Q4 2020 Ducommun Inc Earnings Call

The number was still strong and shipments and 20 21 for this customer will be over 4X versus last year.

In regards to the fence backlog. We set an all-time record for the common and in Q4 with a backlog of $530 million dollars. The total backlog was $822 billion company sequentially up from Q3, and it's a great number based on the environment.

That's business growth year-over-year by 25% posted by strong revenues across the risky platforms which included F-35 Patriot the tow missile Mera chuso uavs Weapons Systems for ground vehicles at Knoebels and others as this is part of this part of the comic continues to deliver.

Obviously the strength help offset commercial or a special orders, which we anticipate will start increasing in 2021.

The fence results also show great opportunities where we can leverage our structural product lines with the fence.

We have major wins now in the tow missile, which I have spoken about and other new programs and along with Acquisitions. This part of the business will be north of a hundred million revenue for 2021 month. I also want to mention that we are optimistic about the fence going forward despite concerns regarding the budget and change in administration.

It's, the fence segment was under managed in the past. But now it's structural applications going full speed along with the long term track record and value offering of our electronic systems business. Do we see a strong future?

I think you three actions have continued in Q4. You can certainly see the effectiveness of our actions in the positive gross profit. Margin expansion year-over-year wage and solid operating income percentage along with EPS team did a great job in 2020 moving quickly. Imagine. It's difficult environment with no material pandemic real life costs and Kurt including major restructuring or impairments.

Regards to the Outlook or significant backlog in defense. The many growth programs mentioned earlier will provide strong Revenue in 2021.

We estimate that revenues we led by defense but over the quarters and years ahead. We will see more commercial Aerospace volume return to the common.

We have the capacity strong operating team and a prepared for the rate increases, especially in single-aisle aircraft.

We also see the comments titanium business of hot form and super plastic forming leading this come back as well.

We are a leader in this area with only OEM operations. We know of at Airbus.

Has a strong position to Titanium already at Boeing Spirit aerosystems go string and among others and you know, we have the operating we know we're going to be ported over the last few years our efforts devote significant franchise with Airbus which continues to go well.

As much in our last call we were returned to growth in 2021 with the first quarter still having a tough compare and being down year-over-year. The other three quarters will see good growth versus 12:20 and we anticipate overall revenue for the Earth of common growing low to mid-single digits.

It's, it also has a great long-term future.

This will be accomplished by leveraging our new built out defense portfolio spoken about earlier, which now is currently 52 programs above a million dollars in yearly Revenue off and that's up from 34 and 2017. That's over fifty percent increase.

Also the comments proposition that commercial Aerospace especially on narrow-body with roughly a two-to-one ratio with widebodies or titanium Market leadership along with Chef an Airbus will drive excellent growth as the market recovers.

Are engineered products portfolio and recent acquisitions will provide opportunities as well.

And finally, we're also remained active in the market for m&a.

I believe this will only be an accelerator to hire 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 fourth-quarter revenue of 115.4 million. Once again, representing strong growth versus 2019 up 25% We drove revenues us a broad variety of Defense platforms the cooling most of our product portfolio as mentioned earlier. We saw increases the demand for our military fixed-wing aircraft programs which with particularly strong rev mentioned from Northrop Grumman Nobles worldwide Patriot GA F-35 mirror and the tow missile the fourth quarter military space Revenue representing a 73% of the comments Revenue in the.

We also get that to be well very well positioned for future growth across our defense platforms of the next several quarters it all sectors and again into the fourth quarter of an all-time high backlog record a 530 million, which is up 17% year-over-year and it also represents 65% of our current backlog.

Within our commercial our space operations fourth quarter revenues declined year-over-year the 37.2 million as expected driven by Bill rate declines on the 737 Max as well as many other programs impacted by COVID-19 pandemic.

Also has effectively adjusted cost and manage the downturn as well positioned once rates stabilized and increase overall long-term.

, will begin to recover in this market in 2021 as mentioned earlier has a very bright future the backlog within our commercial Aerospace sector stands at roughly 268 million at the end of Q4 for the majority of the client due to the 737 Max.

With that, of course is your financial results in detail Chris. Thank you. Steve and good afternoon. Everyone has a reminder. Please see the company's 10-K and Q4 earnings release form the description of information mentioned on today's call Steve discussed our fourth-quarter results. Once again, underscore the diversity of our business and focus on bottom line performance resulting in our posting of Strong Reserve during the pandemic for which we're certainly proud.

