Q3 2022 Ducommun Inc Earnings Call
Okay.
Good day, ladies and gentlemen, and welcome to Ducommun third quarter Conference call. At this time, all participants are in a listen only mode.
Following managements prepared remarks, well hold a question and answer session.
To ask a question. During this session you will need to press star one one on your telephone and you will then hear an automated message advising you had just raised as a reminder, this conference is being recorded today November seven 2022.
I would now like to turn the conference over to Ducommun, Vice President Chief Financial Officer, and controller and Treasurer, Chris Wampler. Please begin.
Thank you and welcome to Ducommun into 2023rd quarter Conference call with me really Boswell 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 risks facing ducommun include among others. 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 the cost of expansion and acquisition.
Petition economic and geopolitical developments and disasters natural or otherwise.
These risks and others are described in our annual report on Form 10-K filed with the SEC.
Forward looking statements are subject to those risks.
Statements made during this call are only as of the time made and we do not intend to update any statements made in this presentation, except if and 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 third quarter Form 10-Q with the SEC today.
I would now like to turn the call over to Steve Oswald for a review of the operating results.
Thank you, Chris and thanks, everyone for joining us today for our third quarter conference call.
And as usual I will give an update of the current situation of the company after which Chris will review our financials in detail.
Our company remains our focus first and foremost on the health and safety of our employees.
We've done an excellent job the team and the leadership with safety protocols put in place since March 2020.
Continue to follow best practices in line with health authorities.
The company, we had 188 cases around the crown variant in Q3 of 2022.
Turning to the Q3 financial results I'm happy to report that the common stared quarter topline performance was very strong the.
The company delivering year over year revenue growth of 14%.
Net revenues also exceeded $180 million for the first time.
Since before the pandemic started in Q4, 2019, and rose to a $186 6 million.
The commercial aerospace market continued recovery was a real bright spot once again in Q3 with Boeing 737, Max business is up 137% year over year.
On the Airbus <unk> hundred 20 also have it.
Up 70% year over year.
Overall commercial aerospace with Airbus Boeing Gulfstream and others was up over 65% from Q3, 2021 the commercial aerospace.
Aerospace business as well showed year over year revenue growth now for the fifth consecutive quarter.
An excellent sign at the industry and build rates recover.
The company's defense business. After two years of unprecedented growth in 2020 in 2021 was only down slightly in Q3, but once again delivered solid performance of over $100 million in revenue.
The company posted solid gross profit of 27% sequentially, but down year over year due partially to several onetime factors, which Chris will cover in his remarks.
Adjusted EBIT of $26 million was a strong increase year over year.
And the highest since I joined the company in 2017.
Adjusted EBIT margins of 13, 9% in Q3 as well.
With a solid performance.
We expect EBITDA growth to continue to be strong in the quarters ahead.
The team also posted adjusted operating income margins of nine 2%.
It is a good improvement from Q2.
Quality of earnings was solid with the company, reaching GAAP diluted EPS of <unk> 69, a share versus 78 cents a share for Q3 2021, but with adjustments the diluted EPS of <unk> 96 cents, a share was higher than last year.
Some key drivers for the lower GAAP diluted EPS include the Gliomas fire related expenses.
Restructuring charges and loss on extinguishment extinguishment of debt as part of the debt refinance.
In regards to the revenue outlook comments, you mentioned in the Q1 and Q2 calls we continue to see the company coming in at the high end of single digits for the full year with the commercial aerospace industry recovery, leading the way.
We estimate that revenue will continue to be strong over the quarters ahead, as we see more and more commercial aerospace volume return.
Our higher narrow body wide body ratio for the business is also a plus.
But we will benefit as well from the news that deliveries of 787.
<unk> resumed.
Ducommun has the business aviation portfolio as well supply a world, leading titanium products and other components and it continues to have good momentum up 60% and revenue year over year with a strong backlog, especially at Gulfstream.
One area of our business I'd like to highlight as we move out of pandemic related headwinds is a <unk>.
