Ducommun Incorporated

Good day, and thank you for standing by. Welcome to the first quarter of 2024 Due Common Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll 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 first speaker today, Suman Muguchi. Chief Financial Officer, please go ahead.

Thank you, and welcome to Duke Commons 2024 First 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 Dukaman 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 risk, 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. Please refer to our annual report on Form 10-K quarterly reports on Form 10Q, and other reports filed from time to time with the SEC, as well as the press release issued today for a detailed discussion of the risks. 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 Q1 2024 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?

Okay, thank you, Suman. Thanks, everyone, for joining us today for our first quarter conference call. Today, and as usual, I will give an update on the current situation of the company Afterwards, Suman will review our finances in detail. Let me start off with an update on our continued progress towards Vision 2027. For background, this vision and strategy was developed coming out of the COVID pandemic over the summer and fall of 2022. Unanimously approved by the DeKalb and Board in November 2022, and then presented to investors the following month in New York. We had excellent feedback. Since that time, Tacoma Management has been executing the Vision 2027 strategy by consolidating its facility footprint, continuing its targeted acquisition program, increasing the revenue proportion of engineered product and aftermarket content, executing our offloading strategy with defense primes and high growth segments of the defense budget, and by expanding content on key commercial aerospace platforms. We all have conviction. in the Vision 2027 goals and strategy, and believe the near-term and mid-term catalysts, along with strong results ahead for DCO, present a unique long-term value creation opportunity for shareholders. The Q1 2024 results were a very good example of the strategy at work. Q1 was an outstanding quarter and a great start to the year for Dukama. Revenues exceeded $190 million for the third consecutive quarter and $190.8 million, going 5.3% over the prior year. Strong growth in our commercial aircraft businesses across both Boeing and Airbus, along with our rotorcraft business, helped drive revenue during the quarter. Recovery on the 787 was notable, with revenues more than doubling over the prior year period, as well as strong growth on the A220 platform. where we make the skins for the entire fuselage. Overall commercial aerospace with Airbus and Boeing and others was up 11% from Q1 2023, despite Boeing and Spirit's continued challenges with max quality issues. We have now grown our year-over-year revenue in our commercial aerospace business for 11 consecutive quarters, demonstrating the resilience of our business even in a challenging OEM environment. Our defense business grew 1% year over year, a strong demand for the Blackhawk, Apache, and F-35 platforms, as well as selected naval programs, including the phalanx, close-in weapon system, and other weapon systems for submarines. Growth was partially offset by declines in legacy programs such as the F-18, which we have talked about in the past, and a pause in the tow missile production, for which we expect a new contract and anticipate starting shipments again in 2025. Defense business was almost 100 million in revenue in the first 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 of 125 million from last year and 42 million from Q4 2023. Defense backlog now stands at over half a billion at $569 million. Significant wins with RTX and Q1 were an important driver for the increased defense backlog. The SPY-6 program is part of the US Navy's family of radars that performs air and missile defense on seven classes of ships as a giant leap for the fleet. SPY-6 radars are integrated meaning they can defend against ballistic missiles, cruise missiles, hypersonic missiles, hostile aircraft, and surface ships simultaneously. DeKalb has been providing one card for the program, as this is part of the offloading strategy we've been working on, and I'm very happy to report that we've been awarded a second card from RTX for the SPY-6 and Q1 after 18 months of work. These are a slow transition as I've mentioned in the past, and it should be. But now it pays off, and the order for two cars in Q1, one new and one a follow-on, was over $50 million. This is also great news as we are now building out a much bigger business in radar support, complementing our long-term track record in missile support. The new card award deliveries are expected to begin in 2025, and the current card shipments are ongoing. As communicated on the overall offloading program, we anticipate that the long-term run rate of the SPY-6 and other defense programs already commercialized or in development will now be $135 million in 2025, an increase of $10 million over our prior target of $125 million for 2025. It has been a long journey, but well worth it. Another real highlight in Q1 was gross margin. of 24.6% for the quarter, up 430 basis points year-over-year from 20.3%, as we continue to realize benefits from our strategic value pricing initiatives, productivity improvements, growing the engineered product portfolio, and initial restructuring savings. We also made significant reductions in the scope of our operations at our Berryville, Arkansas facility during Q1, with several programs fully transitioned to New Commons, Joplin, Missouri facility roughly 200 miles away. This has allowed us to start realizing a portion of the savings expected for Berryville closure during the first quarter, with one more program left to transition with RTX. We also continue to make a full effort with Boeing Commercial and Boeing Defense on the MAX spoilers and Apache tail rotor respectively, working with them on approvals and building buffer. We are in the final transition phase with some headwinds in Q2 and Q3 of this year, But long term, we are driving to a great outcome for the common, Boeing, and our shareholders. For adjusted operating income margins in Q1, the team delivered 9% compared to 7.5% in Q1 2023. A great result driven by the continued growth in our engineered product businesses and with our restructuring savings beginning to kick in during the quarter. Adjusted EBITDA was another great story in Q1 at 14.4% of revenue compared to 12.7% in Q1 2023. 170 basis point improvement year-over-year gives Dukama a great start to 2024, as it worked towards the 18% for the Vision 2027 goals. The GAAP diluted EPS was $0.46 a share in Q1 2024 versus $0.42 a share for Q1 2023. And with the adjustments, diluted EPS was a solid $0.70 a share compared to a diluted EPS of $0.63 a share in the prior year quarter. The higher gap and adjusted dilute EPS was driven by improved operating income as well as lower interest costs during the quarter. The company's consolidated backlog increased sequentially and compared to the prior year quarter. Total company backlog ended Q1 at a record of $1 billion, $46 million, increasing over $52 million sequentially, and it was $85 million year over year. Defense backlog, as mentioned earlier, also increased $125 million compared to the prior year quarter. to end at a record $569 million. Strong defense backlog reaffirms that the commons defense business remains well positioned with more positive news to come. The commercial aerospace backlog decreased slightly year over year, primarily due to industry issues with the single aisle production rates and the max issues mentioned earlier with Boeing and Spirit. However, our commercial aerospace backlog still grew relative to Q4 2023 at $442 million. In Q1, our team delivered another good quarter, managing the supply chain as evidenced by another quarter of positive revenue growth and significant growth margin expansion compared to the prior year period. For revenue guidance for the remainder of 2024, we continue to believe that the uncertainty surrounding BA, Spirit, and the FAA at this point on the max, the best approach is to again guide to middle, mid-single digit, and look to further updates on the next earnings call. We do see a slowdown in the max bill rates, not for the wrong reasons, in Q2 and Q3 for this year, where commercial aerospace will be a bit lighter due to the situation. Despite softness in the max, which is a major program for us, we are comforted by continued strength on other programs, such as the 787 and Airbus programs, including the A220. The best part is the max bill rate will actually be at a much higher level, and we continue to work on gaining more share. Strong bookings and growing backlog in our defense business is also supportive of our revenue outlook. Now let me provide some additional color on our markets, products, and programs. Beginning with our military and space sector, we experienced revenue just below $100 million at $98.9 million compared to $97.7 million in Q1 2023. While growth was muted, we saw positive signs in our military helicopter products, including strong demand on the Blackhawk program, with revenues growing over 70% and also for Apache tail rotor blades, which grew more than 50% year over year. Our naval business also performed well. We saw strong growth on the phalanx closing weapons system used on surface ships, as well as other weapons systems for submarines. First quarter's military and space revenue represented 52% of the commons revenue in the period, down from 59% back in 2022 and 70% in 2021. We expect that this trend will continue, reflecting more balance with commercial aerospace, which we like. We also ended the first quarter with a backlog of $569 million, an increase of $125 million year-over-year, representing 54% of the common total backlog. Then our commercial aerospace operations first quarter revenue continued to see double-digit growth, increasing 11% year-over-year to $80 million, mainly by bill rate increases on large aircraft platforms, including the 737 MAX. 787, and A220 platforms, along with growth on 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, require Boeing to get FAA approval for production rate increases for the 737 MAX. This will likely cap production on the 737 MAX. We do, however, expect the long-term trend to remain very positive once the issues are fully addressed. This rate limitation did not have a significant impact on our first quarter results. The backlog within our commercial aerospace business was $442 million at the end of the first quarter, increasing over $12 million sequentially, a solid number given the temporary weakness in the commercial aerospace markets. With that, I'll have Suman review our financial results in detail.