Now I moved to the details of overall results review of the fourth quarter 2020 revenue for the first quarter of 2020 was 157.8 Million vs. 186.9 million dollars in the fourth quarter of 2019. The decline largely reflects forty two point four million of lower Revenue across our commercial Aerospace customers, 10.10.5 1 million lower Revenue within the company's industrial Market partially offset by 23.2 million of higher Revenue within the military and space sector the continued theme for the year is our commercial platform saw a significant decrease in the demand due to the economic impact of COVID-19 onto Commons customers and air travel in general do Commons overall backlog at the end of the fourth quarter was approximately 822 million months representing sequential growth from 2 to 3 in Military and space orders while our commercial backlog was flat quarter-over-quarter our defense backlog Rose to almost five hundred and thirty million a record for the company job.

As a result 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 34.8 million vs. 40.1 million in the prior year. While gross margins Rose to 22.1% from 21.5% in the fourth quarter of 2019. The margin increased year-over-year was due to favorable product mix particularly within our electronic systems segment more than offsetting the negative impact of lower manufacturing volumes and higher compensation benefit costs. Sg&a was twenty two point six million in the fourth quarter versus twenty four point nine billion last year. Once again, reflecting are tight cost controls and streamline operations to Common report it off before the 4th quarter of eleven point six million or 7.3% of Revenue compared to Fifteen point two million or 8.1% of Revenue in the prior year. Adjusted operating income net of research has accounting adjustments and other one-time items was twelve point nine million this quarter or 8.2% of Revenue compared to Fifteen point eight million or 8.4% of Revenue in the computer and the

terrible. Of 2019

Interest expense was two point six million in the fourth quarter of 2020 versus Five Point two million in the prior year. As lower interest rates more than offset. The impact from higher debt levels The increased that out stage was primarily due to the company's draw down and fifty million dollars in the first quarter to have his cash on hand during the pandemic of this amount. We paid back 25 million during the fourth quarter leaving $25 million outstanding at home. This remained this cash on hand.

The company's net income for the fourth quarter with nine point seven million or eighty cents per diluted share compared to net income of 8.9 million or $0.75 per diluted share for the fourth quarter of 2019. The birth or increase was due to two point six million of lower interest expense 2.4 million of reduced sg&a and 1.6 million of lower income tax expense partially offset by the 5.3 Million Dead and gross profit excluding restructuring expenses and other one-time costs adjusted EPS for the fourth quarter of 2020 with $0.89 vs $0.80 in 2019 adjusted ebitda for the fourth quarter was 22.8 million or 14.4% of Revenue compared to twenty five point two million or 13.5% of revenue for the comparable period in 2019 collecting items. I just discussed

Now let me turn to the segment results are electronic system segment posted revenue of 99.1 million in the fourth quarter of 2020 versus ninety six point three million in the prior year. These rules just reflected Seventeen point six million increase in the company's military and space customers largely offset by 10.1 million lower Revenue within the company's industrial customers and four point seven million of lower Revenue across Aerospace platforms, electronic systems posted operating income for the fourth quarter of eleven point five million or 11.6% of Revenue versus nine point nine million or 10.2% of Revenue in the prior year. This performance primarily reflects improved product mix excluding restructuring charges in this year's fourth quarter adjusted operating income was 11.8% of Revenue.

Are structural systems segment posted 58.7 million and 1/4 quarter of 2020 vs. 90.6 Million last year the year-over-year decrease reflects 37.6 million of lower sales across our commercial Aerospace applications partially offset by 5.7 million of higher Revenue within the company's military and space markets structural systems posted operating income for the quarter of 6.2 million off point six percent of Revenue compared to eleven point, six million or 12.8% of Revenue last year. The Year of year operating margin decline was due to unfavorable manufacturing volumes and mix excluding a structuring charges in one-time accounting adjustments in both years adjusted operating margin was 12.4% in 2020 and 13.4% in 2019.

