Q4 2023 Ducommun Inc Earnings Call

February 15, 2024

Okay.

Operator: Good day, and thank you. Welcome to the Ducommon Earnings Conference. At this time, all participants are in a listen-only mode.

Good day, and thank you for standing by and welcome to the Q4 2000.

Twenty-three Ducommun 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 one on your telephone you will then hear an automated message advising that your hand is raised to withdraw your question. Please press star one again.

Operator: After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising that your hand is raised.

Operator: To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Suman V. Mokherjee, Senior Vice President and Chief Financial Officer. Please go ahead. Thank you, and welcome to the Commons 2023 fourth quarter conference call. With me today is Steve Oswald, Chairman, President, and CEO. I'm going to discuss certain limitations to any forward-looking statement 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.

Please be advised that today's conference is being recorded I would now like to hand, the conference over to your Speaker Dumont brokered Moca G Senior Vice President and Chief Financial Officer. Please go ahead.

Thank you and welcome to Ducommun strategy 23 fourth quarter conference call.

With me today are 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 perspective. 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.

Suman V. Mokherjee: In addition, estimates of future operating results are based on the company's current business, which is subject to change. Particular risks facing Ducommon include, amongst others, the cyclicality of our end-use market, 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 These risks and others will be described in our annual report on Form 10-K once it is filed with the SEC, and our forward-looking statements are subject to those risks.

In addition estimates of future operating results are based on the company's current business, which is subject to change particular risks facing ducommun include amongst others. The cyclicality of our end use market the level of U S government defense spending our customers may experience delays in the launch and certification of new product timing.

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 our 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 cyber security attacks. These.

These risks and others will be described in our annual report on Form 10-K. Once it is filed with the SEC and our forward looking statements are subject to those risks.

Suman V. Mokherjee: Statements made during the call are only as of the time made, and we do not intend to update any statements made in this presentation except if and as required by regulatory authorities. This call also includes non-GAAP financial measures. Please refer to our filings with the SEC for a reconciliation of the GAAP to non-GAAP measures referenced on this call. This year, we expect to file our 2023 Form 10-K on Thursday, February 22, 2024. The additional time is to complete the documentation of our internal controls and preparation of the Form 10-K for filing.

<unk> made during the call are only as of the time made and we do not intend to update any statements made in this presentation, except if and as required by regulatory authorities.

This call also includes non-GAAP financial measures. Please refer to our filings with the SEC for a reconciliation of the GAAP to non-GAAP measures referenced on this call.

This year, we expect to file our 2023 Form 10-K on Thursday February 22020 for the additional time is to complete the documentation of our internal controls and preparation of the Form 10-K for filing.

Suman V. Mokherjee: In the 2023 Form 10-K, we expect to report a material weakness in our internal controls over financial reporting related to our revenue recognition process. This material weakness resulted in immaterial adjustments to net revenues and contract assets as of and for the quarterly period ending December 31, 2023. We do not expect the material weakness to result in a restatement or change to the reported financial statements. We will make the necessary changes to the design and operating effectiveness of these specific Revenue Recognition Internal Controls during 2024. I would now like to turn the call over to Steve Oswald for a review of the operating results. Then, Okay, thank you, Suman.

In the 2023 Form 10-K, we expect to report a material weakness in our internal controls over financial reporting related to our revenue recognition process. This material weakness resulted in immaterial adjustments to net revenues and contract assets as of and for the quarterly period ending December 31.

2023, we do not expect the material weakness to result in a restatement or change to the reported financial statements. We will make the necessary changes to the design and operating effectiveness of these specific revenue recognition internal controls during 2024.

I would now like to turn the call over to Steve Oswald for a review of the operating results Steve.

Okay.

And thanks, everyone for joining us today for our fourth quarter conference call today, and as usual I'll give an update on the current situation of the company.

Afterwards, <unk> will review our financial results in detail.

Q4 was a very good quarter as we wrapped up 2023 revenues exceeded $190 million for the second consecutive quarter to $192 2 million driving.

Stephen G. Oswald: $192.2 million, driving a full year revenue of $757 million, with the last high mark set in 2012. Strong growth in our single-aisle commercial aircraft business helps to drive revenue. Tinted Recovery and Commercial Aerospace once again delivered in Q4 with Boeing's single-aisle platform business, in aggregate, being up 46% year-over-year, along with Airbus' A220 program showing strong growth of 73% year-over-year. Overall commercial aerospace with Airbus and Boeing and others was up 18% from Q4 2022, despite Boeing's and Spirit's continued challenges with quality issues.

Driving our full year revenue of $5 $757 million.

With the last high Mark set in 2000 2012.

Strong growth in our single aisle commercial aircraft business helped to drive the revenue.

The continued recovery in commercial aerospace once again delivered in Q4 with Boeing single Io platform business in aggregate being up 46% year over year, along with Airbus <unk> hundred 20 program showing strong growth of 73% year over year.

Overall, commercial aerospace with Airbus and Boeing and others was up 18% from Q4 2022.

Despite boeing's and spirits continued challenges with Max quality issues.

Stephen G. Oswald: We are now in our 10th quarter of year-over-year revenue growth for commercial aerosol, a continued excellent sign for DCO and the. While our defense business is slightly down in the quarter, with sunsetting programs such as the F-18 having an impact, the company also experienced strong demand for the Apache program, as well as increases for the F-35 and the Mir missile platform. The defense business was over $100 million in revenue once again, at $103 million in revenue for the quarter.

We are now in our 10th quarter of year over year revenue growth for commercial aerospace.

Our continued excellent sign for <unk> in the industry.

While our defense business was slightly down in the quarter with sunsetting programs such as the F 18 are having an impact.

The company also experienced strong demand in the Apache program as well as increases for F 35, and the mirror missile platforms.

The defense business is over $100 million revenue once again at $103 million of revenue for the quarter, we remain optimistic about the growth ahead.

Stephen G. Oswald: We remain optimistic about the growth ahead. As we go through a timing transition on certain programs, the ever-growing backlog of defense tells the story, with the backlog up $70 million from last year and $33 million from Q3 2026. The defense backlog now stands at over half a billion dollars, at $527.1 million. Another real bright spot in Q4 was gross margins of 21.7%, up 120 basis points year-over-year from 20.5%, as we began realizing benefits from our strategic pricing initiative, productivity improvements, and some initial restructuring savings. We're now also in the final stages of operation at our Berryville, Arkansas and Monrovia, California facilities, and we are targeting a full shutdown by June 30, the final approval stage with RTX for the Tomahawk harnesses going to Mexico. The last product still being produced at Berryville is close. And we continue to give a full effort with BA, BCS, and BA Defense on the Max Spoilers and Apache Tail Rotors, respectively, working with them on approval and building buffers due to the low level of production at both sites. However, we do have some headwinds.

As we go through a timing transition on certain programs the ever growing backlog in defense tells the story with backlog up $70 million from last year and $33 million from Q3 2023.

Defense backlog now stands at over half a billion at $527 1 million.

Another real bright spot in Q4 was gross margins of 21, 7%.

For Q1.

20 basis points year over year from 25% as we began realizing benefits from our strategic pricing initiatives.

Productivity improvements and some initial restructuring savings.

We are now also in the final stages of operation and our variable, Arkansas, and Monrovia, California performance centers or.

And are targeting a full shutdown by June 30.

The final approval stage with RPX for the Tomahawk harnesses going to Mexico.

Last products still being produced at very very low as close.

And we continue to give a full effort with VA BCS NBA defense.

On the Max boilers, and Apache tail rotors, respectively.

Working with them on approval and building buffer.

Due to the low level of production at both sites, we do have some headwinds.

Stephen G. Oswald: But this is temporary and will clear after the closure. For Adjusted Operating Margin in Q4, the team delivered 8.3% compared to 8.1% in Q4 2022, a nice result while investing some of the gross margin improvement after a few lean years during COVID and the ramp-up of commercial aerosol. The gap diluted EPS was $0.34 a share in Q4 2023 versus $0.65 a share for Q4 2022. And with the adjustments, diluted EPS was a solid $0.70 a share compared to diluted EPS of $0.85 in the prior year. Some key drivers for the lower gap diluted EPS include higher interest expense due to higher interest rates.

But this is temporary and will clear after the closures.

For adjusted operating margin in Q4, the team delivered eight 3% compared to eight 1% in Q4 2022, a nice result, while investing some of the gross margin improvement after a few lean years during COVID-19 and the ramp up of commercial aerospace.

The GAAP diluted EPS was <unk> 34, a share in Q4 2023.

Versus 65, a share for Q4 2022 and with the adjustments diluted EPS was a solid 70, a share compared to diluted EPS.

<unk> 85.

In the prior year.

Some key drivers for the lower GAAP diluted EPS include higher interest expense due to higher interest rates.

Stephen G. Oswald: Hire, Inventory, Purchase, Accounting, and Justice, and Higher SG&A Expenses as we invest in the business to position it for the future. The total company backlog performance increased both sequentially and compared to the prior year. Total company backlog ended 2023 at almost $994 million, increasing over $30 million both sequentially and compared to the prior year. The defense backlog, as mentioned earlier, also increased $70 million compared to the prior year to end at a record of $527 million.

Higher inventory purchase accounting adjustments and higher SG&A expenses as we invested in the business to position it for the future.

The total company backlog performance.

<unk>, both sequentially and compared to the prior year.

Total company backlog ended 2023 at almost $994 million, increasing over $30 million, both sequentially and compared to the prior year.

Defense backlog as mentioned earlier also increased $70 million compared to the prior year through the end of direct at a record of $527 million.

Stephen G. Oswald: The strong defense backlog reaffirms the Commons defense business remains in good shape, with more positive news to come. Commercial aerospace backlog, however, decreased slightly year-over-year, primarily due to industry issues with single-aisle production rates, specifically the MAX issues mentioned earlier with BA and SPIRIT, but still ended Q4 2023 at a solid $429 million. For Off Loading From Defense Primes, the work continues

The strong defense backlog reaffirms the comments defense business remains in good shape with more positive news to come the.

Our commercial aerospace backlog, however decreased slightly year over year, primarily due to industry issues with single aisle production rates, specifically, the Max issues mentioned earlier with VA and spirit.

But still ended Q4 2023 at a solid $429 million.

For Offloading from defense primes the work continues.

Stephen G. Oswald: We are expecting roughly $90 million for the full year of 2024, as committed to, mainly in our circuit card business for RTX and new areas such as radar for the SPYC. As communicated, the long-term run rate of these defense programs, already commercialized or in development for offloading, will be over $125 million by 2025 once transition work is completed. Thank you for our team delivered another good quarter managing the supply chain, as evidenced by positive revenue growth along with significant gross margin expansion compared to a year ago. Another great example of productivity improvements in people is the revenue per employee number, which is a high-level number but did increase significantly by 16% in 2023 versus 2021.

