Welcome to the First Quarter 2021 Ducommun Earnings Conference Call. My name is Anna, and I will be your operator for today's call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer I will now turn the call over to the Investor Relations Advisor, Chris Witty. Chris, you may begin.
Thank you, and welcome to Ducommun's 2021 Q1 conference call. With me today are Steve Oswald, Chairman, President and CEO Chris Wampler, Vice President, Chief Financial Officer, Controller and Treasurer. I'm going to discuss certain limitations to any forward looking statements regarding future events, projections or performance that we may make during the prepared remarks or the Q and 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 prospective. 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-nineteen 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 acquisitions competitions and disasters, natural or otherwise.
These risks and others are described in our annual report on Form 10 ks 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, except if and as required by regulatory authority. This call also includes non GAAP financial measures. Please refer to our filings with the SEC for a reconciliation of the GAAP to non GAAP measures referenced on this call. We filed our 2021 Q1 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. Well, thank you, Chris, and thanks everyone for joining us today for our Q1 conference call. As in our prior quarter calls, I hope you and your families are healthy for those that have received vaccines that it went or is going well, that we all get through this pandemic as best and fast as possible. Today, and as usual, I will give an update on the current situation at the company, after which Chris Wamp will review our financials in detail. Company remains focused 1st and foremost on the health and safety of our employees.
Team has done an excellent job with the safety protocols put in place since March 2020. We continue to work with authorities on best practice throughout our operations. Amount of cases at Ducommun is roughly 200 since the beginning of the pandemic. We have seen a significant drop off starting in February of this year and we remain diligent on communication with weekly updates to our human resources team. As mentioned in the press release, the comments first quarter results are strong despite the continued challenges in the commercial aerospace markets, which we are all aware of.
All the actions, initiatives and hard work since we began this journey in 2017 have shown the strong operating results, especially since last March and again in Q1. Our defense business continues to be the major contributor as we build out this important segment of the company for scale, which includes having the right product portfolio, strong operating metrics, leveraging our lean and highly focused performance center content. This is particularly evident in the continued margin strength for gross profit and adjusted EBITDA despite the significant year over year headwind. The team also posted adjusted operating income margins of over 7%. Quality of earnings too is very high with the company reaching GAAP diluted EPS of $0.55 a share versus $0.67 a share for Q1 2020 and adjusted diluted EPS of 0.58 dollars a share versus $0.67 in 2020.
These notes are REITs despite overall revenue down 9% from Q1 last year. It's a job well done. This is also a great story for our investors as we see a return to revenue growth overall in 2021 with commercial aerospace recovering. Solid results in Q1 will benefit the rest of the year. The company's Q1 revenue was lower due to commercial aerospace markets.
However, Ducommun's defense business again showed strength being up 12% versus prior year and again was a result of many improvements starting back in 2018. Though not ever wanting to show a negative growth, the overall revenue number is impressive despite the pandemic impact on commercial aerospace in the quarter. We're looking forward to Q2 and posting year over year growth for the first time in a while. The common defense business revenues continue to show excellent progress on shipments and robust business development. Majority of gains in Q1 include the Raytheon TOW program, radar systems for Northrop Grumman, UAVs at General Atomics and other missile programs.
Again, as we've stated in the past, we are thrilled to be a strategic supplier with GA and reached $1,000,000 in revenue in March this year for the first time. And shipments in 2021 will be over 4x versus 2020.
So I
want to mention Raytheon Missile and Defense and the progress in signing the strategic supplier agreement with them in July of 2019. We've been hard at work with new programs and share shift where we can provide value and I'm happy to report 2021 will be a record year overall with the legacy Raytheon businesses growing from less than $90,000,000 in 2020 to over $125,000,000 in 2021, an increase of almost 40%. In regards to the defense backlog, it remains strong, ending Q1 with a backlog of $516,000,000 Total backlog for the company was $810,000,000 and this is a great number based on the environment. The defense business grew year over year by 8.8% bolstered by strong revenues in some key defense platforms, which include the TOW missile, UAV and other programs as part of Tucomis continues to deliver. Obviously, this strength help offset commercial aerospace order pressure, but we anticipate that to start increasing in the second half of twenty twenty one.
