Q1 2021 Ducommun Inc Earnings Call

May 4, 2021

[music].

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. During the question and answer session. If you have a question. Please press Star then one on your Touchtone phone.

I will now turn the call over to the Investor Relations adviser, Chris witty, Chris you may begin.

And to discuss certain limitations to any forward looking statements regarding future events projections of our 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.

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.

And what he believes that the expectations reflected in our forward looking statements are reasonable and we can give no assurance that such expectations will prove to have been correct.

And estimates of future operating results are based on the company's current business, which is subject to change particular risks facing ducommun include among others. The cyclicality of our end use markets the impact of COVID-19 on our operations our customers the lead.

Of all 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 on our annual report on form 10-K filed with the SEC and our forward looking statements are subject to those risks.

Statements made during this call are only as of the time made and we do not intend to update any statements made on this presentation, except if and as required by regulatory authorities.

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.

And we thought or 2021 first quarter form 10-Q, with the SEC today I would now like to turn the call over to Mr. Steve Oswald for a review of the operating results Steve.

Well, thank you, Chris and thanks, everyone for joining us day for our first quarter conference call.

And our prior quarter calls I hope you and your families are healthy for those that have received vaccines that of went or is going well and we will.

I'll 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.

The company range focus first and foremost on the health and safety of our employees.

The team has done an excellent job with the safety protocols put in place since March 2020.

We continue to work with authorities on best practices throughout our operations.

And the other cases that 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 to our human resources team.

As mentioned on the press release, the comments first quarter results of strong despite the continued challenges and the.

Commercial aerospace markets.

Which we're all aware of.

All of the actions initiatives and hard work since the began this journey in 2017 of.

As shown on the strong operating results, especially since the last March and again in Q1.

Our defense business continues to be the major contributor.

The build out this important segment.

Of the company for scale.

Which includes having the right product portfolio and strong operating metrics and.

Leveraging our lean and highly focused performance center concept.

This is particularly evident of the 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%.

The quality of earnings too is very high with the company reach and GAAP diluted EPS of <unk> 55, a share.

Versus 67 sets of share for Q1 and 2020 and.

And adjusted diluted EPS of <unk> 58.

<unk> of share versus 67% and 2020.

These notes will reach the spud overall revenue down 9% from Q1 last year.

It's a job well done.

This is also of great story from our investors.

As we see of returned to revenue growth overall in 2021 with commercial aerospace recovery.

Solid results and Q1 will benefit the rest of the year.

The company's first quarter revenue was lower due to the commercial aerospace markets. However, ducommun and defense business again showed strengthening of 12% versus prior year.

And again was the result of many of proven starting back in 2018.

Though not ever wanted to show negative growth the overview of revenue numbers of impressive despite the pandemic impact on commercial aerospace and in the quarter.

We're looking forward to Q2.

And posting year over year growth for the first time and Hawaii.

The comments defense business revenues continued to show excellent progress on shipments and robust business development.

The majority of gains and Q1 include the Raytheon total program.

Our systems from Northrop Grumman.

Uavs at General Photonics.

And the other missile programs.

Again as we've stated in the past we are thrilled to be of strategic supplier with GE.

And reached $1 million and revenue in March this year for the first time and.

And shipments in 2021 will be over four ex versus 2020.

So auto mentioned Raytheon missile and defense and the progress and signed the strategic supplier agreement with them and 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.

Growing from less than $90 million, and 2022 of $125 million in 2021, and an increase of almost 40%.

And regards to the defense backlog remains strong and in Q1 of the backlog of $516 million.

Total backlog for the company was a $810 million and this is a great number of based on the environment.

The defense business grew year over year by eight 8% bolstered by strong revenues.

And some key defense platforms, which includes the total missile UAV and other programs as part of Ducommun continues to deliver on.

Obviously, the strength of help offset commercial aerospace sort of pressure, but we and.

<unk> debt to start increasing and the second half of 2021.

The the French results also show great opportunities when we leverage our structural product lines with defense Oems.

As mentioned previously we of wins now on the toll missile.

Which was the share shift from another supplier and other new programs such as the standard missile two dorsal fin assembly.

Along with our acquisitions. This part of the business of the north of $110 million of revenue for 2021, where it was under $80 million and 2019.

I also want to mention that we are optimistic about the feds going forward. Despite concerns regarding the budget and change and administration.

Two comments defense segment has been under managed and the past as I've mentioned, but now its structural applications going full speed ahead, along with the long track record of value offerings 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.

And at the end of Q1 of over 1 million and yearly revenue up from 34, and 2017 and over 40% increase.

The company's cost actions through Q1, 2020 are also paying dividends the can.

And certainly see the effectiveness of our actions and the continued strong gross profit margins year over year, and the solid operating income percentage and along with diluted EPS.

The team did a great job on 2020 on cost and.

And is now extending into 2021 and Q1.

