Ducommun Incorporated Q1 2023 Earnings Call
Good day, ladies and gentlemen, and welcome to Ducommun first quarter 2023 conference call. At this time all participants are in a listen only mode. Following managements prepared remarks, well hold a Q&A session.
Good question. Please press star followed by one on your Touchtone phone if anyone has difficulty hearing the conference. Please press star zero for operator assistance.
I remind you that this conference call is being recorded today may four 2023.
I'd now like to turn the conference call over to Ducommun Senior Vice President Chief Financial Officer Controller, and Treasurer, Mr. Shimada look Richie.
Yeah.
Thank you Jade.
And welcome to Ducommun was 2023 first quarter conference call with me today is Steve Oswald Chairman President and CEO .
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.
All 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.
Risks face facing ducommun include among others. The cyclicality of our end use markets the level of U S government defense spending timing of orders from our customers legal and regulatory risks the cost of expansion and acquisitions competition economic and geopolitical developments, including.
Supply chain issues, and rising interest rates, pandemics 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 all 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 also includes non-GAAP financial measures. Please refer to our filings with the SEC for reconciliation of the GAAP to non-GAAP measures referenced on this call.
We filed our Q1 2023 quarterly report on 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 Steve.
Okay. Thank you and thanks, everyone for joining us today for our first quarter conference call today, and as usual I will give an update of the current situation of the company after which time I will review our financials in detail.
Before that though I'd like to discuss our CFO transition and announced yesterday.
First I'd like to say this transition is not related to any issues revolving the company's financial report it.
I would also like to thank Chris Wampler for his contributions and service as CFO .
And welcome to Newmont <unk> to the call and congratulate him on his new role.
So why don't I have known each other for over 12 years worked together three different companies.
I have full confidence in him and his abilities.
As we announced last week I'm also delighted that we have completed the acquisition of DLR.
After the end of Q1 as we had a 30 day filing period that ended on July I am sorry, I ended on April 24th.
DLR Aerospace is our fifth acquisition and largest since I joined the company in 2017 and is 100% in line with the expectations we discussed.
The common investor meeting in New York in December .
<unk> is an industry leader and innovator, providing engineered products and aftermarket services to rotorcraft fix.
Fixed wing business aviation OEM customers and fleet operators.
I want to welcome Mike Carpenter, President on the entire DLR team to ducommun.
I'm excited to begin working with them.
Yeah.
As for the quarter were off to a good start in 2023 with very strong topline growth as a company delivered year over year revenue growth of 11%.
$181 2 million.
As mentioned in the press release, our excellent position in narrow body aircraft was key to driving overall revenue growth.
And another positive signs of recovery is in good shape.
They get better in the near and longer term.
Turning to the markets. The continued recovery in commercial aerospace is once again, a real bright spot in Q1.
With Boeing 737, Max business up 80% year over year.
The Airbus <unk> hundred 20, also having significant growth of 66% year over year.
Overall, commercial aerospace with Airbus and Boeing and others was up 35% from Q1 2022.
The comments commercial aerospace businesses showed year over year revenue growth now for the seventh consecutive quarter, an excellent sign as the industry and bill rates recover.
The company's defense business was down modestly year over year in Q1, mainly due to timing of programs such as the Apache rotor blade.
NGA Uavs among others.
But once again ducommun delivered solid performance.
Roughly $96 million revenue.
As we prepare for increasing Dod budgets in Fms in the years ahead.
The company posted solid gross profit of 23%.
Up year over year from 19, 9%.
A good result, as you work through our restructuring activities.
The team also posted adjusted operating income margins of seven 5%.
And adjusted EBITDA was $23 1 million, an increase of $3 million year over year.
So kind of and have adjusted EBITDA margins of 12, 7% in Q1, as well and we anticipate adjusted EBITDA to be solid this year was much stronger numbers in 2020 for once the plant.
Okay.
2023 are behind us.
Earnings were solid with GAAP diluted EPS of <unk> 42 cents a share.
Versus 66 cents a share for Q1 2022, but with adjustments.
Diluted EPS of <unk> 63 sets of share was comparable diluted EPS of <unk> 67, a share in the prior year.
Some key drivers for the lower GAAP diluted EPS include restructuring charges and higher wireless fire related expenses.
So if you to the company's backlog performance the commercial aerospace backlog increased sequentially for the eighth consecutive quarter from $266 million at the end of Q1 2000 $21 million to $464 million at the end of Q1 2023, an increase of 74%. This.
It was led by the 737 Max.
<unk> for in flight Entertainment, the <unk> hundred 20, <unk> hundred 20 and Gulfstream.