We are expecting roughly $90 million for the full year in 2024 as committed to.

Mainly in our circuit card business for RPX in new areas, such as radar for the <unk> six.

As communicated a long term run rate of these defense programs are already commercialized or in development for off loading will be over $125 million by 2025 once the transition work is completed.

In Q4, our team delivered another good quarter managing the supply chain.

As evidenced by positive revenue growth along with significant gross margin expansion compared to.

A year ago.

Another Great example of productivity improvements and people is the revenue per employee number.

Which granted is a high level number but did increase significantly by 16% in 2023 versus 2022.

That is a terrific job of everyone at the company.

Stephen G. Oswald: That was a terrific job, everyone at 2023 record revenues of $757 million with a solid 6.2% growth over 2022 and in line with the guidance of 6 to 6.5% we provided to you during the Q3 call. We're obviously happy with this record number, last set in 2012, especially in light of the 737 MAX headwinds with BA in spirit that created a more modest pace than it then expected for single-aisle production rates in 2020. For revenue guidance in 2024, we believe that with the uncertainty surrounding BA, Spirit, and the FAA at this point on the max, the best approach is to guide to mid-single digits and look to further updates on future earnings costs. Commercial aerospace recovery will continue to expand along with growth in defense, which is backed by a record backlog. We continue as well to be active with acquisitions, as in 2020, acquisition last April, and believe this is another catalyst to drive us, possibly higher, in the year ahead. Now, let me provide some additional color on our markets, products, and programs.

2023 record revenues of 757 million was a solid six 2% growth over 2022 and in line with the guidance of six to six 5%. We provided to you during the Q3 call.

We're obviously happy with this record number last set in 2012, especially in light of the 737, Max headwinds with VA and spirit that created a more modest pace than expected in single aisle production rates in 2023.

Yeah.

The revenue guidance for 2024, we believe that with the uncertainty surrounding da spirit and the FAA at this point on the Max the best approaches the guide to mid single digits and look to further updates on future earnings calls.

The commercial aerospace recovery will continue to expand along with growth in defense, which is backed by a record backlog.

We continue as all of the active with acquisitions.

As in 2012.

Acquisition last April I believe this is another catalyst to drive us possibly higher.

In the year ahead.

Now, let me provide some additional color on our markets products and programs.

Beginning with our military and space sector, we experienced our second consecutive quarter of revenues over 100 million at $102 8 million compared to $108 4 million in Q4 2022.

Stephen G. Oswald: Beginning with our military and Space sector, we experienced our second consecutive quarter of revenues over $100 million, at $102.8 million compared to $108.4 million in Q4 2022. While lower, we saw some bright spots, including strong demand for the Apache tail rotor blades with over 380% year-over-year growth and increased demand for other military and space products, other military rotary wing platforms, F-35, and the Mir missile as well. The fourth quarter's military and space revenue represented 53% of Ducommon's revenue for the period, down from 58% last year.

While lower we saw some bright spots, including strong demand for the Apache tail rotor blades with over 380% year over year growth and increased demand for other military and space products. Other military rotary wing platforms F 35, and the mere missile as well.

The fourth quarter military and space revenue represented 50, 53% of ducommun as revenue in the period down from 58% last year and this trend will continue to reflect more balanced with commercial aerospace, which we like.

Stephen G. Oswald: And this trend will continue to reflect more balance with commercial aerospace, which we like. We also ended the fourth quarter with backlog in excess of $500 million, which represents 53% of the Commons total. Within our commercial aerospace operations, fourth quarter revenue saw double-digit growth once again, increasing 18% year-over-year to $80 million. This was driven mainly by build rate increases on large aircraft platforms, including the 737 MAX and A220 platforms and twin-aisle commercial aircraft platforms, commercial rotary wing aircraft platforms, and regional and business jets. As many of you are aware, the FAA announced in January that it would increase its oversight of Boeing, as well as require Boeing to get approval for production rate increases or additional production lines for the 737 MAX until it is satisfied that Boeing is in full compliance with the required quality control.

We also ended the fourth quarter with backlog in excess of $500 million to $527 million, an increase of $70 million year over year and represents 53% of the comments total backlog.

Within our commercial aerospace operations fourth quarter revenue saw a double digit growth once again, increasing 18% year over year to $80 million driven mainly by bill rate increases on large aircraft platforms, including the 737, Max and <unk> hundred 20 platforms and twin aisle commercial aircraft platforms commercial.

Rotary wing aircraft platforms, and regional and business Jets.

As many of you are aware of the FAA announced in January that will increase its oversight of Boeing as well as required to get approval for production rate increases or additional production lines for the 737 Max until it is satisfied that boys in full compliance with the required quality control procedures.

Stephen G. Oswald: This will likely cap the production of the 737 MAX, but we need to see how things go in Q1 of 2024 and the FAA going forward. We do, however, expect the long-term trend to remain positive once the issues are fully addressed. The backlog within our commercial aerospace sector was $429 million at the end of the fourth quarter.

This will likely tap the production of the 737, Max but we need to see how things go in Q1 of 2024 and the FAA going forward plan.

We do however, expect a long term change remained positive once the issues are fully addressed.

The backlog within our commercial aerospace sector was $429 million at the end of the fourth quarter.

Stephen G. Oswald: And while it was $21 million lower year over year, it increased $7 million sequentially, a solid number given the temporary weakness in commercial aerosols. With that, I'll have Suman review our financial results. Thank you, Steve.

And while it was $21 million lower year over year, and increased 7 million sequentially, a solid number given the temporary weakness in commercial aerospace.

With that I'll have <unk> review of our financial results in detail.

Thank you Steve as a reminder, please see the company's Q4 earnings release for a further description of information mentioned on today's call.

Suman V. Mokherjee: As a reminder, please see the company's Q4 earnings release for a further description of information mentioned on today's call. As Steve discussed, our fourth quarter results reflect another period of good performance. We again saw a significant increase in our commercial aerospace revenues.

As Steve discussed our fourth quarter results reflect another period of good performance. 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 <unk>.

Suman V. Mokherjee: 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-aisle production. In addition, we are encouraged by the strong backlog growth in our military and space business, which should help drive our revenues in that end-user segment going forward. During the quarter, we also continued to make progress on our restructuring program, and I will provide some more color shortly. With all this, we feel like we have entered 2024 with good momentum that will continue to drive our performance. Now turning to our fourth-quarter results, revenue for the fourth quarter of 2023 was $192.2 million versus $188.3 million for the fourth quarter of 2022.

A lot of production rates. In addition, we are encouraged by the strong backlog growth in our military and space business that should help drive our revenues in that end user segment going forward.

During the quarter. We also continued to make progress on our restructuring program and I will provide some more color shortly with all this we feel like we have entered 2024 with good momentum as we continue to drive our performance now.

Now turning to our fourth quarter results.

Revenue for the fourth quarter of 2023 was $192 2 million versus $188 3 million for the fourth quarter of 2022, the year over year increase reflects $12 $1 million of growth across our commercial aerospace platforms, partially offset by $5 6 million of lower revenue within the <unk>.

<unk> and space sector due to lower build rates on various missile platforms and military fixed wing aircraft platforms, such as the F 18, partially offset by higher bill rates on military rotary wing aircraft platforms, such as the Apache.

Suman V. Mokherjee: The year-over-year increase reflects $12.1 million of growth across our commercial aerospace platforms, partially offset by $5.6 million of lower revenue within the military and Space sector due to lower bill rates on various missile platforms and military fixed-wing aircraft platforms, such as the F-18, partially offset by higher bill rates on military rotor-wing aircraft platforms, such as the Apache. Ducommon's total backlog at the end of the fourth quarter was $993.6 million.

Ducommun total backlog at the end of the fourth quarter was $993 6 million. This includes a record backlog in our defense and end users defense end user segment, which grew by $33 million to a total of $527 million the backlog in our commercial aerospace business increased slightly during the quarter.

Suman V. Mokherjee: This includes a record backlog in our defense and end-user, defense end-user segment, which grew by $33 million to a total of $527 million. The backlog in our commercial aerospace business increased slightly during the quarter, from $423 million at the end of Q3 to $429 million at the end of Q4. As a reminder, we define backlog as potential revenue based on customer purchase orders and long-term agreements with some fixed prices and expected delivery dates of 24 months or less.

For our 440 $423 million at the end of Q3 to $429 million at the end of Q4 as a reminder, we define backlog as potential revenue based on customer purchase orders and long term agreements with some fixed prices and expected delivery dates of.

24 months or less.

We posted a total gross profit of $41 7 million or 21, 7% of revenue for the quarter versus $38 6 million or 25% of revenue in the prior year period, we continue to share adjusted gross margins as we have certain non-GAAP cost of sales items in the current <unk>.

Suman V. Mokherjee: We posted total gross profit of $41.7 million, or 21.7% of revenue for the quarter versus $38.6 million, or 20.5% of revenue in the prior year period. We continue to share adjusted gross margins as we have certain non-GAAP cost of sales items in the current and prior year periods relating to inventory step-up amortization on our recent acquisitions, restructuring charges, and the impact of the Guaymas fire on our operations. On an adjusted basis, our gross margins were 23.2% in Q4 2023 versus 21% in Q4 2022. The improvement in gross margins was driven by favorable product mix, better pricing, and improved scale in our commercial aerospace business. We continue to work through a difficult operating environment with supply chain and labor.

Prior year period relating to inventory step up amortization on our recent acquisitions restructuring charges and the impact of the Gliomas fire on our operations on an adjusted basis. Our gross margins were 23, 2% in Q4 2023 versus 21% in Q4 2002.

Due to the improvement in gross margins was driven by favorable product mix better pricing and improved scale in our commercial aerospace business we.

We continue to work through a difficult operating environment with supply chain and labor, however, through our proactive efforts, including strategic buys in our inventory investments, we have been able to avoid any significant impact thus far on our business.

In parallel we continue to look for opportunities to one wind our working capital investments to improve our cash flow during the fourth quarter of 2023, we were able to reduce our inventory by $16 million sequentially compared to Q3, we also reduced our contract assets net of contract liabilities by.

Suman V. Mokherjee: However, through our proactive efforts, including strategic buys and our inventory investments, we have been able to avoid any significant impacts on our business. In parallel, we continue to look for opportunities to unwind our working capital investments to improve our cash flow. During the fourth quarter of 2023, we were able to reduce our inventory by $16 million sequentially compared to Q3. We also reduced our contract assets' net of contract liabilities by $15 million. Ducommon reported operating income for the fourth quarter of $8.9 million, or 4.6% of revenue, compared to $9.7 million, or 5.1% of revenue, in the prior year period.