And regards to the outlook, our significant backlog and defense. The many growth programs mentioned earlier will provide strong revenue for the remainder of 2021.

We estimate that revenue, we led by defense, but over the quarters and years ahead, we see more commercial aerospace volume returned to ducommun.

We have the capacity of.

Strong operating team and are prepared for the rate increases.

<unk> and single aisle aircraft.

We stand ready as well with our strong narrow body of platform positions with the comments titanium businesses of hot form and superplastic, forming leading the way.

As I've mentioned and the path we of the World leader in this area.

And have strong positions already at Airbus and Boeing Spirit Aero systems, Gulfstream and among other Oems.

The comment all sorts of recognized is now included in the Boeing Premier bidders program.

Getting all of this Oems criteria.

And I also wanted to send my congratulations to our team supporting Airbus.

By reaching 100% on time delivery performance for two years straight.

And April 2021.

And that's a real achievement.

As mentioned on our last call.

We will return to growth and 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 of ducommun growing low to mid single digits.

The common also has a great midterm and long term future.

This will be accomplished by leveraging our new built out the fence business and strong position and commercial aerospace, especially on narrow body revenues as we have the two to one ratio versus double aisle aircraft.

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

Finally, we also remain active and the market for M&A and.

And believe this of all of the accelerator the higher results and the future.

Yeah.

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.

And once again, representing strong growth versus 2020 up 12%.

The revenue on some key defense platforms.

And earlier, we saw increases in demand on our toll missile UAV and other missile programs.

The first quarter's military and space revenue represented 73% of.

All of the comments revenue and the period.

We also continue to be very well positioned for further growth across our defense platforms over the next several quarters and all sectors, especially at Raytheon and Gea and again ended the first quarter with the strong backlog of $516 million, which is up eight 8% year over year represents almost 64% of the comments backlog.

Within our commercial aerospace operations first quarter revenue declined year over year to 30, $35 4 million as expected driven by build rate declines on the number of commercial aerospace platforms impacted by the.

COVID-19 pandemic.

The comment also has effectively adjusted costs and manage the downturn is well positioned once the rates stabilize and increase over the long term.

It's kind of will begin to recover and this market in the second half of 2021.

And as mentioned earlier has a very bright future.

The backlog within our commercial aerospace sector stands at roughly $266 million at the end of the first quarter from the majority of the declines due to the 737 Max program.

We do however stand ready with the team processes the capital in place to support the Bill rate increases. The next few years and we're anxious to get started.

With that I'll have Chris review of our financial results and detail Chris.

You, Steve and 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 and reduced volume levels, which we have had since the onset of the COVID-19 pandemic over one year ago.

And we're looking forward of leveraging the expected increase in demand for our commercial aircraft components of the systems as well as the strength of our defense business as we return to growth and 2021.

Now turning to our first quarter results.

And we review some of the highlights.

Revenue for the first quarter of 2021 was $157 2 million versus $173 $5 million and 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 and our industrial business, partially offset by $12 2 million of higher sales within the military and space sector.

The comments overall backlog at the end of the first quarter was approximately $810 million.

As a reminder, we define 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 and the prior year period, while gross margins were essentially flat year over year 21, 1% of 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 and the first quarter versus $23 2 million last year.

<unk>, the company's ongoing cost controls and streamlined operations.

Ducommun reported operating income for the first quarter of $10 6 million or six 8% of revenue compared to $13 6 million or seven 8% of revenue and the prior year period.

Adjusted operating income excluding expenses related to the previous reported climates fire.

Was $11 1 million or seven 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 and the prior year period.

The lower interest rates more than offset the impact from higher debt levels and the debt outstanding rose due to the company's cash drawdown of $50 million last year to have on hand, as we work through the impact of the pandemic of this amount we paid back $25 million during the fourth quarter of 2020, and another $5 million and Q1, leaving $20 million.

Outstanding.

The company reported net income for the first quarter of $6 7 million or <unk> 55 per diluted share compared to.

Net income of $7 9 million or <unk> 67 per diluted share for the first quarter of 2020.

Excluding onetime expenses adjusted EPS for the first quarter of 2021 was 58.

Adjusted EBITDA for the first quarter was $21 1 million or 13, 5% of revenue compared to $23 2 million of 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 electronics segments electronic systems segment posted revenue of $99 1 million for the first quarter of 2020 versus $98 1 million and the prior year period.

These results reflect a $7 4 million increase and 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 <unk>.

Electronic systems operating income for the first quarter was $12 5 million of 12, 6% of revenue versus $15 1 million or 15, 4% of revenue and the prior year period.

And the lower margin was primarily as a result of unfavorable product mix, primarily offset partially offset by lower compensation and benefit costs.

Our structural systems segment posted revenue of $58 million and the first quarter of 2021 versus $75 4 million of 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 and military and space markets structural systems operating income for the quarter was $5 1 million or eight 8% of revenue compared to $5 4 million or seven 2% of revenue last year.

