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spk00: Good day, ladies and gentlemen, and welcome to the Duke Commons second quarter conference call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we'll hold a question and answer session. To ask a question, please press star followed by one on your touchtone phone. If anyone has difficulty hearing the conference, please press zero for operator's assistance. As a reminder, this conference is being recorded today, August 12, 2021. I would now like to turn the conference over to your Investor Relations Advisor, Chris Woody.
spk02: Thank you, and welcome to the Commons 2021 Second 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 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, competition 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 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 have followed our 2021 Second 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?
spk06: Well, thank you, Chris, and thanks, everyone, for joining us today for our second quarter conference call. Today, as usual, I'll give an update on the current situation at the company, after which Chris Swamp 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 safety protocols put in place since March 2020. We continue to work with authorities on best practice throughout our many operations. The total number of cases is roughly 214 since the beginning of the pandemic. And within the company, we had 14 cases in Q2 2021. As mentioned in the press release, the common second quarter results were very strong, with the company delivering year-over-year revenue growth of 9%, all organic, for the first time since Q1 2020. The company's defense business continues to be a major success, with upward momentum growing again year over year, and with the main contributor to the quarter. The challenges in the commercial aerospace market were overcome again by the team. Though we have seen some good signs, for example, with growth at Spirit Aerosystems in Q2, we're optimistic that we'll start seeing meaningful OEM build rate increases starting in 2022. In addition to revenue growth, we posted gross margins of 23%, which is the highest level reached in 10 years at the company, along with adjusted EBITDA margins of 14.6%, which is an increase of 80 basis points year over year. The team also posted adjusted operating income margins of 9%, which is excellent progress. The quality of earnings was high as well, with the company reaching GAAP diluted EPS of 69 cents a share versus 43 cents a share for Q2 2020, and adjusted diluted EPS of 74 cents a share versus $0.48 in 2020. These numbers reflect the return to revenue growth we anticipated along with strong operating management. This is also a great story for our investors, as this quarter was the beginning of a return to revenue growth for the full year of 2021, with the commercial aerospace market starting to recover in the quarters ahead. The company's second quarter revenue was higher with the commons defense business as mentioned earlier, leading the way, being up 20% versus prior year. Our defense business revenues continue to show excellent progress on shipments and a robust business development approach. The majority of the gains in Q2 include the radar systems for Northrop Grumman, Raising on Tow Program, F-18, Apache helicopter, UAVs and General Atomics, Phalanx, and other missile programs. Our approach to the market is innovative products and processes that provide significant value to the customer, along with striving for the highest level of service. The numbers show that we continue to be rewarded for this strategy. I also want to mention, as I have in the past, the Raytheon Missile and Defense business and the progress since signing the strategic supplier agreement with them in July of 2019. We have been hard at work in three areas. New programs, offloading, and share shift. I'm happy to report that 2021 will be a record year overall with this legacy Raytheon business growing from less than $90 million in 2020 to over $115 million in 2021, an increase of more than 25%. What a great story. The defense results also show great opportunities when we leverage our structural product lines with defense OEMs. As previously mentioned, 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 tool, dorsal fin assembly, both for Raytheon Missile and Defense. 