Or what you would expect after a slower than expected recovery during 2022.
The best backlog decreased modestly sequentially from Q2 2022, but remains solid at the end of Q1 as well and ended the quarter at $444 million.
I also want to share with you some great news on the 737 Max.
We recently received our first order ever from Spirit Aero systems for Max Fuselages skins.
Similar to what we make currently for the eight to 20.
This is an initial order for four skin sections, which comprised of roughly 5% of the total fuselage. So we expect this to grow as we move forward.
The initial force get orders projected to be $4 million in revenue yearly.
And we're excited about what is ahead.
Keep in mind, we provide close to 100% of the skins for the <unk> hundred 20 fuselage as a sole source or a 50 50 split with spirit for certain areas.
So we already do a lot more after this initial order.
The foreskin sections will be fully commercialized by year end.
For Offloading for defense Prime the work continues.
We're expecting roughly $90 million for the full year is committed to with a great deal of that in our circuit card business for Raytheon at such sites as Appleton, Wisconsin in Tulsa, Oklahoma.
Long term run rate of these defense programs already commercialized or under development for Offloading of the over $125 million for ducommun by 2025.
One item to note is that there are lags with these types of projects.
Not only have to transfer a legacy or by test equipment et cetera, but we do have initial headwind on revenue with the OEM supply material from there on it on hand stock.
So the numbers with these large Oems do take some time.
The company's actions in lean organizational structure also continuing to pay dividends.
Our team delivered another excellent quarter as well in Q1, managing the supply chain.
And this has not only shown in our financials, but also we cannot be in better shape with our customers regarding our on time delivery and quality.
In addition, we were honored and so loose in March by Airbus with an award for being a top performing supplier for hot farm and superplastic, forming titanium parts.
The government put out a press release on this and we are very proud of our work.
For context, we did not have any business with Airbus before 2016.
It has been a great success.
And Airbus has a very high global standard for these awards.
It is a select group.
For revenue guidance for the year, we're happy to update it to mid to high single digit for 2023.
Based on better news on commercial aerospace along with a very successful win.
With DLR and the acquisition.
Just a few comments on our win.
These are never easy and require a great deal of effort and excellence.
I'm happy to report that the seller due to our approach what exclusive with ducommun early on.
And this provide beneficial this provide beneficial benefits for everyone.
On the commercial aerospace side the recovery, we continue to lead the way and revenue would be very good for the rest of 2023 as we see more and more volume return with defense also being solid.
The two plant closings later this year, we'll also have some limited headwinds on revenue as we seek to prune non strategic and low volume business, but.
Youre very confident in our much improved guidance for 2023 revenue.
Now, let me provide some additional color on our markets products and programs.
Beginning with our military and space sector, we posted first quarter revenue of $96 4 million.
Our modest decrease versus Q1 2022.
Despite being down as mentioned earlier was a solid showing for the business in Q1.
We still saw increases in demand.
On our other military and space platforms Mirror missile other military rotary aircraft platforms and other military fixed wing aircraft platforms.
The first quarter military and space revenue represented 53% of the comments revenue in the period down from 61% last year and this trend will continue to reflect more balanced with commercial aerospace and we like that.
We also ended the first quarter with a solid backlog of $444 million.
I also down modestly sequentially still represents 46% of the garments total backlog.
Within our commercial aerospace operations first quarter revenue increased 35% year over year to $73 1 million.
Driven mainly by bill rate increases at Boeing Airbus and others.
So I would expect this to continue to gain momentum in 2023 in.
In the future is very bright across our product offerings.
Our delivery and quality also continues to standout as we move ahead.
The backlog within our commercial aerospace sector.
Sector stands at $464 million at the end of the first quarter.
And was $87 million higher or haven't had a 23% increase year over year from Q1 'twenty 2022.
With that I'll ask <unk> to review our financial results in detail.
Thank you Steve.
As a reminder, please see the company's Q1 10-Q and Q1 earnings release for a further description of information mentioned on today's call.
As Steve discussed our first quarter results reflect another period of strong performance.
Once again, we saw a significant increase in our commercial aerospace revenues.
We remain encouraged by the continued strength in domestic and global travel, which would support higher long term demand for aircraft and are also encouraged by the build rate outlook from our key customers that should drive continued growth in our shipments.
During the quarter. We also continued to make progress on our restructuring program and as Steve mentioned, we announced the acquisition of <unk> Aerospace in Q1, and subsequently closed on the transaction on April 25th.
With all this we feel like we have laid a strong foundation for the year in the first quarter.
Now turning to our first quarter results.