Thank you, Steve. As a reminder, please see the company's Q1 10Q and Q1 earnings release for a further description of information mentioned on today's call. As Steve discussed, our first quarter results reflected another period of strong performance. Despite industry headwinds, we again saw a significant increase in our commercial aerospace revenues. We remain encouraged by the continued strength in domestic and global travel, which should support higher long-term demand for aircraft as we work through some of the industry issues impacting single oil production rates. In addition, we are encouraged by the record backlog we achieved in the first quarter, especially in our military and space end-user segment. With all this, we feel like we are beginning 2024 with good momentum that will continue to drive our performance. Now turning to our first quarter results. Revenue for the first quarter of 2024 was 190.8 million versus 181.2 million for the first quarter of 2023. The year-over-year increase of 5.3% reflects growth in all three of our end-user segments, highlighted by 8.1 million of growth across our commercial aerospace platforms and 1.3 million of growth in our military and space platforms. We posted total gross profit of 46.9 million, or 24.6% of revenue for the quarter, versus $36.8 million or 20.3% of revenue in the prior year period. We continue to provide adjusted gross margins as we have certain non-GAAP cost of sales items in the current and prior period relating to inventory step-up amortization on our recent acquisitions, restructuring charges, and impact from the Guaymas fire on our operations. On an adjusted basis, our gross margins were 25% in Q1 2024 versus 21.1% in Q1 2023. The improvement in gross margin was driven by our growing engineered products portfolio, strategic pricing initiatives, productivity improvements, and some initial restructuring savings. We continue to make progress working through a difficult operating environment with supply chain and labor. Through our proactive efforts, including strategic buys and our inventory investments, we have been able to avoid any significant impacts thus far on our business. During the first quarter of 2024, we increased our inventory by 9.8 million from year end 2023 to position our performance centers to meet our 2024 delivery commitments. We also grew our contract assets net of contract liabilities by 15 million. We continue to look for opportunities to unwind our working capital investments to improve our cash flow. View Common reported operating income for the first quarter of $12.6 million or 6.6% of revenue compared to $6.4 million or 3.5% of revenue in the prior year period. Adjusted operating income was $17.1 million or 9% of revenue this quarter compared to $13.6 million or 7.5% of revenue in the comparable period last year. The company reported net income for the first quarter of 2024 of $6.8 million, or $0.46 per diluted share, compared to net income of $5.2 million, or $0.42 per diluted share, a year ago. On an adjusted basis, the company reported net income of $10.4 million, or $0.70 per diluted share, compared to net income of $7.9 million, or $0.63 in Q1 2023. The higher net income and adjusted net income during the quarter were driven by the higher operating income and adjusted operating income. Additionally, our interest rate hedge helped to reduce our year-over-year interest expense. Now, let me turn to our segment results. Our structural systems segment posted revenue of $83.3 million in the first quarter of 2024 versus $75.6 million last year. The year-over-year increase reflected $5.7 million of higher sales across our commercial aerospace applications including the 787, 737 MAX, and the A220, in addition to selected commercial rotorcraft platforms, and $2.1 million of higher revenue within the military and space markets, driven by strength in the Black Hawk and Apache programs. Structural systems operating income for the quarter was $2.9 million, or 3.4% of revenue, compared to $4.7 million, or 6.3% of revenue, for the prior year quarter. Excluding restructuring charges and other adjustments in both years, the segment operating margin was 7.8% in Q1 2024 versus 12.9% in Q1 2023. This can be attributed to higher costs in our Monrovia plant as it winds down production, reducing operating margins year over year. Our electronic systems segment posted revenue of $107.5 million in the first quarter of 2024, versus 105.6 million in the prior year period. The increase was mainly due to growth across the commercial aerospace platforms and certain military platforms, including the F-35, and naval programs such as the failings close-in weapon system and submarine launch, missile launch systems, partially offset by the impact and timing of reduction in legacy platforms such as the F-18. Electronic systems operating income for the first quarter was $19 million or 17.6% of revenue versus $10 million or 9.4% of revenue in the prior year period. Excluding restructuring charges and other adjustments in both years, the segment operating margin was 18.4% in Q1 2024 versus 11.6% in Q1 2023. The year-over-year increase was due to favorable product mix including growth in our engineered products portfolio, strategic pricing initiatives, as well as savings from restructuring program beginning to kick in during the quarter. The restructuring savings were driven by the transition of product lines from our variable performance center to other facilities. Next, to provide an update on restructuring. As a reminder, and as previously discussed, We commenced a restructuring initiative back in 2022. These actions are being taken to accelerate the achievement of our strategic goals and to better position the company for stronger performance in the short and long term. This includes the shutdown of our facilities in Monrovia, California, and Berryville, Arkansas, and the transfer of that work to our low-cost operation in Guaymas, Mexico, and to other existing performance centers in the United States. We continue to make progress on these transitions with excellent employee retention and engagement, and are also working diligently with our customers, Boeing and RTX, to obtain the requisite approvals. During Q1 2024, we recorded $1.4 million in restructuring charges. The majority of these charges were severance and related benefits as we continue to wind down the two operations. The recertification process is ongoing, and we plan to complete production at both facilities by the end of the second quarter. We expect to incur an additional $5 to $6 million in restructuring expenses through the end of 2024 as we complete the program. Upon the completion of our restructuring program, we expect to generate $11 to $13 million in annual savings from our actions and are beginning to see realization of these actions in this year. We anticipate selling the land and building at both Monrovia, California and Berryville, Arkansas. Turning next to liquidity and capital resources. During Q1 2024, we used $1.6 million in cash flow from operating activities, which was an improvement compared to Q1 2023 usage of $18.9 million. The improvement was due to a smaller increase in inventories and higher contract liabilities, partially offset by higher contract assets. As of the end of the first quarter, we had available liquidity of $208.1 million comprising of the unutilized portion of our revolver and cash on hand. Our existing credit facility was put in place in July 2023 at an opportune time in the credit markets, allowing us to reduce our spread, increase the size of our revolver, and allowing us the flexibility to execute on our acquisition strategy. Interest expense was $3.9 million compared to $4.2 million in Q1 of 2023. The year-over-year improvement in interest cost despite a higher debt balance was due to the interest rate hedge going into effect. In November 2021, we put in place an interest rate hedge that went into effect for a seven-year period starting January 2024 and pegs the one-month term so far at 170 basis points for $150 million of our debt. The hedge resulted in interest savings of $1.3 million in Q1 2024 and will continue to drive significant interest cost savings in 2024 and beyond. To conclude the financial overview for Q1 2024, I would like to say that we had a strong start to 2024 and anticipate a strong balance of the year. I'll now turn it back over to Steve for his closing remarks. Steve?

Okay, thanks, Shaman.

In closing, Q1 was an excellent quarter, a record in some cases, with many highlights for the company and our shareholders. The strong start to the year with solid revenue and earnings growth certainly strengthens our path to delivering on the goals we set out in the Vision 2027. 2024 is also our 175th year of continuous operation, a great achievement, and we'll be recognizing that through the year. I did the math recently, and the door at the company has been continuously open for over 43,000 business days, a long time in a young country like the United States. What a great story with a very bright future ahead for the company, our shareholders, and all other stakeholders. Thank you for listening. Let's now open up for questions.

Thank you. At this time, we'll conduct the question and answer session. As a reminder to ask a question, you'll need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Mike Crawford of V-Riley Securities. Your line is now open.

Thank you. Steve, what are some of the main pressure points you're trying to avoid with the strategic inventory buys? Like would it be titanium, which is becoming a problem for some, or? What else are you trying to get at?