<unk> improvements of our commercial aerospace business within our structures system segment during 2022.
Commercial aerospace revenue within structures year to date was $122 million, a roughly 60% higher than the year ago period.
In addition, Q3 2022 commercial aerospace revenue, where it was 46 million or almost 70%, 75% higher than a year ago.
<unk> signed that growth to accelerate in this part of our business.
Finally backlog at the end of Q3, 2022 stood at $321 million or 36% higher than Q3 2021. So we are set up for excellent growth to continue now and in the future.
Investors should also keep in mind, our structures business. This component based not wings are in itself and we strive to produce products from all the industry niche technology, such as titanium hot form and superplastic forming.
For a floating from defense primes. The work continues as we will meet our target for over $45 million in $2020 22 up from roughly $31 million in 2021.
We then expect to double its a $90 million plus in 2023 with a great deal of that in our circuit card business for Raytheon as.
Sites, such as Appleton, Wisconsin.
Our long term run rate of these defense programs already commercialized or in development for Offloading will be over $125 million for ducommun by 2025.
For backlog performance of commercial aerospace backlog increased sequentially for the fifth consecutive quarter from $276 million at the end of Q2 2021.
431 million at the end of Q3, 2022 an increase of over 55%.
This was led by the 737 Max.
<unk> sat for in flight Entertainment.
220, <unk> hundred 20 and Gulfstream.
Or what you would expect after we came out of a very tough 'twenty and 2021 for this part of the Commerce business.
The defense backlog remains solid in Q3, as well and ended the quarter at $467 million.
The company's cost actions and Lee lean organizational structure are continuing to pay dividends too.
Our supply chain team is well delivered another excellent quarter managing the supply chain and this has not only shown in our financials, but we cannot be in a better place with our customers regarding our on time delivery.
And quality.
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 $106 3 million, a slight decrease versus 2021.
Despite being down as mentioned earlier, it was greater than $100 million and a solid showing for the business in Q3.
We saw increases in demand for F 18, Patriot missiles, and other missile programs as well as other military and space programs.
Third quarter military and space revenue represented 57% of the comments revenue in the period down from 70% last year and this trend will continue to reflect more balanced with commercial aerospace.
We also ended the third quarter with a solid backlog of 467 billion, which represents roughly 50% of the comments total backlog.
Within our commercial aerospace operations third quarter revenue increase year over year to $68 3 million driven mainly by bill rate increases on large aircraft platforms in flight products for Viasat other commercial aerospace platforms and business aviation.
It's a common expects this continued improvement in the commercial aerospace market overall to gain momentum for the rest of 2022 and 2023.
In the future is bright across all our product offerings.
The backlog within our commercial aerospace sector sector stands at 431 million at the end of the third quarter.
It was $145 million higher or over 50% increase year over year from Q3 2021.
With that I'll have Chris who share our financial results in detail Chris. Thank.
Thank you Steve.
As a reminder, please see the company's 10-Q in Q3 earnings.
Further description of information mentioned on today's call.
As Steve discussed our third quarter results reflected a period of strong performance. The third quarter results saw a significant increase in commercial aerospace revenue. We remain encouraged by the continued strength in domestic and global travel, which should help support higher long term demand and shipments going forward.
There were a multitude of positive themes during the first nine months of 2022, and we're looking forward to building on this performance.
Now turning to our third quarter results. Let me review some of the highlights revenue for the third quarter of 2022 was $186 6 million versus $163 2 million for the third quarter of 2021.
The year over year increase reflects $27 2 million of growth across our commercial aerospace aerospace platforms, partially offset by $7 3 million of lower revenue within the military and space sector.
Portion of the year over year increase is directly attributable to <unk>, which we acquired in December 2021, that's our overall growth was a combination of organic and inorganic growth.
<unk> overall backlog at the end of the third quarter was approximately $954 million. This.
