Q3 2021 Ducommun Inc Earnings Call
Thank you all for standing by and welcome to the conference call entitled Q3, 2021, Ducommun earnings Conference call.
At this time all participants are in a listen only mode.
Near the end of today's session. We will have a question and answer session to.
To ask a question over the phone it by that time, you May press the star key followed by the number one.
Please also note that today's call is being recorded.
I'll now hand, the call over to your host Investor Relations advisor of Ducommun incorporated Chris witty, Sir you may now begin.
Thank you and welcome to the comments 2021 third quarter conference call.
With me today are Steve Oswald, Chairman, President and CEO, and Chris Wampler, Vice President Chief Financial Officer Controller and Treasurer.
I'm going to discuss certain limitations to any forward looking statements regarding future events projections or performance that we may make during the prepared remarks or the Q&A session that follows.
Certain statements today that are not historical facts, including any statements as to future market conditions results of operations and financial projections.
For looking statements under the private Securities Litigation Reform Act of 95.
And are therefore perspective here.
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. The terms of our ability to complete a potential sale leaseback transaction the level of U S government defense spending timing of orders from our customers legal and regulatory risks management changes the cost of it.
Spansion and acquisitions competitions, 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 other forward looking statements, which are subject to those risks statements.
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 call will also include non-GAAP financial measures. Please refer to our filings with the SEC for a reconciliation of the GAAP to non-GAAP measures referenced on today's call.
We filed our 2021 third 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.
Chris and thanks, everyone for joining us today for our third quarter conference call.
As usual I will give an update on the current situation of the company after which Chris swap will review our financials in detail.
We remain focused first and foremost on the health and safety of our employees.
Excellent job safety protocols put in place since March of 2020.
We continue to follow our best practices aligning with health authorities throughout our many operations.
Total number of cases is roughly 279 since the beginning of the pandemic.
The company had 65 cases in Q3 of 2021.
I also want to mention that the company will be following the Osha vaccination requirements and we are currently awaiting those rules.
From the government.
As mentioned in the press release, the climb in the third quarter results were strong.
The company delivering year over year revenue.
9% all organic.
Company's defense business delivered another solid performance in the commercial business showed year over year revenue growth for the first time since Q4 2019 in the quarter.
The commercial aerospace markets are recovering.
And we are seeing some bright spots for example spirit Aero systems.
Well, it's 5% of revenue for the quarter.
And also going from a position of our 19th largest customer by revenue in Q3 of 2020.
Two to four in Q3 of 2021.
We were optimistic as well at the Com will start seeing meaningful OEM build rate increases for recent comments from Airbus and Boeing starting in 2022.
Additional revenue growth, we posted solid gross margins of 21, 6%.
Along with adjusted EBITDA margins of 14, 6%.
The team also posted adjusted operating income margin.
Of 9%.
Which is excellent progress as we continue to build our track record of delivering impressive financial results in any environment.
The quality of earnings as high as well.
Reaching GAAP diluted EPS of <unk> 78 cents, a share versus 54, a share for Q3 2020.
44% increase in adjusted diluted EPS of 83 cents a share versus 69 cents in 2020.
Those those reflect a return to revenue growth commitment, we had anticipated and communicated mid last year.
This is also a great story for our investors as Q3 was also the second consecutive quarter of year over year revenue growth with significant runway ahead.
The company's third quarter revenue was higher with the Congress commercial business showing year over year growth for the first time since Q4, 2019 up 34% and continued solid defense business versus prior year.
Defense business revenues continue to show excellent progress on shipments and robust business development.
The majority of the gains in Q3 include the F 18 F 35.
Uavs with general Atomics, which more than doubled.
Raytheon Til program another missile programs.
Our approach to the market continues to be innovative products and processes that provide significant value to the defense customer.
What's driving for consistent high levels of service.
The current numbers and backlog shall we continue to be rewarded for this strategy.
I also want to mention is in the past the Raytheon missile and defense business and the progress since signing the strategic supplier agreement with them in July of 2019.
We've been hard at work in three areas, new programs Offloading and share shift.
Happy to report that 2021 will be a record year overall with this legacy Raytheon business growing from less than $90 million in 2022 over $115 million in 2021 an increase of more than 25% with much more runway ahead.
Another highlight of this partnership occurred in Q3.
The comment about a contract Raytheon will be supplying critical circuit card assemblies for the S. P Y six radar program.
With over $15 million annual run rate.
This is a major win for our defense circuit card business on a very prestigious program.
And a great example of our ability to help defense primes offload production and drive significant value for them with more opportunities ahead.
In addition, I continue to be optimistic about the fence opportunities for our company. Despite the overall industry challenges with examples like the S. P Y six one just mentioned G E. B tell me a larger customer our newly developing Northrop relationship.
Other revenue opportunities.
In regard to the defense backlog remains strong.
And ending Q3 with a backlog of $498 million.
The commercial aerospace backlog also showed some signs of recovery increasing sequentially.
The second concern for the second consecutive quarter from $276 million at the end of Q2 to $286 million at the end of Q3 2021, a very good sign.
The total backlog was 836 million for the company.
And it's a good number based on the environment.
The company's cost actions are also continuing to pay dividend.
You can certainly see even before the pandemic the company as a company was working on initiatives to offset the 737 Max.
The effectiveness of our operations leadership and actions show and a solid gross profit margins and the very good operating income percentages along with the diluted EPS.
I also want to mention our pricing efforts continue.
Giving a positive impact.
In regards to the outlook.
Backlog in defense and more momentum in commercial aerospace provide good revenue in Q4 and again in 2022.
We estimate that revenue will remain strong in defense, but over the quarters ahead, we will see more and more commercial aerospace volume returned to ducommun.
I want to make clear to our investors and our analysts who are very well positioned.
With our high narrow body wide body ratio for our business.