Thank you. Thank you. Good morning. Yes, you know, look, titanium is obviously a big one. I mean, you know, as the white body, A350, and these other platforms start going up, and obviously with the situation in Russia, it's something that we've been very proactive over the last couple of years and, you know, are in really good shape with our titanium. The other thing we did on strategic buy was really around the car business. uh you know i know there's less drama now uh than there was in the past but we we did go out and buy ahead on on certain things for circuit cards obviously it's an important business for us just getting even more important so i'd say those two i think we're in good shape we're we're not gonna you know plan on doing uh as long as things you know i mean titanium aside on things like for the for the circuit cards we'll probably just continue to uh take it day by day but uh those are the two reports i have

Okay, excellent. And then, I mean, you did call out the F18 as a legacy platform that's in decline. You know, one that might eventually get that way could be the Blackhawk, although that's going up for you now. What are the, maybe some of the other key platforms that are growing for you and conversely, you know, maybe phasing out a little bit just given the transition period?

Sure, sure. I'd say, look, you know, you're spot on. The F-18 is the one, right? So we all know about the F-18. We know what's happening in St. Louis. You know, we are going to see, I think, still good business in depot maintenance and other things. So, you know, that's still going to be an okay program for us. That's kind of the biggest one. I talked about the tow missile. Again, these things are timing related, so we're going to see the tow come back. We're going to start shipping again, we plan in 2025. I mean, as far as on the positive side, I mean, we couldn't be happier with, you know, the Blackhawk business. I mean, even though I know there's lots of discussion and everything, that business is going great for us, the Apache. I'll also mention that we're just starting to move higher and higher on the Seahawk out of Sikorsky as well. So our rotary business was terrific. Despite the F-18, we still had, you know, great volume in the F-35 and some other programs. So we're feeling very good, especially with the backlog, Mike, and it's getting a second cart.

Some of the other missiles programs, if I may add, are also giving us strength, including the Mir missile, the standard missile, and as Steve previously pointed out, the SPY-6 radar and next-generation jammer. So missiles and radar programs are helping offset the decline in the legacy programs.

Yeah, as a transition time, right?

Okay, thank you. Just one final one for me, kind of related to the rotary platform. So it's now just over a year since you acquired VOR Aerospace, and I know one of the goals there was to maybe try to get some of their unique structures into military aircraft. Is there some progress there?

Working on it right now, and Mike, you're spot on on that. You know, our big opportunity is really with the Blackhawks, and that's really through the National Guard. So we have a lot of things, I think, that these things obviously take time, right? But we're excited. We think that also with some of the other news about switching out the engine on that, I think there's more opportunity for that. So stay tuned on that.

All right, excellent. Thank you.

Excellent.

Thank you. One moment for our next question. Our next question comes from the line of Michael Ceramoli of Tourist Security. Your line is now open.

Hey, good afternoon, guys. Thanks for taking questions. Nice results. Maybe kind of a two part, I guess, Steve or Suman, just the margins really strong in the ES segment. You commented on pricing and I know you threw out the value based. And I think that's something we hear pretty often now. Anything you guys are doing differently with pricing outside of just taking advantage of the whole inflationary environment? And then just how do we think about these? these electronic systems margins going forward. I think that was a record level. I'd hate to kind of say, okay, let's extrapolate this. You know, it sounded like you got some mix in there as well. But any color on both of those items?

Yes, Mike, and a great question. We're really happy with the electronic systems margins this quarter. As you noted, pricing is a key factor, and certainly, as you have seen across the aftermarket in the industry, pricing has been strong, and we have seen the same. But kind of beyond that, there are a couple of other things at play here, kind of two themes that are key drivers of our Vision 2027 strategy, and one is growing the engineered product portfolio. And as that continues to grow as a percentage of the revenue in the electronic systems business, you know, the drop-through is really good. So we've had good growth in kind of engineered product businesses. And the second is the consolidation of footprint strategy, right? And that has also started kicking in this quarter with programs getting fully transitioned from our variable performance center to our adjustment performance center and us taking out a significant amount of cost early in the quarter out of the variable facility, which is now has a skeleton crew and only one active program, those other programs are now being produced out of Joplin without much addition to overhead and SG&A in that business. So that's really driving the margins, those two factors. And outside of some minor impacts of product mix, I think the general trend is sustainable. the current margins we're seeing within a narrow band is sustainable going forward.

Okay. Any way to quantify what you saw from the run rate consolidation savings? I know you said 11 to 13, you know, annualized, so it sounds like you got some. Any way to quantify that?

It's still in the early stages of that. It's over a million dollars during the current quarter.

Yeah, I think, Mike, I think this is a good story. I mean, look, we're thrilled with the number, right? You're spot on about, you know, the 18%. So we're excited about that. We think that, again, as we move into the second year of Vision 2027, you know, these things are coming together and we're obviously driving value pricing across the board, right? So that's going to help.

Got it. And then I guess conversely on structural systems, you know, sounds like you're just dealing with overhead under absorption issues as you transition. And it sounds like, I mean, should we expect that margin rate to persist next two quarters? And, you know, I guess it doesn't sound like anything really out of the normal except for just the kind of wind down drag.

Yes. I mean, our Monrovia Performance Center, which is being wound down, revenues were almost a third of what they were on a year-over-year quarter basis, almost half on a sequential quarter basis. So that's naturally going to create a significant amount of drag on margins. And as you can imagine, in a facility being wound down, it's not that easy, right? So we do expect that to linger for the next one to two quarters, but gradually improve. The trend is going to be improvement. And then really the benefits of the complete closure will only kick in in 2025 when we not only shut down the facility in Monrovia here in 2024, but then start actively producing some of those products out of Guaymas in 2025. Yeah.

And, Mike, just for everybody on the call, too, you know, Monrovia is very close to Los Angeles. It's in that area, and, you know, it's the size of an aircraft carrier, okay? So it's not a small plant, all right? So it's been around for a long time, too. So good things ahead there. We're at the three-yard line here in Monrovia. Got it.

got it um last one uh for me stephen i don't want to put words in your mouth or numbers here but i i think you started the defense offloading i don't know if that was really in earnest in late 20 or 21 but if you're you're thinking 135 million By 25 I mean I could go back and take your 20 defense revenue run rate and I could get something you know north of 550 million by 25 obviously you're losing some work in there, you know FAT and I'm sure there's some other programs. But, you know, how should we think about this defense growth trajectory? You know, again, it might not be apples to apples the way I'm thinking about it, but I can come up with some pretty sharp growth there.

Yeah, you're right. It's some, you know, like even I'm looking at the numbers here as we speak here, you know, like a company like GA, right? So we've had a couple of really good years with GA, but as you know, that whole market's been disrupted for them because of these lower-cost UAVs and everything, right? So our volume is down on there. The FAT would talk about some other stuff, but a lot of what we're seeing, we're seeing a lot of repeat orders, but we're getting the next-generation jammer. That's coming out of RTX, and we're getting an Appleton. So we consider that offload, right? We consider that, you know what I mean? So even though you might say, well, no, we... You know, they had it. They went to us and said, you know, we love what you guys are doing. Take it. You know, same thing with the SPY-6. So, you know, I think that it's not apples to apples, but I think overall the story, I think, holds pretty well. And that's what we want. We want to, if we're going to, as you know, there's a lot of new programs out there and these things delay and you know all that. But, you know, we want the stuff that's got a long, long life like the SPY-6, right? It's got to be in the fleet forever. And, you know, we want that current business. That's what we're doing. I mean, as well as the new stuff, right? That's as well. So I think, you know, more to come on that, okay, as well. We get to 26 and 2027, but let's hold it now at 135.

Got it. All right. Good stuff. I'll jump back in the queue, guys. Thanks, Mike.

Thank you. One moment for our next question. Our next question comes from the line of Ken Herbert of RBC Capital Markets. Your line is now open.

Yeah, hi, good morning, Stephen Suman.

Good morning, Ken. Good morning.

Hey, Steve, when we look at the gross margins in the first quarter, is there any reason that they would step down in the second quarter, or is this gross margin run rate now something we should model moving forward?

I'll take a first stab at that, Ken. We are really happy with the gross margins in the first quarter. As I said, on the electronic side, driven by engineered products, restructuring savings, and that really were the key drivers. If you look at the overall company, they were partially offset by the headwinds we had in Monrovia in the structures business. These, outside of I would say marginal benefits from product mix during the quarter, these gross margins within a fairly narrow band are sustainable. If you were to look at our adjusted gross margin in Q4, it was 23.2% of last year, and it's now 25%. If you look at Quarter year over year, it's a big difference, and especially with some of the adjustments, but we've been able to take more of the adjustments into the GAAP gross margin, which is a really good thing, and I would say we feel really good about these margins going forward within the narrow range.

