Q1 2022 Ducommun Inc Earnings Call
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After the speaker presentation, there will be a question and answer session to ask a question. During the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded.
If you require assistance during the conference. Please press Star Zero I would now like to hand, the conference over to your Speaker today, Chris Wampler, Vice President Chief Financial Officer Controller and Treasurer.
Thank you.
And welcome to Ducommun 2022 first quarter conference call with me today is Steve Oswald Chairman President and CEO.
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 are 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.
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.
Particular risks facing ducommun include among other things the cyclicality of our end use markets the impact of COVID-19 on our operations or customers 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 acquisition competition geopolitical.
Development 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.
If and as required by regulatory authorities.
This call also includes non-GAAP financial measures. Please refer to our filing with the SEC for a reconciliation of the GAAP to non-GAAP measures referenced on this call. We filed our 2022 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.
Okay. Thank you, Chris and thanks, everyone for joining us today for our first quarter conference call.
Today and as usual I think you've been update of the current situation of the company.
Afterwards, <unk> will review our financials in detail.
The company remains focused first and foremost on the health and safety of our employees.
The team has done an excellent job safety protocols put in place since March 2020.
We continue to follow our best practices aligning with health authorities.
Within the company, we had 287 cases.
Obama crop in Q1 of 2022.
With 263 of them occurring in January .
Turning to the Q1 financial results.
First quarter performance was very solid.
Any delivering year over year revenue growth of 4%.
This was excellent in light of the significant amount of Covid cases mentioned previously among the workforce in January .
The commercial aerospace market recovery was a real bright spot in Q1.
And Boeing 737, Max business was up over 100% year over year.
And the Airbus <unk> hundred 20 family also had a significant increase of over 80% year over year.
The company's defense business after a great progress in the past two years, it was down but still delivered a solid performance.
Finally, overall commercial aerospace business showed good year over year revenue growth for the third consecutive quarter.
We also posted solid gross profit of $19, 9%.
Hello, with an adjusted EBITDA of 12, 3%, despite the challenging start to the year.
The team also posted adjusted operating income margins of seven 5%.
Which is good progress for the start of the year as we continue to build our track record.
Effective operational leadership and cost management in any environment.
Quality of earnings with solid as well the company, reaching GAAP diluted EPS of.
66, a share versus 55, a share for Q1 two.
<unk> 2021, and adjusted diluted EPS of <unk> 67, a share versus <unk> 66 cents in 2021.
First quarter revenue was higher due to the Commons overall commercial aerospace growth up 53% year over year, along with continued solid defense business versus prior year, though down on a fairly strong Q1 2021 number.
The military and space program that had growth in Q1 included the F 18 F 16 near missile program and other military rotary wing aircraft programs.
I'll continue to approach the defense market continues to be innovative products and processes is a tier one supplier.
That provides significant value to the customer.
Striving for consistent high level of service.
Raytheon technologies as well was again, our number one customer in Q1.
We continue to benefit from the strategic supplier agreement signed with the missile and defense business over two years ago.
We've been hard at work with current and new programs Offloading and share shift with Raytheon technologies and look forward to continuing to leverage that relationship in 2022 and 2023.
I mentioned in the last call about the Offloading from defense primes, and the future benefits for the company.
The work is progressing with Raytheon GAA, Northrop Grumman and others.
It will be over $45 million in 2022 for strictly offloading up from roughly $31 million in 2021.
With an expected doublet to $90 million plus in 2023.
The great deal of that in our circuit card business.
The long term run rate of programs already commercialized or in development will be over $125 million by 2025.
These opportunities include.
Raytheon S P y six.
Products for Gea.
Tom This electronic harnesses and circuit cards.
And the next generation jammer, which be it may reach major driver for revenue.
The defense backlog was also a bright spot in Q1 and ended the quarter at $509 million.
