Good afternoon, ladies and gentlemen, and welcome to the 2019 Fourth Quarter Ducommun Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Chris Witty, the moderator. Please go ahead, sir..

Thank you, and welcome to Ducommun's 2019 Foruth Quarter Conference Call. With me today are Steve Oswald, Chairman, President and CEO; and Chris Wampler, Vice President, Interim Chief Financial Officer and Treasurer, Controller and Chief Accounting Officer.

I'm going to make or 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 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 Federal 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 be 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 level of U.S. government defense spending, legal and regulatory risks, management changes, the cost of expansion and acquisitions and competition.

These risks and others are described in our Annual Report in 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 of 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 a reconciliation of the non-GAAP measures referenced on this call to the most similar GAAP measures. We filed our Form 10-Q with the SEC today, and you'll find a link to all our filings on the company's website under the Investor Relations tab.

I would now like to turn the call over to Mr. Steve Oswald for a review of the operating results.

Steve?.

Well, thank you Chris. Thanks everyone for joining us today for our fourth quarter conference call. As usual, I'll begin by providing an update on recent developments at the company, after which Chris Wampler will review our financials in detail.

As we finished a very important year for the company in 2019, I want to take this opportunity to first review a few highlights of our strong performance.

Our team has been working diligently over the past three years, improving all of our operations, developing our product portfolio, driving new technologies, focusing on providing high-value to customers and making strategic acquisitions among others. In 2019, Ducommun sales grew $721 million up 15% over 2018 and it’s highest since 2014.

In conjunction with that increase, we grew gross profit to $152 million or 21.1%. Net margin rate for 2019 has not been realized at the company in more than 15 years. Adjusted margins rose as well to 7.9% from 6.4% in 2018 and we generated $51 million in cash from operations.

Just as important, with great top and bottom line growth EBITDA rose to $92.3 million in 2019 or 12.8% of sales versus $70.7 million or 11.2% of sales last year. We're very proud of all these gains as we developed the company for sustained high-performance in the years ahead.

Now turning specifically to the fourth quarter, revenue rose 14% year-over-year and marked the sixth consecutive quarter of double digit increases averaging 15% growth which was mainly organic. The majority of the gains were driven by important military programs such as the F-35, F-15, the Apache helicopter and several missile programs.

It also included good growth with Airbus and Boeing. The other real bad surprise for the quarter was ending the year with a backlog of about $910 million boasted by strong orders across numerous key platforms, particularly within our defense business. We also posted an impressive book-to-bill ratio on the quarter of 1.4, again driven by defense.

As mentioned in the press release, we spent a good amount of time during the past few years improving the performance of our defense operations and business development team and now are seeing the results. It's also great to see our team leveraging Ducommun’s capabilities and structures more and more within the defense markets.

And orders in that part of the Ducommun business increased sequentially in the second half of the year by 45%. At the same time, we completed another important acquisition, Nobles Worldwide, who supplies advanced technical products for a variety of aircraft, Naval vessels and military vehicles.

The integration is going very well and the team is already adding great value opening new markets and opportunities for the Ducommun, along with expanding our engineered products portfolio. As also mentioned in the press release, we're up to a strong start in 2020 within many areas of the company.

In addition, we are also working closely with Boeing and Spirit AeroSystems on the 737 MAX. After the announcements in December from both companies, Ducommun took action in January to ensure all costs within our effective – are within our affected operations are being closely and proactively managed.

All of our affected operations have been working to minimize the impact and due to some of our successes with new business, we have been able to redeploy some employees. The amount of personnel furloughed in January due to the MAX is less than 3% and those are difficult.

We are proud of our performance center teams proactively dealing with the situation. That being said, we are looking forward to starting production back later in Q1 with Spirit based on public comments and communication from them and with Boeing as soon as April.

We're also well positioned operationally to meet any rate requirements along with the ramp up in the future.

In regards to the 2020 outlook, we see our strong backlog in defense, growing business with Airbus and our strategic supplier agreement with Raytheon, which we announced in July, 2019 as all examples of programs helping to offset this year's revenue headwind with 737 MAX production.

Company is also benefiting from new process technologies exemplified by our $200 million 10-year contract to supply Middle River Aerostructures with LEAP engine to sell components for the A320 platform.

This business is utilizing Ducommun’s proprietary Versacore composite process technology, will deliver over $10 million in 2020 revenue, with the full ramp up to $20 million in 2021. And is now all being fully produced at our Guaymas, Mexico performance center.