The year over year operating margin increase was primarily due to favorable product mix and excluding the gliomas charges first quarter adjusted operating margin was nine 7% and 2021.

Corporate general and administrative expense see G&A expense for the first quarter of 'twenty. One of 2021 was <unk> 7 million of four 5% of revenue.

And $6 $9 million of 4% of revenue in 2020.

Turning to liquidity and capital resources, we of 17 million and cash on hand and.

And 80 million available on our revolver revolving resulting and available liquidity of $97 million.

We utilized $23 million of cash from operations this quarter compared to the with utilizing $12 million of the prior year period. The first quarter typically results in the cash outflow from operations as we pay the annual incentives and invest and 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 months debt to adjusted EBITDA ratio was three four 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 align with our return to growth and 2021, we anticipate spending between 16 million to 18 billion and 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 our return to growth and commercial volumes during the second half as Steve indicated.

We will discuss these trends further on our upcoming Investor day on May 26.

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

Okay. Thanks, Chris.

And certainly proud of the results this quarter and we've looked obviously forward as everyone does depend on market conditions and commercial aerospace later this year.

We met our commitments despite.

Some very difficult headwinds.

And this is really due to our people and leadership at the end of the day I would add as well that we do of the right footprint operating system cost structure and discipline.

And performing at a high level and feel very confident and.

In the future.

As in the Q4 call I also want to thank our customers shareholders and all of our business partners for the continued support.

As we work through these difficult times together, both last year and in Q1.

I want to take this opportunity as well as Chris mentioned.

And let you know that the Investor day, I mentioned earlier and the year will take place on Wednesday May 26, and start at nine a M Pacific time.

And I'd like to invite everyone to this important meeting when we discuss our plans for the future.

And appreciate your support and attending.

In closing I'd like to again take this time to thank ducommun employees.

And I am proud of them.

And all of our efforts and with the many challenges from the pandemic that began in 2020.

And that will continue in Q1 2021.

Our team members show up at the operations every day.

And those stressful they get the jobs on for our customers our nation and from one of them.

So with that let's go to questions. Please and thank you.

Thanks, and we will now begin the question and answer session. If you have a question. Please press Star then one on your Touchtone phone if you wish to be removed from the queue. Please press the pound sign or the hash key there will be at the label for the first question is announced and if you are using a speakerphone and you may need to pick up the handset first before pressing the numbers. Once again, if you have a question. Please.

Thats Star then one on your Touchtone phone.

And we have a question from Pete Australian and from choice of Securities. Please go ahead.

Hey, good afternoon, and this is Pete Oswald on for Mike and <unk>. Thanks for taking my question.

So it looks like your operating margins took a step back versus versus the fourth quarter and structural systems. Despite the.

Sales of being pretty flat there on a sequential basis. So I was just wondering if you could give some color on what drove that there was.

Perfect and the first quarter or just the change in mix or just any help you could give there.

Yes, no debt.

One is related with structures. It's all about the talk about the mix and we had we had again year over year. It was a nice change of favorably, but sequentially, yes, that's what caused us a little bit of headwind there.

Okay. Thanks, and then.

And it looks like your backlog has stabilized and 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 aerospace hold on the sequential basis and in the second quarter or if you think it's really just going to be and the second half of all of that materializing.

Yes. This is Steve Oswald welcome to the call by the way and.

Certainly we're optimistic about our order flow the.

The rest of the of probably more weighted towards the second half.

Of the of 2021.

But we definitely anticipate that we're going to see orders go up and.

Overall, the story is going to be a very good one.

Not only of near term of midterm.

Great. Thanks, and then just one more I was wondering if you could comment on how your M&A pipeline is looking at the.

And the areas you'd call out that are currently of priority and just what youre seeing in terms of available opportunities and valuation.

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 and the market we're looking at things.

There is 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 have done three deals since the since we started here in 2017 I think the open were winners so we.

We're careful on 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.

Alright, great. Thanks, a lot.

Hey, Thank you for taking us.

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

Thanks, Steve what if any program capture goal of the App and 21 similar to what you did with the tow missiles and 2020.

Yes can you say the again, sorry, if I can turn on the fall below that and this room and you say that again, please and I apologize.

Yes.

Just as you captured the tow missile program from the that a competitor in 2020 right of any.

And I can share regarding additional program capture on this year.

Yes.

I don't.

And I can't share it as far as we're constantly I would tell you this is that.

I think it's a 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.

And that's that's the case of the total missile and the we're not.

The days of us just competing on price or over because generally it didn't work out so well. So I will tell you that we are active.

Not only on not only share shift, but also off loading. That's another theme, we're going to see more and more to come and is offloading from defense price that we can pick up and the nice thing is is the.

We were able to make the toll missile happen and that's that's of significant project and its not its not as easy part to make so I think all of us pointing the right direction and when we have something more material significant we'll let you know.