And also it is important to have the capacity supply chain and strong operating team to deliver in the forecasted race ahead.
We also remain active in the market for M&A looking for new companies that fit our model and believe this is only the accelerator so higher results.
Now, let me provide some additional color on our markets products and programs.
Beginning with our military and space sector, we posted third quarter revenue of $113 6 million, a slight increase versus 2020.
A solid showing was from revenue on key defense.
As mentioned earlier, we saw increases in demand for F 35, F 18, Uavs tow and other missile programs.
Third quarter military and space revenue represented 70% of the Commons revenue in the period.
They tend to be very well positioned for further growth as I've mentioned earlier across defense platforms over the next several quarters and all sectors, especially at Raytheon.
And again in the third quarter with a strong backlog.
498 million, which represents 60%.
Of our total backlog.
Within our commercial aerospace operations third quarter revenue increase year over year to $41 2 million driven mainly by bill rate increases on large aircraft platforms and we are also seeing some good year over year growth of the business jet customers, both Gulfstream and Bombardier.
It's a common expect a meaningful improvement in the market overall in 2022 and 2023 in the future. We believe is very bright.
The backlog within our commercial aerospace sector stands at roughly $286 million at the end of Q3.
<unk> increased sequentially compared to Q2, 2021 and the second consecutive quarter of growth.
For the company.
Before having Chris review, our financial results and what I've mentioned that.
Three acquisitions since I joined Ducommun have all been wonders for the company, our shareholders and new acquisitions continue to be a very important component of our vision and strategic plan.
He said that available capital as a critical catalyst and therefore, we've undertaken a review of our southern California Industrial legacy real estate portfolio.
Industrial properties in southern California, as in Seattle, and other areas are extremely high demand.
And the company recently initiated the marketing one of our facilities.
That was unexpected sale leaseback transaction.
We anticipate signing and closing on this transaction in the next few months.
This transaction is expected to generate an excess of at least $90 million of after tax cash that would then be able to deploy it mainly for strategic acquisitions and debt repayment.
We will also good pendulum evaluate additional sale leaseback opportunities as we move forward in California.
And are excited about the opportunity and the value we create for our company for the company and our shareholders.
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 and Q3 earnings release for further description of information mentioned on today's call.
As Steve discussed we are pleased with our third quarter results and are upbeat about the outlook for the remainder of 2021 and beyond.
Execution during Q3 like much of 2021 has been a journey focusing on areas that we can control.
Demonstrating strong performance and minimizing the impact of some of the things we can't control like commercial aerospace recovery pacing along with other pandemic related complexities make our Q3 performance even more noteworthy.
Now turning to our third quarter results, Let me review some of the islands.
Revenue for the third quarter of 2021 was $163 2 million versus $150 4 million for the third quarter of 2020.
The year over year increase reflects $10 4 million of growth across our commercial aerospace platforms, and $2 6 million of higher sales within the military and space sector.
All of this growth was organic.
Ducommun is overall backlog at the end of the third quarter was approximately $835 5 million the highest level since the start of the pandemic, reflecting strength in the military electronics markets as well as growth across our commercial aerospace platforms.
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 $35 3 million for the quarter versus $33 5 million in the prior year period, while gross margins were 21, 6% and 22, 3% in 2021 and 2020, respectively.
Slight decline in margin year over year reflects unfavorable product mix S.
SG&A was $22 million in the third quarter versus $22 1 million last year, reflecting the company's ongoing cost controls and streamlined operations.
Ducommun reported operating income for the third quarter of $13 4 million or eight 2% of revenue compared to $10 3 million or six 8% of revenue in the prior year period.
<unk> operating income, excluding restructuring expenses and costs related to the previously reported Guaymas fire was $14 1 million or eight 6% of revenue this quarter compared to $12 4 million or eight 2% of revenue in the comparable period last year.
Interest expense was $2 8 million in the third quarter of 2021 versus $3 1 million in the prior year period, reflecting lower interest rates and a lower outstanding debt balance.
The company reported net income for the third quarter of $9 6 million or <unk> 78 per diluted share compared to net income of $6 5 million or <unk> 54 per diluted share for the third quarter of 2020.
Excluding onetime expenses adjusted EPS for the third quarter of 2021, and 2020 was 83 and 69 cents respectively.
Adjusted EBITDA for the third quarter was $23 9 million or 14, 6% of revenue compared to $21 6 million or.
<unk> thousand 14, 4% of revenue for the comparable period in 2020, reflecting the items I just discussed.
Now, let me turn to our segment results.
Our electronic systems segment posted revenue of $104 7 million in the third quarter of 2021 versus $103 5 million in the prior year period. These results reflect the $1 2 million increase in sales with the customers military and space customers and a slight <unk> 2 million uptick in revenue across our commercial aerospace.
It forms.
Electronic systems operating income for the third quarter was $15 3 million or 14, 6% of revenue versus $14 9 million or 14, 4% of revenue in the prior year period, reflecting the higher revenue and continued strong operational results and our performance centers.
Our structural systems segment posted revenue of $58 5 million in the third quarter of 2021 versus $46 9 million last year.
The year over year increase reflects $10 2 million of higher sales across our commercial aerospace applications and $1 4 million of greater revenue from the company's military and space markets.
The year over year growth helps demonstrate the underlying commercial aerospace demand recovery from the trough levels in the prior year.
Structural systems operating income for the quarter was $4 5 million or seven 6% of revenue compared to $1 8 million or three 8% of revenue last year.
The year over year operating margin increase was due to favorable volume and fewer one time charges, excluding restructuring expenses and the impact of requirements fire. The segment operating margin was eight 8% in 2021 versus seven 7% last year.
See G&A expense for the third quarter of 2021 was $6 4 million or three 9% of revenue versus $6 4 million or four 2% of revenue in 2020.
Turning to liquidity and capital resources.