Great, thank you. And can you level set us on your expected, I guess, either max deliveries this year or sort of a monthly or quarterly production rate? Because it sounds like there's maybe a step down sequentially from the first to the second to the third quarter, but maybe an anticipated uptick in the back of the year. Can you maybe sort of comment on where you are on that program and how we should think about the cadence for the year on the max?

Yeah, so, Ken, yeah, good question. So, look, we had a fairly good, you know, first quarter because there was a lot of things still happening, right, until this, you know, until this terrible thing happened, obviously, in January. Then lots of things came after that. So, Q1 was pretty good. April was a bit light. So, you know, we're going to, you know, anticipate, you know, a little bit lighter action on it, you know, because remember, we're both feeding Spirit, you know, which is a major customer as well as, you know... Boeing OEM, right, so PCA. So we, you know, right now we're thinking, you know, maybe it's in the mid-20s, you know, lower to mid-20s for, you know, the second quarter. We'll have to figure out the third when we get there, right, based on their progress. But, you know, we see it coming back. The nice thing is, too, for shareholders and for all of us, I mean, we're working real hard with, and I don't want to, can't go making any announcement right now, but we're working on gaining share on the MAXX. Okay, as well as the A320. So we're working on those types of things. And so, you know, I think, Ken, we're going to get a little shallower, maybe mid-20s. You know, certainly it's been a little lighter in April, but nothing. We're concerned, but we want to be transparent. But we have the 787, which I know has its own problems, but we're seeing a nice bounce back there. And we're happy with our Airbus business. So as well as GS.

Great. And thanks. And just finally, Steve, where would you see the opportunity on the A320 or even the A220 to take share? And what could be the timing around some of the share gains with Airbus on the narrow body portfolio?

Yeah, we, you know, again, we're looking probably within 12 months. So we're working on something right now. We'll see how it goes, right? Because these things are, you know, these things take time. But we think within, 12 months, we might have something going again on the A320. And the A220, we could just continue to work. We continue to grow. As you know, that's a major program for us. And good things ahead there.

Great. Thanks, Steve. Thanks, Jamon.

Thanks, Ken. Thank you.

Thank you. One moment for our next question. Again, as a reminder, to ask a question, you'll need to press star 1-1 on your telephone.

Our next question comes from the line of Jason Gursky of Citi. Your line is now open. Jason Gursky, your line is now open.

Apologies. I had myself on mute. Good morning, everybody. Thanks for taking the question. Hello, Jason. Steve, I wanted to ask a little bit more about Vision 2027. Sure. in particular the M&A component of the vision there, because you've got some inorganic growth I think you'd like to get done. So, yeah, the question I guess is maybe a bit of a two-part question. You know, we've got, you know, a company that's recently went public that's now got, you know, access to some more money that, you know, claims that it's going to go out and be heavily involved in buying up proprietary product type companies. So I'm just kind of curious what the competitive environment looks like these days for assets. So I guess, A, the pipeline, what's the pipeline looking like? What's the competitive environment look like? And then I also want to just, you know, kind of get your take on, you know, the size and scale of things that you guys would be willing to chew off and maybe talk a little bit about the dynamic that's going on there with one of your big customers and Spirit and the Airbus work because that's Seems like, you know, it's a Boeing by spirit. That Airbus work has got to go somewhere. And just kind of curious what kind of appetite you guys might all have for taking on some of that work, all in the context of your M&A strategy. Thanks.

Yeah, no, thanks, Jason. Good to be with you. Let me first just on our Vision 2027 and, you know, the acquisition piece. We have a placeholder for $75 million, right? So we're a bit modest on that. you know, because obviously it's only 2024. We got, you know, several years ahead of us. So, you know, we feel good about that. Again, it's a bit modest, but, you know, we're right now, as we move forward in time, you know, we've really been happy with what we're doing acquisitions. I think it's been a real, you know, great thing for shareholders and for the company. And so, but we're looking more where we can do some, you know, maybe, look at acquisitions where they can, you know, again, help our current engineered product portfolio. You know, we're committed to that, you know, to build a business on that side. I think that's smart and it's a winning formula for shareholders. I think, you know, 75 again is low. I think we're going to do more bolt-ons. But again, if we can find something where there can be some consolidation, we're going to do that as well. So I think for the next couple of years, that's sort of where we sit. As far as spirit, uh you know just let you know for airbus uh we we ship directly into toulouse for uh for a320 so we're we're we're really uh you know just working with them directly we don't really do anything for airbus for spirit spirits much more i think in the a350 world which we're not right now so we'd be open to it i mean you know i think it's uh as i read the notes this morning on on on some of the situations in the meeting new york last night it's going to be difficult But we're there. I mean, we have the capacity. You know, that could be an upside for us. You know, we have nothing to report on it. But we certainly, you know, think we could help out. And, you know, Airbus, again, for all the business we do right now is a first tier. We do everything with Toulouse direct.

Mm-hmm.

Okay, great. So the $75 million placeholder, you know, looks like that, you know, through the 27 timeframe, you think is going to be pretty achievable. I'm just kind of curious, though, you know, what does the pipeline look like today? What do you think the cadence of or potential timing of of those acquisitions might be. Is this going to be, you know, nearer term, more back-end weighted towards 2027? And just kind of what the competitive environment looks like and, you know, pricing on the kinds of assets that you might be chasing.

Let me jump in so I can say a few things, okay? So we're always in the market. So I'll just say that, all right? So, you know, we're always, we're looking at things. We have an excellent team here led by Siman on M&A. You know, if something comes up this year, we're going to do it, our cadence is, It's obviously slowed down through COVID for everybody, but we like to do at least one, if not two, a year. Again, this year, we just did BLR back in last April and May, so we have a little bit of time now. We're always in the market. It's competitive. I know you follow the companies, many of them. And, you know, it's a crowded lobby. But I will tell you that, you know, for what we want and what we've done, I mean, we've got a really good hit rate. We've had a lot of success for the things we've gone after. Not every single one, but, you know, it's up there. So we're excited about, you know, building that part of the business. It's a big thing for me when I came in in 2017. And so I'll let Suman, do you want to say anything else on that?

Yeah, we've been actively looking at businesses. I would say there's been a pickup in deal flow in late Q1 and coming into Q2. We're seeing more assets come to market. Competitive environment, I wouldn't say necessarily has dramatically changed. The company you referenced that went public recently has been around and looking for similar assets for over 10 years. We've certainly come across them in the past, so I don't see that dynamic changing now. So we will continue to be aggressive for businesses that we really like and where we really think we can drive a lot of incremental value for our shareholders. So we will continue to be aggressive with those opportunities. And as we have demonstrated in the past five years, we can, despite the competitive environment, win assets at a price at which we can still drive additional benefit and ROI for our shareholders. So we feel good about being able to continue doing that. And timing, as Steve said, is difficult to predict. Active work ongoing on several opportunities, but timing always difficult to predict on M&A.

And Jason, just to chime in here, we also are very excited about organic growth. Okay, you know, we really want to get, you know, hopefully the MAX will find its way by the end of the year. I mean, if they're at 50 at some point in the future, you know, a drop through and everything else, you know, we feel very good about our current operation, too, delivering.

Okay, great. That's wonderful. Appreciate the time.

Thank you, Jason. Always appreciate you calling in.

Thank you. I'm showing no further questions at this time. I would now like to turn it back to Steven Oswald for closing remarks.

Okay, thank you very much, and thanks for joining us today. Obviously, you know, we couldn't be happier with our Q1. I want to thank my team, all the people working hard every day to come in, and with our relentless approach to things. That's what we do here, and, you know, we are very encouraged as we come out of March to have, I think, a super year for everybody, for our shareholders and for our company, and for all the other stakeholders involved with us. So again, thanks for joining us. Have a great and safe day. Thank you.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Thank you. Thank you. Thank you. Good day, and thank you for standing by. Welcome to the first quarter of 2024 Duke Common Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you'll 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 first speaker today, Suman Muruchi, Chief Financial Officer, please go ahead.