Corporate General administrative expense CG and expense for the fourth quarter of 2020 with 6.1 million or 3.9% of Revenue and 6.3 million or 3.4% of Revenue wage 2019. We have $56 million cash on hand and seventy-five million on are available are available credit line when we talk about our liquidity and capital resources off during the quarter. We generate 11.1 million of cash from operations with Thirty 1 million in the prior year. We expect to return too much stronger and more normalized cash flow generation during 2026. Our debt-to-ebitda was 2.9 at your end in terms of capital expenditures. We spent four point three million during the fourth quarter and 12.5 million for the year a significant decrease from 2019 going forward. We anticipate spending between 16 to 18 million and twenty Twenty-One for ongoing product to customer support.

our full-year effect

Tax rate came in at a very favorable rate as expected. The effective tax rate was roughly 9% The main impact related to fin 48 releases during the fourth quarter. Overall We Believe are performed last year during the challenging circumstances speaks volumes. It underscores the versatility of our streamline operations dedication of our staff the strength of our product lines and diversity of the customer base, which leaves us on solid footing for 20 21 Beyond and look forward to meeting any remaining challenges this year while continuing to post Superior results for our shareholders on I'll turn it back over to Steve for his closing remarks Steve. Okay. Thanks Chris and you know first, you know, we're we're certainly proud of the results this quarter and overall in 2020. We met our commitments despite, you know, massive head went and as mentioned plan a start growing the business again and and twenty Twenty-One I would add as well that we we do have the right footprint operating system cost structure discipline and Leadership to continue performing at a high level.

And we feel very confident the future as in the Q3 call. I also want to thank our customers shareholders all other business partners for their continued support as we work through these difficult times together. We've also now, you know, as we mentioned earlier giving out quite a bit of money toward a common foundation for 1.3 million dollars to local charities or we operate to Home and Community in 2020. We have partnered as well with the organization's help improve the quality in our nation and assist small business recovery due to the social unrest off in the past in Los Angeles and first and foremost in closing. I'd like to get in this floor to take this time to thank you, and employees in my team proud of them all dealing with the many challenges and the pandemic and twenty twenty and delivering our team showed up everyday at our operations.

Those stressful and got the job done for our customers for our nation.

So with that being said I'd like to again thank you for your time and we'll turn it over to questions. Thank you. As a reminder to ask a question. You will need to press the star key telephone to withdraw your question, press the pound or haschke. Please standby we can pile Q&A roster. Your first question comes from the line of Ken Herbert from Concord your line is open.

Yeah, hi. Good afternoon. Steve and Chris. Hey Steve. I just wondered if you could talk a little bit about your expectations for the revenue Cadence in 1521. I mean, obviously the first quarter is going to be a challenge. And you said that should be down does the second quarter look about like the first quarter with what you see down we start to see growth on easier comps order start to see some some acceleration in the Top Line in the second quarter and through the rest of the year. I'd say it's both. Okay. So good question. Yeah, just I see us some money you're going up going up a bit as we move through the year with even though we're we're expecting bigger things in 2022 and 2023 on the commercial side. We do see see better numbers there. But as you all know Q2 through Q4 of this year are going to be a good comparison for us. So we'll probably see a mix of both Ken.

Okay, and then and then as part of that on the commercial Aerospace side, can you can you level set us with sort of what rate you're shipping out on the max now? And and if you're seeing still seeing some inventory off from Channel headwinds and and how you see that progressing over the year? Yeah, you know, I would say that I'd say that 2021 is a transition year. I think you know for the max. I think there is some inventory. I think you know, there is some still work through its spirit and at Boeing we we think we feel better about the second half than the first but just in general, you know, we as a nation in my remarks for the for the full year for two, and we're looking at you know, sort of lower to two single mid mid on the on the revenue overall.

Perfect. And if I could just one final question, I mean phenomenal job on the defense business. I think you called out over 50 customers now our customers programs that are over a million each. How does the poem? How does the new business environment look on defense in terms of your ability to to take share and does that number continue to expand as we as we move forward.

Well, first of all, thank you for mentioning that we think that's that's that's a tremendous metric, you know, as I mentioned in my rocks as well. As far as where we came from a fence business is that you know, we still see a lot of Headroom. I know there's concerned about the budget and concerns about Administration priorities and we'll have to work through that but if you just look at our our level of penetration at some of these defense Prime's I mean it's still pretty low. So I mean if we can, you know have a company like a defense Prime like Raytheon with those kind of numbers. I mean, why can't we have with Northrup and I'm Lockheed so I see, you know share shift. I see new programs and you know, the nice thing about our portfolio is, you know, we're delivering a high level high service levels really good quality and you know, people are trusting us more and more. So I think it's all all bodes well for the future

Great. Thanks. Steve. Really nice job over this year. Thanks for your support, and we appreciate it sincerely. Thank you.

