Welcome to the First Quarter 2021 Ducommun Earnings Conference Call. My name is Anna, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] I will now turn the call over to the investor relations advisor, Chris Witty. Chris, you may begin.

Thank you, and welcome to Ducommun's 2021 first quarter conference call. With me today are Steve Oswald, Chairman, President and CEO; and Chris Wampler, Vice President, Chief Financial Officer, Controller and Treasurer. 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. In addition, estimates of future operating results are based on the Company's current business, which is subject to change. Particular risk facing to common include among others, the cyclicality of our end-use markets, the impact of COVID-19 on our operations, our customers, the level of U.S. government defense spending, timing of orders from our customers, legal and regulatory risks, management changes, the cost of expansion and acquisitions, competitions and disasters, natural or otherwise. These risks and others are described in the annual report on form 10-K filed with the SEC and our forward looking statements are subject to those risks. Statements made during this call are only as of the time made and we do not intend to update any statements made in this presentation, except if, and, as required by regulatory authority. This call also includes non-GAAP financial measures. Please refer to our filings with the SEC for a reconciliation of the GAAP to non-GAAP measures referenced on this call. We filed our 2021 first quarter form 10-Q with the SEC today. I would now like to turn the call over to Mr. Steve Oswald for review of the operating results. Steve?

Okay. Thank you, Chris, and thanks everyone for joining us today for our first quarter conference call. As in our prior quarter calls, I hope you and your families are healthy, for those that have received vaccines that have went or is going well. And we all get through this pandemic as best and fast as possible. Today and as usual, I will give an update on the current situation at the Company, after which Chris Wampler will review our financials in detail. Company ratings focus first and foremost on the health and safety of our employees. Team has done an excellent job with the safety protocols put in place since March 2020. We continue to work with authorities on best practice throughout our operations. Now, the cases at Ducommun is roughly 200. Since the beginning of the pandemic, we have seen a significant drop-off starting in February of this year, and we remain diligent on communication with weekly updates through our human resources team. As mentioned in the press release two comments, First quarter results are strong despite the continued challenges and the commercial aerospace markets, which we're all aware of. All the actions, initiatives, and hard work since we began this journey in 2017 have shown strong operating results, especially since last March and again, in Q1. Our defense business continues to be the major contributor as we build out this important segment of the Company for scale, which includes having the right product portfolio, strong operating metrics, leveraging our lean, highly focused performance center concept. This particularly evident to continue margin strength for gross profit and adjusted EBITDA, despite the significant year-over-year headwind. The team also posted adjusted operating income margins of over 7%. Quality of earning too was very high, with the Company reaching GAAP, diluted…

Thank you, Steve. Good afternoon, everyone. As a reminder, please see the Company's 10-Q and Q1 earnings release for further description of information mentioned on today's call. As Steve discussed, our first quarter results were very solid. During Q1, we continued to demonstrate our ability to perform well at reduced volume levels, which we have had since the onset of the COVID-19 pandemic over one year ago. We're looking forward to leveraging the expected increase in demand for our commercial aircraft components and systems, as well as the strength of our defense business as we return to growth in 2021. Now turning to our first quarter results. Let me review some of the highlights. Revenue for the first quarter of 2021 was 157.2 million versus 173.5 million in the first quarter of 2020. The year-over-year decline reflects 25.2 million of lower revenue across our commercial aerospace platforms and a decrease in our industrial business, partially offset by 12.2 million of higher sales within the military and space sector. Comet's overall backlog at the end of the first quarter was approximately 810 million. As a reminder, we defined backlog as potential revenue based on customer purchase orders and long-term agreements with firm, fixed prices and expected delivery dates of 24 months or less. We posted total gross profit of 33.1 million for the quarter versus 36.8 million in the prior year period. While gross margins were essentially flat year-over-year, 21.1% in the first quarter of fiscal 2021 versus 21.2% last year, the headwind from significantly lower manufacturing volumes was largely offset by improved product mix and lower compensation and benefit costs. SG&A was 22.5 million in the first quarter versus 23.2 million last year, reflecting the Company's ongoing cost controls with streamlined operations. Comet reported operating income for the first quarter…