The Nobles acquisition closed in October, 2019 will also help provide additional revenue this year. Finally, all the hard work in the past three years, including process improvements, restructuring, leadership development, cost discipline and other initiatives will also contribute in 2020.

Therefore Ducommun’s 2020 revenue growth based on both Spirit and Boeing following through on their public comments regarding their production plans should be flat to slightly down low-single digit in the first half of 2020 and up low-single digits in the second half of 2020.

Coming off the last few years, it is certainly more modest, but under the circumstances with the 737 MAX situation, we feel it's an excellent outcome, shows the company's development in the past few years and we will deliver on our commitments. Now let me provide some additional color on our markets, products and programs.

Beginning with our military and space sector, we posted fourth quarter revenue of $89.5 million up 22% versus 2018. In 2019 we drove sales of nearly $325 million again over 17% over 2018 reflecting growth across a broad variety of defense platforms, including every aspect of our product portfolio.

We saw a double digit increase in demand for our military fixed wing aircraft programs, particularly strong shipments from the F-15 and F-35, as well as substantial top line expansion for helicopters like the , Black Hawk and Chinook. In addition, the Patriot Missile System rose and become one of our top sellers last year.

We saw significant growth across many other military and space applications. We are well-positioned for future growth across our defense platforms in 2020, again in all sectors and began the year with a backlog roughly $450 million up 32% year-over-year.

Within our commercial aerospace operations, fourth quarter sales declined slightly year-over-year to $83 million, while for 2019 as a whole, revenue grew 15% to just over $350 million. Ducommon’s growth continues to be fueled by large, narrow body aircraft platforms, nearly all of which saw double-digit growth last year.

While Boeing is still our largest customer and the 737 MAX, a major contributor revenue. Ducommon’s expansion with Airbus since 2017 has clearly helped and put important balance in our portfolio.

The Airbus A320 and A220 families in particular have become very important factors in our growth trajectory and Airbus in total represents a larger and larger share both directly and indirectly in Ducommon’s commercial revenue last quarter.

The backlog within our commercial aerospace sector stood at roughly $431 million at the end of 2019 positioning us well for solid performance going forward. Despite some uncertainty with the 737 MAX production schedule, we remain optimistic about the commercial market given the breadth of key platforms we serve in this market in 2020.

With that, I'll have Chris review our financial results in detail.

Chris?.

Thank you, Steve, and good afternoon, everyone. As a reminder, please see the company's filings and today's press release for further description of matters under discussion during the call.

2019 as Steve discussed was a year of great accomplishment for Ducommun that included strong top line growth, solid margin expansion, adjusted EBITDA growth, and a variety of wins that position us well for the future.

Our Ducommun operating system and its performance-center-focused factory approach continues to be a catalyst in driving the improvement of the year-over-year operating results. We feel confident that our efforts to broaden our customer base and streamline the business will continue to serve as well as we head into 2020 and beyond.

Now we'll move to the details of our overall results. A review of the fourth quarter 2019. Revenue for the fourth quarter of 2019 was $186.9 million versus $164.2 million in the fourth quarter of 2018.

The performance was driven primarily by $16.1 million of higher sales within the military and space sector and to a lesser extent $3.6 million of greater revenue from our commercial aerospace customers, but then markets saw increased demand across a variety of platforms and programs.

Ducommun's overall backlog at the end of the fourth quarter was approximately $910 million, a new record for the company. As a reminder, we defined 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.

Our focus-factory-approach at our performance centers continues to drive strong margins as our gross margin was 21.5% in the fourth quarter versus 19.9% in the prior year's comparable period. The increase year-over-year was primarily due to the impact of favorable volume along with the manufacturing efficiencies.

This was our highest gross profit percentage quarter since the second quarter of 2010 and our Q4 gross profit amount of $40.1 million was the highest gross profit dollar result in the company's history.

SG&A was $24.9 million in the fourth quarter versus $22.5 million in the fourth quarter of 2018, with the increase primarily reflecting incremental SG&A from the Nobles business in higher compensation and benefit costs.

The company reported operating income for the fourth quarter of $15.2 million or 8.1% of revenue compared to $6.3 million or 3.8% of revenue in the prior period.

The year-over-year improvement was due to higher revenue, higher gross profit, and the fact that the prior year included in aggregate $4.5 million of restructure charges and refined thing costs. The 2019 fourth quarter by comparison included a total of $0.6 million of purchase accounting adjustments and refinancing costs.

