Ducommun Incorporated

Good day, and thank you for standing by. Welcome to the Q2 2022 Ducommons Earnings Conference Call. At this time, all participants are in the listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during that session, you'll need to press star 1 1 on your phone. Please be advised that today's conference is being recorded, and I would now like to hand the conference over to Ducommons VP, CFO, Controller, and Treasurer, Chris Wampler. Mr. Wampler, please go ahead.

Thank you, Chris. And welcome to Duke Commons 2022 Second 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 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 or 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, the cost of expansion and acquisition, competition, geopolitical developments, 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 these risks. Statements made during the 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 filing with the SEC for reconciliation of the gaps and non-gap measures referenced on this call. We filed our 2022 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?

Okay, Chris, thank you, and thanks, everyone, for joining us today for our second quarter conference call. Today, and as usual, I will give you an update on the current situation of the company, after which Chris will review our finances 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 follow our best practices in line with health authorities. And within the company, we had 106 cases of the Omicron variant in Q2 of 2022. Turning to the Q2 financial results, Tacoma's second quarter performance was very good, the company delivering year-over-year revenue growth of 9%, in line with 2022 guidance. The commercial aerospace market continued recovery was the real bright spot in Q2, with Boeing 737 MAX business up over 200% year-over-year, and the Airbus A220 also had a significant increase, over 200% growth year-over-year. Overall, commercial aerospace, with Airbus, Boeing, Gulfstream, and others, was up over 50%. from Q2 2021. I also want to add that our commercial aerospace business showed year-over-year growth now for the fourth consecutive quarter, an excellent sign, and we're just getting started. The company's business in defense as well, after tremendous growth of roughly 40% over the past two years in 2020 and 2021, was only down slightly in Q2, but still delivered a solid performance of over $100 million in revenue. The company posted solid gross profit of 19.9%, which was down year-over-year and was partially impacted by several one-time factors, which Chris will cover in his remarks. In addition, we had strong bounce back for adjusted EBITDA margins to 13.8% in Q2 from the Q1 number, which is very nice to see, and expect EBITDA to continue to grow in the quarters ahead. The team also posted adjusted operating income margins of 8.2%, which is good progress through the first half of 2022 as we continue to build on our track record of effective operational leadership and cost management. The quality of earnings is solid too with the company reaching GAAP diluted EPS of $0.34 a share versus $0.69 a share for Q2 2021 and adjusted diluted EPS of $0.76 a share versus $0.81 in 2021. Some key drivers for the lower diluted EPS include restructuring charges, Guaymas fire-related expenses, and inventory purchase to county adjustments for the Max Steel acquisition last December. On the customer side, Raytheon Technologies was again our number one customer in Q2 revenue. We continue to benefit from the strategic supplier agreement signed with them back in 2019 for the missile and defense business. We've been hard at work with current and new programs offloading and share shift with them and look forward to continuing to leverage that relationship in the second half of this year in 2023. We're also taking that model now to Northrop Grumman, who year to date is our third largest customer in revenue. NG has been a real success story for New Commons since 2018. We have almost doubled the business. This is all part of our plans to build a second defense prime customer, similar to the $150 million a year we do right now with Raytheon. I've also mentioned in the past about the offloading from defense firms and the benefits for the company. The work continues. We will meet our target of about $45 million in 2022, up from roughly $31 million in 2021. We then expect to double it to $90 million plus in 2023, with a great deal of that in our circuit card business for Raytheon. A Q2 highlight from Raytheon was the latest offloading win for us on circuit cards for the next generation Jammer. This will be a top program moving forward for the defense industry. The initial order in Q2 was over $15 million. The products were produced at our Appleton, Wisconsin facility and was one due to our high level of performance and strong relationships. We're also driving the SPY6 offload for circuit cards, and 500 of the first card built and tested with excellent results. This is another top program for us. It is going at a conservative pace, which it should, and we hope to be full turnkey on this card in Q2 of 2023. The best news is the long-term run rate of programs already commercialized or in development for offloading for the common will be over $125 million by 2025. For backlog performance, the commercial aerospace backlog increased sequentially from the fourth consecutive quarter from $276 million at the end of Q2 2021 to $419 million at the end of Q2 2022, and over 50% increase. This was led by the 737 MAX, Viasat for in-flight entertainment, the A320, A220, and Gulfstream, all which you would expect after coming up a very tough 20 and 21 for this part of the commons business. Defense backlog remained solid in Q2 as well, and ended the quarter at $494 million. The book-to-bill ratio for Q2 was 1.1, and we are thrilled that for the second consecutive quarter, the backlog for Q2 reached a new all-time high of $976 million for the company. Company's cost actions and lead organizational structure are continuing to pay dividends, too. Our supply chain team delivered another excellent quarter managing materials, along with SG&A spending, in particular at the corporate level, among the best in the industry. In regards to the revenue outlook comments made last quarter, we continue to see the company at a high single digit this year, with the commercial aerospace industry recovery continuing to move forward, along with our significant backlog in defense. We estimate that revenue will remain very good over the quarters ahead as we see more and more commercial aerospace volume return. Our high narrow-body to wide-body ratio for the business will also help based on the current challenges facing wide-body aircraft, though we were very happy for us and the entire industry to see the 787 news last Friday night. The other bright spot for Dukama is our business aviation portfolio, up more than 50% in revenue year-over-year with a very strong backlog, especially with Gulfstream. Another important area for the company investors is M&A. We continue to be actively looking for companies that fit our model, continue to be accelerated to higher results now and in the future. We had a significant win with the acquisition of MagSeal in December. I'm happy to report that the numbers are ahead of plan, the team intact, and growth plans on revenue, investment, and pricing on the move. Another highlight is our Nobles business. required in Q4 2019. We are bringing on a new program in the second half of this year, supporting the new Oshkosh Striker vehicle with the ammunition handling system. We will be sole sourced and will increase revenue significantly in the second half of 2022. Finally, we announced and commenced the restructuring initiative in early Q2. Our team has taken this action to accelerate the achievement of our strategic goals better position of the company for stronger performance now and in the future. While we are finalizing some details as to the timing of certain remaining actions and the operations affected, including facility repositioning related expenses and payment of long-lived assets and severance, we've already taken some actions and related charges during G2. Now let me provide some color on our markets, products, and programs. Beginning with our military and space sector, we posted second quarter revenue of $106.7 million, a decrease versus 2021. Despite being down, as mentioned earlier, it was greater than $100 million, so it was a solid showing for the business in Q2. We saw increases in demand for F-18, F-16, Aegis, Mir missile, Magseal products, and Gator radar systems. The second quarter military and space revenue represented more than 60% of the common revenue in the period, down from 70% last year. This will be changing more over time to reflect more balance with our commercial aerospace business. We also ended the quarter with a solid backlog, as mentioned earlier, of $494 million, which represents 51% of the common total backlog. Then our commercial aerospace operations second quarter revenue increased year-over-year to $57.1 million, driven mainly by bill rate increases on large aircraft platforms business aviation, in-flight products from Viasat, and other commercial aerospace platforms. The Common expects continued improvement in the commercial aerospace markets overall for the rest of 2022 and 2023, and the future is very bright across our product offerings, including our industry-leading titanium structural business. The backlog within our commercial aerospace sector stands at roughly $419 million at the end of the second quarter. And as mentioned, it was over a 50% increase year-over-year from Q2 2021. With that, I'll have Chris review our financial results in detail. Chris?