The defense results also show great opportunities when we leverage our structural product lines with defense OEMs. As mentioned previously, we have wins now on the TOW missile, which was a share shift from another supplier and other new programs such as the Standard Missile 2 dorsal fin assembly. Along with our acquisitions, this part of the business will be north of $110,000,000 in revenue for 2021 or was under $80,000,000 in 20 19. I also want to mention that we are optimistic about defense going forward despite concerns regarding the budget and change in administration. Tucano's defense segment has been under managed in the past as I've mentioned, but now with structural applications going full speed ahead along with a long track record and value offering of our Electronic Systems business, we see a strong future.
One other very important metric is that our defense portfolio currently has 48 programs at the end of Q1 above $1,000,000 in yearly revenue, up from $34,000,000 in 2017 and over 40% increase. The company's cost actions through Q1 2020 are also paying dividends. You can certainly see the effectiveness of our actions in the continued strong gross profit margins year over year and a solid operating income percentage along with diluted EPS. The team did a great job in 2020 on cost and is now extending into 2021 in Q1. In regards to the outlook, our significant backlog in Defense, the many growth programs mentioned earlier will provide strong revenue for the remainder of 2021.
We estimate that revenue will be led by defense, but over the quarters and years ahead, we see more commercial aerospace volume return to Ducommun. We have the capacity, a strong operating team and are prepared for the rate increases, especially in single aisle aircraft. We stand ready as well with our strong narrow body platform positions with the common titanium businesses of hot form and super plastic forming leading the way. As I've mentioned in the past, we are the world leader in this area and have strong positions already at Airbus, Boeing, Spirit AeroSystems, Gulfstream and among other OEMs. Tucumet also has been recognized and is now included in the Boeing Premier Bidders program, meeting all of this OEM's criteria.
And I also want to send my congratulations to our team supporting Airbus by reaching 100 percent on time delivery performance for 2 years straight in April 2021. That's a real achievement. As mentioned on our last call, we will return to growth in 2021 with the Q1 being down year over year, but now that is behind us. The other three quarters will see good momentum versus 2020, and we anticipate overall revenue for the year at Ducommun growing lowtomid single digits. Ducommun also has a great mid term and long term future.
This will be accomplished by leveraging our new built out defense business and strong position in commercial aerospace, especially on narrow body revenues as we have a 2:one ratio versus double aisle aircraft. Our Engineered Products portfolio and recent acquisitions will provide opportunities as well. Finally, we also remain active in the market for M and A and believe this will only be an accelerator to higher results in the future. Now let me provide some additional color on our markets, products and programs. Beginning with our military and space sector, we posted 1st quarter revenue of 114,100,000 dollars once again representing strong growth versus 2020, up 12%.
We brought revenue on some key defense platforms. Mentioned earlier, we saw increases in demand on our TOW missile, UAV and other missile programs. 1st quarter's military and space revenue represented 73% of the common's revenue in the period. We also continue to be very well positioned for further growth across our defense platforms over the next several quarters in all sectors, especially at Raytheon and GA and again ended the 1st quarter with a strong backlog of 516,000,000 which is up 8.8% year over year and represents almost 64% of the common backlog. Within our commercial aerospace operation, 1st quarter revenue declined year over year to $35,400,000 as expected driven by build rate declines on number of commercial aerospace platforms impacted by the COVID-nineteen pandemic.
Tucumab also has effectively adjusted costs and management downturn is well positioned once rates stabilize and increase over the long term. Tacama will begin to recover in this market in the second half of twenty twenty one, and as mentioned earlier, has a very bright future. The backlog within our commercial aerospace sector stands at roughly $266,000,000 at the end of the Q1, with the majority of the declines due to the 7 37 MAX program. We do however stand ready with the team, processes and capital in place to support the bill rate increases in the next few years and we're anxious to get started. With that, I'll let Chris review our financial results in detail.
Chris?
Thank you, Steve. Good afternoon, everyone. As a reminder, please see the company's 10 Q and Q1 earnings release for a further description of information mentioned on today's call. As Steve discussed, our Q1 results were very solid. During Q1, we continued to demonstrate our ability to perform well at reduced volume levels, which we have had since the onset of the COVID-nineteen pandemic over 1 year ago.
