Ducommun Incorporated (DCO) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to the 2020 Annual Meeting of Ducommun Shareholders. At this time, I would like to turn the conference over to Mr. Stephen G. Oswald, the Chairman, CEO and President of Ducommun Incorporated. Please go ahead, sir.

Well, thank you, and good morning, ladies and gentlemen. I want to welcome you to the 2020 Annual Meeting of Ducommun Shareholders. Thank you for joining us today. I am Stephen G. Oswald, Chairman, President and CEO. Due to the COVID-19 pandemic, we made the decision last month to hold our first virtual annual meeting, and my hope is it will be effective for all our attendees. You have heard me say, the safety of our employees, and today shareholders as well, is the #1 priority, along with following local and state health guidelines. As is our custom, we will conduct the business portion of our meeting first and answer questions near the end of the meeting. Though we may not be able to answer every question, we would do our best to provide a response to as many as possible. It is now shortly after 9:00 a.m., okay, on May 6, 2020. And this meeting is officially called to order. Before we begin the formal business of the meeting, I'd like to make some important introductions. First, your Board of Directors: Richard Baldridge, President and Chief Operating Officer, ViaSat, Inc.; Gregory Churchill, retired Executive Vice President, Rockwell Collins; Shirley Drazba, retired Corporate Vice President, Product Launch Strategy and Innovation, IDEX Corporation; Robert Ducommun, Business Adviser; Dean Flatt, retired President, Defense and Space, Honeywell International Inc.; Jay Haberland, retired Vice President, United Technologies. Also at this time, I would like to acknowledge Mr. Robert Paulson, our Lead Director, who will be retiring from the Board today following the meeting. Bob has been on the Board since 2003. And on behalf of the Board and the company, I would like to sincerely thank Bob for his many years of valuable leadership, guidance and contributions. Bob is also a great colleague to work with, and I want to wish him all the best. Next, I would like to recognize the members of our corporate management team: Suman Mookerji, Vice President, Strategy, Acquisitions and Integration; Rose Rogers, Vice President and Chief Human Resources Officer; Jerry Redondo, Senior Vice President of Operations; Raj Tata, Vice President, General Counsel and Corporate Secretary; Chris Wampler, Vice President, Interim Chief Financial Officer and Treasurer and Controller and Chief Accounting Officer. We're also joined here today by representatives of PricewaterhouseCoopers, our independent accountants: Scott Thompson, partner; Amanda Neal, senior manager. Finally, the company has appointed Mr. [ Richard Liza ] to act as inspector of elections. Mr. [ Liza ] is with us today and took the oath of inspector of elections in advance of the meeting. Prior to the formal meeting being adjourned, we will provide time for general questions. Only validated shareholders may ask questions in the designated field on the web portal. As considerations for others, please limit yourself to one question. Please also note that this meeting is being recorded. However, no one attending via webcast or telephone is permitted to use any audio recording device. Finally, and before we move to the formal business of today's meeting, I would like to call your attention to the rules of conduct and procedures, which are in place to ensure a fair and orderly meeting for all shareholders. You can access the rules of conduct in the meeting materials section of the web portal. We appreciate your cooperation in observing the rules throughout the meeting. Mr. Tata will now confirm proof of notice of the meeting and that a quorum is present.

Thank you, Mr. Oswald. The Board of Directors fixed March 9, 2020, as the record date for determining shareholders entitled to vote at this meeting. An affidavit has been delivered attesting to the fact that either, number one, a notice of Internet availability of the notice of meeting, the proxy statement and the 2019 annual report to shareholders; or two, the documents themselves were mailed on or about March 20, 2020, to all shareholders as of the record date and will be incorporated into the minutes of this meeting. The shareholder list shows that as of the record date, there were 11,641,809 shares of common stock outstanding and entitled to vote at this meeting. In addition, we're informed by the inspector of election that there are represented, in person or by proxy, shares of common stock representing 10,778,872 votes or approximately 92.58% of the voting power on the record date. Since this represents more than a majority of the voting power of all issued and outstanding stock entitled to vote on the record date, a quorum is present for the purposes of transacting business. Finally, I can also confirm that consistent with Delaware law, a list of the shareholders entitled to vote at this meeting is available for inspection on the website used to access this meeting.

With that, we will now proceed with the formal business of the meeting. And I hereby declare the meeting has been duly called and that business may be conducted. Proposal 1 is the election of directors. The Board of Directors has nominated Richard A. Baldridge and myself, Stephen G. Oswald, for election as directors to hold office until the 2023 Annual Meeting of Shareholders or until our successors are duly elected and qualified. The Board of Directors unanimously recommend that you vote for Mr. Baldridge and myself. Proposal 2 is the advisory vote to approve the compensation of our named executive officers as described in the proxy statement. While this is a nonbinding vote, the Compensation Committee and the Board will certainly take the results of the vote into account when making future compensation decisions. The Board of Directors unanimously recommends that you vote for proposal #2. Proposal 3 is the approval of the company's 2020 stock incentive plan to, among other things, increase the number of shares reserved for issuance by 429,030. The increase will provide the company the continued ability to grant stock awards to help attract and retain employees and compensate the members of the Board. The Board of Directors unanimously recommends you vote for approval of the 2020 stock incentive plan. Proposal 4 is to ratify the selection of PricewaterhouseCoopers LLP as the company's independent registered accounting firm for the year ending December 31, 2020. The Board of Directors unanimously recommends you vote for ratification of the selection of PricewaterhouseCoopers as the company's independent registered public accounting firm for 2020. It is now 9:10 Pacific Time, on May 6, 2020, and the polls are now open. Any shareholder who has yet to vote or has not yet voted or wishes to change their vote may do so by clicking the voting button on the web portal and following the instructions there. Shareholders who have sent in proxies or voted via the telephone or Internet and do not want to change their vote do not need to take any further action. We'll now pause for 30 seconds. [Voting]