The commercial backlog also showed strong signs of recovery increasing sequentially for the third consecutive quarter from $276 million at the end of Q2 2000 $21 million to $377 million at the end of Q1 2022.
Very good sign.
The book to Bill ratio for Q1 was one point too.
We are thrilled that the total backlog for Q1.
Reached an all time high of $943 million for the company.
Yeah.
The company's cost actions and lead organization are also continuing to pay dividends.
Even before the pandemic the company was working on initiatives to offset the 737, Max beginning in Q4 2019.
Effective as of our operational leadership and action since then and through two years of Covid.
Provide meaningful benefits as we move forward and gain scale across our businesses.
SG&A spending in particular is a contributor, especially at the corporate level, which is among the industry leaders.
Regards to the outlook our continued good momentum in commercial aerospace along with a significant backlog of defense will result in high single digit revenue growth for the full year of 2022.
Which we're very pleased with.
We estimate that revenue remained solid in defence, but over the quarters ahead, we will see more and more commercial aerospace volume return.
Our high narrow body wide body ratio for the business will also help us based on current challenges facing wide body aircrafts.
The other bright spot for ducommun as our business aviation portfolio.
Which is up 70% in revenue year over year with a strong backlog, especially with GFS.
As mentioned in previous calls we have the capacity supply chain and strong operating team ready to deliver the forecasted rate increases ahead.
And we look forward to every opportunity.
Another area for the companies and investors to discuss is M&A.
We continue to be actively looking for companies that fit our model.
I believe this will only be an accelerated so higher results now and in the future.
We had a significant win with the acquisition of Max Steel of December .
I'm happy to report that the numbers are already ahead of plan.
The integration has been excellent.
I also want to mention that all of our acquisitions completed since 2017.
Have been integrated well.
Our leaders in their space.
The financial numbers are ahead of expectations.
And have added much needed high margin aftermarket revenue to the company.
We will delve deeper into this performance at our upcoming Investor meeting planned for the second half of this year and stay tuned for to date.
Before I moved to the market commentary, we announced today, a restructuring initiative, which commenced subsequent to Q1 2022.
Our team has taken this action to accelerate the achievement.
Of our strategic goals to better position the company for stronger performance.
We are still finalizing details at the timing certain actions in operations affected.
Including facility repositioning related expenses.
Paramount of long lived assets severance and write down of inventory.
We currently anticipate this initiative will result in approximately $10 million to $14 million in total pre tax restructuring charges over the next 12 months.
The company anticipates. These restructuring actions will result in estimated annual cost savings of approximately $3 million to $4 million beginning in 2023.
Now, let me provide you with some color on our markets products and programs.
Beginning with our military and space sector, we posted first.
First quarter revenue of.
$99 3 million a decrease versus 2021.
Despite being down this was a solid showing for the business in Q1.
As mentioned earlier, we saw increases in demand for our F. 18 F 16 Mirror missile program and other military rotary wing aircraft.
First quarter military and space revenue represented about 70% of the <unk> revenue in the period and this will be changing over time to reflect more balanced with commercial aerospace.
We also ended the first quarter with a solid backlog of $509 million.
Which represents 54% of the Commons total backlog.
Within our commercial aerospace operations first quarter revenue increase year over year to $54 1 million driven mainly by bill rate increases on large aircraft platforms.
<unk> aviation and in flight products provides us.
Two common expects a meaningful improvement in the commercial aerospace markets overall for the rest of 2022 and 2023.
And the future is very bright across our product offerings, including our industry, leading titanium structural business.
The backlog within our commercial aerospace sector stands at roughly $376 million at the end of the first quarter.
Significant increase sequentially compared to Q4, 2021, and the third consecutive quarter of growth.
Okay.
With that I'll have Chris review, our financial results in detail Chris.
Thank you, Steve and good afternoon again, 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 reflected another period of solid performance. The first quarter results saw a strong increase in commercial aerospace revenue. We are pleased to see the continued strength in <unk>.