Revenue for the first quarter of 2023 was $181 2 million versus $163 5 million for the first quarter of 2022, the year over year increase reflects $19 million of growth across our commercial aerospace platforms, partially offset by $2 9 million of lower revenue.
Within the military and space sector.
<unk> overall backlog at the end of the first quarter was approximately $961 million similar to the level at the end of Q4, 2022 and $18 million higher than at the end of Q1 2022.
This reflects recent growth across our commercial aerospace platforms.
Our defense backlog was $444 million and we remain positioned for continued solid performance as we move through the remainder of 2023.
As a reminder, we define backlog as potential revenue based on customer purchase orders and long term agreements with firm fixed prices and expected delivery dates of 24 months or less.
We posted total gross profit of $36 8 million or 23% of revenue for the quarter versus $32 5 million or 19, 9% of revenue in the prior year period.
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 guaymas fire related impact.
On an adjusted basis, our gross margins were 21, 1% in Q1 2023 versus 28% in Q1 2022.
We continue to work through a difficult operating environment with supply chain and labor, however, through our proactive efforts, including strategic buys and our inventory investments we have been able to avoid any significant impacts on the business.
Ducommun reported operating income for the first quarter of $6 4 million or three 5% of revenue compared to $9 1 million or five 6% of revenue in the prior year period.
Adjusted operating income was $13 6 million or seven 5% of revenue this quarter compared to $12 3 million or seven 5% of revenue in the comparable period last year.
The company reported net income for the first quarter of 2023 of $5 2 million or 42 cents per diluted share compared to net income of $8 1 million or <unk> 66 per diluted share a year ago.
On an adjusted basis. The company reported net income of $7 9 million or <unk> 63 per diluted share compared to net income of $8 3 million or <unk> 67 in Q1 2022.
The lower net income relative to operating income was driven by higher interest costs during the period.
Adjusted EBITDA for the first quarter of 2023 was $23 1 million or 12, 7% of revenue compared to $20 1 million or 12, 3% of revenue for the comparable period in 2022.
Now, let me turn to our segment results.
Our structural systems segment posted revenue of $75 6 million in the first quarter of 2023 versus <unk> $66 million last year.
The year over year increase reflects $14 million or higher sales across our commercial aerospace applications, partially offset by $4 4 million of lower revenue within the company's military and space markets.
Structural systems operating income for the quarter was $4 7 million or six 3% of revenue.
A $4 9 million or seven 4% of revenue last year.
The year over year operating margin decrease was primarily due to higher restructuring charges.
Excluding restructuring charges and other adjustments in both years. The segment operating margin was 12, 9% in Q1 2023 versus 11, 7% in Q1 2022.
This is a solid operating performance from our structural systems segment.
Our electronic systems segment posted revenue of $105 6 million in the first quarter of 2023 versus $97 5 million in the prior year period. These results reflect 5 million of higher commercial aerospace revenue and $1 5 million of higher revenue across the company's military and space customers.
Electronic systems operating income for the first quarter was $10 million.
95% of revenue versus $9 4 million or nine 7% of revenue in the prior year period.
The lower operating income as a percentage of revenue was primarily due to higher restructuring charges, excluding restructuring charges and other adjustments in both years. The segment operating margin was 11, 6% in Q1 2023.
First is 10% in Q1 2022.
Now an update on our restructuring.
As a reminder, and as discussed previously we commenced a restructuring initiative back in Q2 2022. These.
These actions are being taken to accelerate the achievement of our strategic goals and to better position the company for stronger performance in both the short and long term.
This includes the shutdown of our facilities in Monrovia, California, and variable, Arkansas and transfer of majority of that work through our low cost operation in Guaymas, Mexico with the remainder going to other existing performance centers in the United States.
We are progressing well on these transitions, both with employee retention and engagement and with customer alignment.
During Q1, 2023, we incurred $4 2 million in restructuring charges.
Majority of these charges was evidenced in benefits related.
We expect to incur an additional $8 million to $12 million in restructuring expenses during the rest of 2023.
Upon the completion of our restructuring program, we expect to generate 11% to $13 million in annual savings from our actions.
Once we wind down production at Monrovia, and Barry will we anticipate selling the associated land and building at both locations.
Turning to liquidity and capital resources.
We have available liquidity of $217 million at the end of the first quarter. The first quarter of ETF is typically our largest net usage of cash in operations, primarily due to the payout of year end accrued incentives and this year. We also made an estimated tax payment of approximately <unk> <unk>.
$8 million to cover changes in tax rules for R&D expenses, which now need to capitalize and amortize.
And thus used $18 9 million in cash flow from operating activities during the quarter.
This was similar to the prior year, which also saw net cash used in operations of $18 9 million.
