Ducommun Incorporated
Q4 2020 Earnings Call Transcript

Published: 11 Feb 2021

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Q4, 2020 Ducommun Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Chris Witty, Investor Relations Moderator. Thank you. Please go ahead, sir.

[Chris Witty:]

Thank you, and welcome to Ducommun's 2020 fourth quarter conference call. With me today are Steve Oswald, Chairman, President and CEO, and Chris Wampler, Vice President, Chief Financial Officer, Controller and Treasurer.

[Steve Oswald:]

Okay. Thank you, Chris. Thanks everyone for joining us for our fourth quarter conference call. As in our second and third quarter calls, I first hope you and your families are healthy, continue to get through this pandemic as best as possible. Today, and as usual, I will give an update of the current situation of the company, after which Chris Wampler will review our financials in detail.

[Chris Wampler:]

Thank you, Steve, and good afternoon, everyone. As a reminder, please see the company's 10-K and Q4 earnings release for a further description of information mentioned on today's call. As Steve discussed, our fourth quarter results once again underscore the diversity of our business and focus on bottom line performance, resulting in our posting of strong results during the pandemic for which we're certainly proud. Now move to the details of overall results. Review of the fourth quarter 2020. Revenue for the fourth quarter of 2020 was $157.8 million versus $186.9 million in the fourth quarter of 2019. The decline largely reflects $42.4 million of lower revenue across our commercial aerospace customers, $10.1 million lower revenue within the company's industrial market, partially offset by $23.2 million of higher revenue within the military and space sector. The continued theme for the year is our commercial platform saw a significant decrease in the demand due to the economic impact of COVID-19 on Ducommun's customers and air travel in general. Ducommun’s overall backlog at the end of the fourth quarter was approximately $822 million, representing sequential growth from Q3 in military and space orders, while our commercial backlog was flat quarter-over-quarter. Our defense backlog rose almost $530 million, a record for the company. 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 $34.8 million versus $40.1 million in the prior year period, while gross margins rose to 22.1% from 21.5% in the fourth quarter of 2019. The margin increase year-over-year was due to favorable product mix, particularly within our Electronic Systems segment, more than offsetting the negative impact of lower manufacturing volumes and higher compensation benefit costs. SG&A was $22.6 million in the fourth quarter versus $24.9 million last year. Once again, reflecting our tight cost controls to streamline operations. Ducommun reported operating income for the fourth quarter of $11.6 million or 7.3% of revenue, compared to $15.2 million or 8.1% of revenue in the prior year period. Adjusted operating income, net of restructuring charges, accounting adjustments and other onetime items was $12.9 million this quarter, or 8.2% of revenue, compared to $15.8 million or 8.4% of revenue in the comparable period of 2019.

[Steve Oswald:]

Okay. Thanks, Chris. And first, we're certainly proud of the results this quarter and overall in 2020. We met our commitments despite massive headwinds. And as mentioned, planned to start growing the business again in 2021. I would add as well that we do the right footprint, operating system, cost structure, discipline and leadership to continue performing at a high level. And we feel very confident in the future. As in the Q3 call, I also want to thank our customers, shareholders all other business partners for their continued support as we work through these difficult times together. We've also now, as we mentioned earlier, giving out quite a bit of money through our Ducommun Foundation for $1.3 million to local charities, where we operate to help our neighbors and community. In 2020, we have partnered as well with two organizations to help improve the quality in our nation, and assist small business recovery due to the social unrest in the past in Los Angeles. And first and foremost, in closing, I'd like to, again just want to take this time to thank the Ducommun employees and my team. I'm proud of them, all their efforts dealing with the many challenges from the pandemic in 2020 and delivering. Our team showed up every day at our operations, those stressful and got the job done for our customers and for our nation. So with that being said, I'd like to again, thank you for your time and we'll turn it over to questions.

[Operator:]

Thank you. Your first question comes from the line of Ken Herbert from Canaccord. Your line is open.

[Ken Herbert:]

Yes. Hi, good afternoon, Steve and Chris.

[Steve Oswald:]

Hi, good afternoon.

[Ken Herbert:]

Hey Steve, I just wondered if you can talk a little bit about your expectations for the revenue cadence in fiscal ‘21. I mean, obviously, the first quarter is going to be a challenge. And you said that should be down. Does the second quarter look a lot like the first quarter with what you see now and we start to see growth on easier comps? Or do we start to see some acceleration in the top line in the second quarter and through the rest of the year?

[Steve Oswald:]

I'd say it's both. Okay, so good question. Yes, just I see us, certainly revenue, you're going up a bit as we move through the year with, even though we're expecting bigger things in 2022 and 2023 on the commercial side. We do see better numbers there. But as you all know, Q2 to Q4 of this year are going to be a good comparison for us. So we will probably see a mix of both, Ken.

[Ken Herbert:]

Okay. And then and then as part of that on the commercial aerospace side, can you level set us with sort of what rate you're shipping out on the MAX now? And if you're still seeing some inventory or some channel headwinds, and how you see that progressing over the year?