World travel demand, which should drive higher shipments going forward.
We're off to a decent start in 2022 and are looking forward to building on our Q1 2022 results and are in a position to do so.
Now turning to our first quarter results. Let me review some of the highlights revenue for the first quarter of 2022 was $163 5 million versus $157 2 million for the first quarter of 2021.
The year over year increase reflects $18 7 million of growth across our commercial aerospace platforms, partially offset by $14 8 million of lower revenue within the military and space sector. A portion of the year over year increase is directly attributable to <unk>, which we acquired in December 2021, Thus our overall growth was a combination of organic.
And inorganic to.
It comes overall backlog at the end of the first quarter was approximately $943 million, an all time high.
Reflecting recent growth across our commercial aerospace platforms setting up the company for strong topline performance for the rest of 2022 and beyond.
Our defence backlog remains strong at $509 million and has us positioned for another strong year for our defense business.
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 $32 5 million for the quarter versus $33 1 million in the prior year period, while gross margins were 19, 9% and 21, 1% in 2022 and 2021, respectively.
The decrease in margin year over year reflects unfavorable product mix, partially offset by lower compensation and benefit costs. During the first part of Q1, our workforce availability was impacted by the Covid Amazon variant as well as harsh winter weather in the Midwest. The ripple effects of these items slowed production and some performance centers also while we were.
Not immune to supply chain issues, we were able to manage through another quarter without significant supply chain impacts through our proactive supply chain efforts executing strategic buys leveraging our performance center flexibility in utilizing inventory that we had invested in.
SG&A was $23 4 million in the first quarter versus $22 5 million last year, the increase largely reflects onetime severance charges.
Ducommun reported operating income for the first quarter of $9 1 million or five 6% of revenue compared to $10 6 million or six 8% of revenue in the prior year period. Adjusted operating income was $12 3 million or seven 5% of revenue this quarter compared to $12 3 million or seven 8% of <unk>.
Revenue in the comparable period last year, our definition of adjusted income now includes an add back for acquisition related amortization expense as a result, as a result of this change we have recast comparable numbers with this methodology.
Interest expense was $2 4 million for the first quarter of 2022 versus $2 8 million in the prior year period.
The company reported net income for the first quarter of 2022 of $8 1 million or <unk> 66 per diluted share compared to net income of $6 7 million or <unk> 55 per diluted share a year ago. The increase year over year includes other income of 3 million $3 7 million for the insurance recoveries related to business interruption related to.
Gliomas recovery.
On an adjusted basis. The company reported net income of $8 3 million or <unk> 67 per diluted share compared to net income of $8 million or <unk> 66 in 2021, both the adjusted net income and adjusted diluted EPS amounts include the aforementioned add back of acquisition related amortization expense.
Adjusted EBITDA for the first quarter was $20 1 million or 12, 3% of revenue compared to $21 1 million or 13, 5% of revenue for the comparable period in 2021.
Now, let me turn to the segment results.
Our structural segment segment posted revenue of $66 million in the first quarter of 2022 versus $58 million last year. The year over year increase reflects $12 8 million of higher sales across our commercial aerospace applications, partially offset by $4 9 million of lower revenue within the company's military and space markets struck.
<unk> segment operating income for the quarter was $4 9 million or seven 4% of revenue compared to $5 1 million or eight 8% of revenue last year. The year over year operating margin decrease was primarily due to unfavorable product mix, partially offset by favorable manufacturing volume and lower compensation and benefit costs excluding.
Tori purchase accounting adjustments and other adjustments in both years. The segment operating margin was 11, 7% in 2022 versus 11, 1% in 2021 as a reminder, the recently acquired <unk> business results are a part of the structures business.
Our electronic systems segment posted revenue of $97 5 million in the first quarter of 2022 versus $99 1 million in the prior year period. These results reflect $9 9 million of lower revenue across the company's military and space customers, partially offset by $5 9 million of higher commercial aerospace revenue.
