Ducommun Incorporated

Good day and thank you for standing by. Welcome to the Q1 2025 DoCommon Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 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 Duke Commons Senior Vice President, Chief Financial Officer, Mr. Suman Mukherjee. Please go ahead.

Thank you, and welcome to Duke Commons 2025 first 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 and regulatory conditions, results of operations, and financial projections, including those under our Vision 2027 game plan for investors, are forward-looking statements under the Private Securities Litigation Reform Act of 1995 and are therefore prospective. These forward-looking statements are subject to risks, uncertainties, and other factors which could cause actual results to differ materially from the future results expressed or implied by such forward-looking statements. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we can give no assurance that such expectations will prove to have been correct. In addition, estimates of future operating results are based on the company's current business, which is subject to change. Particular risks facing Dukama include, 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, our ability to obtain additional financing, and service existing debt to fund capital expenditures and meet our working capital needs. Legal and regulatory risks, including pending litigation matters, the cost of expansion, consolidation, and acquisitions, competition, economic and geopolitical developments, including supply chain issues, international trade restrictions, the impact of tariffs and rising or high interest rates, the ability to attract and retain key personnel and avoid labor disruption, 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. This call also includes non-GAAP financial measures, Please refer to our filings with the SEC for a reconciliation of the GAAP and non-GAAP measures referenced on this call. We filed our Q1 2025 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, thanks, Saman. Thanks, everyone, for joining us today for our first quarter conference call. Today, as usual, I will give an update of the current situation at the company. Afterwards tomorrow, we'll review our financials in detail. Let me start off again on this quarterly call with the Commons Vision 2027 game plan for investors as we start our third year in 2025. 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. This includes increasing the revenue percentage of engineered product and aftermarket content, which finished at 23% for 2024, up from 19% in 2023, consolidating our rooftop footprint and contract manufacturing, continuing the targeted acquisition program, executing our offloading strategy with defense primes, and high growth segments of the defense budget, driving value-added pricing, and expanded 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 unique value creation opportunity for shareholders. The Q1 2025 results are another example of our strategy and initiatives working. Just look at the margin expansion performance, and much more to come this year and in 2026. Despite the challenges discussed on our prior earnings call, I'm happy to report Q1 sales of $194.1 million, which was 1.7% over prior year, making this quarter our 16th consecutive quarter with year-over-year growth in revenue. The team achieved this despite the headwinds in commercial aerospace bill rates, destocking at BA and SPR, and the continued strategic pruning of our non-core industrial business. It was also our seventh consecutive quarter above $190 million in revenue. Strong growth in our missile and electronic warfare, along with military helicopter programs, drove our military and space revenue to 15% growth over prior years. This includes not just order increases, but also major programs I've been speaking about coming online, such as the offload of the Next Generation Jammer from RTX and Amran. Our defense business looks great with Apache Blades coming back online in Q2, Tomahawk Cables along with the Tome Missile Case in Q3. We can't wait. I also want to point out that three of our top five customers in Q1 were defense primes, and that is consistent with all of 2024 as well. Our team continues to build scale at other defense customers outside of RTX, which is and has been a long-term goal. Northrop Grumman is a great example of the strategic effort. The strong growth in our defense business more than offset lower revenue in our commercial aerospace business, which declined 10% in the quarter and was anticipated. This is the first commercial aerospace decline in the past 15 quarters for DCO. We had tough compares in Q1. as both Boeing and Spirit drove higher demand during this period last year. We have seen steady improvement in demand with both these customers over the course of Q1 2025, coming out of the Boeing strike in Q4 of last year, and the outlook is promising. I also want to add that everything we are seeing out of Boeing Commercial the last few months has been very encouraging, both on the 737 and 787, our main platforms. We are optimistic that bill rates will be at 38 soon, on the 7th, 37th. Growth margin also grew 4.7 million to 26.6% in Q1, a new quarterly record, up 200 basis points year-over-year from 24.6%, as we continue to realize year-over-year benefits from our growing engineered products portfolio with aftermarket, strategic value pricing initiatives, restructuring actions, and productivity improvements. We have ceased manufacturing operations both on Monrovia, California, and Berryville, Arkansas facilities and are already seeing cost savings from this action. We expect to see these savings be higher as