Ladies and gentlemen, thank you for standing by, and welcome to the Ducommun Second Quarter Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your moderator today, Mr. Chris Witty. Thank you. Please go ahead.

Thank you, and welcome to Ducommun's 2020 Second Quarter Conference Call. With me today are Steve Oswald, Chairman, President and CEO; and Chris Wampler, Vice President, Interim Chief Financial Officer and Treasurer and Controller and Chief Accounting Officer. I'm going to discuss certain limitations to any forward-looking statements regarding future events, projections or performance that we may make during the prepared remarks or the question-and-answer 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 Federal 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 be correct. 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, among others, the cyclicality of our end-use markets, the impact of COVID-19 on our operations or 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 and competition. These risks and others are described in our 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 of the time made, and we do not intend to update any statements made in this presentation except if, and as, required by regulatory authorities. This call also includes non-GAAP financial measures. Please refer to our filings with the SEC for a reconciliation of the GAAP to non-GAAP measures referenced on this call. We filed our 2020 second quarter Form 10-Q with the SEC today. However, the SEC is having some technical difficulties. So you may not be able to currently view it on their website. Please continue to check, as they are working on it. I would now like to turn the call over to Mr. Steve Oswald for a review of the operating results. Steve?

Well, thank you, Chris. And thanks, everyone, for joining us today for our second quarter conference call. I also hope that you and your families are healthy and continuing to get through this pandemic as best 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. The company remains focused, first and foremost, on the health and safety of our employees. The team has done an excellent job, and despite facilities around the country, and quite a few in Southern California, the impact has been mostly zero and the amount of positive cases across the company less than 25. We also continue to remain diligent on communication and ensuring best practices are followed in all facilities to sustain this performance. Ducommun's second quarter results were strong in light of the unprecedented challenges due to the pandemic in the commercial aerospace markets. As mentioned in our April call, the reasons for the strength is that since 2017 the team has been improving all of our operations, developing and rationalizing the product portfolio, driving new technologies, focusing on providing high value to customers, along with pricing, developing an effective cost structure with a flat organization and making 3 strategic acquisitions. This has been particularly evident in the revenue and order progress over the last few quarters for Ducommun's defense business, along with the overall margin performance for the company. The company's second quarter revenue was down 18.4% year-over-year, all due to the commercial aerospace markets and in line with our communication and expectations. Ducommun's defense business, however, showed great strength, being up 23% versus prior year. Though not ever wanting to show negative growth, the revenue number is impressive, from not only the virus…

Thank you, Steve, and good afternoon, everyone. As a reminder, when it shows up on the SEC website, you can see the company's filing, along with the Q2 earnings release that is already out there, for a further description of information mentioned on today's call. As Steve discussed, we were pleased with our overall second quarter results, particularly during a global pandemic that has severely impacted commercial and aircraft demand. We remain confident that our ability to flex production at our performance centers while leveraging ongoing strong demand within the military and defense sector will serve us well, going forward. Now I'll move to the details of our overall results. Review of the second quarter 2020. Revenue for the second quarter of 2020 was $147.3 million, versus $180.5 million in the second quarter of 2019. The performance reflected $17.4 million of higher sales within the military and space sector, offset by $51.6 million of lower revenue from our commercial aerospace customers. As Steve discussed, nearly all of our commercial platforms have been negatively impacted by lower demand due to COVID-19. Ducommun's overall backlog at the end of the second quarter was approximately $831 million. Growth in the military and space sector continues to drive a sustained solid base of business. As a reminder, we define backlog as a 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 strong gross margins for the quarter, as gross margins rose to 22.2%, from 21.1% in the prior year's comparable period. The increase year-over-year was due to favorable product mix and lower compensation of benefit costs. Gross profit fell to $32.7 million, from $38.1 million last year, due to the lower commercial aerospace revenue. We continue to focus…

Okay, Chris. Thank you. Well, certainly, first, I hope we have provided some important information today as we work through 2020. Again, I thought the second quarter was strong despite the challenges and believe we have a lot of runway ahead in the long term. I'd also add that we do have the right footprint, cost structure, discipline and operational leadership and experience to continue performing in the face of the current crisis. I also want to thank our customers, shareholders and all of our business partners for their continued support as you work through these difficult times together. We've also given out now $1 million to the local area charities where we operate to help our neighbors and communities. In closing, I would like to again this quarter take this time to tell Ducommun employees that I'm proud of them and all their efforts dealing with the many challenges from the pandemic. Our team members show up at our operations every day and, though stressful, get the job done for our customers and nation. With that, let's turn it over to some calls, please. Thank you.