Okay. Thanks, and then.

And your commercial line spin and backup.

Is there.

The delay on.

When the margins pick up as well or is it just primarily just the function of scale.

Yes, Mike, it's primarily a function of scale I mean, there should not be.

A quote delay I mean, we're just going to pick up efficiency as we leverage up and.

We're looking forward of that because it's we're calling back from a pretty significant fall back last year Q on Q2.

Great and with that last question.

And as I say with that I mean, its not happened and just yes. So were as we work through this year as Stephen mentioned that sort of.

And we're looking to see as we work through this year.

Okay. Thanks, Chris and then just the final question is how many different programs are you on with <unk> is it just one.

And then platform or is it multiple.

Yeah.

I can only say so much because I've got to be respectful of GAA and.

All of them at all there.

I asked me to be.

So the high level on things, but.

We're on multiple programs.

Alright, Thank you very much okay. Thank you.

And as a reminder, if you would like to ask a question. Please press Star then one on your Touchtone phone.

And we have a question from Ken Herbert from Canaccord Genuity. Please go ahead.

Yeah and good afternoon.

Steve how are you doing good Ken good.

Good afternoon and just.

And Chris I, just wanted to first ask you about <unk>.

Cash and 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 looks like working capital was it had some pretty significant investments.

Can you just talk about any particular programs that may have been.

Driving the use of cash and the quarter. 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, youre hitting on the right themes for sure and it's all of the support our growth and sort of as we're looking out over the next few quarters. We're trying to line up what we can what we need to build what we've got the ability to build and to meet the customer demand to hit the sales growth that we're talking about now as we go sequentially quarter to quarter.

So thats, where it related to the inventory and the the Unbilled, that's where that some of that investment is done at this point. So that we can manage through a little stronger and the customer demands and the next couple of quarters.

Can you just comment Chris is it maybe more on the commercial side and anticipation of maybe Max build rates or is it is it still predominantly on the defense side, yes.

And 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 and the commercial side. We certainly had a quick stop to a lot of the build last year. So that's what left us with the little inventory and more inventory on that side of the business. So we've got that sort of is our jumped out of the jump off.

The point is we hit the growth rate defense wise, where we've got a little more of that build coming at us that we need to keep ahead of.

Yes, Ken this is Stephen Yes, Ken and Steve is definitely less debt.

On the ended towards the defense I mean, we're busy.

And.

We're building things up we've got a lot of new programs coming online.

We have a pretty active so yes, it's late a little bit towards that.

As far as the cash at least to get started and the year.

Okay, and Steve you made a comment early in your prepared remarks that you are building defense towards.

And towards the right scale can you just share and maybe you'll get the purchase later on in May, but but what do you view as sort of the the <unk>.

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 to really get the leverage out of the model yes.

Yes look I think I'm going to.

I'm kind of I'm going to basically talk.

A lot more and May I think thats, the appropriate time, but I would tell you this debt where we have our.

The performance Center concept right. So we have performance centers that make harnesses performance centers that make.

Our assemblies and make cards those type of things and we have a pretty good idea of at least the game plan.

Certainly the get those those centers up the scale, which is going to be I think terrific for from investors and for our margins. So stay tuned we'll have more on Mei promise.

Okay.

One final question from me, if we look at and.

Electronic systems.

The segment margins you were 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.

Ill get back to the sort of run rate here and the.

And the second quarter or is it maybe a couple of quarters out.

Ken This is Chris let me jump in a little bit here. So you are right and when you look at last year's Q1, everything is sort of click right in to get us to the north of 15% margin.

And our electronics segment and 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 and 11% and then as we continue the journey now it's more of 11 12, 13%, even though <unk> was sort of the outlier you get to this quarter. It was it wasn't a perfect and one in terms of mix, but it all.

Also we did have some significant weather and the Midwest and the middle of the quarter. One in February and we had quite a bit of downtime that was there as well and it had an impact. So a couple of those things sort of led us to that point, but as we move forward again, we should be we should be thinking about that of 11% to 13% is sort of the range and.

We've talked about with the segments. It doesn't take a lot to sort of move around so that's why we've got the range out there.

Yes, Ken let me just this is Steve yes, so the polar vortex is real for ducommun, Okay. So that's <unk>.

And that was real for us and February Unfortunately, so.

Impacted a lot of our operations.

So I guess.

And there is some trade off when you think about Kansas and other locations relative to southern California.

So this year that comes to mind, Ken There's a few.

Alright, guys. Thanks, a lot.

Ken Thanks for the support and as always thank you.

As a reminder, if you would like to ask a question. Please press Star then one on your Touchtone phone.

And they are going around and there appears to be no further questions on 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 you everybody for joining us for the first quarter call.

We're certainly looking forward of better days, and we know theyre coming.

And my opening remarks here are.

Our focus through this whole thing has been employee safety first and foremost and I think that from overall, we've done a really really good job I just want to thank you for your support and 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.