Thank you, and welcome to Duke Commons' 2024 First 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 Dukaman 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 risk, 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. Please refer to our annual report on Form 10-K quarterly reports on Form 10Q, and other reports filed from time to time with the SEC, as well as the press release issued today for a detailed discussion of the risks. 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 Q1 2024 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?

Okay, thank you, Suman. Thanks, everyone, for joining us today for our first quarter conference call. Today, and as usual, I will give an update on the current situation of the company. Afterwards, Suman will review our financials in detail. Let me start off with an update on our continued progress towards Vision 2027. For background, this vision and strategy was developed coming out of the COVID pandemic over the summer and fall of 2022. Unanimously approved by the DeKalb and Board in November 2022, and then presented to investors the following month in New York. We got excellent feedback. Since that time, Tacoma Management has been executing the Vision 2027 strategy by consolidating its facility footprint, continuing its targeted acquisition program, increasing the revenue proportion of engineered product and aftermarket content, executing our offloading strategy with defense primes and high growth segments of the defense budget, and by expanding content on key commercial aerospace platforms. We all have conviction. the vision 2027 goals and strategy and believe the near-term and mid-term catalysts along with strong results ahead for dco present a unique long-term value creation opportunity for shareholders the q1 2024 results were a very good example of the strategy at work q1 was an outstanding quarter and a great start to the year for the comments Revenues exceeded $190 million for the third consecutive quarter and $190.8 million, going 5.3% over the prior year. Strong growth in our commercial aircraft businesses across both Boeing and Airbus, along with our rotorcraft business, helped drive revenue during the quarter. Recovery on the 787 was notable, with revenues more than doubling over the prior year period, as well as strong growth on the A220 platform. where we make the skins for the entire fuselage. Overall commercial aerospace with Airbus and Boeing and others was up 11% from Q1 2023, despite Boeing and Spirit's continued challenges with max quality issues. We have now grown our year-over-year revenue in our commercial aerospace business for 11 consecutive quarters, demonstrating the resilience of our business even in a challenging OEM environment. Our defense business grew 1% year over year, a strong demand for the Blackhawk, Apache, and F-35 platforms, as well as selected naval programs, including the phalanx, close-in weapon system, and other weapon systems for submarines. Growth was partially offset by declines in legacy programs such as the F-18, which we have talked about in the past, and a pause in the tow missile production, for which we expect a new contract and anticipate starting shipments again in 2025. Defense business was almost $100 million in revenue in the first 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 of $125 million from last year and $42 million from Q4 2023. Defense backlog now stands at over half a billion at $569 million. Significant wins with RTX and Q1 were an important driver for the increased defense backlog. The SPY-6 program is part of the US Navy's family of radars that performs air and missile defense on seven classes of ships as a giant leap for the fleet. SPY-6 radars are integrated meaning they can defend against ballistic missiles, cruise missiles, hypersonic missiles, hostile aircraft, and surface ships simultaneously. DeKalb has been provided one card for the program, as this is part of the offloading strategy we've been working on, and I'm very happy to report that we've been awarded a second card from RTX for the SPY-6 and Q1 after 18 months of work. These are a slow transition as I've mentioned in the past, and it should be. But now it pays off, and the order for two cars in Q1, one new and one to follow on, was over $50 million. This is also great news as we are now building out a much bigger business in radar support, complementing our long-term track record in missile support. The new card award deliveries are expected to begin in 2025, and the current card shipments are ongoing. As communicated on the overall offloading program, we anticipate that the long-term run rate of the SPY-6 and other defense programs already commercialized or in development will now be $135 million in 2025, an increase of $10 million over our prior target of $125 million for 2025. It has been a long journey, but well worth it. Another real highlight in Q1 was gross margin. of 24.6% for the quarter, up 430 basis points year-over-year from 20.3%, as we continue to realize benefits from our strategic value pricing initiatives, productivity improvements, growing the engineered product portfolio, and initial restructuring savings. We also made significant reductions in the scope of our operations at our Berryville, Arkansas facility during Q1, with several programs fully transitioned to New Commons, Joplin, Missouri facility roughly 200 miles away. This has allowed us to start realizing a portion of the savings expected for Berryville closure during the first quarter, with one more program left to transition with RTX. We also continue to make a full effort with Boeing Commercial and Boeing Defense on the MAX spoilers and Apache tail rotor respectively, working with them on approvals and building buffer. We're in the final transition phase with some headwinds in Q2 and Q3 of this year, but long-term we are driving to a great outcome for the common, Boeing, and our shareholders. For adjusted operating income margins in Q1, the team delivered 9% compared to 7.5% in Q1, 2023. A great result driven by the continued growth in our engineered product businesses and with our restructuring savings beginning to kick in during the quarter. Adjusted EBITDA was another great story in Q1 at 14.4% of revenue compared to 12.7% in Q1, 2023. 170 basis point improvement year-over-year gives Dukama a great start to 2024, as it worked towards the 18% for the Vision 2027 goals. The GAAP diluted EPS was $0.46 a share in Q1 2024 versus $0.42 a share for Q1 2023. And with the adjustments, diluted EPS was a solid $0.70 a share compared to a diluted EPS of $0.63 a share in the prior year quarter. The higher gap and adjusted dilute EPS was driven by improved operating income as well as lower interest costs during the quarter. The company's consolidated backlog increased sequentially and compared to the prior year quarter. Total company backlog ended Q1 at a record of 1 billion 46 million, increasing over 52 million sequentially and it was 85 million year over year. Defense backlog, as mentioned earlier, also increased 125 million compared to the prior year quarter. to end at a record $569 million. The Strong Defense Backlog reaffirms that the Commons defense business remains well positioned with more positive news to come. The Commercial Aerospace Backlog decreased slightly year-over-year, primarily due to industry issues with the single aisle production rates and the MAX issues mentioned earlier with Boeing and Spirit. However, our Commercial Aerospace Backlog still grew relative to Q4 2023 at $442 million. In Q1, our team delivered another good quarter, managing the supply chain as evidenced by another quarter of positive revenue growth and significant growth margin expansion compared to the prior year period. For revenue guidance for the remainder of 2024, we continue to believe that the uncertainty surrounding BA, Spirit, and the FAA at this point on the max, the best approach is to again guide to middle, mid-single digit, and look to further updates on the next earnings call. We do see a slowdown in the max bill rates, not for the wrong reasons, in Q2 and Q3 for this year, where commercial aerospace will be a bit lighter due to the situation. Despite softness in the max, which is a major program for us, we are comforted by continued strength on other programs, such as the 787 and Airbus programs, including the A220. The best part is the max bill rate will actually be at a much higher level, and we continue to work on gaining more share. Strong bookings and growing backlog in our fence business is also supportive of our revenue outlook. Now let me provide some additional color on our markets, products, and programs. Beginning with our military and space sector, we experienced revenue just below $100 million at $98.9 million compared to $97.7 million in Q1 2023. While growth was muted, we saw positive signs in our military helicopter products, including strong demand on the Blackhawk program, with revenues growing over 70% and also for Apache tail rotor blades, which grew more than 50% year over year. Our naval business also performed well. We saw strong growth on the phalanx closing weapon system used on surface ships, as well as other weapons systems for submarines. First quarter's military and space revenue represented 52% of the commons revenue in the period, down from 59% back in 2022 and 70% in 2021. We expect that this trend will continue reflecting more balance with commercial aerospace, which we like. We also ended the first quarter with a backlog of $569 million, an increase of $125 million year-over-year, representing 54% of the common total backlog. Then our commercial aerospace operations first quarter revenue continued to see double-digit growth, increasing 11% year-over-year to $80 million, mainly by bill rate increases on large aircraft platforms, including the 737 MAX. 787, and A220 platforms, along with growth on 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, require Boeing to get FAA approval for production rate increases for the 737 MAX. This will likely cap production on the 737 MAX. We do, however, expect the long-term trend to remain very positive once the issues are fully addressed. This rate limitation did not have a significant impact on our first quarter results. The backlog within our commercial aerospace business was $442 million at the end of the first quarter, increasing over $12 million sequentially, a solid number given the temporary weakness in the commercial aerospace markets. With that, I'll have Simone review our financial results in detail.