Okay. Thanks, Chris. Certainly proud of the results this quarter, and we look obviously forward as everyone does to better market conditions in commercial aerospace later this year. We've met our commitments despite some very difficult headwind. And this is really due to our people and leadership at the end of the day. I would add as well that we do have the right footprint, operating system, cost structure and discipline. We intend to performing at a high level and feel very confident in the future. As in the Q4 call, I also want to thank our customers, shareholders and all our business partners for their continued support as we worked through these difficult times together both last year and in Q1. I'll take this opportunity as well as, Chris mentioned, to let you know that the investor day I mentioned earlier in the year will take place on Wednesday, May 26 and start at 9 a.m. Pacific Time. I'd like to invite everyone to this important meeting, where we discuss our plans for the future, and appreciate your support in attending. In closing, I'd like to, again, take this time to thank the common employees that I'm proud of them and all their efforts dealing with the many challenges from the pandemic that began in 2020 and now will continue in Q1 2021. Our team never showed up at the operations every day, and, though stressful, they get the job done for our customers, our nation and for one of them. So with that, let's go to questions please. And thank you.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And we have a question from Pete Osterland from Truist Securities. Please go ahead.

This is Pete Osterland on for Mike Ciarmoli. So it looks like your operating margins took a step back versus the fourth quarter instructional systems despite sales being pretty flat there on a sequential basis. So I was just wondering if you could give some color on what drove this, if there was anything specific in the first quarter or just a change in mix or just any help you can give there.

Yes, Pete. No. Q1 is really -- with structures, it's all about the mix. Again, year-over-year, it was a nice change favorably, but sequentially, yes, that's what caused us a little bit of headwind there.

Okay. And then it looks like your backlog has stabilized in commercial aero over the course of the last couple of quarters. So I was just wondering how order flow is trending there and if you could be expecting to see any meaningful increase for commercial aero sales on a sequential basis in the second quarter, or if you think it's really just going to be in the second half before that materializes.

Pete, this is Steve Oswald, and welcome to the call, by the way. And certainly we're optimistic about our order flow the rest of the year, probably more leaning towards the second half of 2021, but we definitely anticipate that we're going to see orders go up. And I think overall, the story is going to be a very good one, not only a near term, but mid-term.

Great. And then just one more. I was wondering if you could comment on how your M&A pipeline is looking, if there are any areas you'd call out that are currently a priority and just what you're seeing in terms of available opportunities and valuations.

Sure. Well, look, we're active. We've been active. When I came in and took this role, we stood up our BD team and we have some excellent people running that function, and we're highly engaged in the market. We're looking at things. There's certainly a little bit less on the commercial side you would anticipate versus on the defense side, but we like what we see as we've done three deals since we started here in 2017. I think they've all been real winners. So we're careful about what we do, but we're certainly leaning in and we hope for something to maybe happen this year and we continue to work hard at it.

And we have a question from Mike Crawford from B. Riley. Please go ahead.

Steve, what, if any, program capture goals do you have in '21 similar to what you did with TOW missiles in 2020?

Yes. Can you say that again? I'm sorry, man. I got to turn the phone up a little bit in this room. Can you say that again, please? I apologize.

Yes. Just as you captured the TOW missile program from another competitor in 2020, do you have any goals you can share regarding additional program capturing this year?

Yes. I can't share it as far as we're constantly. I will tell you this, is that, and I think it's good news for investors, is that there are opportunities for us for the share shift, but we're only going to do it where we can really add value. Okay? And that's a case of the TOW missile. I mean, the days of us just competing on price are over, because generally it didn't work out so well. So I will tell you that we are active, not only share shift, but also offloading. That's another theme we're going to see more and more to common, is offloading from defense primes that we can pick up. And the nice thing is that we're able to make the TOW missile happen, and that's a significant project and it's not an easy part to make. So I think all of it's pointing in the right direction. And when we have something more material or significant, we'll let you know.

Okay. And then as your commercial line spin back up, is there a delay on when margins pick up as well? Or is it just primarily just a function of scale?

Yes. Mike, it's primarily a function of scale. I mean, there should not be a “delay”. I mean, we're just going to pick up efficiency as we leverage up and we're looking forward to that, because we're clawing back from a pretty significant fall back last year Q1, Q2. Yes.

Great. And this last question is -- excuse me?

Go ahead. No. Just say with that, I mean, it's not happening just yet. So as we work through this year, as Steve and I mentioned, that's what we're looking to see as we work through this year.

Okay. And then just the final question is how many different programs are you on with GA? Is it just one unmanned platform? Or is it multiple…

I can only say so much, because I've got to be respectful of GA. And if you know them at all, they asked me to be sort of high level on things, but we're on multiple core ramps.

[Operator Instructions] And we have a question from Ken Herbert from Canaccord Genuity. Please go ahead.