And thank you.

Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.

[music].

Welcome to the first quarter 2021 Ducommun earnings Conference call. My name is and I 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 the question and answer session. During the question and answer session. If you have a question. Please press Star then one on your Touchtone phone.

And I'll turn the call over to the Investor Relations adviser, Chris witty, Chris you may begin.

Thank you and welcome to the comments 2020, one first quarter conference call with me today are Steve Oswald Chairman, President and CEO, and Chris Wampler, Vice President and Chief Financial Officer Controller, and Treasurer, and I'm going to discuss certain limitations to any forward looking statements regarding future events projections of our performance and we.

We may make during the prepared remarks or the Q&A session that follows sort of.

The 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 the.

And though he believes that the expectations reflected in our forward looking statements are reasonable and we can give no assurance that such expectations will prove to have been correct and it.

Estimates of future operating results are based on the company's current business, which is subject to change particular risks facing ducommun include among others. The cyclicality of our end use markets the impact of COVID-19 on our operations of our customers.

Level of U S government defense spending and 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 on our annual report on form 10-K filed with the SEC and our forward looking statements are subject to those risks.

Statements made during this call are only as of the time made and we do not intend to update any statements made on this presentation, except if and as required by regulatory authorities.

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.

Part of 2021 first quarter form 10-Q, with the SEC today I would now like to turn the call over to Mr. Steve Oswald from your view of the operating results Steve.

Okay, well, thank you, Chris and thanks, everyone for joining us day for our first quarter conference call.

And then our prior quarter calls I hope you and your families are healthy.

Those that have received vaccines that of wet there 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.

The company range focus first and foremost on the health and safety of our employees.

The team has done an excellent job with the safety protocols put in place since March 2020.

We continue to work with authorities on best practices throughout our operations.

And the other cases at Ducommun is roughly 200 and since the beginning of the pandemic.

We have seen a significant drop off starting in February of this year.

And we remain diligent on our communication with the weekly updates to our human resources team.

Yes.

As mentioned on the press release, the comments first quarter results of strong despite the continued challenges and the converse.

Aerospace markets.

Which we're all aware of.

All of the actions and initiatives and hard works at the began this journey in 2017.

As shown on the strong operating results, especially since the last March and again in Q1.

Our defense business continues to be the major contributor.

The build out this important segment of the company for scale.

Which includes having the right product portfolio and strong operating metrics.

Leveraging of our lean and highly focused on.

<unk> Center concept.

This particular.

The other than the continued margin strength of our gross profit and adjusted EBITDA. Despite the significant year over year headwind.

The team also posted adjusted operating income margins of over 7%.

The quality of earnings too is very high with the company reach and GAAP diluted EPS of <unk> 55, a share.

Versus 67 sets of share for Q1 and 2020 and.

And adjusted diluted EPS of <unk> 58.

Of share versus 67% and 2020.

These nose of reeds, despite overall revenue down 9% from Q1 last year.

It's a job well done.

This is also of great story for our investors.

As we see of recharge of revenue growth overall in 2021 with commercial aerospace recovery.

Solid results and Q level of benefit the rest of the year.

The company's first quarter revenue was lower due to the commercial aerospace markets. However, ducommun and defense business again showed strengthening of 12% versus prior year.

And again it was the result of many of proven starting back in 2018.

So not ever wanted to show negative growth the overall.

The revenue number is impressive despite the pandemic impact on commercial aerospace and in the quarter.

We're looking forward to Q2.

And posting year over year growth for the first time and awhile.

It's kind of a defense business revenues continue to show excellent progress on shipments and robust business development.

The majority of gains and Q1 include the Raytheon total program.

Radar systems from Northrop Grumman.

Uavs at general the topics.

And the other missile programs.

Again as we've stated in the past we are thrilled to be of strategic supplier with G E.

And reached $1 million and revenue and March this year for the first time and.

And shipments in 2020, one will be over four ex versus 2020.

So auto mentioned Raytheon missile and defense and the progress and sign of the strategic supplier agreement with them and 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.

And from less than $90 million, and 2020% of over $125 million and 2021, and an increase of almost 40%.

With regards to the defense backlog remains strong and in Q1 was the backlog of $516 million.

Total backlog for the company was a $810 million and this is a great number of based on the environment.

The defense business grew year over year by eight 8% bolstered by strong revenues.

And some key defense platforms, which includes the toll missile UAV and other programs as part of Ducommun continues to deliver on.

Obviously, the strike to help offset commercial aerospace sort of pressure.

But we anticipate that the start increasing and the second half of 2021.

The the French results also show great opportunities when we leverage our structural product lines with defense Oems.

As mentioned previously we of wins now on the top of missile.

Which was a share shift from another supplier and other new programs such as the standard missile two dorsal fin assembly.

Along with our acquisitions this part of the business the north of $110 million and revenue for 2021, where it was another $80 million and 2019.