$15 million.

Ducommun reported operating income for the fourth quarter of $8 9 million or four 6% of revenue compared to $9 7 million or five 1% of revenue in the prior year period. Adjusted operating income was $15 9 million or eight 3% of revenue this quarter compared to $15.

$2 million or eight 1% of revenue in the comparable comparable period last year.

The company reported net income for the fourth quarter of 2023 of $5 1 million or <unk> 34 per diluted share compared to net income of 81, $8 1 million or <unk> 65 per diluted share a year ago.

On an adjusted basis. The company reported net income of $10 4 million or <unk> 70 per diluted share compared to net income of $10 6 million or <unk> 85 in.

Suman V. Mokherjee: The adjusted operating income was $15.9 million, or 8.3% of revenue this quarter, compared to $15.2 million, or 8.1% of revenue in the comparable period last quarter. The company reported net income for the fourth quarter of 2023 of $5.1 million, or $0.34 per diluted share, compared to net income of $8.1 million, or $0.65 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 $10.6 million, or $0.85 per diluted share, in Q4 2022. The lower adjusted net income during the quarter, despite a higher level of adjusted operating income, was driven mainly by higher interest costs, partially offset by lower income tax expense.

In Q4, 'twenty to 'twenty two the lower adjusted net income during the quarter. Despite the higher level of adjusted operating income was driven mainly by higher interest costs, partially offset by lower income tax expense.

This was primarily due to the impact of a fed rate hike on short term interest rates I will discuss this along with our interest rate hedge which took effect on January one 2024 shortly.

Now, let me turn to our segment results.

Our structural systems segment posted revenue of $85 6 million in the fourth quarter of 2023 versus $68 2 million last year. The year over year increase reflects $12 3 million of higher sales across our commercial aerospace applications, mainly for single aisle aircraft for the 737, Max and <unk> hundred 20 platform.

<unk> and $5 million of higher revenue within the military and space markets, mainly from the ramp up in sales in the Apache program and other military rotary wing aircraft platform.

Structural systems operating income for the quarter was $6 6 million or seven 7% of revenue compared to $4 4 million or six 4% of revenue last year, excluding restructuring charges and other adjustments in both years. The segment operating margin was 14, 6% in Q4 2023.

Suman V. Mokherjee: This was primarily due to the impact of the Fed's rate hike on short-term interest rates. I will discuss this along with our interest rate hedge, which took effect on January 1, 2024. Now, let me turn to our segment results. Our structural system segment posted revenue of $85.6 million in the fourth quarter of 2023 versus $68.2 million last year. The year-over-year increase reflects $12.3 million of higher sales across our commercial aerospace applications, mainly for single-aisle aircraft for the 737 MAX and A220 platforms, and $5 million of higher revenue within the military and space markets, mainly from the ramp-up of sales in the Apache program and other military rotor-wing aircraft platforms. Structural systems operating income for the quarter was $6.6 million, or 7.7% of revenue compared to $4.4 million, or 6.4% of revenue last year. Excluding restructuring charges and other adjustments in both years, the segment operating margin was 14.6% in Q4 2023 versus 10.8% in Q4 2022.

See lesser standpoint, 8% in Q4 2022 strong.

Strong year over year improvement was driven by favorable product mix better pricing and higher.

And more scale in the businesses.

In the business as our commercial aerospace revenues have continued to grow this has been another great quarter for our structural systems segment.

Our electronic systems segment posted revenue of $106 7 million in the fourth quarter of 2023 versus $120 million in the prior year period.

The decline was mainly due to lower revenues with the company's military and space customers, including the impact and timing of reductions in revenues on sunsetting programs such as the F 18, not synchronized with growth in sales from the company's position on next Gen platforms.

Electronic systems operating income for the fourth quarter was $9 8 million or nine 2% of revenue versus $13 million or 10, 8% of revenue in the prior year period.

Excluding restructuring charges and other adjustments in both years. The segment operating margin was standpoint, and 2% in Q4 2023 versus 12, 9% in Q4 of 2022.

Suman V. Mokherjee: Strong year-over-year improvement was driven by favorable product mix, better pricing, and higher... This has been another great quarter for our Structural Systems segment. Our electronic system segment posted revenue of $106.7 million in the fourth quarter of 2023 versus $120 million in the prior year period. The decline was mainly due to lower revenues with the company's military and space customers, including the impact and timing of reductions in revenues on synthetic programs such as the F-18 not synchronized with growth in sales from the company's position on next-gen platforms. Electronic systems operating income for the fourth quarter was $9.8 million, or 9.2% of revenue versus $13 million, or 10.8% of revenue in the prior year period. Excluding restructuring charges and other adjustments in both years, the segment operating margin was 10.2% in Q4 2023 versus 12.9% in Q4 2022. The year-over-year decrease was due to unfavorable product mix and, as Steve mentioned earlier, due to the loss of To clarify, such inefficiencies have not been considered as restructuring charges in our calculation of adjusted operating income or adjusted EBITDA.

The year over year decrease was due to unfavorable product mix and as Steve mentioned earlier due to the loss of manufacturing volume and inefficiencies at our variable performance center as we wind down their operations.

To clarify such and efficiencies have not been considered as restructuring charges in our calculation of adjusted operating income or adjusted EBITDA.

Next on our restructuring.

As a reminder, and as discussed previously 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 variable, Arkansas and transfer of majority of that work to a low cost operation in Guaymas, Mexico with the remainder going 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 RPX to obtain the requisite approvals.

During Q4 'twenty to 'twenty, three we recorded $1 9 million in restructuring charges. The majority of these charges were severance and benefits related as we continue to wind down the two operations.

The recertification process is ongoing and we plan to close both facilities fully in the first half of 'twenty 'twenty four we.

Suman V. Mokherjee: Next on the restructuring. As a reminder, and as discussed previously, 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 terms. This includes the shutdown of our facilities in Monrovia, California, and Berryville, Arkansas, and the transfer of the majority of that work to a low-cost operation in Guaymas, Mexico, with the remainder going 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 approval. During Q4 2023, we recorded 1.9 million in restructuring charges. The majority of these charges were severance and benefits related as we continue to wind down the two operations.

We expect to incur $5 million to $7 million in restructuring expenses through 2024 and that will conclude the spending.

Upon completion of our restructuring program, we expect to generate $11 million to $13 million in annual savings from our actions and expect a portion of those savings to be realized starting in the second half of 2024.

We anticipate selling the land and buildings at both Monrovia, California and variable Arkansas.

Turning next to liquidity and capital resources.

During Q4 'twenty to 'twenty, three we generated $26 5 million in cash flow from operating activities, which was up from $14 3 million in Q3 2023.

For the full year 2023, we generated $31 1 million in cash flow from operating activities.

This is despite cash payments of $10 7 million for restructuring and $18 3 million for taxes relating to changes in rules for R&D tax credits relating to 2022 and 2023.

At the end of the fourth quarter, we have available liquidity of $218 9 million comprising of the unutilized portion of our revolver and cash on hand.

Our existing credit facility was put in place in July 2022 at an opportune time in the credit markets, allowing us to reduce our spread increase the size of our revolver, allowing us the flexibility to execute on our acquisition strategy.

Our debt through Q4, 2023 was 100% floating and linked to software as a.

Salt and as I highlighted before the increase in our interest cost from $3 5 million in Q4 2022 to five 4 million in Q4 2023.

It was driven by the run up in short term rates due to the fed rate hikes.

And November 2021 we have put in place an interest rate hedge that went into effect for a seven year period, starting January 2024, and begs the one month term so far at 170 basis points or $150 million of our debt.

Suman V. Mokherjee: During Q4 2023, we generated $26.5 million in cash flow from operating activities, which was up from $14.3 million in Q3 2023. For the full year 2023, we generated $31.1 million in cash flow from operating activities. This is despite cash payments of $10.7 million for restructuring and $18.3 million for taxes relating to changes in rules for R&D tax credits relating to 2022 and 2020. At the end of the fourth quarter, we had available liquidity of $218.9 million, comprising the unutilized portion of our revolver and cash on hand.

This will help drive significant interest cost savings in 2024 and beyond.

To conclude the financial overview for Q4, 2023, I would like to say that we had a strong finish to 2023 and anticipate another strong year in 2024.

I would now like to turn it back over to Steve for his closing remarks, Steve.

Okay. Thanks, Jim.

So just a couple of more comments, we go to questions in closing.

I think Q4 was a very good quarter with many highlights for the company and our shareholders. In addition to achieving all time highs for annual revenue and adjusted EBITDA of $757 million and $102 million, respectively. In 2023, a wonderful milestones.

Suman V. Mokherjee: Our existing credit facility was put in place in July 2022 at an opportune time in the credit markets, allowing us to reduce our spread, increase the size of our revolver, and allow us the flexibility to execute on our acquisition strategy. Our debt through Q4 2023 was 100% floating and linked to so- As a result, and as I highlighted before, the increase in our interest costs from $3.5 million in Q4 2022 to $5.4 million in Q4 2023 was driven by the run-up in short-term rates due to the Fed rate hike. 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. This will help drive significant interest cost savings in 2024 and beyond.

And I'm very happy for the hardworking ducommun team and all of our other stakeholders for those achievements.

I also want to mention that 2024 will be our 175th year of continuous operation here at ducommun.

A great achievement.

We will be recognizing that through the year.

Final note is our 2027 strategy, which we've talked about we had a strong first year with both engineered products and aftermarket Danny a larger percentage of revenue for the company in 2023 versus 2022.

In the future is very bright.

And with those remarks, I will conclude and open it up to questions. Thank you for listening.

Certainly as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby, while we compile the Q&A roster and one moment for our first question.

Our first question will be coming from Griffin boss of B Riley Securities. Your line is open.

Hi, Thank you for taking my questions.

Dave you just mentioned the engineered products and aftermarket parts are there any more specific details you can give on percentage of revenue there and how you would characterize that trending going forward versus the rest of the business.

So I'm not going to disclose the actual number.

Just noticed that at this time, we will probably do something as we go forward on Investor Day meeting, but it was certainly it was certainly up quite a bit I will say that both in revenue growth in revenue and the aftermarket for engineered products and.

Stephen G. Oswald: So just a couple more comments before we go to questions in closing. I think Q4 was a very good quarter with many highlights for the company and our shareholders. In addition to achieving all-time highs for annual revenue and adjusted EBITDA, $757 million and $102 million, respectively, in 2023 are wonderful milestones.