We have available liquidity of $99 million and generated $5 5 million of cash from operations this quarter compared to $4 9 million in the prior year period.
Q4 is typically our strongest cash flow generation quarter, and we expect that to be the case this year or in our investment in inventory and level loading performance centers continues to be the most significant component of our incremental working capital investment.
Our trailing debt to EBITDA ratio was three two at two two times at the end of the third quarter.
As Steve mentioned, we are planning on an opportunistic unlocking of some of the equity we have in our southern California real estate through a potential sale leaseback of our Gardena facility. Once completed we expect the result is that we are in an even better positioned to pursue acquisitions either with the cash we expect to generate or with the additional debt capacity.
He created from potentially paying down debt.
In terms of capital expenditures, we spent $3 4 million during the quarter, reflecting lower investment requirements and the current economic environment for the full year 2021, we anticipate spending between $16 million to $18 million and capital expenditures.
In conclusion the <unk>.
Third quarter as expected once again highlighted the stability and strength of ducommun product lines and the efficiency of our performance Center focused factory operations.
While military demand remains high commercial deliveries are picking up a trend we see continuing and we believe will gather momentum in the quarters to come.
We will stay focused on employee safety growth.
Bottom line results and enhancing shareholder value as we assess the business for further ways to increase returns on capital.
The company is in great shape, as we look to deliver a strong finish to 2021 and head into 2022, I'll now turn it back over to Steve for his closing remarks, Okay, Chris well. Thank you and look just sort of finish up here. We're certainly proud of the results this quarter.
It just gets us better position for when the commercial aerospace rates.
Go up meaningfully.
Elite higher in 'twenty to 'twenty two.
We've got our commitment.
We certainly have strengthened the company through this difficult period for us and for the entire industry and that's really due to our effective strategy, our dedicated people and our operational leadership.
In closing as in the past I just want to thank our until all of our employees and I'm proud of them and all their efforts with the many challenges of.
The continued issues on the pandemic and the 737 Max.
All of our members show up at our operations every day and those stressful they get the job done for our customers for our nation and allies and each other so with that I'll turn it over for questions. Thank you.
Thank you Mr Hospital participants we will now begin the question and answer session.
As a reminder to ask a question over the phone you May press star one from your telephone keypads to withdraw your request you May press the pound key.
Speakers. Our first question is from Michael <unk> of <unk> Securities. Your line is now open.
Hey, good evening. This is heat osterlund on for Mike Thanks for taking our questions.
First just a question on what Youre seeing with the conditions in the labor market right now or are you expecting any issues related to the vaccine mandates in the near term and.
Looking into next year do you have the resources you need in order to ramp up to meet rising demand just thinking about that higher production rates are you expecting to see in commercial aero.
Yeah look a couple of things first you know just at the end of your question. We do we think that Oh, we have we're going to have the resources. We have I think we've been pretty careful about keeping our best people even despite some of the challenges in commercial aerospace on the team so I feel going into next year.
Very good shape.
So that's that's one thing second thing is is that we're going to follow the osha requirements.
And so as everybody knows this is still.
And Washington being worked out so we don't know when that's going to be effective and what that's actually going to look like.
But we believe it's going to be either you vaccinate or you get tested once a week, but.
That's just speculation at this point, but that's where we're going to follow.
We you know we feel good about our position and we're looking forward to the work to be honest with you.
Alright, great. Thanks, and then just I'm.
Turning to margins.
15% EBITDA margins in the structural systems were down a bit just compared to.
I think it was 17% in the second quarter. So just wondering what drove the step back on a sequential basis, where there any particular platforms that impacted product mix or are you seeing any input cost headwinds that had an impact versus prior quarter.
No. Thanks for the question I think you know sequentially. That's the type of I mean, we ended up with that type of movement quarter to quarter, depending on how the utilization is and how the mix is so theres no theres no single platform, that's sort of driving that that's more just a combination of a little bit of a mix, but also the structural businesses for sure.
Our working off of the low basis from the trough in on the build back so there's a little more volatility as we sort of get this recovery you know fully going.
Great. Thanks, and then just lastly, if I could on raw materials.
Experiencing any raw material tightness on the metal side, whether for titanium or any other basic materials.
I would say, we're all aware I think everybody is keenly aware of the challenges that are out there broadly, but in our particular case when we look at most of our raw materials, particularly with things like titanium.
And what we do through our a couple of key customers with Airbus and Boeing there's a lot of things that we get source directed and and so we feel comfortable on the supply. We've got a lot of that we've got other places. We've got you know LTA is that we've been able to sort of leverage and try to get ahead of where we need strategic components. So we feel good about that it's not without.
It's not without an issue coming up now and then but overall, we feel like we've been in a good spot.
Alright, thanks, very much for taking the questions. Okay. Thank you for joining us.
Next question is from Ken Herbert of RBC. Your line is now open.
Hi, good afternoon, Steve and Chris.
Hey, good afternoon again.
Hey, Steve I wanted to first ask about the.
S. P Y six announcement you just made when do we when does that revenue start to ramp or when do you get to that sort of $15 million a year incremental run rate and how would you comment about the broader environment today that you're seeing for outsourcing.
Outsourcing opportunities on the defense side in particular as we.
It was the primes start to lower their outlook for top line growth into the 'twenty two 'twenty three time frame.
Yeah, well great. Great question Channel is certainly we're certainly proud of the work we're doing on the yes, I think that's really going to be a 2023 events.
Because obviously you know it's it's a it's a very high level of program.
It's only a couple of cards.
But you know it's going to take us some time to get all the spectrum equipment lots of things have to happen. So I would say that that event is really around 2023 early 2024, but it's been it's been awarded so that one so that one of the very.
You know very proud of I would say.
No what I'm, saying and that's one of the reasons I'm optimistic about our defense business you know with our yeah, we're fairly still.