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. Another defense structural highlight in Q2 was that Nobles Worldwide has secured significant content to supply integrated ammunition handling systems as part of the Stryker MCWS Increased Lethality Program, recently awarded to Oshkosh Defense. The total program of six years can be worth up to $943 million to Oshkosh and their partners. I am also overall still optimistic about defense opportunities for Dukama going forward. concerns regarding the recent budget discussions in Washington and the change in administration. This is again due to our value offering and still a modest revenue base. A good amount of runway is still ahead of us here at Tacoma. In regards to defense backlog, it remains strong in ending Q2 with a backlog of $501 million. The commercial aerospace backlog also began show some signs of recovery increasing sequentially from 266 million at the end of Q1 to 276 million at the end of Q2. This is certainly a good sign. The total backlog was 814 million for the company, and this is very good. It's a very good number based on the environment. Now I want to take a few minutes to discuss my thoughts on a commercial aerospace business. We were notified in May with press release approval in July that the con was recognized as an Airbus Detail Parts Partner and awarded a long-term five-year contract. The commitment from the current industry leader allows us to provide a titanium work package for key products on the A320 and A330 programs. We were and are thrilled and honored to be awarded for the first time a D2P partner designation. which is a major accomplishment at Airbus, representing preferred supplier status along with a long-term five-year contract. This is a significant step forward for Ducamin, and it's industry-leading titanium structural component business. To me, it is the highest level of endorsement, and as I mentioned in the press release, a major milestone in the 172-year history of our company. This contract extends through 2026 and will provide many years of great value to DeCommon and its shareholders. The company's cost actions are also continuing to pay dividends. You can certainly see that even before the pandemic, the company was working on initiatives to offset the 737 max. The effectiveness of our operational leadership and actions show the gross profit margins year over year and a solid operating income percentage along with the diluted EPS. I also want to mention our efforts on pricing. This is also having a positive impact on the company's financials. In regards to the outlook, our significant backlog in defense with the many growth programs mentioned earlier will provide good revenue in 2021. We estimate that revenue will be led by defense, but over the quarters ahead, we'll see more commercial aerospace volume return to the comments. We're also very well positioned with a high narrow body to wide body ratio for our business and have the capacity and strong operating team to deliver on the forecasted rate increases. We will return overall revenue growth this year and anticipate the Commons total revenue to grow in the low to mid single digits versus 2020. Future growth will be accomplished by leveraging our newly built out defense business strong positions in commercial aerospace, especially on narrow-body revenues, with Airbus being a big part of our future, as well as our three acquisitions, which continue to deliver. We also remain active in the market for M&A for new companies that fit our model and believe this will only be an accelerator to higher results. Now let me provide some additional color on our markets, products, and programs. Beginning with our military and space sector, We posted second quarter revenue of $113 million, once again representing strong organic growth versus 2020, up 20%. We drove revenue on some key defense platforms. As mentioned earlier, we saw increased demand for radar systems, tow missile, F-18, Apache helicopter, UAVs, Phalanx, and other missile programs. The second quarter's military and space revenue represented more than 70% of the economy's revenue in the period. We also continue to be very well positioned for further growth across defense platforms over the next several quarters in all sectors, especially at Raytheon. Again, added the second quarter with a strong backlog of 501 million, which represents 62% of the common's total backlog. Within our commercial aerospace operations, second quarter revenue declined year over year to $37.6 billion, as expected, driven by bill rate declines on a number of commercial aerospace platforms impacted by the COVID-19 pandemic. However, The decline in revenue is not as sharp as in prior quarters. The common also has effectively adjusted costs and managed the downturn in its well positions once rates stabilize and increase over the long term. The common expects a meaningful improvement in this market in the second half of 2021, and as mentioned earlier, has a very bright future. The backlog within our commercial aerospace stands at roughly $276 million, at the end of the second quarter, slight increase sequentially, as I mentioned earlier, compared to Q1. We stand ready with the team, processes and capital in place to support the expected bill rate increases in the next few years, and we are excited to get started. With that, I'll let Chris review our financial results in detail. Chris?