We're looking forward to leveraging the expected increase in demand for our commercial aircraft components and systems, as well as the strength of our defense business as we return to growth in 2021. Now turning to our Q1 results, let me review some of the highlights. Revenue for the Q1 of 2021 was $157,200,000 versus $173,500,000 in the Q1 of 2020. The year over year decline reflects $25,200,000 of lower revenue across our commercial aerospace platforms and a decrease in our industrial business, partially offset by $12,200,000 of higher sales within the military and space sector. Ducommun's overall backlog at the end of the first quarter was approximately $810,000,000 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 $33,100,000 for the quarter versus $36,800,000 in the prior year period, while gross margins were essentially flat year over year, 21.1% in the Q1 of fiscal 2021 versus 21.2% last year. The headwind from significantly lower manufacturing volumes was largely offset by improved product mix and lower compensation and benefit costs. SG and A was $22,500,000 in the Q1 versus $23,200,000 last year, reflecting the company's ongoing cost controls and streamlined operations. Ducommun reported operating income for the Q1 of $10,600,000 or 6.8 percent of revenue compared to $13,600,000 or 7.8 percent of revenue in the prior year period. Adjusted operating income excluding expenses related to the previously reported Quimas Fire was 11,100,000 dollars or 7.1 percent of revenue with the year over year performance largely reflecting the impact of lower volumes.
Interest expense was $2,800,000 for the Q1 of 2020 versus $4,200,000 in the prior year period, as the lower interest rates more than offset the impact from higher debt levels. The debt outstanding rose due to the company's cash drawdown of $50,000,000 last year to have hand as we work through the impact of the pandemic. Of this amount, we paid back $25,000,000 during the Q4 of 2020 and another $5,000,000 in Q1, leaving $20,000,000 outstanding. The company reported net income for the Q1 of $6,700,000 or $0.55 per diluted share compared to net income of $7,900,000 or $0.67 per diluted share for the Q1 of 2020. Excluding one time expenses, adjusted EPS for the Q1 of 2021 was $0.58 Adjusted EBITDA for the Q1 was $21,100,000 or 13.5 percent of revenue compared to $23,200,000 or 13.4 percent of revenue for the comparable period in 2020, reflecting the items I just discussed.
Now let me turn to our segment results. Our Electronics Systems segment posted revenue of 99,100,000 dollars for the Q1 of 2020 versus $98,100,000 in the prior year period. These results reflect a $7,400,000 increase in sales with the company's military and space customers, somewhat offset by $3,100,000 of lower revenue across our commercial aerospace platforms along with lower industrial sales. Electronic Systems operating income for the Q1 was $12,500,000 or 12.6 percent of revenue versus $15,100,000 or 15.4 percent of revenue in the prior year period. The lower margin was primarily as a result of unfavorable product mix, primarily offset partially offset by lower compensation and benefit costs.
Our Structural Systems segment posted revenue of $58,000,000 in the Q1 of 2021 versus $75,400,000 last year. The year over year decrease reflects $22,100,000 of lower sales across our commercial aerospace applications, partially offset by $4,800,000 of higher revenue within the company's military and space markets. Structural Systems operating income for the quarter was $5,100,000 or 8.8 percent of revenue compared to $5,400,000 or 7.2 percent of revenue last year. The year over year operating margin increase was primarily due to favorable product mix and excluding the Glimus charges, 1st quarter adjusted operating margin was 9.7% in 2021. Corporate, general and administrative expense.
CG and A expense for the Q1 of 2021 was $7,000,000 or 4.5 percent of revenue and $6,900,000 or 4 percent of revenue in 2020. Turning to liquidity and capital resources. We have $17,000,000 in cash on hand $80,000,000 available on our revolver resulting in available liquidity of 97,000,000 dollars We utilized $23,000,000 of cash from operations this quarter compared to utilizing $12,000,000 in the prior year period. The Q1 typically cash flow generation levels as we move through the rest of 2021. Our 12 months debt to adjusted EBITDA ratio was 3.4 at the end of the Q1.
In terms of capital expenditures, we spent $4,500,000 during the Q1 reflecting a return to more normal investment levels and aligned with our return to growth in 2021. We anticipate spending between $16,000,000 to $18,000,000 in 2021 to support ongoing product development and sustaining capital. In conclusion, we believe our performance this quarter was solid and stable reflecting the company's lean operations, diverse customer base and strong military demand. For 2021, we continue to be cautiously optimistic about a return to growth in commercial volumes during the second half, as Steve indicated. We'll discuss these trends further at our upcoming Investor Day on May 26.
I'll now turn it back over to Steve for his closing remarks.
Okay. Thanks, Chris. Certainly proud of the results this quarter and we look obviously forward as everyone does to better market conditions in commercial aerospace later this year. We met our commitments despite some very difficult headwinds and this is really due to our people and leadership at the end of the day. I would add as well that we do have the right footprint, operating system, cost structure and discipline.