Our penetration is fairly still a light level I think you know what I'm hearing what I'm seeing is that you know there's more competition.
So margins are being you know pressure.
Pressured and.
Folks that we're more vertically integrated in the past or you just can't do that anymore.
They get more firm fixed pricing, there's other things that are going on so you know we we feel you know for us because you know all our processes.
And all the different things we can do it is just the next few years, we feel really good about it more to come.
Okay.
Okay, that's great and I just wanted to follow up on the margin question.
Is there I know youre, not giving specific guidance, yet, but as we think about fiscal 2022 and maybe some of the mix headwinds you had in this quarter is there any reason as you ship as commercial becomes a bigger piece of the mix in 'twenty. Two what are the implications of that for gross margins and as and as that.
Any material headwind as commercial really starts to ramp in growth on the defense side slows or how should we think about that.
Let me, Kansas, Chris Let me start and Steve can certainly jump in anywhere, but I think I think the once a quarter the sequential question and some of the mix not necessarily.
A harbinger of what we've got in front of us.
I feel like the programs that we have particularly ones there where the rates are going to be coming back on are going to be helpful. But certainly across the board. The volume is going to be very helpful. As well. So I think it's both of those we're going to make it make our road over the course of the next several quarters, you know a little more hopefully predictable.
And with some more upside to it but but no no no single thing driving that right now.
Okay.
And then just finally you know.
When you complete the sale leaseback, assuming that goes through it looks like you'll have capacity probably close to.
$200 million, if not more how does the M&A pipeline look and how are you thinking about.
M&A relative to other.
Other uses of cash to debt reduction I mean is there a certain point at which if you don't do an acquisition you will start to get more aggressive on on the leverage or how do we think about that.
I think you're spot on there I think look we're right now focusing on closing the transaction, we're thrilled about and by the way.
Especially taking advantage of you know these red Hot industrial markets. So that's that's a that's a big positive you know we were going to.
We're going to hopefully close the transaction, we're going to have this.
Think unique opportunity.
We're in the game.
Very active right now.
You know our strategy is around really trying to find products that.
Our engineered that it can have.
All of us on the aftermarket.
And continue to drive that strategy, which is which we've been rewarded for it. So I think that will continue it will we'll have to see how everything is.
Opportunistic with acquisitions. So you know we might.
Down the road I think a little bit about you know lowering leverage in and doing some debt paydown that we might do that so I think that's why the remarks were kind of caught a little bit of both I think that's fair at this point.
Okay and it sounds like this is just gardena just there are similar opportunities as we think about Monrovia or Carson or some of your other southern California footprint.
There could also be in the mix down the road.
Yeah, Ken I mean, as we as we sort of tried to lay that out it's more that we're reviewing all of the the own facilities certainly some we own some relief, but the ones that are owned as a part of the evaluation, having said that the one that's been it's been front and center here that we decided to share progress on and sort of where we're headed as gardena and we're sort of focused on that.
Not we've not done a sale leaseback transaction here.
And literally ever probably but for a very long time at a minimum and so we're sort of focused on working through that one and then and then we'll keep everybody updated on where we go from there and I think that's fair I mean, I can't we're Gonna review all property.
So.
Perfect.
Alright, Thanks, guys nice quarter, Okay. Thanks, Chad I appreciate your support as always.
Okay.
Again participants its star one to ask a question or the pound key to withdraw your request.
Question is from Mike Crawford of B Riley Securities. Your line is now open.
Thank you so.
And I think in the fixed wing.
Wing platforms, what about rotary wing is that a long time.
Secular decline in business in that market or do you see a rebound in the picture there.
I'll tell you what you know.
I would say couple of things first obviously on rotary.
There's.
But a fairly.
Think meaningful change in Fms sales right. So you have certainly Apache and other things that you might see some headwind obviously.
Things happening with the Black Hawk as well we overall, we're in we're in many platforms miles. So we think overall, we're we're certainly decent shape. The other thing is the stuff that we make for these things are really a lot of times. It's very it's also sourced it's one of the time, so we're really not.
Not in every probably every case, but we're a lot of sole source on rotary and so whatever it's going to happen, we're going to get it and I feel I feel I feel good about rotary. It's I think you know it'll be a little flattish, but I think for the comment I think we're gonna come out okay.
Okay. Thanks, Steve and then just similar to the new programs Offloading and share shift that you're garnering Raytheon is there anything you can comment on the same at the Airbus.
Airbus is look we just we just won the DCP right. So that's.
Thats one thing were five years ago, we weren't they'd even though who you were okay. So you know we're kind of.
Moving forward in that in that vein, where now we're sort of a preferred.
It was a couple of other firms Okay fine now we're moving forward, we certainly I believe that and this is again speculation, but when they really start moving and theyre getting into 60, plus okay, and they're fully committed which I think there will be okay. I think you know more share is going to be coming our way.
Because you can only make so much in house as far as their titanium operations. So we'll have to see how that goes but certainly as the bill rates go up we believe we're going to pick up more business that went to preferred status now.
That's that's that's a really big deal for the company. So I think really good things ahead for Boeing into common I mean for Airbus or the common excuse me.
Okay. Thank you.
Yeah, Thanks, Mike Thanks, Mike.
Thank you participants there are no further questions on queue I'll now turn the call back over to Steve Oswald for closing remarks, okay, well. Thank you.
Just wanted to.
Set along again by the BOP.
We have a whole team. We appreciate everybody's support we're coming to the end of 2021. It certainly has been I think.
A good year for the company despite all the challenges.
We certainly wanted commercial aerospace to come back a little bit further but has not yet, but we feel very good about 2022. Our team is ready for you know for these increases and are.
Looking forward to continued growth overall defense M&A and I'll leave it there. So again my thanks for your time today on the phone and be safe and have a great evening.
Thanks, everyone.