On an adjusted basis, operating income was $15.8 million or 8.4% of sales in the fourth quarter of 2019 versus $10.8 million or 6.6% of sales in 2018. Interest expense was $5.2 million in the fourth quarter of 2019 versus $3.8 million in the prior year period due to higher debt levels related to the company's acquisition of Nobles in October 2019.

As announced on December 20, 2019 we executed a debt refinancing which included entering into a Term Loan A of $140 million to clear our $100 million revolver as well as pay down some of our Term Loan B, which carries a higher interest rate.

The company reported net income for the fourth quarter of $8.9 million or $0.75 per diluted share compared to net income of $0.7 million or $0.06 per diluted share for the fourth quarter of 2018. The year-over-year increase was primarily due to $7.4 million of higher gross profit and lower restructure and other charges as I previously mentioned.

Adjusted net income was $9.5 million or $0.80 per diluted share in the fourth quarter – in 2019 fourth quarter versus $5.2 million or $0.44 per share in the prior year period.

Adjusted EBITDA for the fourth quarter of 2019 was $25.2 million or 13.5% of revenue compared to $19.4 million or 11.8% of revenue for the comparable period in 2018, an increase of 170 basis points. Now let me turn to the segment results. Electronic Systems.

Our Electronic System segment posted revenue of $96.3 million in the fourth quarter of 2019 versus $85.3 million in the prior year period. These results reflect a $9.3 million increase in sales to our military and space customers, while commercial aerospace shipments were down slightly year-over-year.

Electronic Systems posted operating income for the fourth quarter of $9.9 million or 10.2% of revenue versus $7.5 million or 8.7% of revenue in the prior period. Excluding restructuring charges last year, electronics adjusted operating margin was 11.5% for the 2018 fourth quarter with the year-over-year decline reflecting product mix.

Structural Systems. Our Structural System segment posted revenue of $90.6 million in the fourth quarter of 2019 versus $78.9 million last year.

The year-over-year increase was due to $4.9 million of higher sales across our commercial aerospace applications, primarily large airframe single aisle platforms and a $6.8 million increase in revenue within the company's military and space markets.

Structural Systems posted operating income for the quarter of $11.6 million or 12.8% of revenue compared to $5.7 million or 7.2% of revenue last year. Excluding restructuring charges and inventory purchase accounting adjustments, Structures adjusted operating margin was 13.4% for the 2019 fourth quarter and 8.7% for the 2018 fourth quarter.

The year-over-year operating margin improvement reflects favorable product mix and improved manufacturing efficiencies. Corporate general administrative expense, CG&A expense for the fourth quarter of 2019 was $6.3 million or 3.4% of revenue versus $6.9 million or 4.2% of revenue in 2018.

The year-over-year decrease was due to lower restructure charges of $0.3 million and lower general corporate expenses of $0.2 million.

Turning to liquidity and capital resources, we generated $31 million of cash from operations in the fourth quarter of 2019 and $51 million for the full year compared with $13 million during the prior year quarter and $46 million for 2018 in total.

We remain committed to managing working capital effectively, and improving asset utilization to maintain solid margins and generate as much operating cash as possible. In terms of capital expenditures, we spent $3.9 million during the fourth quarter and $18.8 million for the full year.

We anticipate spending $16 million to $18 million in 2020 to support new programs and product development. We're again pleased with our full year in fourth quarter performance and remain upbeat about our future results. I'll now turn it back over to Steve for his closing remarks.

Steve?.

Okay. Thanks Chris and well, we've certainly hopefully provided, I think some important information for shareholders today as we begin 2020. Again, a few final thoughts here, 2019 was certainly a terrific year for the company was just three years ago. And despite the short-term challenges, the MAX, I believe we have a lot of runway ahead.

2020 will be one that sees increasing content with Airbus, continued strength across all of our defense platforms and determined focus on serving Boeing and Spirit as we support this important program along with the subsequent resumption of production.

I'd also add that we do have the right footprint, cost structure, discipline and operational leadership to continue developments at the company and strengthen it this year. Finally, you can be assured that everyone at the company is fully engaged as we move through the first quarter.

And like our track record during the past few years, despite the short-term challenge, we will deliver on our commitments. With that, I'll turn it over for questions.

Alexander?.

[Operator Instructions] We have your first question from Ken Herbert from Canaccord. Your line is open..