Thank you, Steve. As a reminder, please see the company's Q1 10Q and Q1 earnings release for a further description of information mentioned on today's call. As Steve discussed, our first quarter results reflected another period of strong performance. Despite industry headwinds, we again saw a significant increase in our commercial aerospace revenues. We remain encouraged by the continued strength in domestic and global travel, which should support higher long-term demand for aircraft as we work through some of the industry issues impacting single oil production rates. In addition, we are encouraged by the record backlog we achieved in the first quarter, especially in our military and space end user segment. With all this, we feel like we are beginning 2024 with good momentum that will continue to drive our performance. Now turning to our first quarter results. Revenue for the first quarter of 2024 was $190.8 million versus $181.2 million for the first quarter of 2023. The year-over-year increase of 5.3% reflects growth in all three of our end-user segments, highlighted by 8.1 million of growth across our commercial aerospace platforms and 1.3 million of growth in our military and space platforms. We posted total gross profit of 46.9 million, or 24.6% of revenue for the quarter, versus 36.8 million or 20.3% of revenue in the prior year period. We continue to provide adjusted gross margins as we have certain non-GAAP cost of sales items in the current and prior period relating to inventory step-up amortization on our recent acquisitions, restructuring charges, and the impact from the Guaymas fire on our operations. On an adjusted basis, our gross margins were 25% in Q1 2024 versus 21.1% in Q1 2023. The improvement in gross margin was driven by our growing engineered products portfolio, strategic pricing initiatives, productivity improvements, and some initial restructuring savings. We continue to make progress working through a difficult operating environment with supply chain and labor. Through our proactive efforts, including strategic buys and our inventory investments, we have been able to avoid any significant impacts thus far on our business. During the first quarter of 2024, we increased our inventory by 9.8 million from year end 2023 to position our performance centers to meet our 2024 delivery commitments. We also grew our contract assets net of contract liabilities by 15 million. We continue to look for opportunities to unwind our working capital investments to improve our cash flow. View Common reported operating income for the first quarter of $12.6 million or 6.6% of revenue compared to $6.4 million or 3.5% of revenue in the prior year period. Adjusted operating income was $17.1 million or 9% of revenue this quarter compared to $13.6 million or 7.5% of revenue in the comparable period last year. The company reported net income for the first quarter of 2024 of $6.8 million, or $0.46 per diluted share, compared to net income of $5.2 million, or $0.42 per diluted share, a year ago. On an adjusted basis, the company reported net income of $10.4 million, or $0.70 per diluted share, compared to net income of $7.9 million, or $0.63 in Q1 2023. The higher net income and adjusted net income during the quarter were driven by the higher operating income and adjusted operating income. Additionally, our interest rate hedge helped to reduce our year-over-year interest expense. Now, let me turn to our segment results. Our structural systems segment posted revenue of $83.3 million in the first quarter of 2024 versus $75.6 million last year. The year-over-year increase reflected $5.7 million of higher sales across our commercial aerospace applications including the 787, 737 MAX, and the A220, in addition to selected commercial rotorcraft platforms, and $2.1 million of higher revenue within the military and space markets, driven by strength in the Black Hawk and Apache programs. Structural systems operating income for the quarter was $2.9 million, or 3.4% of revenue, compared to $4.7 million, or 6.3% of revenue, for the prior year quarter. Excluding restructuring charges and other adjustments in both years, the segment operating margin was 7.8% in Q1 2024 versus 12.9% in Q1 2023. This can be attributed to higher costs in our Monrovia plant as it winds down production, reducing operating margins year over year. Our electronic systems segment posted revenue of $107.5 million in the first quarter of 2024, versus 105.6 million in the prior year period. The increase was mainly due to growth across the commercial aerospace platforms and certain military platforms, including the F-35, and naval programs such as the failings close-in weapon system and submarine missile launch systems, partially offset by the impact and timing of reduction in legacy platforms such as the F-18. Electronic systems operating income for the first quarter was $19 million or 17.6% of revenue versus $10 million or 9.4% of revenue in the prior year period. Excluding restructuring charges and other adjustments in both years, the segment operating margin was 18.4% in Q1 2024 versus 11.6% in Q1 2023. The year-over-year increase was due to favorable product mix including growth in our engineered products portfolio, strategic pricing initiatives, as well as savings from restructuring program beginning to kick in during the quarter. The restructuring savings were driven by the transition of product lines from our variable performance center to other facilities. Next, to provide an update on restructuring. As a reminder, and as previously discussed, We commenced a restructuring initiative back in 2022. These actions are being taken to accelerate the achievement of our strategic goals and to better position the company for stronger performance in the short and long term. This includes the shutdown of our facilities in Monrovia, California, and Berryville, Arkansas, and the transfer of that work to our low-cost operation in Guaymas, Mexico, and to other existing performance centers in the United States. We continue to make progress on these transitions with excellent employee retention and engagement, and are also working diligently with our customers, Boeing and RTX, to obtain the requisite approvals. During Q1 2024, we recorded $1.4 million in restructuring charges. The majority of these charges were severance and related benefits as we continue to wind down the two operations. The recertification process is ongoing, and we plan to complete production at both facilities by the end of the second quarter. We expect to incur an additional $5 to $6 million in restructuring expenses through the end of 2024 as we complete the program. Upon the completion of our restructuring program, we expect to generate $11 to $13 million in annual savings from our actions and are beginning to see realization of these actions in this year. We anticipate selling the land and building at both Monrovia, California and Berryville, Arkansas. Turning next to liquidity and capital resources. During Q1 2024, we used $1.6 million in cash flow from operating activities, which was an improvement compared to Q1 2023 usage of $18.9 million. The improvement was due to a smaller increase in inventories and higher contract liabilities, partially offset by higher contract assets. As of the end of the first quarter, we had available liquidity of $208.1 million comprising of the unutilized portion of our revolver and cash on hand. Our existing credit facility was put in place in July 2023 at an opportune time in the credit markets, allowing us to reduce our spread, increase the size of our revolver, and allowing us the flexibility to execute on our acquisition strategy. Interest expense was $3.9 million compared to $4.2 million in Q1 of 2023. The year-over-year improvement in interest cost despite a higher debt balance was due to the interest rate hedge going into effect. In November 2021, we put in place an interest rate hedge that went into effect for a seven-year period starting January 2024 and pegs the one-month term so far at 170 basis points for $150 million of our debt. The hedge resulted in interest savings of $1.3 million in Q1 2024 and will continue to drive significant interest cost savings in 2024 and beyond. To conclude the financial overview for Q1 2024, I would like to say that we had a strong start to 2024 and anticipate a strong balance of the year. I'll now turn it back over to Steve for his closing remarks. Steve?

Okay, thanks, Suman.

In closing, Q1 was an excellent quarter, a record in some cases, with many highlights for the company and our shareholders. The strong start to the year with solid revenue and earnings growth certainly strengthens our path to delivering on the goals we set out in the Vision 2027. 2024 is also our 175th year of continuous operation, a great achievement, and we'll be recognizing that through the year. I did the math recently, and the door at the company has been continuously open for over 43,000 business days, a long time in a young country like the United States. What a great story with a very bright future ahead for the company, our shareholders, and all other stakeholders. Thank you for listening. Let's now open up for questions.

Thank you. At this time, we'll conduct the question and answer session. As a reminder to ask a question, you'll need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Mike Crawford of V-Riley Securities. Your line is now open.

Thank you. Steve, what are some of the main pressure points you're trying to avoid with the strategic inventory buys? Like would it be titanium, which is becoming a problem for some, or? What else are you trying to get at?

Yeah, Mike, thank you. Thank you. Good morning. Yes, you know, look, titanium is obviously a big one. I mean, you know, as the wide-body A350 and these other platforms start going up, and obviously with the situation in Russia, it's something that we've been very proactive over the last couple of years and, you know, are in really good shape with our titanium. The other thing we did on Strategic 5 is really around the car business. You know, I know there's less drama now than there was in the past, but we did go out and buy ahead on certain things for circuit cards. Obviously, it's an important business for us just getting even more important. So I'd say those two, I think we're in good shape. We're not going to, you know, plan on doing as long as things, you know, I mean, titanium aside on things like for the circuit cards, we'll probably just continue to take it day by day. But those are the two reports I have.