Yeah.
That concludes today's conference call.
Thank you all for joining you may now disconnect.
Yeah.
Thank you.
[music].
[music].
Thank you all for standing by and welcome to the conference call entitled Q3, 2021, Ducommun earnings Conference call at.
At this time all participants are in a listen only mode.
Near the end of today's session. We will have a question and answer session.
To ask a question over the phone up by that time, you May press the star key followed by the number one.
Please also note that today's call is being recorded.
I'll now hand, the call over to your host Investor Relations advisor of Ducommun incorporated Chris witty, Sir you may now begin.
Thank you and welcome to the comments 2021 third quarter conference call.
With me today are Steve Oswald, Chairman, President and CEO, and Chris Wampler, Vice President Chief Financial Officer Controller and Treasurer.
I'm going to discuss certain limitations to any forward looking statements regarding future events projections or performance that we need.
They make during the prepared remarks or the Q&A session that follows.
Certain statements today that are not historical facts, including any statements as to future market conditions results of operations and financial projections are forward looking.
Statements under the private Securities Litigation Reform Act of 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 in terms of our ability to complete a potential sales leaseback transaction the level of U S government defense spending timing of orders from our customers legal and regulatory risks management changes the cost of expansion and acquisitions competitions and disasters natural or otherwise these risks and others are just.
And our annual report on Form 10-K filed with the SEC and our other forward looking statements, which are subject to those risks statements.
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.
Call will also include non-GAAP financial measures. Please refer to our filings with the SEC for a reconciliation of the GAAP to non-GAAP measures referenced on today's call.
We filed our 2021 third 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.
Thanks, Chris and thanks, everyone for joining us today for our third quarter conference call.
As usual I will give an update on the current situation of the company after which Chris Wampler will review our financials in detail.
We remain focused first and foremost on the health and safety of our employees.
Excellent job safety protocols put in place since March of 2020.
We continue to follow our best practices aligning with health authorities throughout our many operations.
Total number of cases is roughly 279 since the beginning of the pandemic.
The company had 65 cases in Q3 of 2021.
I also want to mentioned the company will be following the Osha vaccination requirements and we are currently awaiting those rules.
From the government.
As mentioned in the press release, the comments third quarter results were strong company delivering year over year revenue of 9% all organic.
This has delivered another solid performance in the commercial business showed year over year revenue growth for the first time since Q4 2019 in the quarter.
The commercial aerospace markets are recovering.
And we're seeing some bright spots for example spirit Aero systems.
Well, it's 5% of revenue for the quarter.
And also going from a position of our 19th largest customer by revenue in Q3 of 2020.
Through the fourth in Q3 of 2021.
We are optimistic as well as Calum will start seeing meaningful OEM bill rate increases for recent comments from Airbus and Boeing starting in 2022.
Additional revenue growth, we posted solid gross margins of 21, 6% along with adjusted EBITDA margins of 14, 6%.
The team also posted adjusted operating income margins of.
9%.
Which is excellent progress as we continue to build our track record of delivering impressive financial results in any environment.
The quality of earnings was high as well.
Reaching GAAP diluted EPS of <unk> 78, a share versus <unk> 54, a share for Q3 2020.
44% increase in adjusted diluted EPS of <unk> 83, a share versus 69 and.
In 2020.
Those those reflect a return to revenue growth commitment, we had anticipated and communicated mid last year.
This is also a great story for our investors as Q3 was also the second consecutive quarter of year over year revenue growth with significant runway ahead.
The Companys third quarter revenue was higher with the comments commercial business showing year over year growth. The first time since Q4, 2019 up 34% and continued solid defense business versus prior year.
Defense business revenues continue to show excellent progress on shipments and robust business development.
The majority of the gains in Q3 include the F 18 F 35.
<unk> is a general atomics, which more than doubled.
Raytheon Til program another missile programs.
Our approach to the market continues to be innovative products and processes that provide significant value to the defense customer of all of its driving for consistent high levels of service.
The current numbers and backlog so we continue to be rewarded for this strategy.
I also want to mention is in the past the Raytheon missile and defense business and the progress in signing the strategic supplier agreement with them in July of 2019.
We've been hard at work in three areas new programs.
And.
And share shift and 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 2022 over $115 million in 2021, an increase of more than 25% with much more runway ahead.
Another highlight of this partnership occurred in Q3.
As a comment about our contract Raytheon will now be supplying critical circuit card assemblies for the S. P Y six radar program.
With over $15 million annual run rate.
This is a major win for our defense circuit card business on a very prestigious program.
And a great example of our ability to help defense primes offload production and drive significant value for them with more opportunities.
In addition, I continue to be optimistic about defense opportunities for our company. Despite the overall industry challenges with examples like the <unk> six one just mentioned.
Becoming a larger customer our newly developing Northrop relationship.
Other revenue opportunities.
In regard to the defense backlog remains strong at.
Ending Q3, with a backlog of $498 million.
The commercial aerospace backlog also showed some signs of recovery increasing sequentially.
And the second concern for the second consecutive quarter from $276 million at the end of Q2 to $286 million at the end of Q3 2021, a very good sign.
The total backlog was $836 million for the company.
And it's a good number based on the environment.
The company's cost actions are also continuing to pay dividend.
You can certainly see even before the pandemic. The company is the company was working on initiatives to offset the 737 Max.
The effectiveness of our operations leadership and actions.
And a solid gross profit margins and the very good operating income percentages, along with the diluted EPS.
Also on mentioned our pricing efforts continue.
And are having a positive impact.
In regards to the outlook the significant backlog in defense and more momentum in commercial aerospace provide good revenue in Q4 and again in 2022.
We estimate that revenue will remain strong in defense, but over the quarters ahead, we will see more and more commercial aerospace volume returned to comment.
I want to make clear to our investors and our analysts who are very well positioned.
With our higher narrow body wide body ratio for our business and also as important and have the capacity supply chain and strong operating team to deliver in the forecasted rates ahead.
We also remain active in the market for M&A.
Looking for new companies that fit our model and believe this is only the accelerator so higher results.
Now, let me provide some additional color on our markets products and programs.
Beginning with our military and space sector, we posted third quarter revenue of $113 6 million, a slight increase versus 2020.
The solid showing was from revenue on key defense.
Platforms as mentioned earlier, we saw increases in demand for F 35 F.
<unk> Uavs tow and other missile programs.
Third quarter military and space revenue represented 70% of <unk> revenue in the period.
We also did tend to be very well positioned for further growth as I've mentioned earlier across defense platforms over the next several quarters and oil sectors, especially at Raytheon.
And again in the third quarter with a strong backlog.
498 million, which represents 60%.
Of our total backlog.
Within our commercial aerospace operations third quarter revenue increase year over year to $41 2 million driven mainly by bill rate increases on our large aircraft platforms and we're also seeing some good year over year growth of our business jet customers, both Gulfstream and Bombardier.
It's a common expect a meaningful improvement in the market overall in 2022 and 2023 in the future. We believe is very bright the.
The backlog within our commercial aerospace sector stands at roughly $286 million at the end of Q3, a slight increase sequentially compared to Q2, 2021, and the second consecutive quarter of growth.
For the company.
Before having Chris review, our financial results and what I've mentioned that.
Our three acquisitions since I joined Ducommun have all been what is for the company our shareholders and new acquisitions continue to be a very important component of our vision and strategic plan.
Having said that available capital as a critical catalyst and therefore, we have undertaken a review of our southern California industrial legacy real estate portfolio.
Industrial properties in southern California, as in Seattle, and other areas are in extremely high demand.
And the company recently initiated the marketing of one of our facilities as.
As unexpected sale leaseback transaction.
We anticipate signing and closing on this transaction in the next few months.
This transaction.
<unk> is expected to generate an excess of at least $90 million of after tax cash.
Then to be able to deploy mainly for strategic acquisitions and debt repayment.
We will also continue to evaluate additional sale leaseback opportunities as we move forward in California.
And are excited about the opportunity and the value we create for our company for the company and our shareholders.
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 and Q3 earnings release for further description of information mentioned on today's call.
As Steve discussed we are pleased with our third quarter results and are upbeat about the outlook for the remainder of 2021 and beyond.
Execution during Q3 like much of 2021 has been a journey focusing on areas that we can control.
Demonstrating strong performance and minimizing the impact of some of the things we can't control like commercial aerospace recovery pacing along with other pandemic related complexities make our Q3 performance even more noteworthy.
Now turning to our third quarter results, Let me review some of the islands.
Revenue for the third quarter of 2021 was $163 2 million versus $150 4 million for the third quarter of 2020.
The year over year increase reflects $10 4 million of growth across our commercial aerospace platforms, and $2 6 million of higher sales within the military and space sector.
All of this growth was organic.
<unk> overall backlog at the end of the third quarter was approximately $835 5 million the highest level since the start of the pandemic, reflecting strength in the military electronics markets as well as growth across our commercial aerospace platforms.
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 $35 3 million for the quarter versus $33 5 million in the prior year period, while gross margins were 21, 6% and 22, 3% in 2021 and 2020, respectively.
Slight decline in margin year over year reflects unfavorable product mix <unk>.
SG&A was $22 million in the third quarter versus $22 1 million last year, reflecting the company's ongoing cost controls and streamlined operations.
Ducommun reported operating income for the third quarter of $13 4 million or eight 2% of revenue compared to $10 3 million or six 8% of revenue in the prior year period.
Adjusted operating income, excluding restructuring expenses and costs related to the previously reported Gliomas fire was $14 1 million or eight 6% of revenue this quarter compared to $12 4 million or eight 2% of revenue in the comparable period last year.
Interest expense was $2 8 million in the third quarter of 2021 versus $3 1 million in the prior year period, reflecting lower interest rates and a lower outstanding debt balance.
The company reported net income for the third quarter of $9 6 million or <unk> 78 per diluted share compared to net income of $6 5 million or <unk> 54 per diluted share for the third quarter of 2020.
Excluding onetime expenses adjusted EPS for the third quarter of 2021, and 2020 was $83 69, respectively.
Adjusted EBITDA for the third quarter was $23 9 million or 14, 6% of revenue compared to $21 6 million or 14, 4% of revenue for the comparable period in 2020, reflecting the items I just discussed.
Now, let me turn to our segment results.
Our electronic systems segment posted revenue of $104 7 million in the third quarter of 2021 versus $103 5 million in the prior year period.
These results reflect a $1 2 million increase in sales with the customers military and space customers and a slight <unk> 2 million uptick in revenue across our commercial aerospace platforms.
Electronic systems operating income for the third quarter was $15 3 million or 14, 6% of revenue versus $14 9 million or 14, 4% of revenue in the prior year period, reflecting the higher revenue and continued strong operational results and our performance centers.
Our structural systems segment posted revenue of $58 5 million in the third quarter of 2021 versus $46 9 million last year.
The year over year increase reflects $10 2 million of higher sales across our commercial aerospace applications and $1 4 million in greater revenue from the company's military and space markets. The year over year growth helps demonstrate the underlying commercial aerospace demand recovery from the trough levels in the prior year.
Structural systems operating income for the quarter was $4 5 million or seven 6% of revenue compared to $1 8 million or three 8% of revenue last year.
The year over year operating margin increase was due to favorable volume and fewer one time charges, excluding restructuring expenses and the impact of requirements fire. The segment operating margin was eight 8% in 2021 versus seven 7% last year.
See G&A expense for the third quarter of 2021 was $6 4 million or three 9% of revenue versus $6 4 million or four 2% of revenue in 2020.