I also want to mention that we are optimistic about the feds going forward. Despite concerns regarding the budget and change and administration.

To cause the defense segment has been under managed and the past as I've mentioned, but now its structural applications going full speed ahead, along with the long track record of value off of our electronic systems business.

We see the strong future.

One other very important metric is that our defense portfolio currently has 48 programs.

At the end of Q1 of over 1 million and yearly revenue up from 34, and 2017 and over 40% increase.

The company's cost actions through Q1, 2020 are also paying dividends the can.

And certainly see the effectiveness of our actions and the continued strong gross profit margins year over year, and a solid operating income percentage level of diluted EPS.

The team did a great job and 2020 on cost.

And is now extending into 2021 and Q1.

And regards to the outlook on this get backlog and defense. The many growth programs mentioned earlier will provide <unk> revenue for the remainder of 2021.

We estimate that revenue, we led by defense, but over the quarters and years ahead, we see more commercial aerospace volume returned to ducommun.

We have the capacity of.

A strong operating team and are prepared for the rate increases.

Specially and single aisle aircraft.

We stand ready as well with our strong narrow body of platform positions with the comments titanium businesses of hot form and superplastic, forming leading the way.

As I've mentioned in the past we of the World leader in this area.

And have strong positions already at Airbus and Boeing Spirit Aero systems, Gulfstream and among other Oems.

The car, but also as a recognized is now included in the Boeing Premier bidders program.

During all of this Oems criteria.

And I also wanted to send my congratulations to our team supporting Airbus.

By reaching 100% on time delivery performance for two years straight.

And April 2021.

And that's a real achievement.

As mentioned on our last call.

We returned to growth and 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 of ducommun growing low to mid single digits.

The common also has a great midterm and long term future.

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

Finally, we also remain active and the market for M&A.

And believe this of all of the accelerator the higher results and the future.

Yeah.

Now, let me provide some additional color on our markets products and programs.

Beginning with the military and space sector, we posted first quarter revenue of $114 1 million.

And once again, representing strong growth versus 2020 up 12%.

The revenue on some key defense platforms.

And earlier, we saw increases in demand on our total missile UAV and other missile programs.

The first quarter's military and space revenue represented 73%.

Of the comments revenue and the period.

We also continue to be very well positioned for further growth across our defense platforms over the next several quarters and all sectors.

Especially of Raytheon and Gea and again ended the first quarter, where the strong backlog of $516 million, which is up eight 8% year over year represents almost 64% of the comments backlog.

It's kind of and also has effectively adjusted costs and manage the downturn is well positioned once the rates stabilize and increase over the long term.

The call will begin to recover and this market in the second half of 2021.

And as mentioned earlier has a very bright future.

The backlog within our commercial aerospace sector stands at roughly $266 million at the end of the first quarter with the majority of the clients due to the 737 Max program.

We do however stand ready with the team processes the capital on place to support the Bill rate increases. The next few years and we're anxious to get started.

With that I'll have Chris the view of our financial results and detail, Chris. Thank you, Steve and 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.

We're looking forward of 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 and 2021.

Now turning to our first quarter results.

And we review some of the highlights.

Revenue for the first quarter of 2021 was $157 2 million versus $173 5 million and the first quarter of 2020.

The comment the raw backlog at the end of the first quarter was approximately $810 million.

As a reminder, we define 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.

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 and the first quarter versus $23 2 million last year.

Reflecting the company's ongoing cost controls and streamlined operations.

Ducommun reported operating income for the first quarter of $10 6 million or six 8% of revenue compared to $13 6 million or seven 8% of revenue and the prior year period.

Adjusted operating income excluding expenses related to the previous reported climates fire was $11 1 million or seven 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 and the prior year period.

The lower interest rates more than offset the impact from higher debt levels. The debt outstanding rose due to the company's cash drawdown of $50 million last year to have on hand, as we worked through the impact of the pandemic of this amount and we paid back $25 million during the fourth quarter of 2020, and another $5 million and Q1, leaving $20 million.

Outstanding.

The company reported net income for the first quarter of $6 7 million or <unk> 55 per diluted share compared.

Compared to net income of $7 9 million or <unk> 67 per diluted share for the first quarter of 2020.

Excluding onetime expenses adjusted EPS for the first quarter of 2021 was 58.

Adjusted EBITDA for the first quarter was $21 1 million or 13, 5% of revenue compared to $23 2 million of 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 segments electronic systems segment posted revenue of $99 1 million for the first quarter of 2020 versus $98 1 million and the prior year period.

These results reflect the seven 4 million increase and 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 of 12, 6% of revenue versus $15 1 million or 15, 4% of revenue and the prior year period.

And the lower margin was primarily as a result of unfavorable product mix, primarily offset partially offset by lower compensation and benefit costs.

