Ducommun Incorporated

Good day, ladies and gentlemen, and welcome to the Commons fourth 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 star zero for operator assistance. As a reminder, this conference is being recorded today, February 23, 2022. I would now like to turn the conference over to DuCommons Vice President, Chief Financial Officer and Controller and Treasurer, Chris Wampler. Please begin.

Thank you, Norma, and welcome to DuCommons 2021 Fourth Quarter Conference Call. With me today is Steve Oswald, Chairman, President, and CEO. 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 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 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, amongst 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 acquisition, 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 reconciliation of the GAAP to non-GAAP measures referenced on this call. We filed our 2021 annual report on Form 10-K with the SEC today. I would now like to turn the call over to Mr. Steve Oswald for a review of the operating results.

Okay, thank you, Chris, and thanks, everyone, for joining us today for our fourth quarter conference call. Today, and as usual, I will give an update of the current situation at the company, after which Chris 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, and we continue to follow our best practices aligned with health authorities throughout our many operations. The total number of cases is roughly 360 since the beginning of the pandemic. And within the company, we had 80 cases in Q4 of 2021 with the new variant. Before going over the fourth quarter results, I want to highlight two transactions that were completed during the quarter and previously announced that I'm very proud of. First, we completed the sale-leaseback transaction of our Gardena Performance Center located in Carson, California. which was the first in the long history of the company. The building and land were sold for approximately $143 million, generating more than $110 million in after-tax proceeds. This was an extraordinary price based on the very high demand for commercial real estate in Southern California in Q4, and we took full advantage of it. To put it in perspective, in 2015, we had the property appraised for a financial project and it was $38 million. This transaction was a major event for our company and shareholders and allowed us to monetize a portion of our legacy California-owned real estate portfolio. Second, we completed the acquisition of MagSeal as well in Q4, a leading provider of high-impact, military-proven magnetic seals for critical systems in aerospace and defense applications for $69 million. $0.5 million net of cash acquired. MagSeal was a critical purchase coming at the end of the second year of COVID and continues to advance our strategy to diversify and offer more customized, value-driven engineering products with aftermarket revenue. A portion of the proceeds from the sale-leaseback transaction for the Gardena Performance Center was deployed to pay for this acquisition. We are thrilled with both Turning to the Q4 financial results, Tacoma's fourth quarter results were solid with company delivering year-over-year revenue growth of 4%, all organic. Company's defense business, although slightly down, still delivered a solid performance, and the commercial business showed modest year-over-year revenue growth for the second consecutive quarter. The commercial aerospace markets are recovering. We are seeing some bright spots. For example, Spirit Aerosystems was our fourth largest customer for the second consecutive quarter in Q4, with over 5% of revenue, a significant difference from 2020. In addition to revenue growth, we posted margin expansion for gross profit at 22.6%, along with adjusted EBITDA of 14.8%. The team also posted adjusted operating income margins of 8%, which is excellent progress as we continue to build our track record of delivering true operational leadership and cost management in any environment. The quality of earnings was solid as well, with the company reaching GAAP diluted EPS of $9.05 a share versus $0.80 a share for Q4 2020, and adjusted diluted EPS of $0.79 a share versus $0.89 a share in 2020. Fourth quarter revenue was higher with the Commons commercial business showing year-over-year growth for the second consecutive quarter of 12%, and continued solid defense business versus prior year with offloading programs from primes becoming more and more of a theme for our business. The programs that had growth in Q4 included the F-18, F-15, F-16, UAVs at General Atomics, Raytheon tow program, and other missile programs. Our approach to the market continues to be innovative products and processes that provide significant value to the defense customer, along with striving for a consistent high level of service. Raytheon Missile and Defense activity is also moving to a higher level since signing the Strategic Supplier Agreement with them over two years ago. We've been hard at work in many areas, current and new programs, offloading, and share shift. I'm happy to report that 2021 was a record year for that division and Raytheon Technologies overall. Raytheon Technologies is our largest customer, and revenues increased more than 20% to $158 million in 2021, and Q4 alone was over $45 million, which is showing very good momentum entering 2022. I mentioned earlier about the offloading from defense primes and the future benefits for the companies. We've been hard at work with Raytheon, GA, Northrop Grumman, and others, and we'll be over $45 million in 2022 for strictly offloading, up from roughly $31 million in 2021. We then expect $90 million plus in 2023, and the long-term revenue run rate of programs already commercialized or in development will be over $125 million by 2025. These programs include Raytheon SPY6, products for GA, tow harnesses and circuit cards, and the next generation jammer. In regards to the defense backlog, it also remains strong and ending Q4 with a backlog of $520 million. The commercial aerospace backlog also shows strong signs of recovery, increasing sequentially for the third consecutive quarter from $276 million at the end of Q2 2021 to $333 million at the end of Q4 2021. 2021, a very good sign. The total backlog of $905 million for the company is approaching pre-pandemic territory. The company's cost actions are also continuing to pay dividends. You can certainly see even before the pandemic, the company was working on initiatives to offset the 737 max beginning in Q4 2019. The effectiveness of our operational leadership and action since then and through two years of COVID, shows in all our margins, GP, OI, EBITDA, along with diluted ETS. In addition, Tacoma's overall low SG&A costs, including at our corporate level, is among the industry leaders. For the full year of 2021, revenue was $645 million versus $629 million in 2020. Operating income was $49 million versus $46 million in 2020. and backlog was $905 million versus $808 million in 2020. These numbers reflect the return to growth commitment for 2021 that I made during the August 12, 2020 Q2 investor call. I am proud of the team for this achievement, as once again, the common team meets its commitments. In regards to the outlook, our significant backlog in defense and continued momentum in commercial aerospace will result in high single-digit revenue growth for 2022. We estimate that revenue will remain good in defense, but over the quarters ahead, we will see more and more commercial aerospace volume return to the common. Our high narrow-body to wide-body ratio for our business will help us as well, and we have the capacity, supply chain, and strong operating team ready to deliver the forecasted rate increases ahead. We're also working with OEM and Tier 1 companies to drive a higher percentage of share on key platforms and remain confident that this will occur in 2022. Another critical area is M&A. We're always actively looking for companies that fit our model and believe this will only be an accelerator to higher results. This has been demonstrated in the past. We expect to see this thing continue for the company and its shareholders. 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 $113.1 million, a slight decrease versus 2020. Solid showing was from revenue on some key defense platforms. As earlier mentioned, we saw increases in demand for our F-18, F-15, F-16, UAVs, tow, and other missile programs. The fourth quarter's military and space revenue represented nearly 70% of the Commons revenue in the period. We also continue to be very well positioned for growth across our defense platforms over the next several quarters in all sectors, especially at Raytheon, and again ended the fourth quarter with a strong backlog of $520 million, which represents 57% of the Commons total backlog. Within our commercial aerospace operation, fourth quarter revenue increased year over year, to $41.6 million, driven mainly by build rate increases on other commercial aerospace platforms and business aircraft platforms. The economy expects a meaningful improvement in the commercial aerospace market overall in 2022 and 2023, and the future is bright. The backlog within our commercial aerospace sector stands at roughly $333 million at the end of Q4, a significant increase sequentially compared to Q3 2021-2022. and the third consecutive quarter of growth. With that, I'll have Chris review our financial results in detail. Chris?