This reflects recent growth across our commercial aerospace platforms, our defense backlog was $467 million and we remain positioned for continued solid performance for the rest of the 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 $38 6 million for the quarter versus $35 3 million in the prior year period, while gross margins were 27% and 21, 6% in 2022 and 2021, respectively on an adjusted basis. Our gross margins were 21, 5% in 2022 and $22 one per se.
In 2021, we continue to share the adjusted gross margins as we have a higher amount of non-GAAP related cost of sales. This year, mainly driven by our gliomas fire related impact and inventory purchase accounting adjustments related to the <unk> acquisition.
As well like all manufacturing companies, we continue to work through a difficult operating environment with regard guard to supply chain efficiency and labor availability, while we're not immune to supply chain issues, we were able to manage through another quarter without significant supply chain impacts due to our proactive supply chain efforts executing strategic buys leveraging our performance center flexibility.
And utilizing inventory investments.
Ducommun reported operating income for the third quarter of $13 2 million or seven 1% of revenue compared to $13 4 million or eight 2% of revenue in the prior year period. Adjusted operating income was $17 2 million or nine 2% of revenue this quarter compared to $15 3 million or nine 4% of revenue in the comparable.
Period last year.
The company reported net income for the third quarter of 2022 of $8 5 million or <unk> 69 per diluted share compared to net income of $9 6 million or <unk> 78 per diluted share a year ago on an adjusted basis. The company reported net income of $11 9 million or <unk> 96 per diluted share compared to net income of $11 1 million or <unk> 91.
In 2021 adjusted.
Adjusted EBITDA for the third quarter was $26 million or 13, 9% of revenue compared to $23 9 million or 14, 6% of revenue for the comparable period. In 2021. This was the highest quarterly adjusted EBITDA since at least 2017 now.
Now, let me turn to our segment results.
Structural segment, our structural segment systems segment posted revenue of $73 2 million in the third quarter of 2022 versus $58 5 million last year. The year over year increase reflects $19 4 million of higher sales across our commercial aerospace applications, partially offset by $4 8 million of lower revenue within the.
He is military and space markets structural systems operating income for the quarter was $6 7 million or nine 1% of revenue compared to $4 5 million or seven 6% of revenue last year. The year over year operating margin increase was primarily due to favorable manufacturing volume, excluding restructuring charges and other adjustments in both.
<unk> segment operating margin was 13, 3% in 2022 versus 10, 2% in 2021. This is a very strong operating performance for the strict set for the structural systems segment. As a result, the results from our <unk> business, which was acquired in Q4 2021 are part of the structures business.
Our electronic systems segment posted revenues of $113 4 million in the third quarter of 2022 versus $104 7 million in the prior year period.
These results reflect $7 8 million of higher commercial aerospace revenue, partially offset by $2 6 million in revenue across the company's military and space customers in.
Electronic systems operating income for the third quarter was $13 9 million or 12, 2% of revenue versus $15 3 million or 14, 6% of revenue in the prior year period, primarily reflecting unfavorable product mix, partially offset by favorable manufacturing volume.
Excluding restructured charges and other adjustments in both years the segment operating margin was 12, 9% versus 15% in 2021.
Not at the top end of the race that segment has operated this was a solid quarter for the electronics segment.
Yes.
Restructuring update as a reminder, we approve and commenced a restructuring initiative in Q2 2022. Our team is taking is taking these restructure accident actions to accelerate the achievement of our strategic goals and better position the company for stronger performance in the short and long term.
During Q3, we incurred $6 million in restructuring charges. The majority of these charges were severance and benefits related the.
The macro environment the macroeconomic environment has been dynamic since we started this initiative and as such we continue to assess the appropriate scope and activities.
During periods of company restructuring difficult decisions are made and one example is our decision to move work from our wire harness and cable assembly facility in variable, Arkansas to other ducommun facilities, such as our reopened guaymas facility, along with our Joplin performance Center.
This consolidation will provide additional leverage through scale in Joplin as well as more fully utilize our expanded guaymas Mexico facility.