Hi, good afternoon, Steve and Chris..

Ken, good afternoon..

Hey. Really nice end of the year, Steve.

I appreciate the commentary you've given on the impact of the MAX from a top line standpoint, but can you provide any color on how we should think about gross margins in the first half of the year in particular? Are you able to maintain greater than 20% gross margins with the volume headwinds or any more detail on that would be great?.

Yes. No problem. Okay. That’s a great question. As Chris and I had talked about it and we figured we'd get to it on the Q&A. So just at least on the operating income margin, Ken, we did for the whole year in 2019, the 7.8%, roughly, okay.

And we think that for the year flattish to that is where we're going to be, so flattish to run rate of op margins in 2019..

Okay.

Alright, and I'm guessing though, just with volumes you'd probably see some obviously stronger second half of the year relative to the first half of the year?.

Yes. Well said. That's right, yes..

Okay.

And just wanted to elaborate you – I think you mentioned Steve, that you were going to start to ship to Spirit in March and I think you mentioned Boeing in April with the – I'm guessing your shipments would largely be in line with the numbers that certainly Spirit had put out and what they plan to deliver this year, or do you expect to deviate much from that?.

No, absolutely in line, Ken, everything is locked in from what we heard from Spirit. We're expecting on Tuesday of next week to get the production schedule from them officially. So everything is in line to their public comments..

Okay. That's excellent. And then just switching gear, obviously you continue to see great success on the defense side.

Can you just provide a little bit more detail on how you think defense grows in 2020 or you've really benefited obviously from F-35 and F-15 and some of the rotorcraft? How do we think about the moving pieces in 2020 on the defense side?.

Yes. I guess, couple of things. First obviously in my comments, we've put a lot of work into it the last couple of years. I mean, I think we've really improved our defense operations, which we’re not very good when I got here.

We also have built, I think the right type of BD team and I think going forward, I mentioned a little bit, so I won't get into a lot of detail. I think we have some great things you'll hear more this year about driving more structures business and defense. So stay tuned for that.

But I also feel that if you look at a Northrop – if you look at a Lockheed, our penetration in those accounts is fairly low. So I see a lot of runway ahead for Ducommun in those areas..

Okay, perfect. Appreciate the color. I'll pass it back there..

Ken thanks very much..

Thanks, Ken..

Oh! It’s a pleasure..

We have your next question from Mike Crawford from B. Riley FBR. Your line's open..

Thanks. Maybe if we just go into the potential parameters around margin impact, if we can – if we consider as you know in your K that the numbers that Spirit talking about is 216 ship sets in 2020. If that's mostly in the back nine months of the year, you're talking about mid-20s a month.

And then so you gave your margin thoughts around that, but what about the next year if perhaps the monthly run rate is closer to 2x that, how – and if we have as expected year otherwise in defense in the rest of your business, what about – any thoughts on what the margins might look like in the following year?.

Yes. So yes, Mike. I’ll start with – so when you look at this year, and I agree with sort of how you laid it out. So it is – there's a reason we have a diversified portfolio. There's Steve's pointing to the defense side. We'll step up a little bit this year.

So as we take a little step back with MAX – as we take step back with MAX this year, the structure's margins will be – there'll be challenged to be where we were as we ran through 2019, but it's the growth on the defense side that'll sort of balance that out and keep us in the range of performance that we're talking about.

As you move out another year and if the rate doubles up as we headed to that year, then incrementally we'll get that margin back on the structure side and again, plan is that we continue to – we've sort of turned a corner here over the next few years with defense. So we're looking to keep going there.

So that’s a lot, it gives us the expansion possibilities as we move into 2021..

Right.

But, regarding the question of margin impact is that too specific?.

Mike, look, I mean, I guess I say, look we thought about how we were going to talk today. I think that, this year the story obviously, there's a lot of things I run over, but we feel good about – talk at least about our op income margin. But I would say if you look at 2021, if that goes back to X, we're going to expand margins.

I mean we're going to get the scale and we're going to get the drop for, so I would say that if it goes to X 2020 outlooks real good,.

Right? And I'll take one last stab at it and then pass the Baton. But let's say if we get say 737 production back into around 50 a month or something like that and your other business is still growing.

You're being very successful, like more of a longer term operating model target for Ducommun on say gross and/or EBITDA type margins given your current footprint and your expanded VersaCore production and Guaymas, et cetera, et cetera..