Electronic systems operating income for the first quarter was $9 4 million or nine 7% of revenue versus $12 5 million or 12, 6% of revenue in the prior year period, primarily respect, reflecting unfavorable manufacturing volume and product mix as mentioned earlier the impacts of Covid in the winter weather presented challenges in Q1 for us.
Challenges were more prevalent in the mid western portion of the country, which is where the majority of our electronics business operates.
Corporate general and administrative expenses.
G&A expense for the first quarter of 2022 was $5 2 million or three 2% of revenue versus $7 million or four 5% of revenue in 2021, the year over year decrease was primarily due to lower compensation and benefit costs.
Turning to liquidity and capital resources, we have available liquidity of $119 million, we used $18 9 million of cash from operations this quarter compared to cash used of $23 4 million in the prior year period. The first quarter typically results in a cash outflow from operations as we pay our annual incentives and invest in working capital support.
To support expected business growth, we made voluntary paydowns on our term loans of $30 million in the current quarter are 12 months debt to adjusted EBITDA ratio was two six and remains amongst the lowest in the last several years as a reminder, during Q4 2021, we increased retained earnings in shareholders' equity by over one.
Third $15 million, which was an increase of over 30%. This was as a result of the gain related to our successful sale leaseback project. It was a great outcome.
In terms of capital expenditures, we spent $4 8 million during the quarter going forward, we anticipate spending between $16 million to $18 million for the full year 2022 for sustaining capital and ongoing product development.
As Steve mentioned earlier subsequent to quarter end, we approved and commenced a restructuring plan the details and timing of certain actions are being finalized. We currently anticipate this initiative will result in approximately 10 million to $14 million in total pre tax restructure charges over the next 12 months, who will provide additional details in future calls.
In conclusion in the first quarter, we posted solid results, while growing our commercial aerospace backlog setting us up for continued strong performance for the rest of 2022 and beyond we expect to see our topline and Bottomline pick up momentum from Q1, as we move through the year, we significantly improved our gross debt position by paying down $30 million on our term loans will continue to.
Look at our operations for opportunities to accelerate our growth as we look to deliver stronger operating results and returns for our investors going forward.
I'll now turn it back over to Steve for his closing remarks, Steve Okay. Thanks, Chris.
Okay. So on closing.
It was very good start to the year. Despite a few temporary challenges.
I'd like to take this time again this quarter to think our ducommun employees, along with our investors suppliers and other stakeholders for their continued support.
We've done a great job managing the business and maintaining a level of excellence in 2020 in 2021.
And all of our hard and smart work will not pay off in full in the next few years ahead. So we're very optimistic and thank you for listening and we'll now open up for questions.
Operator.
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Please standby, while we compile the Q&A roster.
Our first question comes from Pete asked your line.
I'm curious securities.
Hi, Good evening. This is Keith on for Michael <unk>. Thanks for taking the question.
Alright.
First I just wanted to ask where you are on production rates for the 737. Max are you currently aligned with underlying OEM build rates or are there any differences for your current production rates due to lead times are inventories in the system.
What are your expectations for where production rates will be going throughout the rest of the year.
Well look we're right aligned with with Boeing and right in line with Airbus as far as the bill rates what are the bright.
Bright spots for ducommun as we were in.
Very good position with our with our titanium inventories.
We have we feel very good about where we are.
And sort of shoulder to shoulder with both companies as well as with Gulfstream and other manufacturers. So we feel great about where we are with inventory.
Pretty much aligned and I'll mentioned spirit as well because they're they're a big customer of ours. So I think we're in very good shape.
We had one thing.
I'd just add real quickly to your other part of your question on the inventory that they have I mean.
That's the wrinkle, we're still like everybody working through as we've come out of the out of the pandemic is.
Their rate is the rate we've got in the plan, that's what we're working towards but what we what we see we are still working back to those sort of published rates, we're still as they work through their inventory, we see some of that come from their inventory. So it would come from us.