[Steve Oswald:]

Yes, I would say this, I'd say that 2021 is a transition here. For the MAX, I think there is some inventory. I think, there is some still work through at Spirit and at Boeing. We think we feel better about the second half than the first, but just in general as I mentioned in my remarks, for the full year for Ducommun we're looking at sort of low, single, mid on the revenue overall.

[Ken Herbert:]

Perfect. And if I could just one final question. I mean, phenomenal job on the defense business. I think you called out over 50 customers -- now customers programs that are over a million each. How does the new business environment look on defense in terms of your ability to take share? And does that number continue to expand as we move forward?

[Steve Oswald:]

Well, look, first of all, thank you for mentioning that. And we think that that's a tremendous metric. As I mentioned and my memory rocks as well, as far as where we came from on the defense business, is that, we still see a lot of headroom. I know, there's concern about the budget, and concerns about administration priorities, and we'll have to work through that. But if we just look at our level of penetration at some of these defense primes, I mean, it's still pretty low. So, I mean, if we can have a company like a defense prime, like Raytheon with those kind of numbers, and why can't we have with Northrop and why can't we have at Lockheed. So, I see, share shift. I see new programs. And the nice thing about our portfolio is that, we're delivering a high level, high service levels, really good quality. And people are trusting us more and more. So, I think it's all bodes well for the future.

[Ken Herbert:]

Great. Thanks, Steve. Really nice job over this year.

[Steve Oswald:]

Great, Ken. Thanks for your support in 2020. We appreciate it, sincerely. Thank you.

[Operator:]

Your next question comes from line of Mike Crawford from B. Riley Securities. Your line is open.

[Mike Crawford:]

Thank you. Hey, do you have any preliminary take on how any shifting defense priorities under the new administration may affect Ducommun?

[Steve Oswald:]

We -- why don't you take shot the first?

[Chris Wampler:]

Yes. Mike, we certainly follow what we hear from the various places as much I think as anybody, and our latest is, where we're going here in the next year or two, I think, for the most part, the programs that people are viewing is continuing and sort of having a up arrow, or seeing like the ones that we are attached to, and the ones that seem like they have a lot of headwinds, not as much for us. So, I think that flavor of it feels good. But until this thing gets sort of baked out a little more, we're not saying too much more on that.

[Steve Oswald:]

Yes. Hey, Mike, this is Steve. So, I would say, look, if you look at what we're supplying, I feel fairly confident, obviously, F-35 and lots of other things, missiles. One of the big points, and though we're not heavily into some of the big things what they're going to do with the Navy. And we're going to have to find out, probably May or June about that. But as far as our programs, as far as how this year and next year looks and our backlog position, I mean, we feel good.

[Mike Crawford:]

Thanks, Steve. And then just related, given the nature of your business, how insulated what do you say you are from this Calvert bill seeking to reduce civilian workforce to the DoD by 15% over the next four years?

[Steve Oswald:]

Can you say that one more time? Sorry, Mike?

[Mike Crawford:]

Yes, there's a new bill introduced seeking to reduce the civilian workforce to the DoD. And I imagine you're fairly well insulated from any changes that might bring it out.

[Steve Oswald:]

Yes, I mean, obviously, we're not a defense prime. So we're not -- we're very insulated from that. We're just dealing with our contacts in industry.

[Mike Crawford:]

Okay, thanks. And then final question relates to the commercial aero structures ramp when that starts to occur. Are there any pain points that would reduce margins as you get lines back up to the levels where they used to be producing? Or should it be pretty smooth?

[Chris Wampler:]

Yes. That one might, Mike, I mean, we should be pretty smooth on that. Again, that was part of the flex down that we did. And so as we pick up the various work. And it's across, I mean, it's certainly 737 Max and A320, but it's the whole slew of the commercial programs that once they start to fill back in, those should come on and be very helpful for us with no major items.

[Mike Crawford:]

Excellent. Thank you.

[Steve Oswald:]

Thank you, Mike.

[Operator:]

Your next question comes from a line of Michael Ciarmoli from Truist. Your line is open.

[Michael Ciarmoli:]

Hey, good evening, guys. Thanks for taking the questions here.

[Steve Oswald:]

Hi, Mike.

[Michael Ciarmoli:]

Hey, Steve, real life results, and maybe if I can just to nitpick a little bit. What specifically, you know, I think they may have shaken out a little bit different than we expected. It looks like you got a really big ramp sequentially in structural systems, both on the top line and on the margin performance there. And, maybe the electronic systems, a little bit more squishy, and that that sequential decline in margins. Can you maybe elaborate as to what some of the puts and takes were there?

[Steve Oswald:]

Yes, I'll let Chris go for it and then I'll go throw in there.