Okay, excellent. And then, I mean, you did call out the F18 as a legacy platform that's in decline. You know, one that might eventually get that way could be the Blackhawk, although that's going up for you now. What are maybe some of the other key platforms that are growing for you and conversely, you know, maybe phasing out a little bit just given the transition?

Sure, sure. I'd say, look, you know, you're spot on. The F-18 is the one, right? So we all know about the F-18. We know what's happening in St. Louis. You know, we are going to see, I think, still good business in depot maintenance and other things. So, you know, that's still going to be an okay program for us. That's kind of the biggest one. I talked about the tow missile. Again, these things are timing related, so we're going to see the tow come back. We're going to start shipping again, we plan in 2025. I mean, as far as on the positive side, I mean, we couldn't be happier with the Blackhawk business. I mean, even though I know there's lots of discussion and everything, that business is going great for us, the Apache. I'll also mention that we're just starting to move higher and higher in the Seahawk out of Sikorsky as well. So our rotary business was terrific. Despite the F-18, we still had great volume in the F-35 and some other programs, and we So we're feeling very good, especially with the backlog, Mike, and it's getting a second cart.

Well, some of the other missile programs, if I may add, are also giving us strength, including the Mir missile, the standard missile, and as Steve previously pointed out, the SPY-6 radar and next-generation jammer. So missiles and radar programs are helping offset the decline in the legacy programs.

Yeah, as a transition time, right?

Okay, thank you. Just one final one for me, kind of related to the rotary platform. So it's now just over a year since you acquired BOR Aerospace, and I know one of the goals there was to maybe try to get some of their unique structures into military aircraft. Is there some progress there?

We're... Working on it right now, and Mike, you're spot on on that. You know, our big opportunity is really with the Blackhawks, and that's really through the National Guard. So we have a lot of things, I think, that these things obviously take time, right? But we're excited. We think that also with some of the other news about switching out the engine on that, I think there's more opportunity for that. So stay tuned on that.

All right, excellent. Thank you.

Excellent.

Thank you. One moment for our next question. Our next question comes from the line of Michael Ceramoli of Tourist Security. Your line is now open.

Hey, good afternoon, guys. Thanks for taking the questions. Nice results. Maybe kind of a two part, I guess, Steve or Suman, just the margins really strong in the ES segment. You commented on pricing and I know you threw out the value based. And I think that's something we hear pretty often now. Anything you guys are doing differently with pricing outside of just taking advantage of the whole inflationary environment? And then just how do we think about these? these electronic systems margins going forward? I think that was a record level. I'd hate to kind of say, okay, let's extrapolate this. You know, it sounded like you got some mix in there as well. But any color on both of those items?

Yes, Mike, and a great question. We're really happy with the electronic systems margins this quarter. As you noted, pricing is a key factor, and certainly, as you have seen across the aftermarket in the industry, pricing has been strong, and we have seen the same. But kind of beyond that, there are a couple of other things at play here, kind of two themes that are key drivers of our Vision 2027 strategy, and one is growing the engineered product portfolio. And as that continues to grow as a percentage of the revenue in the electronic systems business, you know, the drop-through is really good. So we've had good growth in kind of engineered product businesses. And the second is the consolidation of footprint strategy, right? And that has also started kicking in this quarter with programs getting fully transitioned from our variable performance center to our Joplin performance center and us taking out a significant amount of cost early in the quarter out of the variable facility, which is now has a skeleton crew and only one active program, those other programs are now being produced out of Joplin without much addition to overhead and SG&A in that business. So that's really driving the margins, those two factors. And outside of some minor impacts of product mix, I think the general trend is sustainable. The current margins we're seeing within a narrow band is sustainable going forward.

Okay. Any way to quantify what you saw from the run rate consolidation savings? I know you said 11 to 13, you know, annualized, so it sounds like you got some. Any way to quantify that?

Still in the early stages of that. It's over a million dollars during the current quarter.

Yeah, I think, Mike, I think this is a good story. I mean, look, we're thrilled with the number, right? You're spot on about, you know, the 18%. So we're excited about that. We think that, again, as we move into the second year of Vision 2027, you know, these things are coming together and we're obviously driving value pricing across the board, right? So that's going to help.

Got it. And then I guess conversely on structural systems, you know, sounds like you're just dealing with overhead under absorption issues as you transition. And it sounds like, I mean, should we expect that margin rate to persist next two quarters? And, you know, I guess it doesn't sound like anything really out of the normal except for just the kind of wind down drag.

Yes. I mean, our Monrovia Performance Center, which is being wound down, revenues were almost a third of what they were on a year-over-year quarter basis, almost half on a sequential quarter basis. So that's naturally going to create a significant amount of drag on margins. And as you can imagine, in a facility being wound down, it's not that easy, right? So we do expect that to linger for the next one to two quarters, but gradually improve. The trend is going to be improvement. And then really the benefits of the complete closure will only kick in in 2025 when we not only shut down the facility in Monrovia here in 2024, but then start actively producing some of those products out of Guaymas in 2025. Yeah.

And, Mike, just for everybody on the call, too, you know, Monrovia is very close to Los Angeles. It's in that area, and, you know, it's the size of an aircraft carrier, okay? So it's not a small plant, all right? So it's been around for a long time, too. So good things ahead there. We're at the three-yard line here in Monrovia. Got it.

Got it. Last one for me, Steven. I don't want to put words in your mouth or numbers here, but I think you started the defense offloading. I don't know if that was really in earnest in late 20 or 21. But if you're thinking $135 million by 2025, I mean, I could go back and take your 20 defense revenue run rate and I could get something north of $550 million by 2025. Obviously, you're losing some work in there, F-18. I'm sure there's some other programs. But, you know, how should we think about this defense growth trajectory? You know, again, it might not be apples to apples the way I'm thinking about it, but I can come up with some pretty sharp growth there.

Yeah, you're right. It's some, you know, like even I'm looking at the numbers here as we speak here, you know, like a company like GA, right? So we've had a lot of, a couple of really good years with GA, but, you know, as you know, that whole market's been disrupted for them because of these lower costs, the UAVs and everything, right? So our volume is down on there. The FAT would talk about some other stuff, but, you know, a lot of what we're seeing, we're seeing a lot of repeat orders, but we're getting like the next generation jammer, you know, that's coming out of RTX and we're getting an Appleton. So we consider that, you know, offload, right? We consider that, you know what I mean? So even though you might say, well, you know, no, we, You know, they had it. They went to us and said, you know, we love what you guys are doing. Take it. You know, same thing with the SPY-6. So, you know, I think it's not apples to apples, but I think overall the story, I think, holds pretty well. And that's what we want. We want to, if we're going to, as you know, there's a lot of new programs out there and these things delay and you know all that. But, you know, we want the stuff that's got a long, long life like the SPY-6, right? It's got to be in the fleet forever. And, you know, we want that current business. That's what we're doing. I mean, as well as the new stuff, right? That's as well. So I think, you know, more to come on that, okay, as well. We get to 26 and 2027, but let's hold it now at 135.

Got it. All right. Good stuff. I'll jump back in the queue, guys. Thanks, Mike.

Thank you. One moment for our next question. Our next question comes from the line of Ken Herbert of RBC Capital Markets. Your line is now open.

Yeah, hi, good morning, Steve and Suman.

Good morning, Ken. Good morning.

Hey, Steve, when we look at the gross margins in the first quarter, is there any reason that they would step down in the second quarter, or is this gross margin run rate now something we should model moving forward?

I'll take a first stab at that, Ken. We are really happy with the gross margins in the first quarter. As I said, on the electronic side, driven by engineered products, restructuring savings, and that really were the key drivers. If you look at the overall company, they were partially offset by the headwinds we had in Monrovia in the structures business. These, outside of I would say marginal benefits from product mix during the quarter, these gross margins within a fairly narrow band are sustainable. If you were to look at our adjusted gross margin in Q4, it was 23.2% of last year, and it's now 25%. If you look at Quarter year over year, it's a big difference, and especially with some of the adjustments, but we've been able to take more of the adjustments into the GAAP gross margin, which is a really good thing, and I would say we feel really good about these margins going forward within the narrow range.