[Operator Instructions] Your first question comes from the line of Ken Herbert from Canaccord.

Steve, I just wanted to first ask, sequentially margins in the Structural Systems segment showed a really nice increase. Was that mix predominantly? Or was there anything else going on, obviously, with the down volume?

I'll take that one. So on Structures, Ken, it was a couple of things. Mix was a big part of the play, for sure. If you look sequentially, Q1 was sort of a perfect storm in terms of we came into Q1 where we had demand that during that quarter started to get pushed out with Boeing and Spirit, and the pandemic was sort of hitting right there at the end as well. So we had a lot of ripple effect on the costs and being able to absorb as cleanly as we'd like, certainly in Q1. Along with the mix, that put us in a tough spot for the number in Q1, and that's why that margin for Q1 was lower than it had been for several quarters. And then in Q2, mix changed a little bit. That certainly helped us. But also some of the initiatives and sort of the realignment and flexing that was taking place during Q1, at the end of Q1, and as we got into Q2 helped clear the path for a better performance.

Ken, we're obviously day-to-day, week-to-week managing costs and driving productivity. And I think we have a -- the way we have it set up with these performance centers, we're able to react quickly and move cost out as appropriate.

Okay. That's great. And as I look at the revised outlook for the second half of the year, I think coming out of the first quarter you were sort of talking about top line down 10%, and now it's sort of mid- to high-teens between the 2 quarters. Is that exclusively the MAX? Or is there anything else that's maybe come out of the schedule or maybe helped offset the MAX relative to first quarter?

So look, we talked to you on April 30. And being we're in this situation I felt it was appropriate, where we really didn't give that in the past, to be a little more granular. And as we said, we were going to be 16% to 20% down in Q2; we came in at 18.4%, which is pretty much where we were. On April 30, Ken, we still had $216 million in the book for Spirit. And as you know, by the middle of June that changed. Okay? So when we looked at it, we're really again going to be 16% to 20% down. That's the best effort we can give right now. And then we're going to get a little better in Q4, 14% to 18%.

I appreciate the guidance. It's very helpful, Steve. And just one final question. Have you adjusted your schedules yet to reflect the sort of downward revisions from Boeing on the 787? Maybe if you can just talk about sort of what level you're shipping at, at that program or how much of a headwind that could be for you over the next couple of quarters.

That's one of the big context, I feel. Look, we've had a great run since I showed up in 2017 and through 2019 on the MAX and the 737 NG, and that was all terrific. Obviously, lots of things have changed, as you know. We are managing it both with Boeing and Spirit. We really have adjusted our order books and our production down. So when we give you this information for the second half of the year, we feel good about it.

Next question comes from the line of Michael Ciarmoli from SunTrust.

Just to go back to and maybe stay on the margins a little bit, obviously, the good sequential improvement in Structural Systems. But what's been the biggest -- if you look at that original forecast, April 30, you had that 5.5% to 6%, and now you've raised that in second half. Is that just more cost takeout? Has anything changed with mix regarding the defense profile? Anything else that's changing from a margin standpoint? Or are you guys just taking out more cost or taking out cost more aggressively?

It's a combination. So the cost takeout that we did as we entered Q2 helped, and we got to sort of see what that meant to us. And then there have been additional activities because, as everybody is talking about, it's been a very dynamic scenario. And so that has been certainly a part of it. But also it's just seeing the sustainment of -- seeing how Structures react to that and sort of where they can come back to, along with this additional defense business and what that will do for us. So I think it's a combination, and it's what will be if we keep working it as we move through the second half of this year.