We're moving we have a 25%.

Target for 2027 for revenues for engineered products and that will just say that we're tracking very strongly towards that and to beat it.

Stephen G. Oswald: And I'm very happy for the hardworking Ducommon team and all of our other stakeholders for those achievements. I also want to mention that 2024 will be our 175th year of continuous operation here at Ducommon. A great achievement.

Okay, Okay, great fair enough and I appreciate the color and then so we saw.

Sequential.

Slight sequential decline in gross margin.

Just curious if you can add a little bit more color on on what Youre seeing there and how youre thinking about that.

Stephen G. Oswald: And we will be recognizing that through the year. The final note is our 2027 strategy, which we've talked about. We had a strong first year with both engineered products and aftermarket gaining a larger percentage of revenue for the company in 2023 versus 2022, and the future is very bright. www.kenherbert.com. With those remarks, I will conclude and open it up to questions. Thank you for listening. Certainly. As a reminder, to ask a question, please 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.

And the next quarter and going into 'twenty four.

So I'll repeat that question a lot of our Griffin.

Yes.

We saw a sequential decline in gross margin.

Was just curious if you could give some more color on what was driving that and how you're thinking about that trending going into 'twenty four.

That's right.

Sequential decline was driven by.

One product mix, but also because we have two facilities that we are in the process of winding down.

And we're just producing inefficiently that given the much lower.

Volume of operations versus the size and scope of those facilities and thats, causing a drag.

Operator: Please stand by while we compile the Q&A roster and one moment for our first question. Our first question will be coming from Griffin Boss of B. Reilly Securities. Your line is, Hi, thank you for taking my question.

Particularly on the electronic systems side, but also some drag on the structural systems side.

And we expect that.

Headwind to linger, but casually go down as we close those both those facilities in the first half of 'twenty 'twenty four yes, I think thats. Good let me just put some color on that for variable for instance is there every quarter and obviously, we have a lot less people in reserve quarter, we would run sort of $7 million a quarter at very bill and now are less than $1 million.

Griffin Boss: So, Steve, you just mentioned engineered products and aftermarket parts. Are there any more specific details you can give on the percentage of revenue there and how you would characterize that trending going forward versus the rest of the business? So I'm not going to disclose an actual number, you know, just not at this time.

Just making the tomahawk. So that's why there's a little bit of a timing issue or have some headwinds.

Okay, great. Thanks for thanks for the detail on that and then just last one from me apologize if I missed this in the prepared remarks can you give us an update on how the offloading opportunities are trending and how you're thinking about potential upside to those 2025 targets on that front.

Stephen G. Oswald: We will probably do something as we go forward in the rest of the meeting. But it certainly was, it was certainly up quite a bit, I will say that, both in revenue and aftermarket for engineered products. And we're moving, you know, we have a 25% target for 2027 for revenues from engineered products, and let me just say that we're tracking very strongly towards that and may even beat it. Okay, yeah, great. Fair enough. And I appreciate the color.

Yes. Thank you for the question. Yes. This is I've been talking about this.

We think there is some potential above the 125, though we still have a little more work to do here.

It's all very positive it's actually movement as soon as I mentioned in my remarks more onto the radar business.

This is a lot of it is cards, but so what happens is is just.

Griffin Boss: And then, so we saw a sequential, slight sequential decline in gross margin. Just curious if you can add a little bit more color on what you're seeing there and how you're thinking about that, you know, in the next quarter and going into 2014. Do I repeat that question, or want more, Griffin?

When you deal with RPX and you're moving work out of their facility.

Lots of inventory they have lots of different things, we have to overcome the of test equipment that either want to keep but they don't want to keep.

That test equivalent as lead times, it's over $1 million for some of these.

Test equipment machine, so theres a lot that goes into it but once you once it gets the tulsa or get somewhere else and Appleton, we're up we're off to the races here. So.

We are actively heads down.

Suman V. Mokherjee: So the sequential decline was driven by one product mix, but also because we have two facilities that we're in the process of winding down, and we're just producing inefficiently there, given the much lower volume of operations versus the size and scope of those facilities. And that's causing a drag, particularly on the electronic system side, but also some drag on the structural system side.

Working very hard in 2024 to get a lot of this past.

So to the finish line here. So we'll have an update later in the year, but we're feeling real good about where we are and we hope to have better report on the 125 plus.

Towards the end of 2024.

Okay, great glad to hear it thanks for taking my questions I appreciate it.

That's correct.

Again, ladies and gentlemen, if you do have a question. Please press star one on your Touchtone telephone again. Please press star one one our next question will be coming from Michael <unk> of choice to Securities. Your line is open.

Hey, good afternoon, guys. Thanks for taking the questions.

Stephen G. Oswald: For Berryville, for instance, during a quarter, obviously, we have a lot fewer people there, but during a quarter, we would run sort of 7 million a quarter at Berryville, and now we're less than a million, making the tomahawk. So that's why there's a little bit of a timing issue where we have some head... Okay, great. Thanks for the thanks for the detail on that. And then just the last one for me. I apologize if I missed this in the prepared remarks. Can you give us an update on how the offloading opportunities are trending and how you're thinking about potential upside to those 2025 targets on that front? Yeah, thank you for the question. Yeah, well, this is what I've been talking about. We think there is some potential above the 125, though we still have a little more work to do here. You know, it's all very positive. It's actually moving us, as I mentioned in my remarks, more into the radar business. For this is, you know, a lot of it is cards.

I don't know if Steve or.

Schumann, just I guess, if we'd look maybe to piggyback on the all floating but if we look at that.

Revenues down sequentially you finished the year I guess down two years in a row and I guess, you haven't really parsed out.

But it sounded like there was more conservatism in there around the Max.

The biggest headwind I mean, I know you called out the F 15.

Wind down but is there anything else impacting that the defense revenue growth.

Yes again this is Mike good to be with you.

A little bit a little bit of a mix may look the F 18 is significant right not for the.

Total business, but the FHA we're also.

Earlier in say 2021 2022, we did these tow missile cases for Raytheon and.

They were running 15 or 20 plus.

A year and what happens with the top missile cases, they have problems with supply chain and they can't get the motor for the vessel and also in the case of business drives up for a year or two and we're a little bit in that valley right. Now. So there's just a couple there's nothing systemic to the business, we like where we are we're getting pinched here and there.

Stephen G. Oswald: But so, what happens is, you know, when you're dealing with RTX and you're moving work out of their facility, they have lots of inventory, they have lots of different things we have to overcome, they have test equipment that they either want to keep or they don't want to keep. You know, that test equipment has lead times, it's over a million dollars for some of these test equipment machines, so there's a lot that So, we are actively, you know, heads down, working very hard in 2024 to get a lot of this past, you know, sort of the finish line here, so we'll have an update later in the year, but we're feeling really good about where we are and, you know, hope to have a better report on the 125 plus by the end of 2025. Okay, great.

Little bit, but we think that coming out of this thing where we're really good shape.

<unk> was we had a great run with it but.

Those things, sometimes they come to an end.

Okay. Okay, and then did I hear it right the off loading was $90 million expected to be in 'twenty four because I think you've called out maybe seeing that step up to 125 and 25, yes.

Yes.

So again.

Again thats.

One of the Big Big rocks here is the <unk> six and there is a number of cards right. So we have the first cards are already being made at Tulsa and Thats.

Stephen G. Oswald: Glad to hear it. Thanks for taking my questions. I appreciate it. Again, ladies and gentlemen, if you do have a question, please press star 11 on your touchtone telephone.

Let's just those cards are lower $15 million to $20 million a year right. So we have those going well we've got two other layers of cards that are just you know.

They are in Andover, it's tough to get them over here, we're working right.

Operator: Our next question will be coming from Michael Ciarmoli of Truist Securities. Your line is open. Hey, good afternoon, guys. Thanks for taking the time to answer the question. Um, Steve or Suman, just guess if we'd look maybe to piggyback on the offloading, but if we look at defense revenues down sequentially, you know, you finish the year, I guess, down two years in a row. And I guess, you know, you haven't really parsed out the guidance, but it sounded like there was more conservatism in there around the max. What's the biggest headwind? I mean, I know you called out the F-15 wind down, but is there anything else impacting defense revenue growth? Yeah, you know, it's Mikey. Good to be with you. It's, you know, it's a little bit of a mix.

Initially we get all the material from them because they've got all the inventory right. So our revenue was tamped down a lot, but breakthroughs, we're feeling very good about 2020 for these.

These changes it just it's great business, but unfortunately coming out of our big OEM, it's a bit of a long time coming.

Got it got it and then just.

Highlight again, the our defense backlog is the highest it has ever been in the last few years. So yes, we had some decline in the current year, but the backlog is at the highest and that's kind of a two year look.

In our backlog numbers, so thats a good position.

Yeah, No no notice that yes definitely positive there and then just.

What's the level of <unk>.

<unk> is now more prudent.

Michael Ciarmoli: I mean, look, the F-18 is is is significant, right? Not, you know, for the total business, but the F-18. We also earlier in, you know, say 2021, 2022, we did these TOW missile cases for right, and you know they were running 15 or 20 plus a year and you know what happens with the towed missile cases you know they have problems with supply chain and they can't get the motor for the missile and then all of a sudden the case of business dries up for a year or two and we're a little bit in that valley right now so you know there's just a couple there's nothing systemic to the business we we like where we are you know we're getting pinched here and there a little bit but we think that you know coming out of this thing we're we're we're really good shape and you know the FAA team was we had a great run with it but you know those things sometimes they come to an, Okay, okay. And did I hear it right?

You've sort of built in for the Max in 2004 can even give us some sense of.

What youre delivering two to spirit, what youre assuming.

Kind of some several commentary from Boeing about lower first half picking up second half, but where exactly are you guys and what are you embedding.

Yes, I hate to say a little bit.

We target date, so we're seeing better things ramping up a little bit of spirit Boeing and now things are as you know from the reports on January we feel that too right, but we're probably.

Speaking for some on here were probably in the $32 34 range right for 2020 for it I would say right 34 30.

<unk> 34, we like kind of beta higher but again, we have to.

Stephen G. Oswald: The offloading was 90 million expected to be in 24, because I think you called out maybe seeing that step up to 125 and 25. Yeah, that's about where we're heading. So again, we're, you know, again, one of the big, big rocks here is the SPY-6, and there are a number of cards, right? So we have the first cards already being made at Tulsa, and that's, you know, that's, you know, just those cards alone are, you know, 15, 20 million a year, right? So we have those going, but we've got two other layers of cards that are just, you know, they're in, they're in Andover, you know; it's tough to get them over here.