These decisions are especially difficult as they have a direct impact on the jobs that some of our ducommun teammates and as a company, we feel we will be providing above market compensation and benefits for those impacted.
We now expect to incur another $7 million to $10 million and expense for facility consolidation severance and impairment of long lived assets over the next several quarters, we plan to update all investors on further details during the December 8th Investor meeting in New York.
We have available liquidity of $221 million as of the end of the third quarter, we used $5 $5 million of cash in operations this quarter compared to cash provided by operations of $5 5 million in the prior year period.
The higher use of cash in the current year quarter was primarily due to increased inventory and contract assets as we work to not only meet customer requirements, but also be in position to take on drop in work or.
12 months debt to adjusted EBITDA ratio was two six and remains among the lowest in the last several years.
As we previously announced during Q3 2022, we completed a refinancing of all of our debt on July 14th with favorable terms, the new credit facility facilities have a five year term that will mature in July 2027. In addition at the same leverage ratio the interest rate spread and our new credit facilities as more than 200 basis.
<unk> lower and the term loan B that we had at the end of Q2, 2022 and slightly favorable to the term loan a that we had at the end of Q2 2022.
To conclude the financial overview in the third quarter, we posted strong results through balanced contributions from our two segments, while continuing efforts to position the company.
For strong long term performance as we maintain a robust backlog continued to work on our restructuring initiatives and improved our long term debt structure.
I'll now turn it back over to Steve for closing remarks, Okay. Thanks, Chris.
At closing.
It was a strong quarter. It was our best so far in 2022 coming out of another tough year in 2021.
The themes are commercial aerospace recovery as we move forward.
<unk> is a good shape with Offloading active are linked cost profile excellent supply chain strong customer preference.
I'm very positive refinancing outcome to drive the company to the next level of the future is all going to be tailwind for us.
As I, usually do I like to again, thank our employees investors and other stakeholders.
As we have been through an unprecedented time in the past couple of years and we're in excellent shape moving forward.
I will now open it up to questions. Thank you.
As a reminder to ask a question you will need to press star one one on your telephone please standby, while we compile the Q&A roster.
Our first question comes from Ken Herbert.
With our BC. Your line is now open.
Hey, good afternoon.
Steve and Chris.
I can Ken how are you.
Pretty good hey.
I just wanted to first ask on the margins and structural systems sequentially really nice step up both in the operating margin as well as the adjusted EBITDA.
Is there any way to to identify if there was anything unusual this quarter or maybe I mean, it looks like maybe volume on the Max was a nice tailwind here, but how.
How should we think about the key drivers of that sequential and year over year improvement in the margin in that segment.
Yes, I mean, the volume again was.
Volume is always helpful. I would say when we think about the performance centers and that structural systems group, we had I would call. It normal flow through the majority of them, but I would say what helped us get to more of a bigger step up in the higher end of I think what anybody would have expected for the quarter.
It was a nice was a nice book of business that came through a couple of facilities. So I think I think that was that put a nice high mark out there for us that's what we will strive to get back to.
Okay.
Paul.
And as we look at the defense business is there when should we expect sort of positive growth in the defense business. There when do you think book.
Bookings in the backlog will trough and we can start to see some organic acceleration in that business.
Let me take that on Ken look.
We're obviously active it's always a little bit of timing of orders.
We have we've had a lot of positive news, especially on programs such as Apache with the with the polymer order and lots of things that are going to going to drive.
Our defense business. However, we're looking definitely into 2023, probably mid year that we were going to see something but again.
Continuing to work the offload continuing to.
Build a book of business with Northrop and other places, but it's a bit of a timing issue on a little bit of a lull here.
Okay, and it sounds like I mean, it's a timing issue is that timing in terms of like customer contracts are maybe delayed or from a budget standpoint or or is it supply chain issues impacting your ability to deliver and ship I mean, how should we maybe a little more detail on that Steve Yes, sure like I mentioned, it's not supply chain.
Okay.
Mother competitive.
Here's what I would is not supply chain, it's just timing of orders.
