Ducommun Incorporated

Welcome to the first quarter 2021 DoCommon 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 session. During the question and answer session, if you have a question, please press star then one on your touchtone phone. I will now turn the call over to the investor relations advisor, Chris Witte. Chris, you may begin.

Thank you and welcome to DoCommon's 2021 first quarter conference call. With me today are Steve Oswald, Chairman, President and CEO, and 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&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 Dukama 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, competitions and disasters, natural or otherwise. These risks and others are described in our annual report on 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 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 first quarter form 10Q 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 first quarter 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 Wample 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 with the safety protocols put in place since March 2020. We continue to work with authorities on best practices throughout our operations. The amount of cases that are common 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 Commons 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, and leveraging our lean and highly focused performance center concept. This is particularly evident in the continued margin strength for gross profit and adjusted EBITDA despite a significant year-over-year headwind. The team also posted adjusted operating income margins of over 7%. The quality of earnings, too, was very high, with the company reaching GAAP diluted EPS of 55 cents a share versus 67 cents a share for Q1 2020, and adjusted diluted EPS of 58 cents a share versus 67 in 2020. These numbers were reached 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 first quarter revenue was lower due to the commercial aerospace markets. However, the commons defense business again showed strength, being up 12% versus prior year. and again was the result of many improvements starting back in 2018. Though not ever wanting to show 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 Commerce Defense business revenues continue to show excellent progress on shipments and robust business development. The majority of gains in Q1 include the Raytheon TOW program, radar systems for north of 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 million in revenue in March this year for the first time. And shipments in 2021 will be over 4X versus 2020. I also 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 million in 2020 to over 125 million in 2021, an increase of almost 40%. In regards to the defense backlog, it remained strong, ending Q1 with a backlog of $516 million. The total backlog for the company was $810 million, and this is a great number based on the environment. The defense business grew year-over-year by 8.8%, bolstered by strong revenues and some key defense platforms, which included the Toll Missile, UAV, and other programs as part of TUCOM and continues to deliver. Obviously this strength helps offset commercial aerospace order pressure, but we anticipate that to start increasing in the second half of 2021. 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 to dorsal fin assembly. Along with our acquisitions, this part of the business will be north of $110 million in revenue for 2021, where it was under $80 million in 2019. I also want to mention that we are optimistic about defense going forward, despite concerns regarding the budget and change in administration. Tacoma's defense segment has been undermanaged 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 a million in yearly revenue, up from 34 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 and 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 the commons. 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 commons 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. Tacoma 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% on-time delivery performance for two years straight in April 2021. That's a real achievement. As mentioned in our last call, We will return to growth in 2021, with the first quarter 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 DeKalb and growing low to mid single digits. DeKalb also has a great midterm 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 two-to-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&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 first quarter revenue of $114.1 million. Once again, representing strong growth versus 2020, up 12%. Revenue on some key defense platforms. I mentioned earlier, we saw increases in demand on our tow missile, UAV, and other missile programs. First quarter's military and space revenue represented 73% of the 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, especially at Raytheon and GA, and again ended the first quarter with a strong backlog of $516 million, which is up 8.8% year-over-year. It represents almost 64% of the Commons backlog. Within our commercial aerospace operation, first quarter revenue declined year-over-year to $35.4 million, as expected, driven by build rate declines on a number of commercial aerospace platforms impacted by the COVID-19 pandemic. Tacoma also has effectively adjusted costs and managed downturn is well positioned once rates stabilize and increase over the long term. Tacoma will begin to recover in this market in the second half of 2021. As mentioned earlier, it has a very bright future. The backlog within our commercial aerospace sector stands at roughly $266 million at the end of the first quarter for the majority of the clients due to the 737 MAX program. We do, however, stand ready with the team, processes the 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 have Chris review our financial results in detail. Chris? Thank you, Steve.