I think this momentum is just going to push us forward hopefully after we get through this FAA audit and rightly so right but.

We're being a little modest right now, but we certainly expect things to ramp up the goods. The good news is Mike we have the capacity we have the people we just need the horse.

Yes, yes makes sense.

Okay, perfect I'll jump back in the queue and then finally, Joe I'll get back in.

Yes.

Thank you Mike.

Hey, Michael.

And Im showing no further questions I would now like to turn the conference back to Steve Oswald for closing remarks.

Okay, all right, let me finish up here. So look I just want to thank everybody for joining us today.

Stephen G. Oswald: We're working, right? You know, initially, you know, we get all the material from them because they get all the inventory, right? So, our revenue is tamped down a lot, but once they break through, we're feeling very good about 2024 on these changes. It's just, you know, it's great business, but unfortunately, coming out of a big OEM, it's a bit of a long time coming. I'd like to highlight again that our defense backlog is the highest it has ever been in the last few years. So yes, we've had some decline in the current year, but the backlog is at its highest, and that's kind of a two-year look at our backlog numbers, so that's a good position to be in. Yeah, no, no, notice that.

Obviously, we had a very very good year in.

In 2023, and I'm thrilled that we're able to breakthrough our record last established in 2012, and we're marching towards our 2027 commitments and we're building more engineered products and where we're driving more aftermarket than you are cleaning up our contract manufacturing and taking costs out of that and driving hopefully.

Much better today once we get these two factories closed and I believe that's going to be the case so.

Looking forward to a great year ahead, we again, thank everybody for their support and once.

Suman V. Mokherjee: Yeah, definitely positive there. And then just, I guess, what's the level of conservatism or prudence that you've sort of built in for the max in 24? Can you even give us a sense of, you know, what you're delivering to the spirit, what you're assuming, you know, I know, we've heard, you know, kind of some commentary from Boeing about the lower first half, picking up the second half. But where exactly are you guys, and what are you embedding? Yeah, I hate to say it, a little bit, it's a little bit of a moving target, okay, so, you know, we're seeing better things ramping up a little bit at Spirit and at Boeing, and now things are, as you know, from the reports for January, we feel that too, right, but, you know, we're probably, you know, speaking for Saman here, we're probably in the 32 Yeah, 34.

Again, thank our employees for all their hard work in 2023. Thank you.

And this concludes today's conference call. Thank you for participating you may now disconnect.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Stephen G. Oswald: Yeah, yeah, 34. We'd like to see it higher, but, you know, again, we have to. I think this momentum is just going to push us forward, you know, hopefully after we get through this FAA audit, and rightly so, right, but, you know, we're being a little modest right now, but we certainly expect things to ramp up. The good news is, Mike, we have the capacity, we have the people, we just need the orders. Yep, yep. It makes sense.

Okay.

[music].

Yes.

Okay.

Stephen G. Oswald: Okay, perfect. I'll, I'll jump back, y'all get back. Transcribed by https://otter.ai. Thank you, Mike, and I have no further questions. I would now like to turn the conference back to Steve Oswald for closing remarks. Let me finish up here. I just want to thank everybody for joining us today.

Yes.

Okay.

Stephen G. Oswald: Obviously, we had a very, very good year in 2023. I'm thrilled that we're able to break through our record last established in 2012, and we're marching towards our 2027 commitments, and we're building more engineered products, and we're driving more aftermarket, and we're cleaning up our contract manufacturing, and taking costs out of that, and driving, hopefully, a much better day once we get these two factories closed, and I believe that's going to be the case. So, I am looking forward to a great year ahead. We would, again, thank everybody for their support, and I want to, again, thank our employees for all their hard work in 2023. Thank you.

[music].

Okay.

Yes.

Okay.

Yes.

Okay.

[music].

Okay.

[music].

Operator: And this concludes today's conference call. Thank you for participating. You may now disconnect, www.kenherbert.com Welcome. Ducommon Earnings Conference At this time, all participants are in a listen-only mode.

Okay.

Yes.

Okay.

[music].

Okay.

[music].

Operator: To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Suman Mishra. Mokherjee, Senior Vice President and Chief Financial Officer, please go ahead. Thank you, and welcome to DuCommon's 2023 fourth quarter conference call. With me today is Steve Oswald, Chairman, President, and CEO. I'm going to discuss certain limitations to any forward-looking statement 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 cannot give any assurance that such expectations will prove to have been correct.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Sure.

[music].

Okay.

Hum.

[music].

Okay.

Sure.

Okay.

[music].

Okay.

[music].

Yes.

[music].

Sure.

[music].

Okay.

[music].

Okay.

[music].

Yes.

[music].

Okay.

[music].

Yes.

[music].

Okay.

Yes.

Sure.

Okay.

[music].

Yes.

Sure.

Okay.

Yeah.

Good day and thank you for standing by welcome to the Q4 2023 Ducommun 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 one on your telephone you will then hear an automated message advising that your hand is.

Great.

Withdraw your question. Please press star one again, please be advised that today's conference is being recorded.

I'll now like to hand, the conference over to your speaker to mine.

Mark Ritchie Senior Vice President and Chief Financial Officer. Please go ahead.

Thank you and welcome to Ducommun strategy 23 fourth quarter Conference call with me today is Steve Oswald Chairman President and CEO.

I'm going to discuss certain limitations to any forward looking statements regarding future events projections or performance that we may make during the prepared remarks or the Q&A session that follows.

And are therefore perspective.

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.

Stephen G. Oswald: And thanks, everyone, for joining us today for our fourth quarter conference. Today, and as usual, I'll give an update on the current situation at the company, after which, tomorrow, we'll review our financial results in detail. Q4 was a very good quarter as we wrapped up 2023. Revenues exceeded $190 million for the second consecutive quarter, so $192.2 million, driving a full year revenue of $757 million, with the last high mark set in 2012. Strong growth in our single-aisle commercial aircraft business helps to drive revenue. Tinted recovery and commercial aerospace once again delivered in Q4, with Boeing's single-aisle platform business in aggregate being up 46% year over year, along with the Airbus A220 program showing strong growth. 73% year-over-year. Overall commercial aerospace with Airbus and Boeing and others was up 18% from Q4 2022.

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.

And enforce intellectual property rights.

Pandemics disasters, natural or otherwise and risk of cyber security attacks. These.

These risks and others will be described in our annual report on Form 10-K. Once it is filed with the SEC and our forward looking statements are subject to those risks.

Stephen G. Oswald: Despite Boeing's and Spirit's continued challenges with max quality issues, we are now in our 10th quarter of year-over-year revenue growth for commercial aerosol, a continued excellent sign for DCO and the. While our defense business is slightly down in the quarter, with sunsetting programs such as the F-18 having an impact, the company also experienced strong demand for the Apache program, as well as increases for the F-35 and the Mir missile platform. The defense business was over $100 million in revenue once again, at $103 million in revenue for the quarter.

<unk> made during the call are only as of the time made and we do not intend to update any statements made in this presentation, except if and as required by regulatory authorities.

This call also includes non-GAAP financial measures. Please refer to our filings with the SEC for a reconciliation of the GAAP to non-GAAP measures referenced on this call.

Stephen G. Oswald: We remain optimistic about the growth ahead. As we go through a timing transition on certain programs, the ever-growing backlog of defense tells the story, with the backlog up $70 million from last year and $33 million from Q3 2026. The defense backlog now stands at over half a billion dollars, at $527.1 million. Another real bright spot in Q4 was gross margins of 21.7%, up 120 basis points year-over-year from 20.5%, as we began realizing benefits from our strategic pricing initiative, productivity improvements, and some initial restructuring savings. We're now also in the final stages of operation at our Berryville, Arkansas, and Monrovia, California, plants, targeting a full shutdown by June 30, the final approval stage with RTX for the Tomahawk harnesses going to Mexico. The last product still being produced at Berryville is close. We continue to give a full effort with BA, BCS, and BA Defense on the Max Spoilers and Apache Tailroaders, respectively, working with them on approval and building buffers due to the low level of production at both sites. However, we do have some headwinds.

In the 2023 Form 10-K, we expect to report a material weakness in our internal controls over financial reporting related to our revenue recognition process. This material weakness resulted in immaterial adjustments to net revenue and contract assets as of and for the quarterly period ending December 31.

2023, we do not expect the material weakness to result in a restatement or change to the reported financial statements. We will make the necessary changes to the design and operating effectiveness of the specific revenue recognition internal controls during 2024.

I would now like to turn the call over to Steve Oswald for a review of the operating results Steve.

Okay.

And thanks, everyone for joining us today for our fourth quarter conference call today, and as usual I'll give an update on the current situation of the company.

Afterwards, <unk> will review our financial results in detail.

Q4 was a very good quarter as we wrapped up 2023 revenues exceeded $190 million for the second consecutive quarter to $192 2 million driving our full year revenue of $5 $757 million.

Stephen G. Oswald: But this is temporary and will clear after the closure. For Adjusted Operating Margin in Q4, the team delivered 8.3% compared to 8.1% in Q4 2022, a nice result while investing some of the gross margin improvement after a few lean years during COVID and the ramp-up of commercial aerosol. The Gap Diluted EPS was $0.34 a share in Q4 2023 versus $0.65 a share for Q4 2022, and with the adjustments, Diluted EPS was a solid $0.70 a share compared to $0.85 in the prior year. Some key drivers for the lower Gap diluted EPS include higher interest expense due to higher interest rates.

With the last high Mark set in 2000 2012.

Strong growth in our single aisle commercial aircraft business helped to drive the revenue.

Overall, commercial aerospace with Airbus and Boeing and others was up 18% from Q4 2022.

Despite boeing's and spirits continued challenges with Max quality issues.

We are now in our 10th quarter of year over year revenue growth for commercial aerospace.

Our continued excellent signed for <unk> in the industry.

While our defense business was slightly down in the quarter with sunsetting programs such as the F 18 are having an impact.

Stephen G. Oswald: Hire, Inventory, Purchase, Accounting, and Justice, and Higher SG&A Expenses as we invest in the business to position it for the future. The total company backlog performance increased both sequentially and compared to the prior year. Total company backlog ended 2023 at almost $994 million, increasing over $30 million both sequentially and compared to the prior year. The fence backlog, as mentioned earlier, also increased $70 million compared to the prior year to end at a record of $527 million.

The company also experienced strong demand in the Apache program as well as increases for F 35, and the mirror missile platforms.

The defense business was over $100 million revenue once again at $103 million of revenue for the quarter, we remain optimistic about the growth ahead.