Flow through of demand, sometimes you'll Fms is going to help us sometimes does not silver.
So we're a little bit in that mix as well with some of the products. We make so I'd say, it's more more leaning that way for sure.
Okay, great. Thanks, I'll jump back in the queue.
Yes.
Please standby for our next question.
Our next question comes from Mike Crawford with B Riley. Your line is now open.
Thank you regarding the restructuring how much of that would you say is attributable to <unk>.
Consolidating some of these niche acquisitions, you've made in the past few years and I guess further to that.
And some of these companies formerly used different facilities, but now completely out of.
Hey, Mike It's Chris.
Thanks for the question.
The restructure really has nothing to do with the acquisition companies. This is more sort of base business.
As we continue to move along trying to just optimize where we think we need to go and so it's much more it's much more about the base business and so therefore.
The new news this morning or today with.
The wire harness.
<unk> situations.
Sort of core business.
But I think the acquisitions themselves continue to be provide.
Provide the niche engineered product type of benefit within within their normal footprint and we continue to move forward with them.
Alright, Thanks, Chris.
Yes.
One other thing just so so we're looking where it makes sense for you know for consolidation and I know you brought up on the call before we have a.
We had a terrible thing happened a couple of years ago, a climate SME, we have our operation now up and running and we just expanded itself. So we're looking to consolidate we're looking to do.
<unk> smart things going forward with our square footage.
Okay and regarding that's a good segue Steve to my final question, which is there any further development and your thoughts on perhaps doing a sale leaseback or you'd rather large California facility.
Kind of a hidden real estate asset value on your books.
Since December as Mike.
Yeah.
December eight we will have more color on that I would just say look where it's absolutely ongoing.
The sale of Gardena.
A real homerun for the company for our investors and we have we have more to comment more to come there. So well have more to say in the investor day, but we are continuing to look at it so.
It's something that's active.
Alright, Thank you very much.
Please standby for our next question.
Our next question comes from Michael <unk> with <unk>. Your line is now open.
Hey, good afternoon, guys. Thanks for taking the questions.
Steve just just on defense I mean.
Youre not going to give us.
<unk> guidance, but I'm just trying to understand.
The $45 million.
Sort of the outsourcing now thinking that's going to grow to $90 million, that's going to put you in a pretty good revenue trajectory next year. I mean is that the right way to think about your defense revenue growth. If you end the year. This year math easy for 'twenty I mean should we.
Be thinking more than 10% growth and then if we get.
More broader thawing of the defense supply chain could that be additive yes.
A couple of things my first good to be with you. So first look we had a we had an excellent run in 2020 in 2021, and we were up 40% and we kind of really.
So to change the game in the company for defense. So we're coming in a little heavy into this year and.
So we've got a lot of programs I think that this this whole.
Outsourcing with Raytheon and <unk> all of that is going to half of what we are we do have some headwind on timing of orders.
When these are kind of come in and assess the Fms related so I don't think I would look at it that high.
Okay.
Okay.
Yes totally helpful.
Have a good story, but again, we're covenant heavy into this year as you know, yes got it.
And just to follow up with what Ken was asking I mean, you guys seem to be handling supply chain well, but do you think some of this timing is just related to other players in the industry. I mean, we're hearing a lot of <unk>.
Supply chain headwinds I mean, do you think thats, causing the timing issue I mean, we're also hearing contracting officer delays.
Should we think about the timing as sort of.
That dynamic and when we see the supply chain start to ease a bit maybe that kind of opens up some things for you.
Yes, I think I think it's pretty I think it's both I mean.
We've been a little more strategic in our buying.
We're being a smaller company, we're able to move a little quicker on things and we've done a few of those things with semiconductors and titanium, but absolutely I think.
<unk> supply chain issues that other Oems and timing of orders and the state Department.
I think thats continues to.
Ongoing and will continue so I think.
I think over the next three or four quarters, that's going to be more of the same unfortunately.
Okay got it.
And then maybe Chris just on free cash flow.
How should we think about.