Alright, Thanks, and then.
Also the question on margins just given the year over year drop in electronics.
Electronic systems understood that some of the impacts you called out was from <unk> and weather.
It seemed like they would be containerboard in the first quarter, but.
Are you expecting that that product mix headwinds that you called out will continue impacting the segment in the second quarter and are you seeing any meaningful inflation for labor or other input costs that might be an additional headwind heading into <unk>.
No I wouldn't say significant I'd say, certainly we're working with a lot of the dynamics that everybody has in terms of inflationary pressures with what you see from labor or what you see from the supply chain, but we're covered and feel like we're in a good spot, especially as we move forward on that but the margin itself Q1 tends to be.
Sort of the toughest margin quarter for us really across the board, but particularly with electronics.
As we look forward, we're planning on the mix coming back to a more normal normal state.
So we can do that we will look forward to snapping back back from where we're at here in Q1.
Okay, Great and then just one last one if I could.
This is Steve let me just say once a mortal kombat so so.
Obviously.
A lot of manufacturers struggle in January sure you've heard it from other companies.
We had two certainly.
Worked very hard in February and March and make up for some absenteeism, which I think we did but I think one of the bright spots going forward on the margins in those type of things. So we have we have our all time record backlog. So that's going to help a lot as we go forward through the next few quarters.
Understood makes sense and then just one last one if I could just.
On the defense side are you seeing any demand signals from your defense prime customers, suggesting that there might be any additional opportunities or volume increases as a result of the Russia, Ukraine situation and just what is your overall outlook for global defense spending environment moving forward.
Yes, we look we built really built our defense business. So we feel real good about it yes, there is more activity absolutely with.
With the threats going on in and continued threats just legacy and in general So the competition with Russia competition with China, Ukraine. So.
So we absolutely are seeing activity.
That.
We're working on and we feel good about the other thing just mentioned again in my remarks is that.
Outside of programs and other things I mean customers are eager to work with us on sort of non core manufacturing issues of defense primes were looking at things and saying, we really want to make a circuit cards in our factories.
As a kind of cost and OEM has or they want to send it to the comments so I think.
Not only this year, but certainly next year, we're going to have some nice tailwind with that offloading.
On top of the order activity now.
Alright, great. Thanks for taking the questions and thanks for taking my thanks.
Our next question is from Ken Herbert with RBC capital markets.
Hi, This is Steve strikeouts on for Ken Herbert I was hoping you guys could just discuss some of the weakness we saw in military and space in terms of the programs.
Yes, I think a couple of things here and I'll, let Chris jump in too is that.
A lot of it was timing of orders.
As we look at some some missile programs that we've had.
There tends to be some movement when you have.
Yes.
Military sales and our.
Our toll missile cases, as well those things kind of go on a little bit of.
Variable as far as orders go. So overall again I thought it was a very solid quarter for us.
So we're good harnesses, we're good but.
And just the top top level market is a little lightness in missiles and then on the showcase.
Yeah, No no I think on the military side just on the fixed wing F 35 down a little bit was a part of it but I'd say the other the other theme really is the volume as a matter of two of what we can produce and what was the issues that we sort of pointed to with Q1 with the with working through Covid and working through whether that is.
The constraint on what we're able to produce on the military side, so pointing that back towards the strong backlog of over 500 million, we feel really good about where we're at but that's a little bit about why Q1 played out the way it did.
Perfect and then you kind of expect that could be a bit more positive into Q and then just if I could just kind of a full year outlook for defense as well.
Yeah, I mean, I'll start and Steve can jump in here, but I mean, we definitely yes, we don't anticipate the same type of complexities on the workforce with Covid, whether things like that in Q2, usually is where we can start to stretch our legs a little bit just as we as we operate so we feel good about that part of it getting to utilize what we have out there in the back.
Log.