Yes. No, I mean, so maybe I'll correlate it, this is your third try Michael. I'll try it another way too. Let's, let's hone in a little bit more on just our baseline, which is where we're at this year. It doesn’t matter when you're talking gross margin or operating margin? Again, we're going to battle this sort of keep right now.

If that scenario plays out where Steve and I are both pointing to is that's upside.

That's expansion as we head into 2021 and I think, we've been on a journey, I mean we've gone from mid-17s to mid-19s and now 21 at the gross profit level and it's how do we take another step in that direction and it's going to take that volume along with the improvements we're talking about to get us there..

And Mike, this is Steve. You're asking me if there's head room on the 2021, there is..

Okay, well thank you..

Okay, thanks..

We have your next question from Michael Ciarmoli from SunTrust. Your line's open..

Hey, good afternoon guys..

Hi, Mike..

Next close to the year here; how are you?.

Great. Thank you, Mike..

Maybe just to stay on the margins a little bit, Steve. You mentioned the employee furlough, but it is pretty impressive that you guys are going to be able to maintain flat margins given the volume declined.

What else are you doing with some of the fixed assets? How are you able to kind of repurpose or reuse any of that excess capacity? And I guess if we think about let's be optimistic and if those rates do double in 2021, what do you have to do then to kind of free up some of that capacity or how are you thinking about bringing employees back on?.

Yes, I'll kick it off and Steve can certainly jump in here anywhere. But I mean, on the question related to what we're currently doing or as these assets are being taken a step back on the level of utilization.

The benefit we have is, we're not – we don't have one facility that is our MAX 737 facility that's carrying the brunt of all of this, the headwind that's coming at us. So the headwind is splintered out amongst three to four facilities that all have pieces of that.

And so with that and then with having the other commercial and then the defense customers that we have that can pick up the slack, that's what gives us the increased flexibility versus if we were sitting there with one facility that was going to take on all this headwinds. So that's why we can – what's why we flex what we did.

That's why we feel like we can manage and certainly as Steve alluded to first half of the year, that’s a little more challenging. And then as the growth is kicking in all the other things along with the MAX rate picking up the second half of the year certainly helps out. And then as we go forward then that again makes it easier to sort of ramp up.

Because you're not talking about – you're not talking about for a company our size of hundreds of people at one location, you're talking about sort of just ramping it up a little bit..

And this I just – a couple of things just, you know, just the other day, Mike, we got – we have the capital already in place, okay. So as I mentioned in my remarks. We're ready for the ramp-up. Fortunately because it’s a new programs and structures and defense, we’re able to redeploy people and so that also helped us.

And last thing I'd say is just when you look at our business, either in the past or going forward and last couple of years, I mean, we have fairly good cost discipline and we're fairly lean. So it's not like all of a sudden, we've got to do a lots of different things. I mean, we've done some things in January. We got ahead of it.

I think again, we're going to be in good shape in 2020..

Got it. And then if I look at 2020, just on the top line you gave sort of the outlook there, but in aggregate, I mean, should we expect the organic growth to be down? And you obviously got more contribution from Nobles. Clearly the rest of the portfolio sounds like it's growing, absent the MAX headwind.

But is that the, I mean, it seems like you're going to have a pretty substantial MAX headwinds, so organically obviously down Nobles contribution gives you – fill some of that hole..

Yes, I think a couple of things. So as I mentioned in the remarks, we're first half a little bit tougher, flattish to a couple of points down. Second half, up single and so we still expect good growth with Airbus, obviously. We've got a lot going on in defense. We've got Nobles as I talked about.

So I kind of feel that, that situation is – we've already got the orders right for the most part. So we're just about – it's about executing and obviously we're expecting Spirit to start sometime in March, and Boeing, so is April for Dave Calhoun. So that's where we are..

Got it. And then just the last one on the backlog.

I mean, you called out the strength in military, big jump in that military backlog sequentially? Was Nobles a factor in driving that, and then can you just maybe point to some of the specific programs that whether there is new winds, follow-on orders that’s driving some of that military growth?.

Yes, Nobles is a part of that. I mean they do bring with them – they bring with them their backlog that we acquired at the valuation date. So this first quarter you've seen Nobles pop in there..

Yes. But a majority of the increase in the backlog for defense was either current programs like F-35 and some other things and new programs.

So is it a nice mix or both nice?.

Got it. All right, I'll jump back in the queue. Thanks guys..

Thank you..

We have your next question from Edward Marshall from Sidoti & Company. Your line’s open..

