog. Obviously you are translating this into revenues in the margins are phenomenal. So I would imagine eventually the cashier starts to really catch up so how should we think about that.
In terms of that opportunity, yes, 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 and Ken. This is Steve as we've talked about with the we mentioned in the call early about operational improvements and.
And outperform incentive strategy to common operating model those type of that's all going to help us on the inventory side.
As we go forward okay.
Yep perfect.
And I appreciate incremental detail on Noble's is is it fair to assume I mean, it is the deal closed I think first week or so the quarter or just around there just this business at sort of.
Four or five points of topline growth in the quarters, that's the right way to think about it.
Yes, I mean, I'd say that in that range I mean, its into is somewhere in that range, but it's.
We're not going to give too much more detailed but.
Thats the neighborhood.
Okay I can appreciate that that's helpful. In another itself and just finally, Steve and really I mean, it almost looks like a great fit can you just maybe provide a little bit more.
How are you know you've only on the business, obviously now for less than a month, but but how the integration is going how you view the team and maybe where you see the opportunity you were the topline opportunity I guess for this business moving forward sure sure first I'll just start with the team.
We're thrilled with the team the president and all all his direct reports are staying and we want them. This day so.
We had with LDS than we have with CTP.
We're three to three now with you know top flight executive staying with us and be able to help us create value as we go forward. So so we're happy with that.
Our other two integrations.
When a better.
Got it tends to the same plan, we bring a lot as I mentioned in the past few bring a lot of experience you know we use a lot of the UGC processes for integration and lots of things that we learned and pass jobs you bring in here is very detail.
So we feel good about that the market is nice.
Certainly nice niche market for us is the fence.
We like that obviously, we think that you know.
Going forward, you know, there's definitely top and Bottomline headroom.
We'll have to see exactly what that looks like but we certainly feel it's you know.
Five to 10 at least next year upside.
Excellent, Okay, all right well thanks.
So every quarter.
All right. Thanks, Dan appreciate it.
We have a question from Armen Glenn.
Yes, Sir your line is now open.
Hey, guys. Thanks for taking my question then.
Congrats on a solid quarter.
Can you talk about some of the aftermarket opportunities.
Now that you've acquired Noble's and then.
Seeing any opportunity to capture some.
Land and and at the platforms I know, you're you're mostly in EHR platforms now, but I don't know noble has a lot of content and land in FY platforms, we see opportunity to capture some some business. There yes, we do actually so we're in great shape renewables on air were really and.
Fairly good shape as well on see our big opportunities on the land. So we're busy at that.
Team is busy with that so.
I think that.
Theres theres more to come.
Go forward here with with Noble's as far as you know the aftermarket that's our goal of ours. We continue to work hard to develop that we'll have more information as we move into the future on that.
Got it thank you and now that Youve completed acquisition noble how would you kind of characterize the current M&A pipeline.
No we would like you're looking at today sure well look you know, it's everything is very competitive as everybody knows and the business World. So you know we see we see that but we also see that we think there's still a lot of opportunities ahead for us obviously, though were.
This noble's deal we've spent a lot of timing it and we studied it and we made sure that it was.
The right by for Us at the right price so.
All these things take time and.
Nothing's really changed there either we'll just have to see with the pipelines in pretty good.
Got it Okay and then.
Turning to Raytheon.
I know you've previously talked about capturing some structures business with Raytheon just wanted to see if there's any progress on that front stated.
There is progress, but we're working with Raytheon as I mentioned in the last call. We're thrilled to be the first the RMS that is the first a supplier they signed up for.
This strategic program, where we're busy working with their teams will have more information on future calls on the structure side.
Got it thank you I'll pass it on.
Okay, great. Thanks. Thanks.
Hi, good morning, ladies and gentlemen, if you have a question.
Please press Star then the number one key on your Touchstone telephone. If your question. It's been answered are you at least a movie yourself from the Q.
Key.
Yeah. The question from Michael Montani of Suntrust. Your line is now open.
Good evening guys. Thanks for taking the question nice quarter My Steve just you know looking at sort of your longer term growth projections, there still 5% to 7% or I guess three year Cagar in Aero can you maybe just talk about what that's dependent on I mean does that.
You know is that contingent on the on the three seven getting up to 57 does it. We obviously saw that the 787 is taking a step down I mean, it doesn't look.
Looks like there's a lot of growth in terms of production rates, so if you're going to be more.
Market share and content expansion for you guys.
I think it's.
It is that I mean, obviously are so I mentioned on my remarks, I mean, a this Airbus relationship is still fairly new to comment so it's still early innings.
We are doing I think some really great where for them on the 320 in some other program. So yes, so I'm pretty comfortable right now with where we're going in for Airbus. Obviously was not in the piano three or four years I think it's going to really help us get through our goals in the next three years.
Got it.
And then just on the back to the electronic margins.
I'm, assuming this was with mix as well, but even on a sequential basis. You had a you had a dip there from the second quarter 11, one to 10 seven on the higher revenue was that entirely due to the product mix in the quarter.
Yeah, no that it was it was Michael it was mix between last year, the compare to last year, we popped a mix that was.
And the more favorable for where we're at during the year this year.
So the opposite but having said that.
We anticipate that segment bouncing back from.
No I feel good about next year, Devon with that so yes.
Got it and then just last one last one noble's I think you mentioned aftermarket you disclosed I think how much was international did you would you be willing to disclose how much of their revenues are coming from the aftermarket and even maybe.
I'm, assuming that this new revenue stream would be would be accretive for the margins is that a a reasonable assessment I would say, yes, no. One yes, yes, that's right now [laughter].
Does that give you have no or very high thanks, guys I'll jump back in the queue, Mike. Thanks, a lot appreciate it.
Okay operator.
Yes, I think Brian there are no further questions Keith I love that during the call to Mr., Steve Oswaldo for any closing remarks.
Okay. Let me just wrap up again I want to thank everybody for joining us today I just want to again mentioned, we feel great about where we are a we feel we're going to get a strong a strong here behind us the closing it up in December and yeah, we feel very good about 2020.
I wanted just also take this time the thank my team my leadership and everybody else would you comment as well as our supply chain partners everybody is really pulling together now we're looking forward a great things ahead.
So I'll leave it there. Thank you again to our shareholders for your support and trust have a great evening.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation have a wonderful day you may already.
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