Ducommun Incorporated

Good day and thank you for standing by. Welcome to the third quarter 2024 due common 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 this session, you will need to press star 11 on your telephone. You will then hear an automated message advising 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 today, Suman Mukherjee, Vice President and Chief Financial Officer. Please go ahead.

Thank you. And welcome to Duke Commons 2024 Third Quarter Conference Call. With me today is Steve Oswald, Chairman, President, and Chief Executive Officer. I'm going to discuss certain limitations to any forward-looking statements regarding future events, projections, or performance, that we may make during the prepared remarks or the Q&A session that follows. Certain statements today that are not historical facts, including any statements as to future market conditions, results of operations, and financial projections, are forward-looking statements under the Private Securities Litigation Reform Act of 1995 and are therefore prospective. These forward-looking statements are subject to risk 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, among 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. Please refer to our annual report on Form 10-K, quarterly reports on Form 10-Q, 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. The call also includes non-GAAP financial measures. Please refer to our filings with the SEC for a reconciliation of the GAAP to non-GAAP measures referenced on this call. We filed our Q3 2024 quarterly report on Form 10-Q with the SEC today. I would now like to turn to 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 third quarter conference call. Today, as usual, I'll give an update of the current situation at the company. Afterwards, Suman will review our financials in detail. Let me start off again on this quarterly call with the Commons Vision 2027 game plan for investors. The strategy and vision were developed coming out of the COVID pandemic over the summer and fall of 2022. unanimously approved by the Common Board in November 2022, and then presented to investors the following month in New York, where we got excellent feedback. Since that time, the Commons management has been executing the Vision 2027 strategy by increasing the revenue percentage of engineered product and aftermarket content, consolidating its facility or rooftop footprint, continuing its target acquisition program, executing our offloading strategy with defense primes and high growth segments of the defense budget, value-added pricing initiatives, and by expanding content on key commercial aerospace platforms. All of us here, as well as my fellow board members, continue to have a high level of conviction in the Vision 2027 strategy and financial goals, and believe the many catalysts ahead present a unique value creation opportunity for shareholders. The Q3 2022 results are another great example of our strategy and initiatives working. Q3 was our second consecutive quarter of record revenue and gross margin and represents another very strong performance for DCO. Revenues exceeded $200 million for the first time ever, growing 2.6% over the prior year, and this quarter is our fifth consecutive quarter above $190 million in revenue. Strong year-over-year growth in our radar, electronic warfare, and missile programs drove our military and space revenues to 6% growth over the prior year. The fence business has now been over $100 million in revenue for the fourth time in the last five quarters. We remain optimistic about the growth ahead. I also want to point out that Northrop Grumman was our second largest customer for revenue this quarter, a first at DCO, and up from Q3 last year by over 100% to over $17 million. This will moderate going forward, but it's a great sign as we move to build scale at other defense primes outside of RTX, our largest customer. In our commercial aerospace business, we continue to see excellent growth on the A220 program, where we make the skins for the entire fuselage, along with strong growth in other Airbus platforms. A real bright spot as well was the A320 family, up 60% year over year. Things are moving. Business jet revenues powered on and was driven higher by the work we do at Gulfstream, Bombardier, and others. The strength at Airbus and with business jets was partially offset by weakness from Boeing platforms, which were down over prior year by over 40%, driven by lower build rates earlier in the quarter and the impact of the strike in September. Overall, commercial aerospace grew 3% year-over-year, and we now have grown year-over-year revenue in our commercial aerospace business for 13 consecutive quarters, demonstrating the resilience of our business, even in a challenging OEM environment with Spirit, and Boeing. The other good news for DCO's commercial aerospace business is the fuselage skin project for the 737 MAX at Spirit, which I've been mentioning, is being outsourced from their internal operation. We received first ARC approval in September and shipped our first production set last month. 