Hey guys. Good evening.

How are you?.

Good..

I'm curious what – what's the anticipation on interest expense for 2020?.

Yes. On 2020 we're anticipating it. If you look at Q4, that's probably a fair view of what we have coming at us, because we definitely picked up like a couple of points with our term-loans switch out for what we did pay down, but we're going to run sort of at that rate..

So about $2 million, $3 million of incremental interest expense in 2018 versus – 2020 versus 2019.

And then it looks like, if we look at the tax rate, just thinking through the tax rate assumptions, I think traditionally we're talking is it 18% to 19%, 18% to 20%, what would it be normally?.

Yes. Now if you look at the tax rate, I mean we're going to run more in the 19% to 20% rate is where we're going to be..

Okay..

Yes..

Okay.

So, given the comments around revenue and then flattish kind of the op income for 2020, should I expect that EPS declines in 2020, is that appropriate given the current environment?.

No, No. I wouldn't say that. And just hold one second, because I’m going to go back on the interest for a second. Yes. We're really looking more – we're probably looking more at a run rate of about 4.5% – I'm sorry, yes, about 4.5% per quarter on the run rate as we look into 2020..

So flattish, even though that's up?.

Yes, that's up, rates down a little bit. That's going to offset..

And so you think in that environment, you still grow – you can still grow EPS?.

Yes, this is Steve, I think over the year, we'll be up..

Okay. Okay. I'm just going to have to work through the math there..

We'll be up for the year..

More second half, right? Okay. And as I look at, as I – I think you've probably touched on this a scenario a few times. I just sort of…..

I think we lost him..

We lost you buddy..

I think about the [indiscernible] cost through that and being able to sustain the operating margin and kind of running – I mean, have you made up the differential between that two-thirds of revenue that's going to be lost in 2020 or pushed down in 2020, that you would have previously received and all of that has been under new programs and the acquired revenue will offset that?.

Okay. Well let's make sure and Chris, go ahead….

Yes, so what I think I was hearing you say is as we're losing, we have the headwind with MAX and margin related impact on cost structure under absorbing. And do we already have it all filled back up? So as we point to no margin impact that's where we're at.

Is that what you're asking?.

Right, right. Yes. We’re able to replace that revenue..

Well, I think, just to Steve's point, I mean when you look at the full scale of next year, the answer is yes. I think when you look at it, day-to-day, month-to-month, week-to-week at all of our performance centers, it's a different story in each one.

So if you go to structures facility that's losing some of the revenue, we don't necessarily have that filled day one and that's why we do think there's more pressure there on the margin in the first half of the year, until we do get the other, until we get some other growth in there to help it.

And again, some of it is will be, we shift and we flex a little more on the defense side and we overdrive a little more there to make up for that as well..

Got it. Okay. Thanks very much..

All right, thanks..

[Operator Instructions] We have your next question from Becky Vincent from Vincent Enterprises, your line is open..

Thank you. Congratulations on the great results..

Thank you..

Thank you..

Thanks to have the opportunity to meet you one day. But my question is really about the F-35 program.

You highlighted that several times throughout the presentation and I was curious if your primary customer on that was Lockheed Martin or some of their primes?.

I'm not sure, I want to disclose that..

We are probably not going to disclose that..

Okay. I didn't realize it was a difficult question. I thought….

It's not a difficult question, it’s just….

That's fine..

Yes..

Thank you..

Thank you..

We have your next question from Ken Herbert from Canaccord, your line is open..

Hi, Steve. I just wondered if again, follow-up on the MAX and I'm just curious if you could provide any more specifics on, I can appreciate you've got people in Monrovia and you've got people of course in Parsons and other key facilities.

Can you provide any more sort of specifics on, on how that sort of the workflow or the volume for the MAX maybe breaks out by facility and I'm curious, if one Guaymas currently or in the future can do more on the MAX? And then second if the steps you've taken around head count and the fixed cost structure, if any of that sort of spills into the second quarter or all of that is largely flowing through in the first quarter?.

Yes. Hey Ken, it's Chris. Okay.

I'll start with, when you look at the first quarter to second quarter, I mean, assuming that what unfolds in terms of the start work time and the production levels ramping back over a reasonable period of time holds to where we're thinking it does now, then what we've done in Q1 should essentially get us where we need to.