We intend to perform at a high level and feel very confident in the future. As in the Q4 call, I also want to thank our customers, shareholders and all our business partners for their continued support as we worked through these difficult times together both last year and in Q1. I'll take this opportunity as well as Chris mentioned to let you know that the Investor Day I mentioned earlier in the year will take place on Wednesday, May 26 and start at 9 am Pacific Time. I'd like to invite everyone to this important meeting where we discuss our plans for the future and appreciate your support in attending. In closing, I'd like to again take this time to thank the common employees that I'm proud of them and all their efforts dealing with the many challenges from the pandemic that began in 2020 and now will continue in Q1 2021.
Our team members show up at the operations every day and though stressful, they get the job done for our customers, our nation and for one of them. So with that, let's go to questions please and thank you.
Thank you. We will now begin the question and answer And we have a question from Pete Osterland from Truist Securities. Please go ahead.
Hey, good afternoon. This is Pete Osterland on for Mike Ciarmoli. For taking our questions.
So it looks like
your operating margins took a step back versus the 4th quarter in Structural Systems despite sales being pretty flat there on a sequential basis. So I was just wondering if you could get some color on what drove this, if there was anything specific in the Q1 or just a change in mix or just any help you could give there?
Yes, Pete. No, Q1 is really with structures, it's all about the mix. And we had, again, year over year, it was a nice change favorably, but sequentially, yes, that's what caused us a little bit of headwind there.
Okay. Thanks. And then, it looks like your backlog has stabilized in commercial aero over the course of the last couple of quarters. So I was just wondering how order flow is trending there and if you could be expecting to see any meaningful increase for commercial aero sales on a sequential basis in the Q2 or if you think it's really just going to be in the second half before that materializes?
Pete, this is Steve Ozan. Welcome to the call, by the way. And we're certainly we're optimistic about our order flow the rest of the year, probably more leaning towards the second half of 2021, but we definitely anticipate that we're going to see orders go up. And I think overall the story is going to be a very good one, not only near term, but mid term.
Great. Thanks. And then just one more. I was wondering if you could comment on how your M and A pipeline is looking. If there are any areas you'd call out that are currently a
this role, we stood up our BD team and we have some excellent people running that function and we're highly engaged in the market. We're looking at things. There's certainly a little bit less on the commercial side you would anticipate versus on the defense side. But we like what we see. As we've done 3 deals since we started here in 2017, I think they all have been real winners.
So we're careful about what we do, but we're certainly leaning in and we hope for something to maybe happen this year and we continue to work hard at it. Great. Thanks a lot. Okay. Thank you for joining us.
And we have a question from Mike Crawford from B. Riley. Please go ahead.
Thanks. Steve, what if any program captured gold do you have in 2021 similar to what you did with the TOW missiles in 2020?
Can you say it again? I'm sorry, I got to turn the phone up a little bit in this room. Can you say that again, please? I apologize.
Yes. Just as you captured the missile program from another competitor in 2020, do you have any goals you can share regarding additional program capturing this year?
Yes. I don't I can't share it as far as we're constantly I would tell you this is that and I think it's a good news for investors is that there are opportunities for us for the share shift, but we're only going to do it where we can really add value, okay. And that's the case of the TOW missile. I mean, we're not the days of us just competing on price are over because generally it didn't work out so well. So I will tell you that we are active not only on not only share shift but also offloading.
That's another theme we're going to see more and more into common is offloading from defense primes that we can pick up. And the nice thing is that we're able to make the TOW missile happen and that's a significant project and it's not an easy part to make. So I think all of it's pointing in the right direction and when we have something more material significant, we'll let you know.
Okay. Thanks. And then as your commercial lines spin back up, is there a delay on when margins pick up as well or is it just primarily just a function of scale?
Yes, Mike, it's primarily a function of scale. I mean, there should not be a quote delay. I mean, that's we're just going to pick up efficiency as we leverage up. And we're looking forward to that because it's we're falling back from a pretty significant fall back last year Q1, Q2.
Great. And then the
last question is
Excuse me? No, I was
just saying with that, I mean, it's not happening just yet. So we're as we work through this year, as Steve and I mentioned, that's what we're looking to see as we work through this year.
Okay. Thanks, Chris. And then just final question is, how many different programs are you on with GA? Is it just one unmanned platform
or is it multiple?
I can only say so much because I've got to be respectful of GA. And if you know them at all, they asked me to be sort of high level on things, but we're on multiple programs.
All right. Thank you very much.
And we have a question from Ken Herbert from Canaccord Genuity. Please go ahead.