2025 revenue for the foreskin should be over $3 million. The foreskin section, which is less than 10% of the fuselage, adds $22,000 to our ship set for the MAX. and we continue to drive that number higher and higher for the program. I also want to add that we are picking up more content on the 787 for all models due to a share shift from a competitor in 2025. We'll have more details for you on the next call. It is significant. Another record highlight in Q3 was gross margins of 26.2% for the quarter, of 350 basis points year-over-year from 22.7%, and 20 basis points compared to the second quarter as we continue to realize benefits from our strategic value pricing initiatives, productivity improvements, favorable product mix, growing engineered product portfolio with aftermarket, and initial restructuring savings. In addition, our Monrovia, California facility is now closed, and our Berryville, Arkansas facility is down to less than 10 people to maintain capability until the receiving plant in Guaymas, Mexico is certified. for the Tomahawk missile program. We're already seeing cost savings from these facility closures, and we see these savings be higher as the receiving plants ramp up production in 2025. Stay tuned. For adjusted operating income margins in Q3, the team delivered 10.5%, a record performance, and well ahead of the 8.9% number in Q3 2023. This is a great result driven by the continued growth in our engineered product businesses, favorable product mix, impact of our strategic pricing initiatives, and our restructuring savings during the quarter. Adjusted EBITDA was another great story in Q3, achieving $31.9 million and expanding to 15.8% for the first time. This is 90 basis points above prior year and 60 basis points over the second quarter. This continues the outstanding momentum we've seen each quarter this year, as we work towards the 18 percent goal in our Vision 2027 plan. Gap diluted EPS was 67 cents a share in Q3 2024 versus 22 cents a share for Q3 2023. And with the adjustments, diluted EPS was an impressive 99 cents a share compared to diluted EPS of 70 cents in the prior year quarter. The higher gap and adjusted diluted EPS during the quarter was driven by improved operating income as well as lower interest costs due to our hedging strategy put in place this year in January. The company's consolidated backlog continues to be strong at $1.44 billion, decreasing $24 million sequentially but increasing over $85 million year-over-year. Defense backlog increased $97 million compared to the prior year quarter and is at $592 million with new orders for tow missiles Mesa airborne surveillance, as well as other platforms. As discussed, we've experienced the pause in the order cycle for the total missile case, but now it is coming back strong with better pricing and will be manufactured on a low-cost Guaymas Mexico facility where previously it was produced in Monrovia, California. The commercial aerospace backlog decreased sequentially by 20 million, but was still up 8 million on a year-over-year basis. As for the 2024 revenue guidance, with BA and the movement of three major programs out of Monrovia and Berryville, we are guiding to the lower end of single digits with an expected range of 3% to 4% for the full year. Three major programs being moved will all start up again in 2025, and the max build rates, though still weak in Q4, will start to recover as BA employees now return to work. We are well-positioned. for the BA recovery in 2025 and 2026 for both the MAX and the 787. Now let me provide some additional color on our markets, products, and programs. Beginning with our military and space sector, we experienced revenues of $111 million compared to $105 million in Q3 2023. Growth was driven by radar and electronic warfare programs, as well as F-15 and the Black Hawk. These are partially offset by weakness in Apache, which is in the middle of being transferred out of Monrovia, and the JSF revenues. The third quarter's military and space revenue represented 55% of the economy's revenues in the period, down from 59% for the full year back in 2022 and 70% in 2021. We expected this trend and reflects commercial aerospace getting stronger for DCO, providing good balance. We also ended the third quarter with a backlog of $592 million, an increase of $97 million year-over-year, representing 57% of the common's total backlog. Within our commercial aerospace operations, third quarter revenue continued to grow, increasing 3% year-over-year to $85 million, driven mainly by growth on the A220 and A320 platforms, as well as with business jets offset by slowing rates on the 737 MAX. As mentioned earlier, we believe in much better stories ahead for BA and the MAX now that the strike is resolved and the return to the projected production rates in 2025. Also keep an eye on the 787 as we move higher on the rates for BA. The backlog within our commercial aerospace business was $431 million at the end of the third quarter, increasing $8 million compared to prior year, a solid number given the temporary weakness in the commercial aerospace markets. With that, I'll have Suman review our financial results in detail. Suman.