That kind of item going forward, obviously inventory continues to build I mean, we're seeing that.
A lot of suppliers out there but.
Maybe just some color as to how youre thinking about cash flow and as it relates to the working capital.
Sure.
Comments.
Well taken and I'd say first of all for Q4 is always our sort of cash quarter. So we'll look to that again this year to get our yearly cash flow back to a sort of a reasonable range. We had a really nice Q2.
And that really put us a little ahead of where we probably would've intended to be Q3, a little lighter. So we're looking to sort of make it happen in Q4, and then as you move forward you mean your point's right on I mean, so what we were looking to do is grow the business with the contract assets and inventory as a percent starting to come down flat dollar amount might.
B sort of level as we are growing, but that's really where theres going to be some additional cash that comes into the model over the next over the next several quarters.
Okay got it yes.
Just a comment on the cash to look what we're using some cash strategically and I've mentioned this in my remarks, I mean since I've been here.
<unk> never been in a better place with our customers across the board on on time delivery and quality I mean, it's just been it's been Super So just heads up got it.
Got it.
The contract assets is that mostly tied to defense timing any sort of milestones there I mean should we if I'm looking at inventory and contract assets.
Do you think you get tailwind from bulk or do we think we get an unwinding of the contract assets.
Youll start to get it will come through both I mean, we've got to protect asset build that I think over again over the course of several quarters the percentage on both sides of the business should should come down some.
Okay.
Perfect ill jump back into queue guys. Thanks.
Thanks, Mike.
As a reminder to ask a question. Please press star one on your telephone please standby for our next question.
Our next question comes from Ken Herbert with RBC. Your line is now open.
Hey, Thanks, Chris I wanted to clarify on that on that last comment are you still expecting to be positive free cash flow for the full year.
Yes, yes, that's correct.
Yes, the fourth quarter will come through will come through strong to get us to a positive free cash flow.
Okay.
Obviously, I don't want to get in front of things too much here, but as you think about the business over the next couple of days.
What's the right framework, we should think about the cash generation potential of the business, maybe as a as a percentage of EBITDA or some other way to look at it.
Where could that get to in the next couple of years as you continue to see success on the defense side and continued ramping on the commercial aerospace side.
Yes, I think well number one I would say, we will talk a little more about it at the Investor day, a little more detail on the cash flow, Ken but I would say again were at an inflection point, we have and we've talked about a little bit through this year, not knowing exactly where the pivoted that we're ready for that to start moving.
And again as the business breaks free and things start to happen.
The lever for our cash generation that will be there and I think if you look historically as the business was sort of this size have been free cash flow of.
Of $20 million, plus is really where we've got to get back to first and then we keep and we keep moving it from there.
Okay, and we're coming up on the one year anniversary of Mag ceiling, I think you've been on sort of a deal a year type pace.
How does how does the M&A pipeline look and where are you focusing your efforts.
Sure Ken.
Question look.
I mean, I'm sure you're hearing that from other folks too it's a bit slow.
Certainly we'd like it more active but.
That's a reality we do continue to work are our proprietary deal pipeline, which is outside of the regular relationships we have with bankers.
We're active we're looking at things as they come through or we're meeting with people. We we really like these acquisition at least one year, hopefully right and they've got a nice accelerator for the company so more to come and we are active.
Sure.
Great. Thanks, So I look forward to seeing you in December yes, we do.
Thank you Jim.
There are no further questions at this time and so Rob I'll pass it back to Steve Oswald for any closing remarks.
Okay. Thank you Michelle and.
Thank you everybody for joining us great questions. It's good to be together again look we couldnt be more happy with Q3.
Yes.
It's been a long journey.
We had the first.
Come in Big time in 2000, 22021, and that's still I think moderating nicely, but we're thrilled to see commercial aerospace back and moving forward and we think it's going to be great for our team.
For our overall company for our investors. So I want to wish you a great day again, thanks for joining us.
This concludes today's conference call. Thank you for participating you may now disconnect.
Yes.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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