spk03: Thank you, Steve. Good afternoon, everyone. As a reminder, please see the company's 10Q and Q2 earnings release for a further description of information mentioned on today's call. As Steve mentioned, Dukaman's second quarter marked our first quarter of top-line year-over-year growth since the pandemic began early in 2020. This growth, all driven organically, combined with our strong margin performance in the second quarter helped deliver outstanding overall performance. We anticipate the favorable year-over-year comparison on revenue to continue throughout the remainder of 2021. We see this as we expect measured improvement in the commercial aerospace market while military demand remains strong. Turning to our second quarter results, let me review some of the highlights. Revenue for the second quarter of 2021 was $160.2 million versus $147.3 million in the second quarter of 2020. The 8.7% increase year over year primarily reflects $18.5 million of higher revenue within the military and space sector partially offset by $2.1 million of lower revenue across our commercial aerospace platforms. DeCommon's overall backlog at the end of the second quarter was approximately $814 million, slightly higher than that at the end of Q1, reflecting program timing, slowly improving commercial demand, and an uptick in industrial orders. 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 $36.8 million for the quarter versus $32.7 million in the prior year period. Gross margin rose 80 basis points to 23.0% from 22.2% in the 2020 second quarter, with the increase primarily reflecting favorable manufacturing volume along with a strong product mix and cost control efforts. The 23% gross margin was our highest quarterly gross margin performance in more than a decade. For the past few years, we've talked about our margin expansion journey that we are on. The second quarter margin highlights that progress. SG&A was $23.7 million in the second quarter versus $22 million last year with the increase reflecting higher compensation and benefit costs. Ducamin reported operating income for the second quarter of $13.1 million or 8.2% of revenue compared to $10 million or 6.8% of revenue in the prior year period. The year-over-year increase was due to the higher revenue partially offset by increased SG&A expenses. Excluding restructuring charges and Guaymas-related expenses, adjusted operating income for the second quarter of 2021 was $13.8 million, or 8.6% of revenue, compared to $10.7 million, or 7.3% of revenue, in the comparable period last year. Interest expense was $2.9 million in the second quarter of 2020 versus $3.7 million in the prior year period, driven mainly by lower interest rates along with the impact of a decrease in total debt outstanding. The company reported net income for the second quarter of $8.4 million, or 69 cents per diluted share, compared to net income of $5.1 million, or 43 cents per diluted share, for the second quarter of 2020. Excluding one-time expenses in both periods, adjusted diluted EPS for the second quarter of 2021 was $0.74 versus $0.48 in 2020. Adjusted EBITDA for the second quarter was $23.4 million, or 14.6% of revenue, compared to $20.3 million, or 13.8% of revenue, for the comparable period in 2020, reflecting the items I just discussed. Now let me turn to our segment results. Our electronic system segment posted revenue of $102.8 million in the second quarter of 2021 versus $92 million in the prior year period. These results reflect an $11.6 million increase in sales to the company's military and space customers, along with $2.8 million of higher revenue across commercial aerospace platforms, partially offset by lower industrial sales. Electronic systems operating income for the second quarter was $14.4 million, or 14% of revenue, versus 10.4 million or 11.4% of revenue in the prior year period. The higher margin reflects favorable product mix and higher volumes. Our structural system segment posted revenue of 57.4 million in the second quarter of 2021 versus 55.4 million last year. The year-over-year increase reflects 6.9 million of higher revenue within the company's military and space markets, partially offset by 4.9 million of lower sales across our commercial aerospace applications. Structural systems operating income for the quarter was 5.6 million or 9.7% of revenue compared to 6.2 million or 11.2% of revenue last year. The year-over-year operating margin decrease was largely due to unfavorable product mix. Excluding one-time charges in both periods, second quarter adjusted operating margin was 10.9% in 2021 compared to 12.4% last year. CG&A expense for the second quarter of 2021 was $6.9 million or 4.3% of revenue versus $6.6 million or 4.5% of revenue in 2020. Turning to liquidity and capital resources, we have available liquidity of $97 million and generated $6 million of cash from operations this quarter compared with $9 million in the prior year period. We generated $3 million of free cash flow for the quarter compared to $8 million in the second quarter of 2020. We expect to return to historical cash flow and free cash flow generation levels as we move through the remainder of 2021. Our leverage ratio was 3.3 at the end of the second quarter. In terms of purchases of property and equipment, we spent $3 million during the second quarter, reflecting a lower investment requirement in the current economic environment. For 2021 in total, we anticipate spending between $16 to $18 million to support ongoing product development and sustaining capital. In conclusion, and echoing Steve's comments, we are certainly pleased with our second quarter results and look forward to continued strong performance through the second half of the year and beyond. Through our operational focus and the strength of our defense business, along with the favorable impacts of the trends for commercial aerospace, domestic air travel demand, and the 737 MAX production, we look forward to delivering continued top-line growth and strong underlying performance heading into and through 2022. I'll now turn it back over to Steve for his closing remarks. Steve?