Our structural systems segment posted revenue of $58 million and the first quarter of 2021 versus 75 4 million of 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 eight 8% of revenue compared to $5 4 million or seven 2% of revenue last year.

The year over year operating margin increase was primarily due to favorable product mix and excluding the gliomas charges first quarter adjusted operating margin was nine 7% and 2021.

Corporate general and administrative expense see G&A expense for the first quarter of 'twenty. One of 2021 was <unk> 7 million or four 5% of revenue.

And $6 $9 million of 4% of revenue in 2020.

Turning to liquidity and capital resources, we have $17 million of cash on hand and.

And $80 million available on our revolver revolving resulting and available liquidity of $97 million.

We utilized $23 million of cash from operations this quarter compared to the with utilizing 12 million on the prior year period. The first quarter typically results in the cash outflow from operations as we pay annual incentives and invest and 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 months debt to adjusted EBITDA ratio was three four at the end of the first quarter.

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 of returned to growth and commercial volumes. During the second half as Steve indicated we will discuss these trends further on our upcoming Investor day on May 26.

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

Okay. Thanks, Chris.

And certainly proud of the results this quarter and we've looked obviously forward as everyone does depend on market conditions and commercial aerospace later this year.

We met our commitments, despite some very difficult headwinds and.

And this is really due to our people and leadership at the end of the day.

I would add as well that we do of the right footprint operating system cost structure and discipline, the intend to performing at a high level and feel very confident of.

And the future.

As in the Q4 call I also want to thank our customers shareholders and all of our business partners for the continued support.

As we work through these difficult times together, both last year and in Q1.

Ill take this opportunity as well as Chris mentioned.

To let you know that the Investor day, I mentioned earlier and the year will take place on Wednesday May 26, and start at nine a M Pacific time.

I'd like to invite everyone to this important meeting when we discuss our plans for the future.

And appreciate your support and attending.

In closing I'd like to again take this time to thank ducommun employees and I am.

Proud of them and.

And all of our efforts with the many challenges from the pandemic that began in 2020 and now will continue in Q1 2021.

Our team members show up at the operations every day.

And those stressful and they get the jobs on 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. If you have a question. Please press Star then one on your Touchtone phone if you wish to be removed from the queue. Please press the pause line or the hash key there will be at the label for the first question is announced and if you are using a speakerphone and you may need to pick up the handset first before pressing the numbers. Once again, if you have a question. Please.

Press Star then one on your Touchtone phone.

And we have a question from Pete Australian and from Choice Securities. Please go ahead.

Hey, good afternoon, and this is Pete Oswald on for Mike Trimboli. Thanks for taking my question.

So it looks like your operating margins took a step back versus versus the fourth quarter and structural system. Despite.

Sales of being pretty flat there on a sequential basis. So I was just wondering if you could give some color on what drove that if there was anything specific and the first quarter or just the change in mix or just any help you could give there.

Yes.

Q1 is related with the structures. It's all about the talk about the mix and we had we had again year over year. It was a nice change of favorably, but sequentially, yes, that's what caused us a little bit of headwind there.

Okay. Thanks, and then.

And it looks like your backlog of has stabilized and 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 the sequential basis and in the second quarter or if you think it's really just going to be and the second half of all of that materializes.

The LP. This is Steve also welcome to the call by the way and.

Certainly we're optimistic about our order flow the.

The rest of the of probably more weighted towards the second half.

Of the of 2021.

But we definitely anticipate that we're going to see orders go up and I think overall of the story is going to be a very good one.

Not only of near term of midterm.

Great. Thanks, and then just one more I was wondering if you could comment on how your M&A pipeline is looking at the.

And the areas you'd call out that are currently of priority and just what youre seeing in terms of available opportunities and valuation.

Sure well look we're active we've got active and I came in and because of this role we stood up our BD team and we have some excellent people right and that function and.

We're highly engaged and the market we're looking at things.

There is 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 have done three deals since the since we started here in 2017 and I think the open road weathers so.

We.

We're careful on what we do but we're certainly leaning in and we hope for something.

And so maybe happened this year and we continue to work hard at it.

Okay, great. Thanks, a lot.

Okay. Thank you.

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

Thanks, Steve what if any program capture goals the average in 'twenty, one and similar to what you did with the tow missiles and 2020.

Can you say the again I'm, sorry, if I get and trying to fall below that and the show and you say that again, please I apologize yeah.

Just as you captured the tow missile program from an out of competitor in 2020 right Anthony.

And I can share regarding additional program capture on this year yeah.

I don't.

I don't I cant share it as far as we're constantly I would tell you. This is that and I think.

I think it's a good news from 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 that's the case of the total missile and whatnot.

On the days of us just competing on price or over because generally it didn't work out so well. So I will tell you that we are active and.

Not only on not only share shift, but also offloading and that's another theme, we're going to see more and more to come and as you know offloading from defense price that we can pick up and the nice thing is is the.