And that's sort of the game plan on that aspect. As you then look at – well, so on that, just real quickly, you know, Steve mentioned, we're locked in with Spirit, we're going to get their work about where we're headed. And then on Boeing, we're still sorting out exactly what it means for each one of them.

Back to your question on sort of which facilities you do, you've got the main facilities, Monrovia, Coxsackie, New York, Parsons, Kansas, we also have our Gardena facility doing some as well. So it is spread out.

And that's why the impact is sort of what it is and why we think we can mitigate some of the impact that somebody looking at it might think we're going have. But that's where we're at – its split fairly evenly, whether the fire seals up in New York or inlets or spoilers, et cetera. So it's a fairly even split..

Again if you see – So, yes, Guaymas, they got their heads down on VersaCore right now, but they still support Monrovia a little bit on the 737 spoilers. So we've been able to, just because of, again, a lot of success over the last six months to 12 months in defense, more and more with Airbus.

And the way we run the operations and kind of staying ahead of it, we were able to I think do a lot of good things in the last six months which helped us, obviously as we started the year..

Yes.

Is there any opportunity to move any of the spoiler work or more of it down to Guaymas out of Monrovia?.

No, it’s not – well, it's a specialized process. We have some legacy tanks in Monrovia, which aren't going to be able to go anywhere. So I think for the most part, they do some work on the spoilers, but there's a little bit of a niche operation in Monrovia that's kind of here to stay..

Okay, fair enough. And just one final question, I mean, not to get too far ahead of it here, but as you think about obviously sort of a roughly doubling of MAX volume from 2020 to 2021 with obviously growth in other programs.

Are you at all concerned, Steve, about just the ability to sort of re-hire and re-staff to support the hire rates or how have you’ve taken steps to mitigate that potential risk down the road?.

Yes. Well, first thing is, we’re fortunate, like less than 3% on the furlough, that was a real – a wonderful thing for Ducommun, because the MAX is an important program within the company. But I have no concerns and because we're so lean, we're able to keep most of our staff..

Excellent. Thank you much..

Alright, Ken. Thanks..

We have your next question from Michael Ciarmoli from SunTrust. Your line is open..

Hey guys, thanks for taking the follow-up..

Sure, Mike..

Maybe Chris, I just want to make sure from a modeling perspective here, looking at the electronic systems margins, they were weaker in the current quarter, I think you guys called out mix, but as we look into next year and the ability to hold that corporate margin flat, what's it – it would seem like some of the burden falls on that electronic system to drive some expansion there.

Maybe just more of a mixed issue in this quarter and what gives you the confidence that you get that expansion in electronic next year?.

Yes. No – I mean, you're exactly right, that's where we're headed.

I mean the – when we talk about the diversified company and the one business helping the other, electronics business we've build it, as Steve alluded to gotten to a better book of businesses as we've exited the year, going to have a better rate of volume that's going to happen throughout the year in most of those performance centers.

And it will be that, as the volume is the big part of being able to drive that extra margin. The margin that was there this year and that we came through, we mentioned 10% to 11% historically sort of where we've been and we've got to pop a little more volume to get that accretion.

And I think that's what we're looking for is we had here to lift it up..

Yes, Mike, scale is going to be our friend this year in the electronic system. Yes..

Got it, that's what I figured. And then just maybe the last one, you talked about some of the growth in those military programs. Is there any concern at all, looking at this budget, certainly some of these legacy aircraft programs, fixed wing look to be pretty big bill payers.

I mean there's a big cut there in Black Hawk, Chinook volumes aren't huge, so couple of units here and there, but any concerns as you see maybe some of the funds flow out of legacy into some of these newer modernization programs?.

I think it's – I think directionally we're going to be fine. I mean, obviously we're on Apache as well and that's going, straight up type of thing. But, I feel that even if we do see, i.e., it's a fair point we do see a little bit of headwind on some of those other programs.

We're winning new business, right, because we now have a business development team that is focused and going into these big defense primes and making it happen.

Mike, you got that?.

Okay. There appears to be no further questions in queue. I will turn it..

That's fine. Perfect. I didn't hear him, okay. Great. Okay, so let me just wrap it up. Again, I want to thank everybody for calling in today. Obviously a lot of information to get through, I thought we had an excellent discussion.

Hopefully we were able to provide enough information, folks understand a little bit more about what's going to happen in 2020 and I feel great about where we are. I feel great about 2021, 2022 and let's keep going. And we look forward to speaking to you at the end of the first quarter. Again, many thanks..

Thanks everyone..

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect..