Q2 2021 Ducommun Inc Earnings Call
Good day, ladies and gentlemen, and welcome to the Ducommun second quarter Conference call. At this time all participants are in a listen only mode. Following managements prepared remarks, well hold a question and answer session to ask a question. Please press star followed by one on your Touchtone phone.
If anyone has difficulty hearing the conference. Please press zero for operator assistance as a reminder, this conference is being recorded today August 12, 2021, I would now like to turn the conference over to your Investor Relations adviser Chris witty.
Thank you and welcome to <unk> comments 2021 second quarter Conference call with me today are Steve Oswald Chairman, President and CEO, and Chris Wampler, Vice President Chief Financial Officer.
Ola and treasurer.
Im going to discuss certain limitations to any forward looking statements regarding future events projections or performance that we may make during the prepared remarks or the Q&A session that follows.
Certain statements today that are not historical facts, including any statements as to future market conditions results of operations and financial projections.
Our forward looking statements under the private Securities Litigation Reform Act of $19.95, and are therefore perspective.
These forward looking statements are subject to risks uncertainties and other factors, which could cause actual results to differ materially from the future results expressed or implied by such forward looking statements.
Although we believe that the expectations reflected in our forward looking statements are reasonable we can give no assurance that such expectations will prove to have been correct. In addition estimates of future operating results are based on the company's current business, which is subject to change.
Particular risks facing ducommun include among others. The cyclicality of our end use markets the impact of COVID-19 on our operations our customers do that.
All of US government defense spending timing of orders from our customers legal and regulatory risks management changes the cost of expansion and acquisitions competition and disasters natural or otherwise.
These risks and others are described in 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 in this presentation, except if and as required by regulatory authorities.
This cost includes non-GAAP financial measures. Please refer to our filings with the SEC for a reconciliation of the GAAP to non-GAAP measures referenced on this call.
We filed our 2021 second 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.
Thank you, Chris and thanks, everyone for joining us today for our second quarter conference call today as usual I'll give an update on the current situation of the company after which Chris swap will review our financials in detail.
<unk> remains focused first and foremost on the health and safety of our employees.
Team has done an excellent job of safety protocols put in place since March 2020, we continue to work with authorities on best practices throughout our many operations.
There are cases is roughly <unk> 214 since at the end of the pandemic.
And within the company, we had 14 cases in Q2.2021.
As mentioned in the press release Ducommun second quarter results were very strong.
Delivering year over year revenue growth of 9% organic for the first time since Q1.2020.
The company's defense business continues to be a major success with upward momentum growing again year over year and with the main contributor to the quarter.
Challenges in the commercial aerospace the aerospace market were overcome again by the team that we have seen some good signs for example with growth at Spirit Aero systems. In Q2, we're optimistic that we will start seeing meaningful OEM build rate increases starting in 2022.
In addition to revenue growth, we posted growth gross margins of 23%, which is the highest level reached in 10 years of the company along with adjusted EBITDA margins of 14, 6%, which is an increase of 80 basis points year over year.
<unk> also posted adjusted operating income margins of 9%, which is excellent progress.
The quality of earnings was high as well with the company, reaching GAAP diluted EPS of <unk> 69, a share versus 43 cents a share for Q2.2020.
And adjusted diluted EPS of <unk> 74, a share versus <unk> 48 in 2020.
These numbers reflect the return to revenue growth.
We had anticipated along with strong operating management.
This is all great. This is also a great story for our investors as this quarter was the beginning of a return to revenue growth for the full year of 2021 with.
The commercial aerospace market started to recover in the quarters ahead.
The company's second quarter revenue was higher was the comment that defense business as mentioned earlier, leading the way being up 20% versus prior year.
Our defense business revenue has continued to show excellent progress on shipments and a robust business development approach.
The majority of the gains in Q2 include the radar systems for Northrop Grumman Raytheon.
Raytheon Tau program F 18, Apache helicopter Uavs with general Atomics filings and other missile programs.
Our approach to the market as innovative products and processes that provides significant value to the customer.
Along with driving for the highest level of service.
The numbers show that we continue to be rewarded for this strategy.
I also want to mention as it has in the past the Raytheon missile defense business.
The progress in science since signing the strategic supplier agreement with them in July of 2019.
We've been hard at work in three years, new programs Offloading and share shifts I'm happy to report that 2021 will be a record year overall with this legacy Raytheon business growing from less than $90 million in 2020.
It's over $115 million in 2021, an increase of more than 25%.
What a great story.
The defense results also show great opportunities, where we leverage our structural product lines with defense Oems.
Previously mentioned, we have wins now on the toll missile, which was a share shift from another supplier and other new programs such as the standard missile two dorsal fin assembly, both for Raytheon missile and defense.
Along with our acquisitions as part of the business will be north of $110 million in revenue for 2021, where it was under $80 million in 2019.
Another defense structural highlight in Q2 was that nobles worldwide and six.
<unk> significant content to supply integrated ammunition handling systems as part of the Stryker Mcw S increase they validate program.
Recently awarded to Oshkosh defense.
The total program of six years can be worth up to $943 million of Oshkosh and their partners.
I am also overall still optimistic about defense up opportunities for ducommun going forward.
By concerns regarding the recent budget discussions in Washington, and the change in administration.
This is again due to our value offering and still a modest revenue base.
A good amount of runway still ahead of us here at Ducommun.
In regards to defense backlog.
It remains strong and ending Q2, and the backlog of $501 million.
The commercial aerospace backlog also began to show some signs of recovery increasing sequentially from.
$266 million at the end of Q1 to 276 million at the end of Q2. This is certainly a good sign.
The total backlog was $814 million for the company and this is very good so very good number based on the environment.
Now I want to take a few minutes discussing my thoughts on our commercial aerospace business.
We were notified in May with press release approval on July the Ducommun was recognized as an Airbus detailed parts partner.
An award of a long term five year contract.
The commitment from the current industry leader.
How's us to provide a titanium work package for key products on the <unk> hundred 20, and <unk> hundred 30 programs.
We were and are thrilled and honored to be awarded for the first time, a <unk> partner designation.
As a major accomplishment at Airbus representing preferred supplier status, along with a long term five year contract.
This is a significant step forward for ducommun and its industry, leading titanium structural component business.
To me it is the highest level of endorsement and as I mentioned in the press release, a major milestone in the 172 year history of our company.
This contract extends through 2026 and.
We will provide many years of great value to ducommun and its shareholders.
The company's cost actions were also continuing to pay dividends.
You can certainly see that even before the pandemic. The company was working on initiatives offset the 737 Max.
The effectiveness of our operations operational leadership and action show the gross profit margins year over year, and a solid operating income percentage along with the diluted EPS.
I also want to mention our efforts on pricing.
This is also having a positive impact on the company's financials.
In regards to the outlook our significant backlog in defense with the many growth programs mentioned earlier will provide good revenue in 2021.
We estimate that revenue will be led by defense, but over the quarters ahead, we'll see more commercial aerospace volume returned to the comp.
We're also very well positioned with a high narrow body.
To wide body ratio for our business and have the capacity and strong operating team to deliver on our forecasted rate increases.
We will return to overall revenue growth. This year anticipated comments total revenue to grow in the low to mid single digits versus 2020.
Future growth will be accomplished by leveraging our newly built out defense business strong positions in commercial aerospace, especially on narrow body revenues with Airbus being a big part of our future as well as our three acquisitions, which continued to deliver.
We also remain active in the market for M&A for new companies that fit our model and believe this will only be an accelerator to higher results.
Now, let me provide some additional color on our markets products and programs.
Beginning with our military and space sector, we posted second quarter revenue of $113 million once again, representing strong organic growth versus 2020 up 20%. We drove revenue on some key defense platforms as.
As mentioned earlier, we saw increased demand for our radar systems toll missile F 18, Apache helicopter Uavs valence and other missile programs.
Second quarter's military and space revenue represented more than 70% of the Companys revenue in the period.
We also continue to be very well positioned for further growth across defense platforms over the next several quarters in all sectors, especially at Raytheon.
Again ended the second quarter with a strong backlog of $501 million, which represent 62% of ducommun total backlog.
Within our commercial aerospace operations second quarter revenue declined year over year to $37.6 billion as expected driven by bill rate declines on a number of commercial aerospace platforms impacted by the COVID-19 pandemic.
However, the decline in revenue is not as sharp as in prior quarters.
It's kind of it also is effectively adjusted cost in Madison downturn and is well positioned once rates stabilize and increase over the long term.
It's a common expect some meaningful improvement in this market in the second half of 2021 and as mentioned earlier has a very bright future.
The backlog within our commercial aerospace stands at roughly $276 million at the end of the second quarter slight increase sequentially as I mentioned earlier compared to Q1.
We stand ready with the team processes and capital in place to support the expected Bill rate increases in the next few years and we are excited to get started.
With that I'll have Chris review, our financial results in detail Chris.
Thank you, Steve and good afternoon, everyone.
As a reminder, please see the company's 10-Q in Q2 earnings release for further description of information mentioned on today's call.
As Steve mentioned Ducommun second quarter marked our first quarter of topline year over year growth since the pandemic began early in 2020.
This growth all driven organically combined with our strong margin performance in the second quarter helped deliver outstanding overall performance, we anticipate the favorable year over year compares on revenue to continue throughout the remainder of 2021.
We see this as we expect measured improvement in the commercial aerospace market, while military demand remained strong.
Turning to our second quarter results, Let me review some of the highlights.
Revenue for the second quarter of 2021 was $160.2 million versus $147.3 million in the second quarter of 2028.
The eight 7% increase year over year, primarily reflects $18.5 million of higher revenue within the military and space sector, partially offset by $2.1 million of lower revenue across our commercial aerospace platforms.
<unk> overall backlog at the end of the second quarter was approximately $814 million slightly higher than that at the end of Q1, reflecting program timing slowly improving commercial demand and an uptick in industrial orders 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 $36.8 million for the quarter versus $32.7 million in the prior year period gross margin rose 80 basis points to 23 zero percent from 22, 2% in the 2022nd quarter with the increase primarily reflecting favorable manufacturing volume along with a strong product mix and cost control.
Efforts the 23% gross margin was our highest quarterly gross margin performance in more than a decade for the past few years, we've talked about our margin expansion journey that we're on the second quarter margin highlights of that progress.
SG&A was $23.7 million in the second quarter versus $22 million last year, with the increase reflecting higher compensation and benefit costs.
Ducommun reported operating income for the second quarter of $13.1 million or eight 2% of revenue compared to $10 million or six 8% of revenue in the prior year period.
Year over year increase was due to the higher revenue, partially offset by increased SG&A expenses.
Excluding restructuring charges and guaymas related expenses adjusted operating income for the second quarter of 2021 was $13.8 million or eight 6% of revenue compared to $10.7 million or seven 3% of revenue in the comparable period last year.
Interest expense was $2.9 million in the second quarter of 2020 versus $3.7 million in the prior year period, driven mainly by lower interest rates along with the impact of a degree of a decrease in total out of total debt outstanding.
The company reported net income for the second quarter of $8.4 million or <unk> 69 per diluted share compared to net income of $5.1 million or <unk> 43 per diluted share for the second quarter of 2020.
Excluding one time expenses in both periods adjusted diluted EPS for the second quarter of 2021 was <unk> 74.
Versus <unk> 48 in 2020.
Adjusted EBITDA for the second quarter was $23.4 million or 14, 6% of revenue compared to $20.3 million or 13, 8% of revenue for the comparable period in 2020, reflecting the items I just discussed.
Now, let me turn to our segment results our electronic.
<unk> systems segment posted revenue of 100 to $2.8 million in the second quarter of 2021 versus $92 million in the prior year period.
These results reflected $11.6 million increase in the sales of the company's military and space customers, along with $2.8 million of higher revenue across commercial aerospace platforms, partially offset by lower industrial sales electron.
Electronic systems operating income for the second quarter was $14.4 million or 14% of revenue versus $10.4 million or 11, 4% of revenue in the prior year period, the higher margin reflects favorable product mix and higher volumes.
Our structural systems segment posted revenue of $57.4 million in the second quarter of 2021 versus $55.4 million last year the.
The year over year increase reflects $6.9 million of higher revenue with the come within the company's military and space markets, partially offset by $4.9 million of lower sales across our commercial aerospace applications structure.
Structural systems operating income for the quarter was $5.6 million or nine 7% of revenue compared to $6.2 million or 11, 2% of revenue last year. The year over year operating margin decrease was largely due to unfavorable product mix. Excluding one time charges in both periods second quarter adjusted operating margin was 10, 9% in <unk>.
'twenty, one compared to 12, 4% last year.
See G&A expense for the second quarter of 2021 was $6.9 million or four 3% of revenue versus $6.6 million or four 5% of revenue in 2020.
Turning to liquidity and capital resources.
We had available liquidity of $97 million and generated $6 million of cash from operations this quarter compared with $9 million in the prior year period, we generated $3 million of free cash flow for the quarter compared to 8 million in the second quarter of 2020, we expect to return to historical cash flow and free cash flow generation levels as we move through the remainder of two.
'twenty one our leverage ratio was three three at the end of the second at the end of the second quarter.
In terms of purchases of property and equipment, we spent $3 million during the second quarter, reflecting a lower investment requirement and the current economic environment for 2021 in total we anticipate spending between $16 million to $18 million to support ongoing product development and sustaining capital.
In conclusion, and echoing Steve's comments, we're certainly pleased with our second quarter results and look forward to continued strong performance for the second half of the year and beyond.
Through our operational focus and the strength of our defense business, along with the favorable impacts of the trends for commercial aerospace domestic air travel demand and the 737 Max production, we look forward to continuing delivering topline continued topline growth and strong underlying performance heading into and through 2022.
I'll now turn it back over to Steve for his closing remarks, Steve Okay. Thank you, Chris and well look we're certainly proud of the results this quarter.
It just gets us better positioned for when commercial aerospace <unk> aerospace rates go meaningfully higher in 2022.
We met our commitments and have strengthened the company through this difficult period.
Due to our effective strategy, our dedicated people and our operational leadership.
I also like to take this time to welcome our newest board member to Ducommun Shula Kramer, who currently serves as vice President and Chief Human Resource Officer at Donaldson Company incorporated.
Sheila will bring important expertise to the company as we work through the pandemic and drive the long term growth of the company.
In closing I'd like to again this quarter and take this time to tell our team our employees.
That I'm very proud of them and all of our efforts dealing with the many challenges since the pandemic started back in March of 2020.
Our team members show up at the operation everyday.
Stressful.
To get the job done for our customers our nation and one another.
So with that I will turn it over for questions. Thank you for listening.
Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question. Please press the pound key.
And our first question comes from the line of Mike Crawford with B Riley Securities. Your line is open. Please go ahead.
Thank you.
Nearly a quarter of $1 billion in structural system.
What percent of that is titanium.
I'm sorry, Mike we were and again measured just came across we've got.
When you say that again please yeah.
Well what percent of your structural systems sales of our titanium.
Well, yes, I don't think Mike, we typically disclose that percentage.
But I would say that everything that.
Those key components those key programs and the one Steve alluded to with Airbus. Those are those are the core of what we have along with whatever's growing back here through the rest of the commercial recovery it's meaningful.
It's a meaningful number.
What about <unk>.
First the quarter at one point I think you were particularly excited about.
<unk> proprietary.
Process and technology and I think that's probably a very small portion of your overall titanium sales, but where do you see that growing to over the coming five years, yes. So first it's a composite of snap titanium just lets you know, but we're excited.
Certainly.
Because of the pandemic and the slowdown.
On the bill rates, that's put the versa for part of the business.
Back.
These probably I don't know, maybe maybe roughly a year, but we're picking up momentum again.
This product is for the leap engine.
We're working on for the Airbus <unk> hundred 20, so good things ahead, there right. So we will have more to say about it.
In the future, but just as a note that we were excited about our prospects for <unk>, though we haven't slowed down a bit because of obviously all the challenges on the bill rates.
Yes.
Okay, Great well then.
King.
The.
Forthcoming government fiscal year budget, particularly looking out for that would help.
Help or not to call them.
Yes, I would just say look I mean I know.
There was an extra $25 billion put in by the committees and.
Things are being worked through.
No.
Sure obviously.
Missile people or electronic people with cars, we make interconnects, we do a lot of things, where we're very very comfortable that as we go forward in time that were what.
We see the defense budget, leading into in certain ways is going to benefit us. So again to my remarks My remarks earlier, we feel we feel overall very good about where we're going to be the next few years.
Great. Thank you very much.
Thanks, Michael.
Thank you and again if you have a question at this time. Please press Star then one our next question comes from the line of Michael <unk> with <unk>.
Securities. Your line is open. Please go ahead.
Hey, good evening guys nice results. Thanks for taking the question.
Steve can you give us or Chris I guess, a little bit more maybe detail on this Airbus deal in.