Great, thank you. And can you level set us on your expected, I guess, either max deliveries this year or sort of a monthly or quarterly production rate? Because it sounds like there's maybe a step down sequentially from the first to the second to the third quarter, but maybe an anticipated uptick in the back of the year. Can you maybe sort of comment on where you are on that program and how we should think about the cadence for the year on the max?

Yeah, so Ken, yeah, good question. So look, we had a fairly good, you know, first quarter because there was a lot of things still happening, right, until this, you know, until this terrible thing happened, obviously, in January. Then lots of things came after that. So Q1 was pretty good. April was a bit light. So, you know, we're going to, you know, anticipate, you know, a little bit lighter action on it, you know, because remember, we're both feeding Spirit, you know, which is a major customer as well as, you know, Boeing OEM, right, so PCA. So we, you know, right now we're thinking, you know, maybe it's in the mid-20s, you know, lower to mid-20s for, you know, the second quarter. We'll have to figure out the third when we get there, right, based on their progress. But, you know, we see it coming back. The nice thing is, too, for shareholders and for all of us, we're working real hard with, and I don't want to, can't go making any announcement right now, but we're working on gaining share on the MAXs. Okay, as well as the A320. So we're working on those types of things. And so, you know, I think, Ken, we're going to get a little shallower, maybe mid-20s. You know, certainly it's been a little lighter in April, but nothing. We're concerned, but we want to be transparent. But we have the 787, which I know has its own problems, but we're seeing a nice bounce back there. And we're happy with our Airbus business. So as well as GS.

Great, and thanks. And just finally, Steve, where would you see the opportunity on the A320 or even the A220 to take share, and what could be the timing around some of the share gains with Airbus on the narrow-body portfolio?

Yeah, we, you know, again, we're looking probably within 12 months, so we're working on something right now. We'll see how it goes, right, because these things are, you know, these things take time, but we think within... 12 months, we might have something going again on the A320. And the A220, we could just continue to work. We continue to grow. As you know, that's a major program for us. And good things ahead there.

Great. Thanks, Steve. Thanks, Jamon.

Thanks, Ken. Thank you.

Thank you. One moment for our next question. Again, as a reminder, to ask a question, you'll need to press star 11 on your telephone.

Our next question comes from the line of Jason Gursky of Citi. Your line is now open. Jason Gursky, your line is now open.

Apologies. I had myself on mute. Good morning, everybody. Thanks for taking the question. Steve, I wanted to ask a little bit more about Vision 2027. in particular the M&A component of the vision there, because you've got some inorganic growth I think you'd like to get done. So, yeah, the question I guess is maybe a bit of a two-part question. You know, we've got, you know, a company that's recently went public that's now got, you know, access to some more money that, you know, claims that it's going to go out and be heavily involved in buying up proprietary product type companies. So I'm just kind of curious what the competitive environment looks like these days for assets. So I guess, A, the pipeline, what's the pipeline looking like? What's the competitive environment look like? And then I also want to just, you know, kind of get your take on, you know, the size and scale of things that you guys would be willing to chew off and maybe talk a little bit about the dynamic that's going on there with one of your big customers and Spirit and the Airbus work because that's It seems like, you know, it's a bowing by spirit. That Airbus work has got to go somewhere. And just kind of curious what kind of appetite you guys might all have for taking on some of that work, all in the context of your M&A strategy. Thanks.

Yeah, no, thanks, Jason. Good to be with you. Let me first just on our Vision 2027 and, you know, the acquisition piece. We have a placeholder for $75 million, right? So we're a bit modest on that. you know, because obviously it's only 2024. We got, you know, several years ahead of us. So, you know, we feel good about that. Again, it's a bit modest, but, you know, we're right now, as we move forward in time, you know, we've really been happy with what we're doing acquisitions. I think it's been a real, you know, great thing for shareholders and for the company. And so, but we're looking more where we can do some, you know, maybe, look at acquisitions where they can, you know, again, help our current engineered product portfolio. You know, we're committed to that, you know, to build the business on that side. I think that's smart and it's a winning formula for shareholders. I think, you know, 75 again is low. I think we're going to do more bolt-ons. But again, if we can find something where there can be some consolidation, we're going to do that as well. So I think for the next couple of years, that's sort of where we sit. As far as spirit, uh you know just let you know for airbus uh we we ship directly into toulouse for uh for a320 so we're we're we're really uh you know just working with them directly we don't really do anything for airbus for spirit spirits much more i think in the a350 world which we're not right now so we'd be open to it i mean you know i think it's uh as i read the notes this morning on on on some of the situations in the meeting in new york last night it's going to be difficult But we're there. I mean, we have the capacity. You know, that could be an upside for us. You know, we have nothing to report on it. But we certainly, you know, think we could help out. And, you know, Airbus, again, for all the business we do right now is a first tier. We do everything with Toulouse direct.

Mm-hmm. Okay, great. So the $75 million placeholder, you know, looks like that, you know, through the 27 timeframe, you think is going to be pretty achievable. I'm just kind of curious, though, you know, what does the pipeline look like today? What do you think the cadence of or potential timing of of those acquisitions might be. Is this going to be, you know, nearer term, more back-end weighted towards 2027? And just kind of what the competitive environment looks like and, you know, pricing on the kinds of assets that you might be chasing.

Let me jump in and Saman can say a few things, okay? So we're always in the market. So I'll just say that, all right? So, you know, we're always, we're looking at things. We have an excellent team here led by Saman on M&A. You know, if something comes up this year, we're going to do it. Our cadence is So it's obviously slowed down through COVID for everybody. But, you know, we like to do at least one, if not two, a year. You know, again, this year, you know, we just did BLR back in last May or last April and May. So we have, you know, a little bit of time now. So we're always in the market. It is, you know, it's competitive. I mean, I know you follow the companies and many of them. And, you know, it's a crowded lobby. But I will tell you that, you know, for what we want and what we've done, I mean, we've got a really good hit rate. We've had a lot of success for the things we've gone after. Not every single one, but, you know, it's up there. So we're excited about, you know, building that part of the business. It's a big thing for me when I came in in 2017. And so I'll let Suman, you want to say anything else on that?

Yeah, we've been actively looking at businesses. I would say there's been a pickup in deal flow in late Q1 and coming into Q2. We're seeing more assets come to market. Competitive environment, I wouldn't say necessarily has dramatically changed. The company you referenced that went public recently has been around and looking for similar assets for over 10 years. We've certainly come across them in the past, so I don't see that dynamic changing now. So we will continue to be aggressive for businesses that we really like and where we really think we can drive a lot of incremental value for our shareholders. So we will continue to be aggressive with those opportunities. And as we have demonstrated in the past five years, we can, despite the competitive environment, win assets at a price at which we can still drive additional benefit and ROI for our shareholders. So we feel good about being able to continue doing that. And timing, as Steve said, is difficult to predict. Active work ongoing on several opportunities, but timing always difficult to predict on M&A. All right.

Yeah. And Jason, just to chime in there, we also are very excited about organic growth. Okay, you know, we really want to get, you know, hopefully the MAX will find its way by the end of the year. I mean, if they're at 50 at some point in the future, you know, a drop through and everything else, you know, we feel very good about our current operation, too, delivering.

Okay, great. That's wonderful. Appreciate the time.

Thank you, Jason. Always appreciate you calling in.

Thank you. I'm showing no further questions at this time. I would now like to turn it back to Steven Oswald for closing remarks.

Okay, thank you very much, and thanks for joining us today. Obviously, you know, we couldn't be happier with our Q1. I want to thank my team, all the people working hard every day to come, and with our relentless approach to things. That's what we do here, and, you know, we are very encouraged as we come out of March to have, I think, a super year for everybody, for our shareholders and for our company, and all the other stakeholders involved with us so again thanks for joining us have a great and safe day thank you thank you for your participation in today's conference this does conclude the program you may now disconnect