Your next question comes from line of Mike Crawford from B Riley Securities. Your line is open.

Thank you. Hey, do you have any preliminary take on any shifting defense priorities under the new Administration may affect you coming.

We want to show you want to shut the first yeah, I know. I mean, yeah, my the, you know, we certainly follow what we hear, you know from the various places as much I think is any birthdays and you know, our our latest is you know, where we're going here in the next year or two. I think for the most part the programs that that people are viewing is is continuing and and sort of having a up Arrow or seem like the ones that we are we being attached to and the ones that seem like they have a lot of headwind, you know, not as much for us. So, you know, I think that that flavor of it feels good but it's until this thing gets sort of baked out a little more that we're not you know, we're not saying too much more on that. Yeah. It makes this is Steve. So I would say, you know, look if you look at what we're supplying I feel you know, fairly confident obviously F-35 and lots of other things missiles, you know, the one of the big point and then we're not heavily heavily into some of the big things what they're going to do with the Navy and you know, we're going to have to find out, you know, probably May or June.

That you know, but as far as our programs as far as how this year next year looks and our backlog position. I mean we we feel good.

Stephen then just relate it given the nature of your business. How insulated what do you say you are from this Calvert Bill seeking to reduce civilian Workforce at the dod by 15% over the next four years.

Because it's can you say that one more time? Yeah, there's there's a new bill introduced seeking to reduce the civilian Workforce at the home from any changes that might bring it up. Yeah, we are. I mean, we're not, you know, obviously we're not a defense Prime. So we're we're very insulated from that. We you know, we're we're just dealing with you know, our contacts industry.

Okay, thanks. And then final question relates to the commercial structures ramp when that starts to occur. Are there any pain points that would reduce margins as you get lined back up to the levels where they used to be producing or should it be pretty smooth know. Yeah, that one might I mean we should be pretty smooth on that again that was part of the the flex down that we did and so as we pick up the various work and it's across I mean it's certainly, you know, 7:30 a.m. And a 3:20, but it's the whole slew of the commercial programs at once they start to fill back in. You know, those should come on and be you know, very very helpful for us with with no no major items.

Excellent. Thank you. Goodbye.

Again, if you would like to ask a question, please press star one on your telephone. Your next question comes from the line of Mike from truest. Your line is open. Hey, good evening guys. Thanks for taking the questions here. Hey Steve real nice results and maybe if I can just to to nitpick a little bit what what specifically, you know, I think they may have taken out a little bit different than we expected. It. Looks like you got a really big ramp sequentially and structural systems both on the top line and on the the margin performance there and you know, maybe the electronic systems, you know a little bit a little bit more squishy and that that sequential decline in in margins. Can you maybe elaborate as to what someone puts and takes for their? Yeah, I like Christopher and then I'll I'll throw in there. Yeah. No Mike. I mean, I think it's sort of keeps with the theme that that we've, you know been communicating for for quite a few quarters in terms of there's it's not all going to be linear and it off.

No, even to the to the prior question. I mean we the company small enough that it doesn't take much to move us a little bit up or down. So you got to look at a few a few quarters Trend and we certainly talked about that electron age group is as we're getting you know decent volume. We we look to continue to expand the margin but that operating income in the in the 10:00 to 11 to 12% range is sort of where we can expect it and when things line up and we'll bus north of that and that's that's really why we're we reset here in Q4. Yeah, and I would just say just in general on you know structures. I mean, we're doing a lot of good things there. We've obviously come a long way but you know, we feel as we move forward in time, you know, we we certainly have more one more runway in structures that as well as an electronic systems because you know scale is going to be our friend as we go forward in life. And you know, right now we're you know part of our business obviously is is is not scale because of you know, all the market conditions, but we we think our position and titanium our position.