[Chris Witty:]

Yes. No, Mike, I mean, I think it sort of keeps with the theme that we've been communicating for quite a few quarters in terms of there is -- it's not all going to be linear. And I mean, even to the prior question. I mean, the company's small enough that it doesn't take much to move us a little bit up or down. So you got to look at a few quarters trend. And we certainly talked about that electronics group is, as we're getting decent volume, we look to continue to expand the margin, but that operating income in the 10% to 11% to 12% range is sort of where we can expect it, and when things line up, then we'll burst north of that. And that's really why where we reset here in Q4.

[Steve Oswald:]

Yes. And I would just say, just in general on structures, I mean, we're doing a lot of good things there. We've obviously come a long way. But we feel as we move forward in time, we certainly have more runway in structure. That as well as in electronic systems, because your scale is going to be our friend as we go forward. And right now, part of our business obviously is not scale, because of all the market conditions. But we think our position in titanium, our position on single aisle also thanks for doing the defense and more to come there that, we're going to see some good results, Mike.

[Michael Ciarmoli:]

Got it. And then just looking into next year as well. Obviously, you've got the tough comps in the first quarter with aerospace. But even throughout the year, I mean, you're going to be lapping some really tough comps on the defense side. And you talked about that I guess total '21 being low to mid-single-digits. But do you think presumably, in that back half commercial aero strengthens? Do you think you can see strength at a defense? Do you think you can grow that backlog as well as you progress through '21?

[Steve Oswald:]

I mean, we certainly feel a couple things. First, we certainly feel good about second half commercial aero coming up a bit, and then we think that that's going to happen. We also feel -- we feel actually good about our revenue line for defense. I mean, certainly last year, I mean, 2020 was really a breakout year. But we still feel like I've mentioned in the past with other defense primes and little things we're doing is, we do have headroom here that, we feel like we can still grow it. Obviously, you're right, it's going to be a tougher comp. But we're going to -- we feel good about again this year 2021 and defense.

[Michael Ciarmoli:]

Got it. And just last one for me, you obviously talked about the declines I think year-on-year on the MAX, you called that out. If you were to sort of or would you -- could you tell us in terms of maybe excess capacity or carrying or any kind of drag on margins as you kind of start to see this ramp, do you get back? I guess I'm kind of asking maybe where you are in terms of the overall footprint and utilization. How much capacity you have and where do you see that trending in terms of utilization as you move through '21?

[Steve Oswald:]

Yes. I mean, I think it's going to continue. Look, we're going to continue to fill the order book. Our capacity and the good news is for our investors and for the company is we have our footprint up to 50 MAXs a month, plus we've got our footprint at 50 Airbus plus a month. So as far as that goes, we're in a good position there. I will also mention that we kind of went out of our way, even though there's some pressure there to keep a lot of our good people on the structure side of the building, because we knew, eventually this will come back. So, we feel good about that utilization. It's going to go up, and I think everybody's going to benefit.

[Michael Ciarmoli:]

Perfect. Sounds good. Thanks a lot, guys.

[Steve Oswald:]

Thanks, Mike.

[Operator:]

Your next question comes from line of Ken Herbert from Canaccord. Your line is open.

[Ken Herbert:]

Hi, Steve. Just a quick follow-up if I could. You paid down a bunch of debt in the quarter. How should we think about capital allocation this year in terms of debt reduction, relative to how the M&A pipeline looks? I mean, since you joined the company, you've done sort of a deal a year. It's been obviously a challenging market this year, but how do we think about M&A this year? Where are you seeing the opportunities? How's the pipeline look? And what's your outlook there?

[Steve Oswald:]

All right. So let me go first. Just look, obviously, we're active. I think we well said 2020 was difficult year to do a deal for lots of reasons, but we're starting the year off in 2021, we're active. We are looking at things. We are seeing opportunities. So that's the first thing I'd say. We're going to continue to follow our strategy that we've had in the past, so really no change there. We feel good about where we are with the whole operating system of the company. So we're optimistic that we're hoping, we're going to do one or two this year, we'll have to see. But certainly we're in the game, and we're moving forward. So you want to say anything else?

[Chris Wampler:]

No, just in terms of the capital allocation, Ken. We certainly have the $50 million in cash and the $75 million available on the revolver. I mean, that's the best thing we can do to utilize it, to create the value is going to be what Steve saying. And so that's what we're looking to do. And you're right, this was the first year we didn't play get through on one and it was a strange year, for a lot of reasons. But yes, that's what we're looking to do as we get through 2021.

[Ken Herbert:]

Great. Thanks.

[Steve Oswald:]

Thanks, Ken.

[Operator:]

At this time, there are no other callers in queue, so we'll turn it back to Mr. Oswald for any closing remarks.

[Steve Oswald:]

Yes. Well, thank you very much. And thank you, everyone for participating today. Obviously 2020 was a very, very difficult year for lots of reasons. And we certainly hope that we're going to see better days sooner or later with the vaccine rollout. On behalf of the team, just want to thank our shareholders and our analysts and everyone involved with the company for their support in 2020. So I'll leave it there. And have a nice evening.

[Chris Wampler:]

Thanks, everyone.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.