Mike, let me add one thing. I think the other story here is that, and I know other companies had to do what they've had to do, but we did a major restructuring back in November 2017. And as you go forward through time here, we really have a flat organization, especially at corporate. And I think we have an effective organization in that spirit. So that's the other thing that's happening this year, is that it's paying off that we really haven't had a lot of cost back since that November 2017 restructuring.

Got it. And you've mentioned value-based pricing a couple of times on this call already. Anything, especially as rates have gone down, have you been able to -- I know on the way up with rate, all we kept hearing about was partnering for success, pressure on rates, the higher volumes. Anything you can get back on pricing? Or have you in the commercial side? It sounds like you're getting on the defense side.

I'm not going to go into specifics, but if you look at our strategy and where we've been and kind of where we're going, we're heavily into titanium, we're heavily into other types of processes where they're sought after, a little less competition, and we're really driving that. And quite frankly, as I've mentioned in my remarks, we've gotten a lot better the last few years on operations. So our customers are very happy with us.

Got it. And then just on the backlog, specifically the commercial aerospace side, is that -- have you guys actually seen order cancellations from customers? Is that you guys just how you calculate the backlog based on production rates? Or what was really driving the backlog erosion there? Is it more customer adjustments and cancellations?

So we do have -- so there's a couple of questions I think embedded in there, Mike. But the first thing is it's the actual purchase orders that we have in there and the demand that we have in there from the customers. There's constant conversation with them. What have we seen this quarter that's a little different than many other quarters? More conversation about pushing some things out, whether it was the rate changes that Steve alluded to or others. So I think not cancellations in terms of anything of any magnitude, but more some push-outs that have happened. But by and large, it's a tough market and we're dealing with it.

And Michael, let me just add on here. The whole -- I think it goes all into my remarks earlier about in the spirit of cancellations. Like I said, with titanium and a lot of things that we do, is that we're in great market position there. So we do have to make some adjustments. We're fairly conservative with our backlog, and I think that's a good thing. But the other, I think, story here is to break $0.5 billion in defense backlog for the first time is a big deal.

Agree. And maybe I'll just ask one more, on defense since you brought up that. The win with General Atomics, and you called out Predator, can we assume this might be, maybe I'll use this term loosely, but tip of the iceberg? Do you have more options within the General Atomics portfolio? I know they're working on some lower-cost drone technology now. But do you think you can further penetrate them after this win here?

Yes, we absolutely do. And I know on April 30, Mike, you asked me who the customer was and I couldn't tell you. So at least I gave you General Atomics this time. Okay, pal? First of all, we're thrilled. GA is a leader, and we're building some great relationship and some great things there. And we think we've got lots to go there, and we think they're a terrific customer to be with.

Next question comes from the line of Mike Crawford from B. Riley.

On the gross margins, is that an all-time record? I went back and the highest I could see was 21.7%, back in the second quarter of 2010.

I believe back in the -- a little earlier back in that decade, we would have popped one a little bigger. But this is certainly since the LaBarge acquisition in 2011, this is a high watermark with a lot of things clicking in now.

And Mike, per my remarks, I just want everybody on the phone to understand, this doesn't happen by accident or just all boats are up in the defense industry. We put a lot of time in, in the last couple of years, to my remarks earlier, to really put us in the position where we're delivering these margins despite some real tough news on the commercial aero side.

Okay. That's great. And just regarding “not by accident” with the increase in working capital, the inventory is up. Was that not by accident? Is that to plan for some of these new military programs? Or is that more of a function of Structural slowdown, where you were gearing up for a certain number of units on the 737? And where do you want to see these accounts, going forward?

So the answer there, Mike, is a little bit of both. So we have certainly some places where we are on new programs or we're building up, to some extent. But definitely as we went through that turbulent Q1 into Q2 period, there was expectation, and certainly we have a lot of long lead time material that goes into being able to build some of the complex components. And turning that off correlated to the demand change can have some leakage there as well. So where do we want to go? We certainly would like to, as Steve alluded to, we're not showing terrific growth here in the second half of the year. So we would like to be able to manage the inventory appropriately as we go through the year.

Okay. And then final question just relates to Guaymas, how that might affect VersaCore deliveries to Airbus and the status of VersaCore manufacturing, in general.