the receiving plants ramp up production later this year and fully in 2026. Stay tuned. For adjusted operating income margins in Q1, the team delivered 9.9%, which was a 90 basis point improvement compared to the prior year of 9%. We continue to be pleased with the growth in our engineered products portfolio, and our structures business this quarter was fully recovered from a one-time expense in Q4 2024. We did tell investors last quarter it was one-time and kept our word. Adjusted EBITDA continues to grow compared to last year at 15.9%, a record for us as the percentage of sales up 3.5 million and almost 31 million. Fantastic progress. This is our second quarter with adjusted EBITDA above 30 million, and it represents an expansion of 150 basis points above prior year and continues the strong momentum we saw in 2024 as we work towards the 18% goal in our Vision 2027 plan. GAAP diluted EPS was 69 cents a share in Q1 2025 versus 46 cents a share for Q1 2024. And with the adjustments, diluted EPS was a strong 83 cents a share compared to adjusted diluted EPS of 70 cents a share in the prior year quarter. The higher gap in adjusted diluted EPS during the quarter was driven by improved operating income, as well as lower interest costs due to lower interest rates, along with a lower outstanding debt balance. The company's consolidated backlog continues to be strong at 1.05 billion, increasing 8 million year over year. The defense backlog increased over 50 million compared to the prior year quarter. No surprise there, and is now at $620 million. The commercial aerospace backlog decreased by $31 million compared to the prior year quarter due to lower OEM production rates, but fully expected to come back. In December 2022, we set a target of generating 25% plus our revenue from engineered products, which was 9% in 2017 and 15% in 2022. In 2024, we reported that our engineered product business drove 23% of our total revenue up from 19% in 2023, positioning us well ahead of the curve in achieving our Vision 2027 goal and certainly pushing for a lot more. We achieved this both through focused investment driving organic growth in our current businesses as well as the BLR acquisition. In Q1 2025, we have maintained this mix at 23%. and continue to work on both organic and inorganic opportunities to drive this higher. We've made tremendous progress to date, and I'm proud of our team and strategic plans. As for 2025 revenue, we are positioned to benefit from the expected bone recovery in the second half along with defense, which includes three programs mentioned earlier coming back online in Q2 and Q3. We are reaffirming our guide of mid-single-digit revenue growth for the year. with Q2 being flattish to last year to the commercial aerospace, including de-stocking, but anticipate good strength in the second half of 2025. In addition, we also believe tariffs will have a limited, if any, impact on our 2025 revenues, a good story for our investors. I want to reiterate as well that Tacoma is a U.S. manufacturer with U.S. employees, and 95% of our revenue is produced in the U.S., Our only other facility is based in Guaymas, Mexico, and that production is less than 5% of our revenue, and thankfully covered under the USMCA, exempting us from tariffs. The other good news is the common sales into China is almost entirely one program for an Airbus supplier who is owned by the government, constitute less than 3% of our revenues, and we have not seen any impact at this point on tariffs for our sales. On the supplier side, we do procure some parts from Europe and Asia, but it is manageable and so far the impact has been pretty de minimis. We will continue to monitor it as the situation evolves, but at this point we certainly don't see it as being something material to the company. To sum it up, to comment in a lot of ways is the new trade policy with most of the U.S. manufacturing operations and U.S. employees. Now let me provide some additional color on our markets, products, and programs. Beginning with our military and space sector, we saw revenues of $114 million compared to $99 million in Q1 2024. Growth was driven by missile programs such as the TOW and AMRAAM, electronic warfare and radar programs, including the NGJ, Aegis Combat System, Gator, and on the F-16 and Black Hawk for fixed and rotary wing platforms. These are partially offset by weakness on the F-35, Patriot, and the V-22. We also ended the first quarter with a backlog of $620 million, an increase of $51 million year-over-year, representing 59% of the Commons total backlog. Within our commercial aerospace operations, first quarter revenue took a step backwards, declining 10% year-over-year in the quarter to $72 million, driven mainly by lower rates on the 737 MAX, commercial helicopters, and in-flight entertainment, partially offset by growth on the A320 and 787. As I mentioned earlier, we believe that finally a much better story is ahead for BA and the MAX. Now the production is ramping up again after the strike. We have seen demand pick up at both Boeing and Spirit over the last few months. The backlog within our commercial aerospace business was $411 million at the end of the first quarter, decreasing $31 million compared to prior year driven by Boeing strike late last year and its impact on production rates. We expect this to recover as production rates ramp up in 2025. Revenue in our industrial business declined to $9 million during Q1 as we continue to strategically prune non-core business from the portfolio. This will benefit the company in the long term as we transition that capacity to our core aerospace and defense platforms. With that, I'll have Suman review our financial results in detail.