Our 12 month debt to adjusted EBITDA ratio was two five and is among the lowest in the last several years.
However, going forward as a result of the completion of the <unk> acquisition in Q2, we expect our debt to adjusted EBITDA ratio to increase.
While our debt refinancing during 2022 was timely and beneficial the rising interest rate environment drove the increase in interest cost of $4 2 million in the quarter versus $2 4 million in Q1 2022.
This was expected.
In November 2021, we put in an interest rate hedge for $150 million, which goes into effect in January 2024, and it will help with our interest costs.
To conclude the financial overview, we are off to a good start in 2023 and with the <unk> acquisition now completed in Q2 and the expected completion of the restructuring program. Later this year. There is much to look forward to for the rest of 2023 and beyond.
I'll now turn it back over to Steve for his closing remarks, Steve Okay. Thanks Ahmad and closing it was.
A very good quarter to begin the year. The <unk> acquisition is another step in the right direction certainly meet the expectations, we communicated at our Investor day in December and.
In addition, all the meetings had been attending now that we're <unk>.
Median person again with top customers in all the industry News news that I read just show some great opportunities over the next several years and the commentary will be ready to capture the upside.
My Thanks, as always to our employees and investors for their support as we embark on a new year and build momentum throughout 2023 towards an even stronger 2024.
I will now open up for questions. Thank you Phillip.
Thank you and at this time, we will conduct a question and answer session.
To ask a question you will need to press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby, while we compile the Q&A roster.
Our first question comes from Ken Herbert of RBC. Your line is now open.
Yeah, Hey, good morning, Stephen Congratulations two months.
Thank you Ken.
Hey, Steve maybe to start off you called out some pretty significant growth in the first quarter for the Max and it sounds like you've taken some share.
On that program, which is nice, but there's been a lot of headlines recently about this program and some issues with spirit.
Can you maybe level set us here in terms of what what bill rate you're currently going in on the Max maybe how you see that progressing over this year and then maybe maybe the revenue contribution this year, how much you expect it to grow across the full year because it sounds like you haven't been impacted by some of the slowdown that we're seeing in spirit.
Yeah. Thanks, Ken Good question I guess, a couple of things first I was up at the Boeing supplier meeting not too long ago, So Stan deal and the team there.
So a couple of things first we came out of the gate pretty much in a modest way at 31 months.
But we do despite some of the issues at spirit.
Wish them all the best to get that cleared up where we're more on the front end and front end of this thing and we think that okay. There will be a little bit of a hiccup, but we still see things heading up from 31 to 38 by the end of the year, we're fairly confident of that.
We're all capitalized for that we've got a little bit of hiring to do but we are.
We're.
Optimistic so.
Certainly it's an issue certainly the repairs I mean theres a lot of things that the spirit team has to has to get done there, but also as I mentioned we have.
It is a major development with them on the skins and.
That was a longtime comment we work very hard on that for over 16 months at least so we got that across the finish line. Just recently, so we already do ROI already.
For raw form and stretch former already big players in fuselage skin is on the <unk> hundred <unk>. So we think that.
Not only were going to see a better better rates I mean, okay. We will have a little bit of headwind right now, but we are planning to get to 38 closed very close by the end of the year, but we're also very optimistic that.
We go forward with spirit.
To pick up more of the stroke program sure.
I think good things ahead for us.
Okay.
Helpful. Thank you and I guess as you think about that to segue into the.
The better outlook for revenues this year.
Mid to high single digit is that predominantly the <unk> acquisition or is there any assumption in there about sort of better performance out of aerospace I mean, it looks like <unk> could add.
Maybe three to four points of growth this year.
So it's a mix okay. So it certainly <unk> is going to contribute.
Pick them up at the end of April right. So we're not going to get a full year of revenue, but we're going to pick up some nice revenue and then also again when we started the year at low single.
We still obviously, a little as he would say nervous, but just be a little more modest.
At the beginning of the year, but we feel better about our prospects as well as Airbus and Gulfstream and.
The other the other companies we support.
I would say it'd be a lot of it is kind of on the lower end of the range that you suggested.
And so there is a substantial organic growth in the.
In the outlook.
Okay, Great and just finally.
I think I think the cash use this quarter was probably consistent with expectations.
Can you reset us on maybe your expectation for full year 'twenty three free cash flow.
So.
We expect to have a better free cash flow. This year than we did last year. There are some headwinds as we do these facility transitions and have to build up.
On the inventory to support those.
To support those boats.
But we're looking at ways to offset some of those headwinds and come out net positive versus where we did on working capital and cash flow last year. We got some interesting Monrovia, we got the Apache back late and we have the Max boilers. Yale So we get some some major major.