As we go through a timing transition on certain programs the ever growing backlog in defense tells the story with backlog up $70 million from last year and $33 million from Q3 2023.

Defense backlog now stands at over half a billion at $527 1 million.

Stephen G. Oswald: The strong defense backlog reaffirms the Comet's defense business remains in good shape, with more positive news to come. Commercial aerospace backlog, however, decreased slightly year-over-year, primarily due to industry issues with single-aisle production rates, specifically the MAX issues mentioned earlier with BA and SPIRIT, but still ended Q4 2023 at a solid $429 million. For Uploading from Defense Primes, the work continues.

Another real bright spot in Q4 was gross margins of 21, 7%.

For Q4 up.

20 basis points year over year from 25% as we began realizing benefits from our strategic pricing initiatives productivity.

The improvements and some initial restructuring savings.

We're now also in the final stages of operation and our variable, Arkansas, and Monrovia, California performance centers or.

Stephen G. Oswald: We are expecting roughly $90 million for the full year of 2024, as committed to, mainly in our circuit card business for RTX and new areas such as radar for the SPYC. As communicated, the long-term run rate of these defense programs, already commercialized or in development for offloading, will be over $125 million by 2025 once transition work is completed. Thank you for our team delivered another good quarter managing the supply chain, as evidenced by positive revenue growth along with significant growth margin expansion compared to a year ago. Another great example of productivity improvements in people is the revenue per employee number, which is a high-level number but did increase significantly by 16% in 2023 versus 2021.

And are targeting a full shutdown by June 30.

The final approval stage with RPX for the Tomahawk harnesses going to Mexico.

Last products still being produced at very low that variable is close.

And we continue to give a full effort with VA BCS MBA defense.

On the Max boilers, and Apache tail rotors, respectively.

Working with them on approval and building buffer.

Due to the low level of production at both sites, we do have some headwinds.

But this is temporary and will clear after the closures.

The GAAP diluted EPS was <unk> 34, a share in Q4 2023 versus <unk> 65, a share for Q4 2022 and with the adjustments diluted EPS was a solid 70, a share compared to diluted EPS.

Stephen G. Oswald: That was a terrific job, everyone at 2023 record revenues of $757 million with a solid 6.2% growth over 2022 and in line with the guidance of 6 to 6.5% we provided to you during the Q3 call. We're obviously happy with this record number, last set in 2012, especially in light of the 737 MAX headwinds with BA in spirit that created a more modest pace than it then expected for single-aisle production rates in 2020. For Revenue Guidance for 2024, we believe that with the uncertainty surrounding BA, Spirit, and the FAA at this point, the best approach is to guide to mid-single digits and look to further updates on future earnings costs. Commercial Aerospace Recovery will continue to expand, along with growth in defense, which is backed by a record backlog.

<unk> 85.

In the prior year.

Some key drivers for the lower GAAP diluted EPS include higher interest expense due to higher interest rates.

Higher inventory purchase accounting adjustments and higher SG&A expenses as we invested in the business to position it for the future.

The total company backlog performance.

<unk>, both sequentially and compared to the prior year.

Total company backlog ended 2023 at almost $994 million, increasing over $30 million, both sequentially and compared to the prior year.

Defense backlog as mentioned earlier also increased $70 million compared to the prior year to the end of direct at a record of $527 million.

The strong defense backlog reaffirms the comments defense business remains in good shape with more positive news to come <unk>.

Stephen G. Oswald: We continue as well to be active with acquisitions, as in 2020, acquisition last April, and believe this is another catalyst to drive us possibly higher in the year ahead. Now, let me provide some additional color on our markets, products, and programs. Beginning with our military and Space sector, we experienced our second consecutive quarter of revenues over $100 million, at $102.8 million compared to $108.4 million in Q4 2022. While lower, we saw some bright spots, including strong demand for the Apache tail rotor blades with over 380% year-over-year growth and increased demand for other military and space products, other military rotary wing platforms, F-35, and the Mir missile as well. The fourth quarter's military and space revenue represented 53% of Ducommon's revenue for the period, down from 58% last year, and this trend will continue to reflect more balance with commercial aerospace, which we like.

But still ended Q4 2023 at a solid $429 million.

For Offloading from the French fries the work continues.

We are expecting roughly $90 million for the full year of 2024 as committed to.

Mainly in our circuit card business for RPX in new areas, such as radar for the <unk> six.

As communicated a long term run rate of these defense programs are already commercialized or in development for off loading will be over $125 million by 2025 once the transition work is completed.

In Q4, our team delivered another good quarter, managing the supply chain as.

As evidenced by positive revenue growth along with significant gross margin expansion compared to.

A year ago.

Another Great example of productivity improvements and people is the revenue per employee number.

Which granted is a high level number but didn't increase significantly by 16% in 2023 versus 2022.

Stephen G. Oswald: We also ended the fourth quarter with backlog in excess of 500 million, an increase of 70 million year-over-year, and represents 53% of the Commons total. Within our commercial aerospace operations, fourth quarter revenue saw double-digit growth once again, increasing 18% year-over-year to $80 million. This was driven mainly by build rate increases on large aircraft platforms, including the 737 MAX and A220 platforms, and twin aisle commercial aircraft platforms, commercial rotary wing aircraft platforms, and regional and business jets. As many of you are aware, the FAA announced in January that it would increase its oversight of Boeing, as well as require Boeing to get approval for production rate increases or additional production lines for the 737 MAX until it is satisfied that Boeing is in full compliance with the required quality control.

That is a terrific job of everyone at the company.

2023 record revenues of $757 million was a solid six 2% growth over 2022 and in line with the guidance of six to six 5%. We provided to you during the Q3 call.

We're obviously happy with this record number last set in 2012, especially in light of the 737, Max headwinds with Bofa and spirit that created a more modest pace than expected in single aisle production rates in 2023.

Yeah.

For revenue guidance for 2024, we believe that with the uncertainty surrounding VA spirit and the FAA at this point on the Max the best approaches the guide to mid single digits and look to further updates on future earnings calls.

The commercial aerospace recovery will continue to expand along with growth in defense, which is backed by a record backlog.

We continue as all of the active with acquisitions.

As in 2012.

Acquisition last April I believe this is another catalyst to drive us possibly higher.

In the year ahead.

Now, let me provide some additional color on our markets products and programs.

Beginning with our military and space sector, we experienced our second consecutive quarter of revenues over $100 million at $102 8 million compared to $108 4 million in Q4 2022.

We also ended the fourth quarter with backlog in excess of $500 million to $527 million, an increase of $70 million year over year and represented 53% of the Commons total backlog.

Rotary wing aircraft platforms, and regional and business Jets.

As many of you are aware the FAA announced in January that will increase its oversight of Boeing as well as required to get approval for production rate increases or additional production lines for the 737 Max until it is satisfied that Boeing is in full compliance with the required quality control procedures.

This will likely tap the production of the 737, Max but we need to see how things go in Q1 of 2024 and the FAA going forward plan.

We do however, expect a long term trend to remain positive once the issues are fully addressed.

The backlog within our commercial aerospace sector was $429 million at the end of the fourth quarter.

Suman V. Mokherjee: This includes a record backlog in our defense and end-users business, which grew by $33 million to a total of $527 million. The backlog in our commercial aerospace business increased slightly during the quarter, from $423 million at the end of Q3 to $429 million at the end of Q4. As a reminder, we define backlog as potential revenue based on customer purchase orders and long-term agreements with some fixed prices and expected delivery dates of 24 months or less.

And while it was $21 million lower year over year, and increased 7 million sequentially, a solid number given the temporary weakness in commercial aerospace.

With that I'll have <unk> review of our financial results in detail Soma. Thank you Steve as a reminder, please see the company's Q4 earnings release for a further description of information mentioned on today's call.

Single aisle production rates. In addition, we are encouraged by the strong backlog growth in our military and space business that should help drive our revenues in that end user segment going forward.

Now turning to our fourth quarter results.

Revenue for the fourth quarter of 2023 was $192 2 million versus $188 3 million for the fourth quarter of 2022, the year over year increase reflects $12 1 million of growth across our commercial aerospace platforms, partially offset by $5 6 million of lower revenue within the <unk>.

Suman V. Mokherjee: We continue to work through a difficult operating environment with supply chain and labor. However, 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. In parallel, we continue to look for opportunities to unwind our working capital investments to improve our cash flow. During the fourth quarter of 2023, we were able to reduce our inventory by $16 million sequentially compared to Q3. We also reduced our contract assets, net of contract liabilities, by $15 million. Ducommon reported operating income for the fourth quarter of $8.9 million, or 4.6% of revenue, compared to $9.7 million, or 5.1% of revenue, in the prior year period.

24 months or less.

We posted total gross profit of $41 7 million or 21, 7% of revenue for the quarter versus $38 6 million or 25% of revenue in the prior year period, we continue to share adjusted gross margins as we have certain non-GAAP cost of sales items in the current <unk>.

Prior year period relating to inventory step up amortization on our recent acquisitions restructuring charges and the impact of the Guaymas fire on our operations on an adjusted basis. Our gross margins were 23, 2% in Q4 2023 versus 21% in Q4 2002.

Due to the improvement in gross margins was driven by favorable product mix better pricing and improved scale in our commercial aerospace business we.

Suman V. Mokherjee: This was primarily due to the impact of the Fed's rate hike on short-term interest rates. I will discuss this along with our interest rate hedge, which took effect on January 1, 2024. Now, let me turn to our segment results. Our structural systems segment posted revenue of $85.6 million in the fourth quarter of 2023 versus $68.2 million last year. The year-over-year increase reflects $12.3 million of higher sales across our commercial aerospace applications, mainly for single-aisle aircraft for the 737 MAX and A220 platforms, and $5 million of higher revenue within the military and space markets, mainly from the ramp-up of sales in the Apache program and other military rotor-wing aircraft platforms. Structural systems operating income for the quarter was $6.6 million, or 7.7% of revenue compared to $4.4 million, or 6.4% of revenue last year. Excluding restructuring charges and other adjustments in both years, the segment operating margin was 14.6% in Q4 2023 versus 10.8% in Q4 2022.

Prove our cash flow during the fourth quarter of 2023, we were able to reduce our inventory by $16 million sequentially compared to Q3, we also reduced our contract assets net of contract liabilities by $15 million.

Ducommun reported operating income for the fourth quarter of $8 9 million or four 6% of revenue compared to $9 7 million or five 1% of revenue in the prior year period.

Adjusted operating income was $15 9 million or eight 3% of revenue this quarter compared to $15 2 million or eight 1% of revenue in the comparable comparable period last year.

