Ducommun Incorporated

Ladies and gentlemen, thank you for standing by, and welcome to the Due Commons Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your moderator today, Mr. Chris Willey. Thank you. Please go ahead.

Thank you, and welcome to Duke Commons 2020 Second Quarter Conference Call. With me today are Steve Oswald, Chairman, President, and CEO, and Chris Wampler, Vice President, Interim Chief Financial Officer and Treasurer, and Controller and Chief Accounting Officer. I'm going to discuss certain limitations of any forward-looking statements regarding future events, projections, or performance that we make may make during the prepared remarks or the question and answer 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 Federal Private Securities Litigation Reform Act of 1995 and are therefore prospective. These forward-looking statements are subject to risks, uncertainties, and other factors, which would 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 to common include, among others, the cyclicality of our end-use markets, the impact of COVID-19 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, and competition. These risks and others are described in our annual report on Form 10-K, followed with the SEC, and our four looking statements are subject to those risks. Statements made during this call are only 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 GAAP to non-GAAP measures referenced on this call. We filed our 2020 Second Quarter Form 10-Q with the SEC today. However, the SEC is having some technical difficulties, so you may not be able to currently view it on their website. Please continue to check as they are working on it. 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, and thanks, everyone, for joining us today for our second quarter conference call. I also hope that you and your families are healthy and continuing to get through this pandemic as best as possible. Today, and as usual, I will give an update on the current situation at the company, after which Chris Wampler will review our financials in detail. The company remains focused first and foremost on the health and safety of our employees. The team has done an excellent job and despite facilities around the country and quite a few in Southern California, the impact is mostly zero. The amount of positive cases across the company less than 25. We also continue to remain diligent on communication and ensuring best practices are followed in all facilities to sustain this performance. Tacoma's second quarter results were strong in light of the unprecedented challenges due to the pandemic in the commercial aerospace markets. As mentioned in our April call, the reasons for the strength is that since 2017, the team has been improving all of our operations, developing and rationalizing the product portfolio, driving new technologies, focusing on providing high value to customers along with pricing, developing an effective cost structure with a flat organization, and making three strategic acquisitions. This is particularly evident in the revenue and order progress over the last few quarters for the commons defense business, along with the overall margin performance for the company. The company's second quarter revenue was down 18.4% year-over-year, all due to the commercial aerospace markets and in line with our communication and expectations. The commons defense business, however, showed great strength, being up 23% versus prior year. Though not ever wanting to show negative growth, the revenue number is impressive from not only the virus impact, but also overcoming $30 million of 737 max headwind in the quarter. The commons defense business, on the other hand, continues to show excellent progress with big opportunities ahead. The majority of the gains in defense included increases from our new weapons systems business, Nobles Worldwide, along with the F-35, Patriot missile, CH-53K heavy lift, V-22 Osprey, F-15, F-16, and other industry programs. Another growth area this year, which I mentioned during our last call, will do common new efforts with UAVs. I'm happy today to announce at this time our first major customer in this new area is General Atomics Aeronautical Systems. We are thrilled to be selected as a strategic supplier by GA, providing critical components on the Predator series remotely piloted aircraft and look forward to many productive years together. The Commonwealth also continues to leverage its preferred supplier agreement signed last July with the former Raytheon Missile Systems business, now known as Raytheon Missile and Defense. The Toll Missile case, a new structures program with RMS, mentioned in the previous call, is now in full production at our Monrovia, California Performance Center. We have two of the wins this year for the Toll Missile, at other Dukamen performance centers in the Midwest. And in total, this one program will generate over $30 million of revenue in 2021. These types of wins have allowed us to build a compelling value story and now track record, utilizing Dukamen's full portfolio of products and services as we move further to drive sales gains at Raytheon Technologies and other defense OEMs. The other real bright spot for the quarter was ending Q2 with a backlog of $505 million for the defense business, which is an all-time record for DeCommon. Total backlog was $831 million for the company, sequentially down from Q1, but still is a great number based on the environment. Defense business grew year-over-year by 38%, bolstered by strong orders across numerous key defense platforms. which included the tow missile, previously discussed, GA, weapon systems for ground vehicles, F-18, Patriot, F-35, Aegis, and others, as this is part of the common that continues to deliver. Obviously, this strength helped offset commercial aerospace order pressure. As in Q1, cost actions have continued with the pandemic and the Q2 737 max schedule changes to ensure we have adjusted our costs. You can certainly see the effectiveness of our actions in both the positive growth profit expansion year over year and a solid operating income percentage. The team has certainly done a great job moving quickly and managing this difficult environment with no material pandemic-related costs incurred. In regards to the Q3 outlook, Our significant backlog in defense, with the many growth programs mentioned earlier, will provide the same strong revenue. However, we see the revenue profile for Q3 the same as Q2, being 16 to 20 percent down year over year. Our comments on the April 30th call were for better sequential revenue in Q3, but this was based at the time of 216 shipments for Spirit Aero Systems in 2020 for the 737 MAX. As you know, this changed later in the quarter from 216 to 125, and now 72. Therefore, this was the main reason we had to adjust the outlook. A real bright spot, though, is that we see our operating income margins now between seven and 8% in the quarter, up 100 basis points, more from our comments in April. As we look to Q4, we estimate that revenue will again be led by defense, but the business overall will be down year-over-year by 14% to 18%, again, due to commercial aerospace. And operating margins will again be in the same range as Q3, at 7% to 8%. As you have seen through the first half of the year, the unprecedented challenges with the pandemic, along with $55 million of headwinds for the MACs, created an historic challenge for the Common and our team. The business, though, has shown great strength due to the many strategic initiatives since 2017, and has clearly made a material difference for the company, our customers, and the shareholder. The Common also has a great long-term future. Despite the current challenges, we look forward to a return to revenue growth for the full year in 2021. leveraging our many defense wins and historic defense backlog, along with benefiting from share gain at Airbus, and also a modest level of recovery for some of our commercial OEM customers. Now let me provide some additional color on our marketing, products, and programs. Beginning with our military and space sector, we posted second quarter revenue of $94.6 million. once again representing strong growth versus 2019, up 23%. We drove revenues across a broad variety of defense platforms, including near every aspect of our product portfolio. As mentioned earlier, we saw increases in demand for our military fixed-wing aircraft programs, with particularly strong shipments for the F-35, F-15, and F-16, as well as top-line expansion for helicopters such as the CH-53K and the V-22. In addition, the Patriot missile system rose again this quarter. We see significant growth across many military and space applications going forward. We also had significant growth on a number of ground vehicle programs, such as the Clowder Leopard. The second quarter military and space revenue represented 64% of New Commons 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, and again, ended the second quarter with an all-time record high backlog. This was an impressive 38% year-over-year, representing over 60% of the Commons backlog at the end of Q2. Within our commercial aerospace operations, second quarter revenue declined year-over-year to $40.4 million, as expected, driven by bill rate declines on the 737 MAX, as well as many other programs impacted by the COVID-19 pandemic. Tacoma, as stated earlier, has effectively adjusted costs and managed the downturn and is well positioned once rates stabilize and increase over the long term. Tacoma's expansion with Airbus since 2017 is clearly going to be a benefit as we move forward and puts important balance in our portfolio for the future. The backlog within our commercial aerospace sector stands at roughly $307 million at the end of the second quarter, with the majority of the decline attributed to the 737 MAX program. With that, I'll have Chris review our financial results.