Industry impact.
Moves here, so we got to make sure we're taking care of first the customer and making sure. We got enough buffer for these for these moves so a little bit of that too.
Great Alright, guys. Thanks, a lot.
Ken.
One moment for our next question please.
Yes.
Our next.
<unk> comes from Mike Crawford of B Riley Securities. Your line is now open.
Hey, Thank you just just.
Make sure.
Are you not comfortable talking about.
Rough.
Annual revenue run rate.
Sure.
As well as.
Working capital.
It's going to put on the balance sheet.
Next time, we see a print.
So we're going to we'll be we'll have more to say I think at the end.
The Q2 call micro just get started here I mean, obviously DLR is an engineered product with aftermarket so it's going to be accretive to.
To the P&L into our current business. So we're excited about it.
I think the earlier with Ken's.
Comments, it's a couple of points for this year for us.
On the revenue side and more to come.
Okay.
And then.
Okay.
Regarding the mid to high <unk>.
Visit growth guidance.
Implying some high 700 millions of revenue versus your 12 month backlog, which is closer to.
$650 million ish.
So where is the main.
Sure.
Business that makes up that difference.
So we see a book and ship in a lot of our engineered product.
<unk>.
And so that is a big driver of that.
And then we may see some of some incremental in our structures business as well as some drop in orders in our electronic manufacturing services businesses as well from time to time.
That typically lead times are longer but mainly in our engineered product businesses is where we have more book and ship business.
Okay, great. Thank you and then.
<unk>.
Okay.
Scott.
I guess the rasco you weren't really prepared to talk about this but once you do get out of our monro.
Our factory like do you have any more sense you can share on <unk>.
Potential timing.
The sale of.
These are the real estate underlying these facilities.
Perhaps what you might get from from it.
Yes, I think it's a little tricky right now because we've got some major things too.
To move right and.
Customers they get nervous so we have to make sure that we do.
On the right things on the front end, we would like to move one if not both properties.
By the year end, if not by Q1, Mike So it's not something we're going to we're in a hurry a bit here, but we've got to make sure. We do the right things for the market, so but sooner than later.
Okay, Alright, thank you very much.
Ron.
Your next call comes from Michael CMO Securities.
Yes.
Taking my question.
Sure.
Hey can you hear me guys, yes, we can.
Hear you Mike.
Maybe just going back.
To the facility transitions I think you talked about the Max boilers and the Apache blades is there any sort of re qualification risk needed to shift that work or or any sort of technical challenges that we should be aware of there.
No, Mike we were making that stuff forever. So.
We're just we're just going to make it somewhere else. So no issue about that but obviously, we have to work with the customer because its going into a new facility right. So.
Theres always a lag dealing with the French prime of our major OEM on the commercial side, but we feel good about where we are the one thing I'd say too just for investors is that and I give a lot of people credit at various fill in Monrovia I mean, we announced this in November of last year, and we still have a pretty much a full workforce.
So people are committed to finishing the job in getting a transfer properly. So I would say at least on the technical side. The answer is no.
Okay.
And then just back to the Max can you just.
Circle back one more time on the content you talked about the $4 million is that does that assume a specific run rate are you on every plane I know the Max was your biggest program pre pandemic, but just trying to get a sense of how much content. This adds.
Yeah. So.
Like I said I mentioned about formula.
You know it's.
It's a good start let's put it that way, it's going to sort of increase our ship rates. That's roughly around 15 15 ship sets a month for the skin. So we're pretty happy with that.
Yes, Sir.
It makes it makes it internally too so.
Again, that's the big that's the big deal we're in the game.
Okay perfect. That's what I was looking for.
Then maybe simona on the restructuring you called out.
And I think you have done this the annualized savings starting in the second half of 'twenty three how should we think about that.
I don't know if its call it $5 5 million or so of savings how should we think about the margin should we expect to see.
Okay.
Youre going to see it towards more towards the end of the year.
Yes, so I think youre going to see the benefit really more pronounced in 2024.
Okay got it.
Yes.
Perfect.
Okay perfect.
It's all I had thanks.
Thanks, Mike always good dividend.
You may now disconnect.
I'd now like to turn it over to Mr. Al Dor for closing remarks.
Okay. Thank you very much.
Look again I think it's a very good start to the year. We got we have a lot going on here.
But I think all very positive for our customers our company and our shareholders.
It should be.
Consequential year for ducommun on the upside and again my thanks for attending today and wish you a good afternoon.
Thank you for attending today's conference. This does conclude the program you may now disconnect.
Okay.
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