Turning to liquidity and capital resources we.
We have available liquidity of $99 million and generated $5 $5 million of cash from operations this quarter compared to $4 9 million in the prior year period Q4 is typically our strongest cash flow generation quarter, and we expect that to be the case this year or in our investment in inventory and level loading performance centers continues to be the most cigna.
Second component of our incremental working capital investment our trailing debt to EBITDA ratio was $3. Two at two two times at the end of the third quarter.
As Steve mentioned, we are planning on an opportunistic unlocking of some of the equity we have in our southern California real estate through a potential sale leaseback of our Gardena facility. Once completed we expect the result is that we are in an even better position to pursue acquisitions either with the cash we expect to generate or with the additional debt capacity.
<unk> created from potentially paying down debt in terms of capital expenditures, we spent $3 $4 million during the quarter, reflecting lower investment requirements and the current economic environment for the full year 2021, we anticipate spending between $16 million to $18 million and capital expenditures.
In conclusion, the third quarter as expected once again highlighted the stability and strength of ducommun product lines and the efficiency of our performance Center focused factory operations.
While military demand remains high commercial deliveries are picking up a trend we see continuing and we believe we will gather momentum in the quarters to come.
We will stay focused on employee safety growth solid bottom line results and enhancing shareholder value as we assess the business for further ways to increase returns on capital.
The company is in great shape, as we look to deliver a strong finish to 2021 and head into 2022, I will now turn it back over to Steve for his closing remarks.
Chris well, thank you and look to sort of finish up here. We're certainly proud of the results this quarter.
It just gets us better position for when the commercial aerospace rates go up meaningfully we believe higher in 'twenty to 'twenty two.
We've got our commitment.
We certainly have strengthened the company through that was difficult period for us and for the entire industry and that's really due to our effective strategy, our dedicated people and our operational leadership.
In closing as in the past as to what to think.
Until all of our employees that I'm proud of them and all of our efforts and automated challenges.
Of the continued issues on the pandemic and the 737 Max.
All of our members show up at our operations every day in those stressful they get the job done for our customers for our nation and allies and each other so with that I'll turn it over for questions. Thank you.
Thank you Mr. Oswald participants we will now begin the question and answer session.
As a reminder to ask a question over the phone you May press star one from your telephone keypad to withdraw your request you May press the pound key.
Speakers. Our first question is from Michael <unk> of <unk> Securities. Your line is now open.
Hi, Good evening. This is heat osterlund on for Mike. Thanks for taking our question.
First just a question on what Youre seeing with conditions in the labor market right. Now are you expecting any issues related to the vaccine mandates in the near term and.
Im looking into next year do you have the resources you need in order to ramp up to meet rising demand just thinking about that higher production rates you are expecting to see in commercial Aero Yeah look a couple of things first.
At the end of your own question, we do we think that.
We're going to have the resources we have.
We've been pretty careful about keeping our best people, even despite some of the challenges in commercial aerospace on the team so I feel going into next year.
We're in very good shape.
So that's one thing second thing is is that we're going to file the osha requirements.
And so as everybody knows this is still.
In Washington.
<unk> worked out so we don't know when that's going to be effective and what thats actually going to look like.
But we believe it's going to be either you vaccinate are you testing once a week, but.
That's just speculation at this point, but that's where we're going to follow.
We feel good about our position and we're looking forward to the work to be honest with you.
Alright, great. Thanks, and then just.
Turning to margins.
15% EBITDA margins and structural systems were down a bit just compared to now.
I think it was 17% in the second quarter. So just wondering what drove the step back on a sequential basis was there any particular platforms that impacted product mix or are you seeing any input cost headwinds that had an impact versus prior quarter.
No. Thanks for the question I think sequentially. That's the type of I mean, we ended up with that type of movement quarter to quarter, depending on how the utilization is and how the mix is so theres no theres no single platform, that's sort of driving that that's more just a combination of a little bit of a mix, but also the.
The structures businesses for sure are working off of the low basis from the trough in on the build back so there's a little more volatility as we sort of get this recovery fully gone.
Great. Thanks, and then just lastly, if I could on raw materials are you experiencing any raw material tightness on the metals side, Weatherford titanium or any other basic materials.
Yes, I would say, we're all aware I think everybody is keenly aware of the challenges that are out there broadly, but in our particular case when we look at most of our raw materials, particularly with things like titanium.
And what we do through our a couple of key customers with Airbus and Boeing there's a lot of things that we get source directed and and so we feel comfortable on the supply we've got on a lot of that we've got other places. We've got LTA is that we've been able to sort of leverage and try to get ahead of where we need strategic components. So we feel good about that it's not without.
It's not without an issue coming up now and then but overall, we feel like we've been in a good spot.
Alright, thanks, very much for taking the questions. Okay. Thank you for joining us.
Next question is from Ken Herbert of RBC. Your line is now open.
Hi, good afternoon, Steve and Chris.
Yeah, good afternoon again.
Hey, Steve I wanted to first ask about the <unk>.
<unk> six announcement you just made when do we when does that revenue start to ramp or when do you get to that sort of $15 million a year.
Incremental run rate and how would you comment about the broader environment today that youre seeing for.
Outsourcing opportunities on the defense side in particular as we as.
The primes start to lower their outlook for top line growth into the 'twenty two 'twenty three time frame.
Yes, great Great question, Ken will certainly we're certainly proud of the work we're doing on the <unk>.
Thats really going to be a 2023 events.
Because obviously you know, it's a very high level of program.
So only a couple of cards.
But it's going to take us some time to get all the section equipment lots of things have to happen. So I would say that that event is really around 2023 early 2024, but it's been it's been awarded so that one so that one will vary.
Very proud of I would say.
What I'm, saying and that's one of the reasons I am optimistic about our defense business.
Yes, we're fairly still.
