Ducommun Incorporated

Good day and thank you for standing by. Welcome to the third quarter 2023 Do Common Earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Suman Mukherjee, Duke Commons Senior Vice President and Chief Financial Officer. Please go ahead.

Thank you, and welcome to Duke Commons 2023 Third Quarter Conference Call. With me today is Steve Oswald, Chairman, President, and Chief Executive Officer. 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 that could cause actual remarks 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 the common include, amongst others, the cyclicality of our end-use markets, the level of U.S. government defense spending, timing of orders from our customers, legal and regulatory risks, the cost of expansion and acquisitions, competition, economic and geopolitical development, including supply chain issues and rising interest rates, pandemics 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 filed our Q3 2023 quarterly report on Form 10Q with the SEC today. I would now like to turn the call over to Steve Oswald for a review of the operating results. Steve.

Thank you, Suman, and thanks, everyone, for joining us today for our third quarter conference call. Today, and as usual, I will give an update of the current situation at the company, after which Suman will review our financials in detail. Q3 was an outstanding quarter. as we grow our top line both year-over-year and sequentially, delivering revenue growth of 5% versus 2022 and reaching a new all-time quarterly record of full revenue of $196.3 million, the previous high being in 2012. As mentioned in the press release, the ramp-up of our wide-body aircraft business, which was welcome news, along with a return to growth of our military business, helped to drive revenue and achieve this new milestone. We have big goals for 2027, discussed at our investor meeting last December, and we need to be realizing this level of revenue, and of course higher, as we move forward over the next few years. The continued recovery in commercial aerospace once again delivered in Q3, with Boeing's twin aisle platform business in aggregate being up almost 170% year over year. Great to see, along with Airbus A220 also having good growth up 33% year over year. Overall commercial aerospace with Boeing and Airbus and others was up 14% from Q3 2022. Despite the continued challenges with the quality repairs reducing the max fuselage build rates. We are now in our ninth quarter as well of year-over-year revenue growth for commercial aerospace, a continued excellent sign overall for the industry. I'm happy to report the commons defense business was also up year-over-year in Q3, mainly due to the Apache program's strong demand, other military and space products, the Mir missile, and other military rotary wing platforms. The business delivered good performance of 109 million in revenue for the quarter. And it was encouraging to see the return to growth for this very important business for the common. The company posted excellent gross margins of 22.7%, up 200 basis points year over year from 20.7%, a breakout number for the business, even as we continue to work through our many restructuring activities. We did benefit from favorable product mix and higher volume in Q3. The team also delivered adjusted operating income margins of 8.9%, along with an all-time high adjusted EBITDA of $29.3 million, an increase of $3.3 million year over year. The Commons adjusted EBITDA margins of 14.9% in Q3 was very strong, and we anticipate adjusted EBITDA to be solid this year with stronger numbers in 2024 once the plant closures and restructuring activities are completed. A good amount of value creation is ahead for the company and shareholders. The quality of earnings was solid with GAAP diluted EPS of 22 cents a share versus 69 cents a share for Q3 2022. And with the adjustments, diluted EPS was 70 cents a share compared to diluted EPS of 96 cents in the prior year. Some key drivers for the lower GAAP diluted EPS include higher interest expense due to higher interest rates, higher restructuring charges, and higher inventory purchase accounting adjustments. Switching to the total company backlog performance, while it decreased sequentially, it was up slightly year-over-year and remained solid at 959 million at the end of Q3 2023. The backlog held flat sequentially, the defense backlog held flat sequentially at 494 million after a significant jump in Q2 2023. It represents a 6% increase on a year-over-year basis. We were pleased with this and a positive sign that the overall DCO defense visit remains in good shape with more positive news to come. The commercial aerospace backlog, however, decreased slightly year over year, primarily due to the industry issues with single aisle production rates, specifically the MAX mentioned earlier, but still ended Q3 2023 at $423 million. For offloading for defense primes, the work continues. We're expecting roughly $90 million for the full year as committed to, mainly in our circuit card business for RTX. As communicated, the long-term run rate of these defense programs already commercialized or in development for offloading will be over $125 million by 2025 once the transition work is completed. In Q3 as well, our team delivered another excellent quarter managing the supply chain as evidenced by the record quarterly revenue along with significant gross margin expansion compared to a year ago. This is another great example of our operating process, company culture, dedicated employees, and leadership. As we move towards the conclusion of the year, I am now narrowing down the previous revenue guidance of mid to high single digit for the year to now a range of 6% to 6.5%. We are happy with this number. especially overcoming the max delays we all know about, which have created a more modest pace in commercial aerospace single aisle production rates in 2023. Before I move to providing our market and program details, I thought it was a good time to spotlight our MagSeal acquisition, which we closed in December of 2021. I think we have found a good balance disclosing information on our acquisitions per shareholder request of course, without harming our competitiveness. I did want to highlight the success at the Rhode Island-based design and manufacture of magnetic seals for aerospace and defense applications. In just over seven quarters of the common ownership, the progress has been excellent. We have grown revenue by more than 75%, with adjusted operating income growing by more than 200%. Maxfield's backlog also grew more than 75% during this ownership period. For background, the company was a family-owned business prior to our acquisition with low involvement from the owners and limited capital. As for our playbook, first, we were able to retain the key leaders post-acquisition. Second, enable them to drive a high level of performance through capital investments in operations, including state-of-the-art new manufacturing equipment to improve productivity. Third, add sales and engineering resources to drive customer engagement and new product development. And fourth, adjusting their channel strategy to bring them closer to the customer where it makes sense. This is our most recent deal with a track record now. And I believe this is a compelling example of how we create value through common shareholders when we spend money on acquisitions. I also want to take this time to congratulate Bob Gard and the MagSeal team on their outstanding performance and look forward to their continued success for many years to come. Now let me provide some additional color on our markets, products, and programs. Beginning with our military and space sector, we saw a return to growth and exceeded $100 million in quarterly revenue to post-third quarter revenues $108.7 million compared to $106.3 million in Q3 2022. The significant increase in demand for the Apache tail rotor blades of almost 250% year-over-year was the main driver, but we also saw increased demand for other military and space products, the Mir missile and other military rotary wing platforms as well as the Bell V-22 rotary wing platform. The third quarter's military and space revenue represented 55% of the Commons revenue in the period, down from 57% last year, and this trend will continue to reflect more balance with commercial aerospace, which we like. We also ended the third quarter with a solid backlog of $494 million, an increase of 6% year-over-year, and represent 52% of the Commons total backlog. In our commercial aerospace operations, third quarter revenue increased 14% year-over-year to $77.9 million, driven mainly by bill rate increases on large aircraft platforms, including the twin-aisle commercial aircraft platforms as well as the A220 platform, commercial rotary wing aircraft platforms, and other commercial aerospace platforms. The comet expects continued growth, although at a more modest pace, and commercial aerospace as the industry navigates various supply chain component issues. I'm also happy to report our delivery and quality to common customers continues to be a bright spot as we move forward. The backlog within our commercial aerospace sector stands at $423 million at the end of the third quarter, and while it was $8 million lower or a 2% decrease year-over-year from Q3 2022, it was still a very solid number given the temporary weakness in commercial aerospace. With that, I'll have Suman review our financial results in detail.