And from a full year I mean, we knew we've come through a couple of really strong years of defense growth and so this year with the story is we have a business now that we certainly flex hard toward defense coming from 19 through 2021 seeing commercial pick back up is going to be really helpful. Defense, We've got a strong business now.
We're going to continue to make some inroads like Steve mentioned, but overall, it's a good commercial businesses, what's going to drive a lot of the high single growth that Steve talked about.
Perfect. Thank you so much thanks.
Thanks for being with us.
Again, if you have a question at this time. Please press star and then the number one key on your phone. If your question has already been answered or you wish to remove yourself from the queue. Please press the pound key.
Our next question is from Mike Crawford with B Riley Securities.
Thanks.
Regarding the.
Latest restructuring initiative, how much is that related to M&A integration do you still think of these acquired entities like <unk>.
LDS GTP novels, and Max deal is separate subsidiaries are they or are they more integrated and structure or no electric systems.
Mike Good afternoon. So look there is definitely more integrated this really is sort of outside.
Those companies are much more into some of our legacy footprint that I haven't deal with since I've been here and I think.
Just for the fall I mean, we did the only other restructuring in November 2017, when I first started and felt that now five years into the job I talked to the team we have some opportunities I'll give you. An example on the calls I think it's important that we have a facility in Thailand that.
It really does have doesn't really fit for us as far as strategic value, it's very far away.
For governance and those types of things. So that's an opportunity we're going to move forward on.
So it's those types of things, Mike where are.
We're getting ready for the next five years here, we're trying to get things right in and get to our long term goals.
Okay, and then further regarding your footprint what's the current.
Capacity Global Act Gliomas following the fiery had there earlier.
Well you have a brand new building and proud of the team. So we're about it by the end of Q2, we're going to be right back where we are as far as production from our background. We had to move all that work up to Gardena, Our gardena facility and we did and we built a new building we feel really good about all the work is.
Reinsurance for it back.
In Q1 and in Q2, so we'll be ready to go I think our capacity.
Mike I think right now we've got a lot of runway and sort of looking to double that business. We're looking at other opportunities because as I mentioned in previous calls.
The leap engine block doors now fully commercialized Middle River.
We have a closeout panels ferrying. So we're looking to do more in that space, we like to solve a lot. We think for us the car can do a good job there so more to come.
Okay. Thanks, just one last one you mentioned.
Things like the spy six radars and J J for commercial Offloading, but what about.
Right.
Captive titanium operation at Airbus that you could you know what to do has there been any progress on that or yes.
No I'm just kidding.
Look you know.
We have our we have our we have a place to play our lane with Airbus I, We're certainly interested in it.
There's more opportunity there I don't see we benefit from higher volume with Airbus gets busier, which they will you know.
We certainly anticipate were going to.
See more sure okay.
So thats sort of whats happened in the past now that we're coming out of Covid. So we think that's more of a play for ducommun titanium is that whereas they go higher and other suppliers may struggle.
We've got an odd time to Airbus over two years now.
So straight so we're we feel good about our position there we're going to benefit.
Once we keep going on these build rates. So so again stay tuned on that too.
Alright, Thank you very much.
Thanks.
I'm showing no further questions at this time I would like to turn the conference back to Mr. Oswald.
Okay. Thank you very much and thanks, everybody for your time today.
We feel obviously, we have a bit of a tough start as I mentioned in January a lot of absenteeism.
<unk>.
That was just a reality, but I think I think we had a very good start to the year, we're very optimistic about the next three quarters. So.
That's a good feeling among our team here and you know the all time backlog number is something that obviously, we're proud of and the customers they vote where orders okay. That's how they vote sorry.
So our customers are behind US we have the team we have the footprint, we have a supply chain. So.
More more good things ahead again as I've always said in my calls. Thank you for your support and have a nice afternoon or evening.
This concludes today's conference call. Thank you for participating you may now disconnect.
Yeah.
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Okay.
Okay.
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