Yes. And Chris, I just wanted to first ask about cash in the quarter. I know the first quarter is typically seasonally soft, but free cash flow was a little bit lower this quarter than we'd expected and it looked like working capital had some pretty significant investments. Can you just talk about any particular programs that may have been driving the use of cash in the quarter, or if there was anything in particular that stuck out in the quarter on a cash standpoint?

Yes. Thanks, Ken. It's Chris, when you look at the cash, I mean, you were hitting on the right themes for sure. And it's all to support our growth, and we're looking out over the next few quarters. We're trying to line up what we need to build, what we've got the ability to build and to meet that customer demand to hit the sales growth that we're talking about, now as we go sequentially quarter to quarter. So that's where it related to the inventory and the unbilled. That's where some of that investment is done at this point, so that we can manage through a little stronger and meet customer demands the next couple quarters.

Can you just comment, Chris? Is it maybe more on the commercial side in anticipation of maybe max bill rates or is it still predominantly on the defense side?

Yes, no, more on the defense side. I mean, if you think about, so just the great question, if you think about the structure side and the commercial side, we certainly had a quick stop to a lot of the bills last year. So that's what left us with a little inventory, more inventory on that side of the business. So we've got that sort of as our jump off point as we hit the growth rate. Defense wise is where we've got a little more of that build coming at us that we need to keep ahead of.

Yes. Ken, this is Steve. It's definitely leaning towards the sense, I mean we're busy. And we're building things up, we've got a lot of new programs coming online, we're pretty active, so yes, it's leaning a little bit towards that as far as the cash at least to get started in the year.

Okay. And Steve, you made a comment early in your prepared remarks as you're building defense towards the right scale. Can you just share, maybe you'll get the purchase later on in May, but what do you view as sort of the minimum threshold in terms of scale for your defense business? I mean, you clearly put up some pretty impressive growth numbers, but how do we think about what you view as the right scale for this business to really get the leverage out of the model?

Yes. Look, I think I'm going to basically talk a lot more in May. I think that's the appropriate time. But I will tell you this, that we have our performance center concept, right? So we have performance centers that make harnesses, performance centers that make assemblies, make cards, those types of things. And we have a pretty good idea, at least the game plan, a certain way to get those centers up to scale, which is going to be, I think, terrific for, for investors and for our margins. So stay tuned. We'll have more and May, I promise.

Okay. Well, just one final question for me. If we look at electronic systems segment margins, you were down quite a bit from the first quarter of last year and I know the first quarter of last year was particularly strong, but can you just remind us anything in particular relative to a year ago, and then how we should think about the margins in that segment, sort of get back to the run rate here in the second quarter, or is it maybe a couple of quarters out?

Ken, this is Chris. Yes. Let me jump in a little bit here. So, so you're right. I mean, when you look at last year's Q1, everything sort of clicked right in to get us to our north of 15% margin, with our electronic segment in that quarter. When you get to this quarter and we sort of, as we went through the year, started to say, historically, we were looking at 10%, 11%. And then as we continue the journey, now it's more 11%, 12%, 13%, even though 15 was sort of the outlier. You get to this quarter, it wasn't a perfect one in terms of mix, but it also, we did have some significant weather in the Midwest in the middle of the quarter one in February. And we had quite a bit of downtime that was there as well, that had an impact. So a couple of those things sort of led us to that point, but as we move forward, Ken, we should be thinking about that 11% to 13% is sort of the range. And like we've talked about with these segments, it doesn't take a lot to sort of move around. So that's why we've got that range out there.

Yes. Ken, this is Steve. Yes, so the polar vortex was real for Ducommun. Okay. So that was real for us in February, unfortunately, so, impacted a lot of our operations.

So I guess there is some trade off when you think about Kansas and other locations relative to Southern California. Right, Steve?

So there's a few that comes to mind, Ken, there's a few.

[Operator Instructions] And at this time, there appears to be no further questions in the queue. So I'll turn it back to Mr. Oswald for any closing remarks.

Okay. Well, let me wrap it up here. First again, I want to, I want to thank everybody for joining us for the first quarter call. We're certainly looking forward to better days and we know they're coming. In opening remarks here, our focus, through this whole thing has been employee safety first and foremost. And I think that for overall, we've done a really, really good job. I just want to thank you for your support. We're working hard here to comment and we're looking forward to better days. And again, we appreciate your interest and your time today on the phone.

Thanks, everyone.

Thank you.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.