Ducommun Incorporated

Good day and thank you for standing by. Welcome to the Q4 2023 DoCommon Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Suman Mukherjee, Senior Vice President and Chief Financial Officer. Please go ahead.

Thank you, and welcome to Duke Commons 2023 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 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 DuCombin include, amongst others, the cyclicality of our end-use markets, the level of U.S. government defense spending, Our customers may experience delays in the launch and certification of new products, timing of orders from our customers, legal and regulatory risks, the cost of expansion and acquisitions, competition, economic and geopolitical developments, including supply chain issues and rising or high interest rates, the ability to attract and retain key personnel and avoid labor disruptions, the ability to adequately protect and enforce intellectual property rights, pandemics, disasters, natural or otherwise, and risk of cybersecurity attacks. These risks and others will be described in our annual report on Form 10-K once it is filed with the SEC, and our forward-looking statements are subject to those 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 filings with the SEC for a reconciliation of the GAAP to non-GAAP measures referenced on this call. This year, we expect to file our 2023 Form 10-K on Thursday, February 22nd, 2024. The additional time is to complete the documentation of our internal controls and preparation of the Form 10-K for filing. In the 2023 Form 10-K, we expect to report a material weakness in our internal controls over financial reporting related to our revenue recognition process. This material weakness resulted in immaterial adjustments to net revenues and contract assets as of and for the quarterly period ending December 31st, 2023. We do not expect the material weakness to result in a restatement or change to the reported financial statements. We will make the necessary changes to the design and operating effectiveness of the specific revenue recognition internal controls during 2024. I would now like to turn the call over to Steve Oswald for a review of the operating results. Steve.