So to circle back on Guaymas, again let's break it into 2 pieces. There's a lot of secondary operations that we've done down there for years since we've had a presence in Guaymas. And for those, we have capabilities back in the plant where the primary operations were coming from. So literally, it's just redeploying where we're going to finish that product out. The part that relates to VersaCore, there has been some investment that's been done there. And in that case, we are retooling at one of our other facilities here in Southern California and getting back online as quickly as we can. And in doing that, we do not view there being a significant change in being able to hit what we need to do to deliver for [indiscernible] on it.

And Mike, let me just chime in here. Look, as you know, and I know you follow at VersaCore, look, we're very upbeat about it. The other thing I'll mention is that the GM for the business as well as certain members of his team are actually -- they're based out of Gardena, California. So that was the other thing, where we do have -- we certainly are disappointed and of course glad no one got hurt, but we're able to move pretty quick with the Guaymas production and we're going to work out of this thing fine.

[Operator Instructions] And you have a follow-up question from Ken Herbert from Canaccord.

I just had a couple of quick follow-up questions. The first, on Nobles, can you remind us again maybe what the contribution to growth was in the quarter from Nobles? And how has that acquisition been going? It seems like there's been some opportunity for them to maybe take some share or grow a little faster than you anticipated. Can you just maybe comment on that specifically a little bit?

Ken, this is Chris. I'll address it. So with the acquisition and the size of the acquisition, similar to LDS and similar to CTP, small enough, we didn't put in a lot of information related to their size of financial statement. So as those 3 tuck-ins' have come in and as Noble's has come in, certainly, that's a nice help to our Structure story as we move forward. But there's no specific dollar amount sort of thrown in there. Having said that, the acquisition has gone very smoothly. And we have been very happy with not only them continuing on with the way that they were preacquisition, but also them finding ways to grow. And Steve alluded to the Clouded Leopard, but there are some other ways there, too, that they're going to continue to find ways to grow. We believe that they will grow even quicker than what we thought at the time of acquisition.

Ken, let me just chime in as well. So look, Nobles' legacy has been on aircraft, okay, and marine. Now we're moving into ground vehicles and, obviously, the Clouded Leopard and some other things. So it's been going very well. This ammunition shoot business is something that we've -- we're the market leader. So we're driving it, and we're absolutely -- I think they're going to have great things in 2021 as well. So it's all thumbs-up for Nobles.

That's good to hear. And Steve, since you've been there you've done roughly sort of an acquisition a year. I'm just curious if you can comment on sort of what you're seeing now in terms of activity and opportunities and maybe how the pipeline looks and maybe the period of time until things maybe start to normalize a little bit.

Sure, Ken. Thank you. So there is a pipeline. Okay? So we are active. I think one of the best things we did was bring in Suman Mookerji. Suman leads the BD department and a lot of experience, ex-UTC and worked with me at KKR as well. And so I think we've got the right process, we've got the right people. The pipeline is okay. Certainly, we're looking at things. As far as our cadence, and I think that we want to be aggressive and we want to lean in, but we don't want to rush. And I think if we look at the last, our last 3 deals, they've all worked out really well for shareholders and for the company and for just in general. So our cadence is if we find something we like, we go after it. We have a pretty successful record for being able to close over the last couple of years. So more to come on that, Ken. Okay? It's important to us.

I know. It's been obviously a big part of the success over the last few years.

It's been a big help.

Yes. And if I could, just one final question, Steve. There's been some suppliers that have been talking about the new, I guess, what they're calling the premier bidder program from Boeing. And I'm just curious, I know obviously it's not a sort of a complete PFS-type replacement. But I'm curious if that's something you've had discussions on, if maybe you've signed up for that, or how you're viewing that and maybe some of the opportunities to invest a little more for maybe an uptick on some volume.

Ken, just to know, we haven't had any conversations with Boeing yet on that.

At this time, there are no further questions in the queue. So I'll turn the call back to Mr. Oswald for any closing remarks.

Okay. All right. Well, thank you very much. I just want to again wish everybody good health for yourself and for your families. And we certainly hope things when we talk to you next time, things will be better on the pandemic front. I just want to wish everyone again a good evening, and we'll look forward to speaking with you again soon.

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