Our penetration is fairly still a light level I think you know what.
I'm hearing what I'm seeing is that you know there is more competition.
So margins are being.
Pressured.
Folks that we're more vertically integrated in the past or you just can't do that anymore.
There are more firm fixed pricing there is other things that are going on so.
We feel for us because of our processes and all the different things. We can do it is just the next few years, we feel really good about it more to come.
Okay. Okay, that's great and I just wanted to follow up on the margin question.
Is there I know youre, not giving specific guidance, yet, but as we think about fiscal 2022.
And maybe some of the mix headwinds you had in this quarter is there any reason as you ship as commercial becomes a bigger piece of the mix in 'twenty. Two what are the implications of that for gross margins and is and is that a material headwind as commercial really starts to ramp in growth on the defense side slows or how should we think about that.
Yes, let me Ken This is Chris let me start and Steve can certainly jump in anywhere, but I think I think the ones the quarter. The sequential question and some of the mix does not necessarily.
A harbinger of what we've got in front of Us I.
I feel like the programs that we have particularly ones there where the rates are going to be coming back on are going to be helpful.
But certainly across the board the volume is going to be very helpful. As well. So I think it's both of those we're going to make you make our road over the course of the next several quarters, a little more hopefully predictable and with some more upside to it but but no no single thing driving that right now.
Okay.
And then just finally.
When you complete the sale leaseback, assuming that goes through it looks like you'll have capacity, probably close to $200 million if not more how does the M&A pipeline look and how are you thinking about <unk>.
M&A relative to.
Other uses of cash a debt reduction I mean is there a certain point at which if you don't do an acquisition you will start to get more aggressive on the leverage or how do we think about that yes, I think you're spot on there I think it will look where we are right now focusing on closing the transaction, we're thrilled about and by the way.
Especially taking advantage of these red Hot industrial markets. So.
That's a big positive.
We were gone.
Hopefully close the transaction, we're going to have this.
I think a unique opportunity we're in the game.
We're very active right now.
As you know our strategy is around really trying to find products that.
Our engineered that can <unk>.
Help us on the aftermarket.
And.
To drive that strategy, which is which we've been rewarded for it. So I think that will continue it will we'll have to see how everything is.
Opportunistic with acquisitions so we.
Mike.
Down the road I think a little bit about lowering leverage in and doing some debt paydown and we might do that so I think that's why the remarks, we're kind of kind of a little bit of both I think thats fair at this point.
Okay and it sounds like this was just gardena is there similar opportunities as we think about Monrovia or car center some of your other southern California footprint.
There could also be in the mix down the road.
Yes, Ken I mean, as we as we sort of tried to lay that out it's more that we're reviewing all of the owned facilities certainly some we own some relief, but the ones that are owned as a part of the evaluation, having said that the one that's been that's been front and center here that we decided to share progress on and sort of where we're headed as gardena and we're sort of focused on that.
What we've not done a sale leaseback transaction here.
And literally ever probably but for a very long time at a minimum and so we're sort of focused on working through that one and then and then we'll keep everybody updated on where we go from there.
Sure.
But so I can't we're going to review all property yet.
So.
Perfect.
Alright, Thanks, guys nice quarter. Okay. Thanks, guys I appreciate your support as always.
Okay.
Again participants its star one to ask a question or the pound key to withdraw your request.
Question is from Mike Crawford of B Riley Securities. Your line is now open.
Thank you so.
<unk>.
Nice strength in the fixed.
Wing platforms, what about rotary wing is that a long term.
Secular decline in business in that market or do you see a rebound in the future there.
I'll tell you what.
I would say couple of things first obviously on rotary <unk>.
This is Phil.
<unk> been a fairly I think meaningful change in Fms sales right. So you'll have certainly Apache and other things that might see some headwind, obviously, there's things happening with the black Hawk as well we overall word.
Many platforms, Mike So we think overall, we're we're certainly.
Certainly in decent shape. The other thing is the stuff that we made for these things are really a lot of times. It's very it's also sourced it's one of the time, so we're really not.
Not in every probably every case, but we're a lot of sole source on rotary and so whatever it's going to happen, we're going to get it.
I feel I feel good about rotary I think it'll be a little flattish, but I think for the comment I think we're going to come out okay.
Okay. Thanks, Steve and then just similar to the new programs Offloading and share shift that you're garnering Raytheon is there anything you can comment on the same at Airbus.
Airbus is look we just we just won the DCP right. So.
Thats one thing were five years ago, we werent data, even though we were okay. So.
We're kind of.
Moving forward in that in that vein, where now we're sort of a preferred.
A couple of other firms Okay fine now we're moving forward, we certainly I believe that and this is again speculation, but when they really start moving and theyre getting into 60 plus.
And they are fully committed which I think there will be okay. I think more share is going to be coming our way.
As you can only make so much in house as far as their titanium operations. So we'll have to see how that goes but certainly as the bill rates go up we believe we're going to pick up more business than what the preferred status now.
That's a really big deal for the company. So I think really good things ahead for Boeing as a comment I made for Airbus or the count excuse me.
Okay. Thank you.
Yes, Thanks, Mike Thanks, Mike.
Thank you participants there are no further questions on queue ill now turn the call back over to Steve Oswald for closing remarks, okay, well. Thank you.
Just wanted to.
<unk> set along.
By the way.
Half of the whole team and we appreciate everybody support we're coming to the end of 2021. It certainly has been I think.
A good year for the company despite all the challenges.
Certainly wanted commercial aerospace come back a little bit further but has not yet, but we feel very good about 2022 our team.
Team is ready for for these increases.
And.
Looking forward to continued growth overall defense M&A at all.
Leave it there so again my thanks for your time today on the phone and be safe and have a great evening.
Thanks, everyone.
That concludes today's conference call.
Thank you all for joining you may now disconnect.