DUCOMMUN INC /DE/ Q3 FY2024 earnings call

• Ducommun's Vision 2027 strategy is being executed, focusing on increasing engineered products and aftermarket revenue, consolidating facilities, targeted acquisitions, offloading with defense primes, value-added pricing, and expanding content on commercial aerospace platforms.
• Q3 2024 was a strong quarter with revenues exceeding $200 million for the first time, growing 2.6% year-over-year. Military and space revenues grew 6%, commercial aerospace grew 3% with strong growth on A220, A320, and business jets, offset by Boeing platform weakness.
• Gross margin was 26.2% in Q3 2024, up 350 basis points year-over-year. Adjusted operating income margin was 10.5%, a record. Adjusted EBITDA was $31.9 million, expanding to 15.8%. GAAP diluted EPS was $0.67 vs $0.22 in Q3 2023, and adjusted diluted EPS was $0.99 vs $0.70.
• Facility closures: Monrovia, California facility closed; Berryville, Arkansas facility reduced to less than 10 people. Cost savings from closures expected to increase in 2025. Backlog was $1.044 billion, with defense backlog at $592 million and commercial aerospace backlog down sequentially but up year-over-year.

Structural Systems segment: Revenues were $86 million in Q3 2024 vs $85.5 million last year. Year-over-year increase due to $3.7 million higher sales in commercial aerospace applications (A320, A220, business jets) offset by $3.3 million lower revenue in military and space markets (decline in Apache revenue). Operating income was $8.3 million or 9.6% of revenue. Electronic Systems segment: Revenues were $115.4 million in Q3 2024 vs $110.7 million prior year. Increase due to higher revenues from radar and electronic warfare programs, offset by lower revenues from in-flight entertainment electronics and pruning of noncore industrial business. Operating income was $18.9 million or 16.4% of revenue.

• 2024 revenue guidance is at the lower end of single digits, expected range 3% to 4%, driven by Boeing strike impact on MAX build rates. MAX build rates weak in Q4 but expected to recover in 2025 and 2026. - Backlog details: Defense backlog increased $97 million year-over-year to $592 million; commercial aerospace backlog decreased sequentially by $20 million but up $8 million year-over-year.

• Cyclicality of end-use markets. - Level of U.S. government defense spending. - Customer delays in launch and certification of new products, timing of orders. - Legal and regulatory risks. - Cost of expansion and acquisitions. - Competition. - Economic and geopolitical developments including supply chain issues and interest rates. - Ability to attract/retain key personnel and avoid labor disruptions. - Intellectual property risks. - Pandemics, disasters, natural or otherwise. - Cybersecurity attacks.

Q: What is it that you're doing new for Northrop Grumman? And where else could you help them?

A: Ducommun does a lot of airborne surveillance, electronics, power packs for Northrop Grumman, including the Mesa program. Steve Oswald will be with Northrop Grumman leadership in Baltimore to explore bigger opportunities ahead.

Q: Just on the revenue guidance, now down at the lower end, I guess it implies a sequential step down into the fourth quarter, maybe 5% or so if you get to that low end. And then I guess I'm just thinking about what does your margin situation look like, try and calibrate us maybe for the fourth quarter and then obviously, with the Boeing strike and disruption and then kind of how we recover to that into '25.

A: The Boeing piece is a key driver. MAX production rates were lower than expected. While MAX has a minor impact on revenues, margins are expected to stay in the same ballpark with some minor impact from volume and product mix. There will still be some continuing activity due to ASC 606 requirements even with low MAX shipments.