I guess, specifically, where your content per platform more annual revenues would be would be tracking now I think.
From one year old <unk> showed the $83.1 million.
Maybe it was kind of.
Running around I guess, it was just under $20 million.
Can you give us any directionally what does it is it is it a two X deal does it.
Just maybe any more color on where you are in terms of absolutely. So it is going to be a bit difficult because of our.
The expectations from the customer as far as disclosure just from Airbus.
There but.
Obviously this is on the <unk> hundred 20, which is a big part of the game here <unk> hundred 30, obviously is less than what.
But the <unk> hundred 20, but I know we've disclosed in the past.
We're going to be a meaningful increase the one thing that I do want to mention about that is that this is the first time were recognized us as a partner with Airbus We kind of got in the game here in 2016, 2017 and I came in in early 2017 in.
This has been a long road.
And.
We really werent, even in the game before 2016.2017, so for us to kind of get in there.
The expectations that Airbus are sky high and be able to meet their operational and other value propositions I think it's just it's.
It's a big deal like I said in my press release, so so it is going to be meaningful.
It's kind of the <unk> hundred <unk>, we're hoping obviously, it's going to continue to evolve because now that we're a partner where we weren't before.
Can you give any more detail.
As to how you won the selection was at Airbus looking for more suppliers, where they are.
Are you did you displace or take a more material amount of share from the previous vendor or any details on how this came about.
You look at the beginning I think.
This titanium business, which I'm on record, saying outside of an OEM, where we're really the world leader here on this SPF and hot form.
They saw something at ducommun, they like and they gave US a shot and it took us four or five years to kind of operationally value added.
I would say as far as where the business came from it probably came from other partners, maybe arent there anymore and they also have internal operations.
Yes.
So I think it's a mix.
Okay got it and then can you.
Sorry got no. It's about the best I can do Mike on that okay.
Perfect.
Can you give us any sense as to where you are on production rates.
Maybe the Max obviously, the 787 minutes the blemish out there you talked about seeing more a.
More work from spirit, presumably on the Max there, but are you kind of in sync with where everyone else is kind of tracking in thinking about this 31 per month.
Early 'twenty two.
Yeah, well, let me first say the headline is 400, okay. Yes, I mean, we got we got the processes. We've got the capital we've got the right people in place now running all of our operations. So.
Definitely leaning into everything.
Thank you pointed in the right way.
Supporting the customer, but we're excited hopefully at least 31 is going to come.
To be a big deal for us as you know.
<unk>.
Obviously, what we're hearing out of Airbus to ever get to 70, a month would be an absolute homerun for ducommun. So so we're ready to go so I would say okay.
Got it last one last one for me any updated thoughts on kind of the M&A environment capital deployment I know you called out nobles with some of the success there, but whats the latest pipeline. How are you guys looking at deal flow.
Well first obviously and thanks for bringing that up the nobles things.
Sure.
This was a big deal for us to win that back in October 2019, and it's got a great future and when we look at our model. We're looking for engineered products. So we can kind of improve our mix there as well as growth.
Growth opportunities.
That's been very positive all three of those have done well for us.
I will say the current environment is.
Additive I think you'll probably hear that from other folks.
There's a lot of money out there, but we have our we have our functional people. We still have the same team is old quiet last year and we are active so we like acquisitions. We think we can integrate them well, we think that track record has been good for.
Shareholders and <unk>.
P&L, so hopefully more to come sooner than later Mike.
Got it thanks, a lot I'll jump back in the queue here.
Yes.
Thank you and again as a reminder, ladies and gentlemen, if you would like to ask a question at this time. Please press Star then one.
Okay.
I'm showing no further questions at this time and I would like to turn the conference back over to Mr. Oswald for any further remarks.
Right.
Thank you Ed.
Thank you everybody for joining us today.
Both our analysts and most important our shareholders and our team.
We're obviously pleased with the return to growth as I talked about I think it was in my Q2 remarks in 2020 that we're going to return to growth. This year and this is our first quarter doing it so.
You can't argue with organic growth of 9% and smaller respectful, even though it was off of.
A lower base in Q2.2020 is still a great number we're thrilled with gross margins at 23%.
And I think we don't allow the right things. So again, we always appreciate your support and your commitment and we look forward to speaking to you again soon.
Thank you. Thank you.
That's concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.
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