spk06: Okay, thank you, Chris. And, well, look, you know, we're certainly proud of the results this quarter. It just gets us better positioned for when commercial aerospace rates go meaningful higher in 2022. We've met our commitments and have strengthened the company through this difficult period, really due to our effective strategy, our dedicated people, and our operational leadership. I also like to take this time to welcome our newest board member to the common, Sheila Kramer, who currently serves as vice president and chief human resource officer at Donaldson Company Incorporated. Sheila will bring important expertise to the company as we work through the pandemic and drive the long-term growth of the company. In closing, I'd like to again this quarter take this time to tell our team, our employees that I'm very proud of them. and all our efforts dealing with the many challenges since the pandemic started back in March of 2020. Our team members show up at the operation every day, and they'll stressful, continue to get the job done for our customers, our nation, and one another. So with that, I will turn it over for questions. Thank you for listening.
spk00: Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, please press the pound key. And our first question comes from the line of Mike Crawford with B. Reilly Securities. Your line is open. Please go ahead.
spk04: Thank you. Of your near quarter of a billion in structural system sales, what percent of that is titanium? I'm sorry, Mike.
spk06: Can you say that again, Mike? It just came across. Can you say that again, please?
spk04: Yeah. Around what percent of your structural system sales are titanium?
spk03: Well, yeah, I don't think, Mike, we typically disclose that percentage. But I would say that everything that those key components, those key programs, and the ones Steve alluded to with Airbus, Those are the core of what we have along with whatever's growing back here through the rest of the commercial recovery. It's meaningful.
spk06: It's a meaningful number.
spk04: What about Versacore? At one point, I think you were particularly excited about that proprietary process and technology. I think that's probably a very small portion of your overall titanium sales, but where do you see that growing to in the coming five years?
spk06: Yeah, so first it's composite. It's not titanium, just to let you know. But we're excited. Certainly because of the pandemic and the slowdown on the build rates, that's put the Versacore part of the business back at least probably, I don't know, maybe roughly a year. But we're picking the momentum again. This product is for the LEAP engine. the one we're working on for the Airbus 320. So, you know, good things ahead there, right? So we'll have more to say about it in the future, but just as a note that we're excited about our prospects for Versacore, though we have been slowed down a bit because of, obviously, all the challenges on the build rates.
spk04: Okay, great. And then is there anything in the – forthcoming government fiscal year budget that you're particularly looking out for that would help or not to calm them?
spk06: Yeah, I was just saying, look, I mean, I know there was an extra $25 billion put in by the committees, and I know that, you know, things are being worked through. You know, we're obviously, you know, we're missile people. We're electronic people with cars. We make interconnects. You know, we do a lot of things where, you know, we're very, very comfortable that, you know, as we go forward in time that what we see, you know, the defense budget leaning into in certain ways is going to benefit us. So, again, to my remarks earlier, we feel overall very good about where we're going to be the next few years.
spk04: Great. Thank you very much.
spk06: Thanks, Mike. Thanks, Mike.
spk00: Thank you. And, again, if you have a question at this time, please press star then 1. Our next question comes from the line of Michael C. Moroli with Truist Securities. Your line is open. Please go ahead.
spk01: Hey, good evening, guys. Nice results. Thanks for taking the question. Steve, can you give us, or Chris, I guess, a little bit more maybe detail on this Airbus deal and, you know, I guess specifically where your content per platform or annual revenues would be tracking now? I think, you know, From one of your old decks, you had showed the A320, you know, maybe was kind of, you know, running around. I guess it was just under $20 million, you know. So can you give us any directionally what does it – is it a 2X deal? Does it, you know, just maybe any more color on where you are in terms of – Sure, absolutely.