on the single-aisle

Also all the things we're doing in the fence and and more to come there that you know, we're going to we're going to see some good results. Mike got it got it and it just looking into next year as well. Obviously, you've got the off the tough comps in the first quarter with Aerospace. But but even throughout the year, I mean, you're going to be laughing some really tough comps on the defense side and you talk about that Thursday, I guess, you know total twenty one being loaded mid single-digits. But but do you think um, you know presumably in that back half commercial error of strengthens. Do you think you can see, you know, our strength that a defense do you think you can grow that backlog as well as you progress through Twenty-One. I mean, we certainly feel a couple of things first. We certainly, you know, feel good about second half commercial Arrow coming up a bit and then we think that that's going to happen. We also feel we feel actually good about our Revenue line for defense. I mean certainly, you know last year, I mean 2020 was you know, really a Breakout

So but we still feel like you know, like I've mentioned in the past with other, you know defense crimes and other things we're doing is that you know, we we do have Headroom here that you know, we feel like we can start, you know grow it. Obviously, you're right. It's got to be a tougher cop, but you know, we're going to we feel good about getting this year 2021 and defense.

Got it. And it took just last one for me obviously talked about you know, the the declines I think year-on-year on the max you called that out. If you were to sort of or would you could you tell us you know, in in terms of maybe excess capacity you're carrying or or any kind of you know, drag on margins, you know, as you kind of start to see this ramp, you know, do you get back? I guess I'm kind of asking maybe where you are in terms of your overall footprint and utilization. You know, how much capacity you have and where do you see that trending in terms of utilization as you as you move through Twenty-One? Yeah. I mean, I think it's going to continue. You know, look we're going to continue to fill the order book, you know our capacity and the good news is for investors and for the companies, you know, we we have or we have our footprint. We have our footprint up to you know, fifty Max has you know a month, you know, and plus, you know, we we've we've got our foot printed 50-year bus plus a month off.

So as far as that goes, you know, we're we're in a good position. There will also mention that we we kind of went out of our way even though you know, there's some pressure there to keep keep a lot of our good people on the structure side of the building. Okay, so, you know because we knew eventually this would come back so, you know, we forgot about that utilization, you know is going to go up and I think everybody's going to benefit them.

Perfect. Sounds good. Thanks a lot guys. Thanks, Mike.

Again, if you would like to ask a question, please press star and the number one on your telephone keypad.

Your next question comes from line of Ken Herbert from canaccord your line is open.

Yeah. Hi Steve. Just a quick follow-up. If I could you paid you paid down a bunch of debt in the quarter. How should we think about Capital allocation this year in terms of debt reduction a relative to how the m&a pipeline looks I mean, since you joined the company you've done sort of a deal a year. It's been obviously a challenging Market this year. But but how do we think about m&a this year? Where are you off opportunities? How's the pipeline look and what's your outlook? They're all right. So let me let me go first just look obviously, you know, we're active Okay, so, you know, we both like well said Ken twenty-twenty was, you know difficult year to do a deal for for lots of reasons, but you know, we're starting year off in 20 21, we were active we are looking at things we are seeing opportunities. So that's the first thing I'd say we're going to continue to to to follow, you know, our our strategy that we've had in the past so really no change their birth.

Yeah, we feel good about you know, where we are with, you know, the operating, uh, you know, the whole operating system of the company. So we're you know, we're we're optimistic that we're hoping, you know, we're off, you know, do one or two this year. We'll have to see but you know, we're certainly we're in the game and we're moving forward. So you want to say anything else, you know, just in terms of the capital allocation can you know, we have we have the fifty million in cash in the in the 75 available on the revolver. I mean, that's the best thing we can do to utilize it, you know to create the value is going to be what Steve saying and so that's what we're so we're looking to do and and you know that you're right. This is the first year of not quite get through on one and it was a strange year for a lot of reasons and but yet that's that's what we're looking to do is we as we go through 2021.

Great. Thanks. Thanks again at this time. There are no other colors in queue. So we'll turn it back to mister Oswald for any closing remarks. Well, thank you very much. And thank you everyone for participating today, you know, obviously twenty-twenty was a you know, a very very difficult year for lots of reasons and we certainly hope that we're going to see better days sooner or later with the vaccine roll out, but we just bought the behalf of the team just want to thank our shareholders and our analysts and everyone involved with the company for for their support and twenty20. So I'll leave it there and have a nice evening. Thank their own space and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

off off off