The company reported net income for the fourth quarter of 2023 of $5 1 million or <unk> 34 per diluted share compared to net income of 81, $8 1 million or <unk> 65 per diluted share a year ago.

On an adjusted basis. The company reported net income of $10 4 million or <unk> 70 per diluted share compared to net income of $10 6 million or <unk> 85.

In Q4 2020, due the lower adjusted net income during the quarter. Despite the higher level of adjusted operating income was driven mainly by higher interest costs, partially offset by lower income tax expense.

Suman V. Mokherjee: Strong year-over-year improvement was driven by favorable product mix, better pricing, and higher.................. This has been another great quarter for our structural systems sector. Our electronic system segment posted revenue of $106.7 million in the fourth quarter of 2023 versus $120 million in the prior year period. The decline was mainly due to lower revenues with the company's military and space customers, including the impact and timing of reductions in revenues on sunsetting programs such as the F-18 not synchronized with growth in sales from the company's position on next-generation platforms. Electronic systems operating income for the fourth quarter was $9.8 million, or 9.2% of revenue versus $13 million, or 10.8% of revenue in the prior year period. Excluding restructuring charges and other adjustments in both years, the segment operating margin was 10.2% in Q4 2023 versus 12.9% in Q4 2022. The year-over-year decrease was due to unfavorable product mix and, as Steve mentioned earlier, due to the loss of To clarify, such inefficiencies have not been considered as restructuring charges in our calculation of adjusted operating income or adjusted EBITDA.

This was primarily due to the impact of a fed rate hike on short term interest rates I will discuss this along with our interest rate hedge which took effect on January one 2024 shortly.

Now, let me turn to our segment results.

And $5 million of higher revenue within the military and space markets, mainly from the ramp up in sales in the Apache program and other military rotary wing aircraft platform.

<unk> standpoint, 8% in Q4 2022.

Strong year over year improvement was driven by favorable product mix better pricing and higher.

And more scale in the businesses.

In the business as our commercial aerospace revenues have continued to grow this has been another great quarter for our structural systems segment.

Our electronic systems segment posted revenue of $106 7 million in the fourth quarter of 2023 versus $120 million in the prior year period.

Electronic systems operating income for the fourth quarter was $9 8 million or nine 2% of revenue versus $13 million or 10, 8% of revenue in the prior year period.

Excluding restructuring charges and other adjustments in both years the segment operating margin was standpoint, and 2% in Q4 2023 versus 12, 9% in Q4 2022.

Suman V. Mokherjee: The recertification process is ongoing, and we plan to close both facilities fully in the first half of 2021. We expect to incur 5 to 7 million in restructuring expenses through 2024, and that will conclude the spending. Upon completion of our restructuring program, we expect to generate $11-13 million in annual savings from our actions and expect a portion of those savings to be realized starting in the second half of 2021. We anticipate selling the land and buildings at both Monrovia, California, and Variable Arc, turning next to liquidity and capital resources. During Q4 2023, we generated $26.5 million in cash flow from operating activities, which was up from $14.3 million in Q3 2023. For the full year 2023, we generated $31.1 million in cash flow from operating activities. This is despite cash payments of $10.7 million for restructuring and $18.3 million for taxes relating to changes in rules for R&D tax credits relating to 2022 and 2021. At the end of the fourth quarter, we had available liquidity of $218.9 million, comprising the unutilized portion of our revolver and cash on hand.

To clarify such and efficiencies have not been considered as restructuring charges in our calculation of adjusted operating income or adjusted EBITDA.

Next on our restructuring.

As a reminder, and as discussed previously we commenced a restructuring initiative back in 2022.

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 RPX to obtain the requisite approvals.

The recertification process is ongoing and we plan to close both facilities fully in the first half of 'twenty 'twenty four we.

We expect to incur $5 million to $7 million in restructuring expenses through 2024 and that will conclude the spending.

Suman V. Mokherjee: Our existing credit facility was put in place in July 2022 at an opportune time in the credit markets, allowing us to reduce our spread, increase the size of our revolver, and allow us the flexibility to execute on our acquisition strategy. Our debt through Q4 2023 was 100% floating and linked to so- As a result, and as I highlighted before, the increase in our interest costs from $3.5 million in Q4 2022 to $5.4 million in Q4 2023 was driven by the run-up in short-term rates due to the Fed rate hike. 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. This will help drive significant interest cost savings in 2024 and beyond.

We anticipate selling the land and buildings at both Monrovia, California and variable Arkansas.

Turning next to liquidity and capital resources.

During Q4 2023, we generated $26 5 million in cash flow from operating activities, which was up from $14 3 million in Q3 2023.

For the full year 2023, we generated $31 1 million in cash flow from operating activities.

This is despite cash payments of $10 7 million for restructuring and $18 3 million for taxes relating to changes in rules for R&D tax credits relating to 2022 and 2023.

At the end of the fourth quarter, we have available liquidity of $218 9 million comprising of the unutilized portion of our revolver and cash on hand.

Our existing credit facility was put in place in July 2022 at an opportune time in the credit markets, allowing us to reduce our spread increased the size of our revolver and allowing us the flexibility to execute on our acquisition strategy.

Suman V. Mokherjee: To conclude the financial overview for Q4 2023, I would like to say that we had a strong finish to 2023 and anticipate another strong year in 2024. I would now like to turn it back over to Steve for his closing remarks. Then, Okay, thanks, Siobhan. So just a couple more comments before we go to questions in closing. I think Q4 was a very good quarter with many highlights for the company and our shareholders. In addition, we achieved all-time highs for annual revenue and adjusted EBITDA.

Our debt through Q4, 2023 was 100% floating and linked to software.

As a result, and as I highlighted before the increase in our interest cost from $3 5 million in Q4 2022 to five 4 million in Q4 2023.

It was driven by the run up in short term rates due to the fed rate hikes in November 'twenty 'twenty. One we have put in place an interest rate hedge that went into effect for a seven year period, starting January 2024, and begs the one month term so far at 170 basis points or $150 million of our debt.

Stephen G. Oswald: $757 million and $102 million, respectively, in 2023 are wonderful milestones, and I'm very happy for the hardworking Ducommon team and all of our other stakeholders for those achievements. I also want to mention that 2024 will be our 175th year of continuous operation here at Ducommon. A great achievement.

This will help drive significant interest cost savings in 2024 and beyond.

To conclude the financial overview for Q4, 2023, I would like to say that we had a strong finish to 2023 and anticipate another strong year in 2024.

Stephen G. Oswald: We will be recognizing that through the year. The final note is our 2027 strategy, which we've talked about. We had a strong first year with both engineered products and aftermarket gaining a larger percentage of revenue for the company in 2023 versus 2022, and the future is very bright. www.kenherbert.com. With those remarks, I will conclude and open it up to questions. Thank you for listening. Certainly. As a reminder, to ask a question, please 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.

I'd now like to turn it back over to Steve for his closing remarks, Steve.

Okay. Thanks, Jim.

So just a couple more comments, we go to questions in closing.

I think Q4 was a very good quarter with many highlights for the company and our shareholders.

In addition to achieving all time highs for annual revenue and adjusted EBITDA of $757 million and $102 million, respectively. In 2023, a wonderful milestones.

And I'm very happy for the hardworking ducommun team and all of our other stakeholders for those achievements.

I also want to mention that 2024 will be our 175th year of continuous operation here at ducommun.

A great achievement.

And we will be recognizing that through the year.

A final note is our 2027 strategy, which we've talked about we had a strong first year with both engineered products and aftermarket Danny a larger percentage of revenue for the company in 2023 versus 2022.

Operator: Please stand by while we compile the Q&A roster and one moment for our first question. Our first question will be from Griffin Boss of B Riley Securities. Your line is, Hi, thank you for taking my question. So, Steve, you just mentioned the engineered products and aftermarket parts.

And the future is very bright.

And with those remarks, I will conclude and open it up to questions. Thank you for listening.

Griffin Boss: Are there any more specific details you can give on the percentage of revenue there and how you would characterize that trending going forward versus the rest of the business? So I'm not going to disclose an actual number, you know, just not at this time. We will probably do something as we go forward in our investigative meeting, but it was certainly up quite a bit, I will say that, both in revenue and aftermarket for engineered products. And we're moving, you know, we have a 25% target for 2027 for revenues for engineered products, and let me just say that we're tracking very strongly towards that and may even beat it. Okay, yeah, great. Fair enough, and I appreciate the color.

Our first question will be coming from Griffin boss of B Riley Securities. Your line is open.

Hi, Thank you for taking my questions.

Steve You just mentioned the engineered products and aftermarket parts are there any more specific details you can give on percentage of revenue there and how you would characterize that trending going forward versus the rest of the business.

So I'm not going to disclose the actual number.

Just noticed that at this time, we will probably do something as we go forward in our Investor Day meeting, but it was certainly it was certainly up quite a bit I will say that both in revenue growth and revenue in the aftermarket for engineered products and.

We're moving we have a 25%.

Griffin Boss: Yeah, so we saw a sequential decline in gross margin. I was just curious if you could give some more color on what was driving that and how you're thinking about that trending going into 24. That's right. So the sequential decline was driven by one product mix, but also because we have two facilities that we're in the process of winding down, and we're just producing inefficiently there, given the much lower volume of operations versus the size and scope of those facilities. And that's causing a drag, particularly on the electronic system side, but also some drag on the structural system side.

Target for 2027 for revenues for engineered products and we just say that we're tracking very strongly towards that and to beat it.

Okay, Okay, great fair enough and I appreciate the color and then so we saw.

Sequential.

Slight sequential decline in gross margin.

Just curious if you can add a little bit more color on on what Youre seeing there and how youre thinking about that.

And the next quarter and going into 'twenty four.

So I'll repeat that question a lot of our Griffin.

Yes.

We saw a sequential decline in gross margin.

Suman V. Mokherjee: And we expect that headwind to linger but gradually go down as we close both those facilities in the first half of 2024. Yeah, I think that's good. Let me just put some color on that. For Berryville, for instance, during a quarter, obviously, we have a lot fewer people there, but during a quarter, we would run sort of 7 million a quarter at Berryville, and now we're less than a million, making the tomahawk.

Was just curious if you could give some more color on what was driving that and how you're thinking about that trending going into 'twenty four.

That's right. So the sequential decline was driven by.

One product mix, but also because we have two facilities that we are in the process of winding down.

And we're just producing inefficiently there given the much lower volume of operations versus the size and scope of those facilities and thats, causing a drag.

Stephen G. Oswald: So that's why there's a little bit of a timing issue, or we have some head... Okay, great. Thanks for the detail on that. And then just the last one for me. I apologize if I missed this in the prepared remarks.