spk06: So it's going to be a bit difficult because of our expectations from the customer as far as disclosure, just from Airbus. So let me just put it up there. But, you know, obviously this is on the A320, which is the big part of the game here. A330 obviously is less, but the A320. But I know we've disclosed in the past, you know, it's going to be a meaningful increase. The one thing that I do want to mention about that is that this is the first time we're recognized as a partner with Airbus. We kind of got in the game here in, you know, 2016, 2017, and I came in in early 2017, and you know, this has been a long road. And, you know, we really weren't even in the game before 2016, 2017. So for us to kind of get in there, the expectations at Airbus are sky high, and be able to meet their operational and other value propositions, I think is just, you know, it's a big deal, like I said in my press release. So it's going to be meaningful. It's going to be A320. We're hoping, obviously, it's going to, continued to evolve because now, you know, now we're a partner where we weren't before.
spk01: Can you give any more detail as to how you won the selection? Was it, you know, Airbus looking for more suppliers? Were they, you know, are you, did you displace or take a more material amount of share from the previous vendor or any details on how this came about?
spk06: Look, you know, at the beginning, I think the, you know, this titanium business, which, you know, I'm on record in saying, you know, outside of an OEM, we're, you know, we're really the world leader here on this SPF to hot form. They saw something at Dukama they liked, and, you know, they gave us a shot. And it took us four or five years to kind of, you know, operationally value add it. You know, I would say as far as where the business came from, it probably came from other partners and maybe weren't there anymore. And they also have internal operations for titanium. So I think it's a mix.
spk01: Okay, got it. And then can you – oh, sorry, go ahead.
spk06: No, it's about the best I can do, Mike, on that thing.
spk01: Okay, no, perfect. What about – can you give us any sense as to where you are on production rates? You know, maybe the max, obviously, the 787 is the blemish out there. You talked about seeing more – more work from spirit presumably on the max there, but you know, are you kind of in sync with, with where everyone else is? Are you kind of tracking and thinking about this 31 per month, uh, in early 22?
spk06: Oh yeah. Yeah. Well, let me first say the headline is we're hungry. Okay. I mean, we got, we got the processes, we got the capital, you know, we got the right people in place now running, you know, all our operations. So, you know, we're, we're definitely, uh, leaning into everything. I think you pointed the right way. I mean, we're, you know, obviously supporting the customer, but, you know, we're excited. Hopefully this 31 is going to come. That's going to be a big deal for us, as you know. And, you know, obviously what we're hearing out of Airbus, you know, to ever get to 70 a month would be, you know, an absolute home run for the commons. So we're ready to go. That's what I would say.
spk01: Okay. Got it. Last one for me. Any updated thoughts on kind of the M&A environment, capital deployment? I know you called out Nobles with some of the success there, but what's the latest pipeline? How are you guys looking at that deal flow?
spk06: Yeah, good. Well, first, obviously, thanks for bringing that up. The Nobles things, you know, I mean, this was a big deal for us to win that back in October 2019. And, you know, it's got a great future. And when we look at our model, we're looking for, you know, engineered products so we can kind of improve our mix there as well as, you know, growth opportunities. That's been very positive. All three of those have done well for us. I will say the current environment is competitive. I think you're probably hearing that from other folks. There's a lot of money out there, but we have our functional people. We still have the same team. It was a little quiet last year. We're active. We like acquisitions. We think we can integrate them well. We think that Our track record has been good for shareholders and good for our P&L. So hopefully more to come sooner than later, Mike.
spk01: Got it. Thanks a lot. I'll jump back in the queue here.
spk00: Thank you. And again, as a reminder, ladies and gentlemen, if you would like to ask a question at this time, please press star then 1. I am showing no further questions at this time, and I would like to turn the conference back over to Mr. Oswald for any further remarks.
spk06: Great. Well, again, thank you, and I want to thank everybody for joining us today, both our analysts and, most important, our shareholders and our team. We're obviously pleased with the return to growth, as I talked about. I think it was in my Q2 remarks in 2020 that we were going to return to growth this year, and this is our first quarter doing it. You know, you can't argue with organic growth. I mean, 9% is more than respectful, even though it was off a lower base in Q2 2020. It's still a great number. We're thrilled with gross margins at 23%, and I think we're doing a lot of the right things. So, again, we always appreciate your support and your commitment, and we look forward to speaking to you again soon. Thank you. Thank you.
spk00: This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day.
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