Yes, good afternoon. Steve. How are you doing?
Good, Ken. Good afternoon.
And Chris, I just wanted to first ask about cash in the quarter. I know the Q1 is typically seasonally soft, but free cash flow was a little bit lower this quarter than we'd expected and it looked like working capital was had some pretty significant investments. Can you just talk about any particular programs that may have been driving the use of cash in the quarter? If there was anything in particular
it's all to support our growth. And so as we're looking out over the next few quarters, we're trying to line up what we need to build, what we've got the ability to build and to meet that customer demand to hit the sales growth that we're talking about now as we go sequentially quarter to quarter. So that's where it related to the inventory and the unbilled, that's where some of that investment is done at this point so that we can manage through a little stronger and be customer demand the next couple of quarters.
Can you just comment, Chris, is it maybe more on the commercial side in anticipation of maybe max build rates or is it still predominantly on the defense side?
Yes. No, more on the defense side. I mean, if you think about so just a great question. If you think about the structure side and the commercial side, we certainly had a quick stop to a lot of the build last year. So that's what left us with a little inventory more inventory on that side of the business.
So we've got that sort of as our jump off point as we hit the growth rate. Defense wise is where we've got a little more of that build coming at us that we need to keep ahead of.
Yes. Ken, this is Steve. It's definitely leaning towards the fence. I mean, we're busy. And we're building things up.
We've got a lot of new programs coming online. We're pretty active. So yes, it's leaning a little bit towards that as far as the cash at least to get started in the year. Yes.
Okay. And Steve, you made a comment early in your prepared remarks as you're building defense towards the right scale. Can you just share and maybe you'll get the purchase later on in May, but what do you view as sort of the minimum threshold in terms of scale for your defense business? I mean, you clearly put up some pretty impressive growth numbers. But how do we think about what you view as the right scale for this business to really get the leverage out of the model?
Yes. Look, I think I'm going to basically talk a lot more in May. I think that's the appropriate time to do it. But I would tell you this that we're we have our performance center concept, right? So we have performance centers that make harnesses, performance centers that make assemblies, make cards, those type of things.
And we have a pretty good idea or at least a game plan sooner or later to get those centers up to scale, which is going to be, I think, terrific for investors and for our margins. So stay tuned. We'll have more in May, promise.
Okay. Well, just one final question for me. If we look at Electronic Systems segment margins, you were down quite a bit from the Q1 of last year. And I know the Q1 of last year was particularly strong. But can you just remind us anything in particular relative to a year ago?
And then how we should think about the margins in that segment sort of get back to the run rate here in the Q2 or is it maybe a couple of quarters out?
Ken, this is Chris. Yes, let me jump in a little bit here. So you're right. I mean, when you look at last year's Q1, everything sort of clicked right in to get us to our north of 15% margin with our Electronics segment in that quarter. When you get to this quarter and we sort of as we went through the year started to say historically, we were looking at 10%, 11%.
And then as we continue the journey, now it's more 11%, 12%, 13%, even though 15% was sort of the outlier. You get to this quarter, it wasn't a perfect one in terms of mix, but it also we did have some significant weather in the Midwest in the middle of the quarter 1 in February, and we had quite a bit of downtime that was there as well that had an impact. So couple of those things sort of led us to that point. But as we move forward, Ken, we should be thinking about that 11% to 13% is sort of the range. And like we've talked about with these segments, it doesn't take a lot to sort of move around.
So that's why we've got that range out there.
Yes. Perfect. Ken, let me just this is Steve. Yes. So the polar vortex was real for Ducommun, okay?
So that was real for us in February, unfortunately. So it impacted a lot of our operations.
So I guess there is some trade off when you think about Kansas and other locations relative to Southern California, right Steve?
There's a few that comes to mind, Ken. There's a few.
Yes. All right, you guys. Thanks a lot.
Ken, thanks for the support. As always, thank you.
At this time, there appears to be no further questions in the queue. So I'll turn it back to Mr. Oswald for any closing remarks.
Okay. Well, let me wrap it up here. First, again, I want to thank everybody for joining us for the Q1 call. We're certainly looking forward to better days and we know they're coming. In my opening remarks here, our focus through this whole thing has been employee safety 1st and foremost, and I think that overall we've done a really, really good job.
I just want to thank you for your support. We're working hard here to comment and we're looking forward to better days. And again, we appreciate your interest and your time today on the phone.
Thanks everyone.
And thank you.
Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.