Particularly on the electronic system side, but also some drag on the structural systems side.

And we expect that.

Headwinds to linger, but casually go down as we close those are both of those facilities in the first half of 2024, Yes, I think that's good let me just put some color on that for variable for instance is there a quarter. Obviously, we have a lot less people in reserve quarter, we would run sort of $7 million a quarter at variable and now are less than $1 million.

Griffin Boss: Can you give us an update on how the offloading opportunities are trending and how you're thinking about potential upside to to those 2025 targets on that front? Yeah, thank you for the question. Yeah, well, this is, you know, I've been talking about this. We think there is some potential above the 125, though we still have a little more work to do here. You know, it's all very positive. It's actually moving us in, as I mentioned in my remarks, more into the radar business. For this is, you know, a lot of it is cards. But so what happens is, is just, you know, it's, When you're dealing with RTX and you're moving work out of their facility, they have lots of inventory, they have lots of different things we have to overcome, they have test equipment that they either want to keep or they don't want to keep, you know, that test equipment has lead times, it's over a million dollars for some of these test equipment machines, so there's a lot that goes into it, but once it gets to Tulsa or gets somewhere else than Appleton, you know, we're off to the races here.

Just making the tomahawk. So that's why there's a little bit of a timing issue or have some headwinds.

Yes. Thank you for the question. Yes. This is I've been talking about this.

We think there is some potential above the 125, though we still have a little more work to do here.

It's all very positive it's actually movement as soon as I mentioned in my remarks more onto the radar business.

This is a lot of it is cards, but so what happens is just.

When you deal with RPX and you're moving work out of their facility. They have lots of inventory. They have lots of different things we have to overcome the of test equipment that either want to keep but they don't want to keep.

Stephen G. Oswald: So, we are actively, you know, heads down, working very hard in 2024 to get a lot of this past, you know, sort of the finish line here, so we'll have an update later in the year, but we're feeling really good about where we are and, you know, hope to have a better report on the 125 plus by the end of 2025. Okay, great. Glad to hear it. Thanks for taking my questions. I appreciate it. Again, ladies and gentlemen, if you do have a question, please press star 1-1 on your touchtone telephone. Again, please press star 1-1.

They have that.

That's equivalent as lead times, it's over $1 million for some of these.

Test equipment machine, so theres a lot that goes into it but once you once it gets the tulsa or get somewhere else and Appleton, Yes, we're up we're off to the races here. So.

We are actively heads down.

Working very hard in 2024 to get a lot of this past.

So to the finish line here. So we'll have an update later in the year, but we're feeling real good about where we are we hope to have better report on the 125 plus.

Towards the end of 2024.

Okay, great glad to hear it thanks for taking my questions I appreciate it that's correct.

Operator: Our next question will be coming from Michael Ciarmoli of Truist Securities. Your line is open. Hey, good afternoon, guys. Thanks for taking the time to answer the question. I don't know, Steve or Suman, just, I guess if we'd look, maybe to piggyback on the offloading, but if we look at defense revenues down sequentially, you finish the year, I guess, down two years in a row, and I guess, you know, you haven't really parsed out the guidance, but it sounded like there was more conservatism in there around the max. What's

Hey.

Guys. Thanks for taking the questions.

Fever, or Schumann, just I guess, if we'd look maybe to piggyback on the all floating but if we'd look at defense revenues down sequentially. You finished the year I guess down two years in a row and I guess, you haven't really parsed out guidance, but it sounded like there was more conservatism in there around the math.

<unk>.

The biggest headwind I mean, I know you called out the F 15.

Michael Ciarmoli: I mean, I know you called out the F-15 wind down, but is there anything else impacting the defense revenue growth? Yeah, you know, it's again, Mikey, good to be with you. It's, you know, it's a little bit of a mix.

Wind down but is there anything else.

Packaging that the defense revenue growth.

Yes.

Dan This is Mike good to be with you it's.

It's a little bit a little bit of a mix may look the FHA is significant right.

Stephen G. Oswald: I mean, look, the F-18 is is is significant, right? Not, you know, for the total business, but the F-18. We also earlier in, you know, say 2021, 2022, we did these towed missile cases for Raytheon, and you know they were running 15 or 20 plus a year and you know what happens with the towed missile cases you know they have problems with supply chain and they can't get the motor for the missile and then all of a sudden the case of business dries up for a year or two and we're a little bit in that valley right now so you know there's just a couple there's nothing systemic to the business we we like where we are you know we're getting pinched here and there a little bit but we think that you know coming out of this thing we're we're we're really good shape and you know the FA team was we had a great run with it but you know those things sometimes they come to an end. Okay, okay. And did I hear it right?

For the total business, but the FHA we're also.

Earlier in say 2021 2022, we did these tow missile cases for Raytheon.

And they.

They were running 15 or 20 plus.

A year and what happens with the top missile cases, they have problems with supply chain and they can't get the motor for the vessel and then also in the case of business drives up for a year or two and we're a little bit in that valley right. Now. So there's just a couple there's nothing systemic to the business, we like where we are we're getting patched here and there.

Little bit, but we think that coming out of this thing where we're really good shape.

<unk> was we had a great run with it but.

Those things, sometimes the account to announce.

Okay. Okay, and then did I hear it right. The off loading was 90 million expected to be in 'twenty four because I think you called out maybe seeing that step up to 125 and 25, yes.

Stephen G. Oswald: The offloading was 90 million expected to be in 24 because I think you called out maybe seeing that step up to 125 and 25. Yeah, that's about where we're heading. So again, we're, you know, again, one of the big, big, you know, rocks here is the SPY-6, and there are a number of cards, right? So we have the first cards already being made at Tulsa, and that's, you know, that's, you know, just those cards alone are, you know, 15, 20 million a year, right? So we have those going, but we've got two other layers of cards that are just, you know, they're in, they're in Andover, you know, it's tough to get them over here. We're working, right? You know, initially, we get all the material from them because they get all the inventory, right?

Yes that survives.

So again.

Again thats.

One of the Big Big rocks here is the <unk> six and Theres a number of cards right. So we have the first cards are already being made at Tulsa.

Just those cards are lower $15 million to $20 million a year right. So we have those going well we've got two other layers of cards that are just there.

They are in Andover, it's tough to get them over here, we're working right.

Initially we get all the material from them because they've got all the inventory right. So our revenue was tamped down a lot, but a breakthrough.

Stephen G. Oswald: So, our revenue is tamped down a lot, but once they break through, we're feeling very good about 2024 on these changes. It's just, you know, it's great business, but unfortunately, coming out of a big OEM, it's a bit of a long time coming. I'd like to highlight again, our defense backlog is the highest it has ever been in the last few years. So yes, we've had some decline in the current year, but the backlog is at its highest, and that's kind of a two-year look at our backlog numbers, so that's a good position to be in. Yeah, no, no, notice that.

Breakthroughs and feeling very good about 2020 for these.

These changes it just it's great business, but unfortunately coming out of our big OEM, it's a bit of a long time coming.

Got it got it and then just.

Highlight again.

Our defense backlog is.

As it has ever been in the last few years. So yes, we had some decline in the current year, but as the backlog is advise and thats kind of a two year look.

In our backlog numbers, so thats a good position.

Yeah, No no notice that yes definitely positive there and then just I guess, what's the level of conservatism or prudence that you've sort of built in for the Max in 2004 can even give us some sense of what youre delivering two to spirit, what youre assuming.

I know.

<unk>.

Some several commentary from Boeing about lower first half picking up second half, but where exactly are you guys and what are you embedding.

Yes, I hate to say a little bit.

We target Dave so.

Stephen G. Oswald: Okay. So, you know, we're seeing better things, ramping up a little bit of spirit at Boeing. And now things are, as you know, from the reports for January, we feel that too, right? But, you know, we're probably, speaking for Saman here, we're probably in the 32, 34 range, right? For 2024, I'd say, right? Yeah. 34.

We're seeing better things ramping up a little bit of spirit Boeing and now things are as you know from the reports on January we feel that too right, but we're probably.

I'll speak for some on here were probably in the $32 34 range right for 2020 for it I would say, yes 34.

Stephen G. Oswald: Yeah. Yeah. 34.

Stephen G. Oswald: We'd like to see it higher. But, you know, again, we have to, I think, there's momentum is just going to push us forward. You know, hopefully, after we get through this FAA audit, and rightly so, right. But, you know, we're, we're being a little modest right now, but we certainly expect things to ramp up. The good news is Mike, we have the capacity, and we have the people. We just need the orders. Yep, yep. It makes sense.

34, we'd like.

But again, we have the.

I think this momentum is just going to push us forward hopefully as we get through this FAA audit and rightly so right but.

We're being a little modest right now, but we certainly expect things to ramp up the good. The good news is Mike we have the capacity we have the people we just need the orders.

Yes, yes makes sense.

Michael Ciarmoli: Okay, perfect. I'll, I'll jump back, y'all get back. Thank you, Mike. And I'm showing no further questions.

Okay, perfect I'll jump back in the queue and then finally, Joe I'll get back in.

Yes.

Thank you Mike.

Thank you Michael.

And Im showing no further questions I would now like to turn the conference back to Steve Oswald for closing remarks.

Stephen G. Oswald: I would now like to turn the conference back to Steve Oswald for closing remarks. Okay, all right, let me finish up here. So, look, I just want to thank everybody for joining us today. You know, obviously, we had a very, very good year in 2023. I'm thrilled that we're able to break through our record last established in 2012, and we're marching towards our 2027 commitments, and we're building more engineered products, and we're driving more aftermarket, and we're cleaning up our contract manufacturing, and taking costs out of that, and driving, hopefully, a much better day once we get these two factories closed, and I believe that's going to be the case. So We would, again, thank everybody for their support, and I want to, again, thank our employees for all their hard work in 2023. Thank you. And this concludes today's conference call. Thank you for participating. You may now disconnect.

Okay, all right, let me finish up here. So look I just want to thank everybody for joining us today.

Obviously, we had a very very good year in.

In 2023, and I'm thrilled that we're able to breakthrough our record last established 2012, and we're marching towards our 2027 commitments and we're building more engineered products and where we're driving more aftermarket than you are cleaning up our contract manufacturing and taking costs out of that and driving hopefully.

Much better today once we get these two factories closed and I believe that's going to be the case so.

Looking forward to a great year ahead, we again, thank everybody for their support and I want to again, thank our employees for all their hard work in 2023. Thank you.

And this concludes today's conference call. Thank you for participating you may now disconnect.

Q4 2023 Ducommun Inc Earnings Call

Request a DemoDemo

DCO

Ducommun

Earnings