Okay, thank you, Suman. And thanks, everyone, for joining us today for our fourth quarter conference call. Today, and as usual, I'll give an update on the current situation at the company, after which Suman will review our financial results in detail. Q4 was a very good quarter as we wrapped up 2023. Revenues exceeded $190 million for the second consecutive quarter, so $192.2 million, driving a full year revenue of $757 million, with the last high mark set in 2012. Strong growth in our single aisle commercial aircraft business helped to drive the revenue. The continued recovery in commercial aerospace once again delivered in Q4 with Boeing single aisle platform business in aggregate being up 46% year over year, along with Airbus A220 program showing strong growth of 73% year over year. Overall commercial aerospace with Airbus and Boeing and others was up 18% from Q4 2022, despite Boeing's and Spirit's continued challenges with max quality issues. We are now in our 10th quarter of year-over-year revenue growth for commercial aerospace, a continued excellent sign for DCO and the industry. While our defense business was slightly down the quarter with sunsetting programs such as the F-18 having an impact, the company also experienced strong demand in the Apache program as well as increases for F-35 and the Mir missile platforms. The defense business was over $100 million in revenue once again at $103 million of revenue for the quarter, we remain optimistic about the growth ahead. As we go through a timing transition on certain programs, the ever-growing backlog in defense tells the story, with backlog up $70 million from last year and $33 million from Q3 2023. Defense backlog now stands at over half a billion, at $527.1 million. Another real bright spot in Q4 was gross margins of 21.7% for Q4, up 120 basis points year-over-year from 20.5%, as we began realizing benefits from our strategic pricing initiative, productivity improvements, and some initial restructuring savings. We are now also in the final stages of operation at our Berryville, Arkansas, and Monrovia, California performance centers, and are targeting a full shutdown by June 30. The final approval stage with RTX for the Tomahawk harness is going to Mexico. The last product still being produced at Berryville is close. And we continue to give a full effort with BA, BCS, and BA Defense on the MAX spoilers and Apache tail rotors, respectively, working with them on approval and building buffer. Due to the low level of production at both sites, we do have some headwinds. but this is temporary and will clear after the closures. For adjusted operating margin in Q4, the team delivered 8.3% compared to 8.1% in Q4 2022. A nice result while investing some of the gross margin improvement after a few lean years during COVID and the ramp up of commercial aerospace. The gap diluted EPS was $0.34 a share in Q4 2023 versus $0.65 a share for Q4 2022. And with the adjustments, diluted EPS was a solid $0.70 a share compared to diluted EPS of $0.85 in the prior year. Some key drivers for the lower gap diluted EPS include higher interest expense due to higher interest rates, higher inventory purchase accounting adjustments, and higher SG&A expenses as we invested in the business to position it for the future. The total company backlog performance increased both sequentially and compared to the prior year. Total company backlog ended 2023 at almost $994 million, increasing over $30 million both sequentially and compared to the prior year. Defense backlog, as mentioned earlier, also increased $70 million compared to the prior year to the end at a record of $527 million. The strong defense backlog reaffirms the common defense business remains in good shape with more positive news to come. The commercial aerospace backlog, however, decreased slightly year over year, primarily due to industry issues with single aisle production rates, specifically the max issues mentioned earlier with BA and Spirit, but still ended Q4 2023 at a solid $429 million. For offloading from defense primes, the work continues. We are expecting roughly $90 million for the full year of 2024 as committed to, mainly in our circuit card business for RTX, in new areas such as radar for the SPY6. 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 transition work is completed. In Q4, our team delivered another good quarter managing the supply chain. as evidenced by positive revenue growth along with significant gross margin expansion compared to a year ago. Another great example of productivity improvements in people is the revenue per employee number, which granted is a high-level number, but did increase significantly by 16% in 2023 versus 2022. That is a terrific job, everyone at the company. 2023 record revenues of $757 million was a solid 6.2% growth over 2022, and in line with the guidance of 6% to 6.5% we provided to you during the Q3 call. We were obviously happy with this record number last set in 2012, especially in light of the 737 MAX headwinds with BA and Spirit that created a more modest pace that it then expected in single aisle production rates in 2023. For revenue guidance in 2024, we believe that with the uncertainty surrounding BA, Spirit, and the FAA at this point on the max, the best approach is to guide to mid-single digits and look to further updates on future earnings calls. The commercial aerospace recovery will continue to expand along with growth in defense, which is backed by a record backlog. We continue as well to be active with acquisitions as in 2020 acquisition last April, and believe this is another catalyst to drive us possibly higher in the year ahead. Now let me provide some additional color on our markets, products, and programs. Beginning with our military and space sector, we experienced our second consecutive quarter of revenues over a hundred million at 102.8 million compared to 108.4 million in Q4, 2022. While lower, we saw some bright spots, including strong demand for the Apache tail rotor blades, with over 380% year-over-year growth, and increased demand for other military and space products, other military rotary wing platforms, F-35, and the Mir missile as well. The fourth quarter's military and space revenue represented 53% of the commons revenue in the period, down from 58% last year. And this trend will continue to reflect more balance with commercial aerospace, which we like. We also ended the fourth quarter with backlog in excess of 500 million to 527 million, an increase of 70 million year-over-year, and represents 53% of the common's total backlog. Within our commercial aerospace operations, fourth quarter revenue saw double-digit growth once again, increasing 18% year-over-year to $80 million, driven mainly by build rate increases on large aircraft platforms, including the 737 MAX and A220 platforms, and twin aisle commercial aircraft platforms, commercial rotary wing aircraft platforms, and regional and business jets. As many of you are aware, the FAA announced in January that it will increase its oversight of Boeing as well as require Boeing to get approval for production rate increases or additional production lines for the 737 MAX until it is satisfied that Boeing is in full compliance with required quality control procedures. This will likely cap the production of the 737 MAX, but we need to see how things go in Q1 of 2024 in the FAA Going Forward Plan. We do, however, expect the long-term trend to remain positive once the issues are fully addressed. The backlog within our commercial aerospace sector was $429 million at the end of the fourth quarter. And while it was $21 million lower year over year, it increased $7 million sequentially, a solid number given the temporary weakness in commercial aerospace. With that, I'll have Suman review our financial results in detail. Suman.