We were able to make the total this will happen and that's that's of significant project and its not its not as easy part to make so I think all of us point and the right direction and when we have something more material significant we'll let you know.

Okay. Thanks, and then.

And your commercial line spin back up.

Is there.

The delay on.

And when margins pick up as well or is it just primarily just the function of scale.

Yes, Mike, it's primarily a function of scale I mean, there should not be.

A quote delay I mean, we're just going to pick up efficiency as we leverage up and.

We're looking forward of that because it's we're calling back from a pretty significant fall back last year Q on Q2.

Great and wouldn't add on question.

Go ahead Lee let.

And as I say with that I mean, its not happened and just yes. So were 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. Thanks, Chris and then just the final question is how many different programs are you on with <unk> is it just one.

And then platform or is it multiple.

Uh huh.

And I can only say so much because I've got to be respectful of GAA and see no them at all there.

They asked me to be.

So the high level on things, but.

We're on multiple core reps.

Alright, Thank you very much okay. Thank you.

And as a reminder, if you would like to ask a question. Please press Star then one on your Touchtone phone.

And we have a question from Ken Herbert from Canaccord Genuity. Please go ahead.

Hey, good afternoon.

Steve how are you doing good.

Good afternoon and just.

And Chris and I just wanted to first ask you about <unk>.

Cash and 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 looks like working capital was the <unk> had some pretty significant investments.

And you just talk about any particular programs that may have been.

Driving the use of cash and the quarter or if there was anything in particular the stuck.

Out on the quarter on a cash standpoint.

Yeah, Thanks, Ken it's Chris.

So, that's where and related to the inventory and and the the Unbilled, that's where the some of that investment is done at this point. So that we can manage through a little stronger and the customer demands and the next couple of quarters.

Can you just comment Chris is it maybe more on the commercial side and anticipation of maybe Max build rates or is it is it still predominantly on the defense side, yes.

And 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 and the commercial side. We certainly had a quick stop to a lot of the build last year. So that's what left us with the little inventory more inventory on that side of the business. So we've got that sort of is our jumped out of the jump off.

The point is we hit the growth rate defense wise, where we've got a little more of that build coming at us that we need to to keep ahead of.

Yes, Ken this is Stephen Yeah, Ken.

Ken. This is Steve is definitely is definitely ended towards the science I mean, we're busy.

And we're building things up we've got a lot of new programs coming on line.

We were pretty active so yeah, it's laid out a little bit towards that.

As far as the cash at least to get started and the year.

Okay, and Steve you made a comment early in your prepared remarks that Youre building defense towards.

Towards the right scale could you just share and maybe you'll get the purchase later on in May, but but what do you view as sort of the 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 to really get the.

Leverage out of the model yes.

Yeah look I think I'm going on.

I'm kind of I'm going to basically.

A lot more and May I think that's the appropriate time to do it but I would tell you this debt.

We have our.

The performance at our concept right. So we have performance centers and then make harnesses performance centers that make.

Assemblies may cards, those type of things and we have a pretty good idea of at least the game plan.

Certainly the get those those centers up the scale, which is going to be I think terrific for investors and from a margin. So stay tuned we'll have more on Mei promise.

Okay.

One final question from me, if we looked at and.

Electronic systems.

Segment margins were down.

Quite a bit from the first quarter of last year in and of the first quarter of last year was particularly strong but can.

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.

Ill get back to the sort of the run rate here and the and.

And the second quarter or is it maybe a couple of quarters out.

Ken This is Chris yet, let me jump in a little bit here. So you are right I mean, when you look at last year's Q1, and everything is sort of click right in to get us to the 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 and 11% and.

And then as we continue the journey now it's more of 11 12, 13%, even though <unk> was sort of the outlier you get to this quarter. It was it wasn't a perfect and one in terms of mix, but it also we did have.

And some significant weather and the Midwest and the middle of the quarter. One in February and we had quite a bit of downtime that was there as well and it 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 we should be thinking about that of 11% to 13% is sort of the range and you know like we've talked about with the segments. It doesn't.

A lot to sort of move around so that's why we've got the range out there.

Yes, and let me just this is Steve yes, so the polar vortex was real for ducommun. Okay. So that's the.

That was real for us and February Unfortunately, so.

And all 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.

[laughter] sales this year that come to mind, Ken There's a few.

Alright, you guys thinking about it Ken.

Ken Thanks for the support and as always thank you.

As a reminder, if you would like to ask a question. Please press Star then one on your Touchtone phone.

And they are going around and there appears to be no further questions on the queue. So I'll turn it back to Mr. Oswald for any closing remarks.

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.

And we're certainly looking forward of better days, and we know they're coming.

And my opening remarks here are.

Our focus through this whole thing has been employee safety first and foremost and I think the overall, we've done a really really good job I just want to thank you for your support and 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.

And thank you.

Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.

Q1 2021 Ducommun Inc Earnings Call

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