Now that everyone has had the opportunity to vote, I hereby declare the polls for the 2020 Ducommun Incorporated Annual Shareholder Meeting closed at 9:11 a.m. Pacific Time on May 6, 2020. May I please have the report on the vote?

We have been informed by the inspector of election that the preliminary vote report shows that with respect to proposal 1, the nominees for election to the Board, Mr. Baldridge and Oswald have been duly elected. For proposal 2, the compensation of the named executive Officers has been approved by advisory vote. With respect to proposal 3, the 2020 stock incentive has been approved. Finally, for proposal 4, the selection of PricewaterhouseCoopers as the company's independent registered accounting firm for the year ending December 31, 2020, has been ratified. We will be reporting the final vote results on a Form 8-K to be filed with the Securities and Exchange Commission within 4 business days of the date of this meeting.

Thank you, Mr. Tata. Now we'd like to open things up for shareholder questions. Please follow the instructions provided on the virtual meeting web portal to submit your questions. We will attempt to answer as many questions as time allows, but only those that are germane to the meeting will be addressed. Okay. So we do not have any questions. So I will move on to the end of the formal business. So there being no further business to come before the meeting, 2020 Annual Meeting of Shareholders of Ducommun Incorporated is now adjourned. Okay. With that being settled, I will now provide some brief comments on the company for the year 2019. So I'll get right into it here. So again, I want to thank everybody for joining us today. Just a few comments on 2019. First, a real highlight was our 170th year. Founded -- the company was founded in 1849. We had, I think, an excellent celebration of the legacy of the company, the legacy of our founder, Charles L. Ducommun. And we're looking forward to many, many years ahead. Some real financial highlight is our revenue grew approximately 15% year-over-year, $721 million in 2019. That's up almost $100 million from $629 million in 2018. A terrific year. Also, our net income grew 40% year-over-year, $32 million in 2019, up from $23 million in 2018. So all the hard work in 2017 and 2018 really came through in 2019 as well as some tough decisions on restructuring. The stock price was rewarded even though it's different now. The stock price increased 39% in 2019, and we closed the year right above $50 a share. So I think that was a great effort in 2019. We also closed a very important acquisition of Nobles Worldwide in October, a leader in ammunition handling system. So really a great effort there, and I think it's going to pay dividends for many years. Customers also said yes to Ducommun. Our backlog increased to an all-time record at the end of the year to $910 million. And as most of you know, we're headquartered in Orange County, California, and we were honored and listed on the Orange County Business Journal's 2019 List of Fastest-Growing Public Companies. So that was a nice highlight as well. So lots of great things happened in 2019. Also, I'll just mention our STEM on the Sidelines program, which we do in local communities. We had another -- it was our second year. We had a really nice program again this year for high school students, and it was a real success. If you look at the company, I think in times like these, our balance is really going to be helpful. Top level of our company, we have, obviously, our fixed-wing aircraft. Then we have a diverse set of defense products, and then we have our commercial and military rotary aircraft. So through 2019, this really showed a great balance. We both had growth extensively in commercial aircraft, but also we had very good growth, especially in bookings on the defense side. So I think a really nice year, nice effort. We talked about why Ducommun and what are we really doing here for strategy and how we're going to make a difference. I mean if you look at our products, we really have, I believe, a lot of defendable niche processes and products. We continue to improve our financials. Even though this year is going to be a bit of a dip because of the situation in commercial aerospace, our long-term prospects, I think, are excellent. And we continue to sharpen our business strategy, really around those niche products and processes, gain share through our performance and most important, our people. I think we've done a lot of work over the last couple of years with our people, our leadership, our engagement and our culture. And I think investors should be very pleased with the performance and the progress we've had over the last 3 years, especially in the area of people. If you look at the business in 2019, our revenue, pretty much split half and half between military and commercial aerospace. So a really good balance here. Still a little bit of industrial in the business, which tends to be mostly medical products, and that's going to continue to be less and less as we move forward in the revenue. The backlog is a great start. As I mentioned, $910 million at the end of the year, all-time record. If you look at the split there, a little bit heavier on military and space, and we're seeing that obviously this year in our numbers. But a nice balance. We have to manage the backlog this year, again, with commercial aerospace. But I think overall, eventually, we're going to come out of this. On the commercial side, we have a very strong titanium business as well as other things. And even though the rates might be down, we're excited about the share gains, especially at companies like Airbus, and we continue to pursue that. We have our performance centers, as I mentioned in the past, and we're proud of our footprint as far as how things are set up. And certainly, as the time goes forward, we build the business, we're going to see the benefits of scale. Just for an overview. We have our Electronic Systems business, which includes our engineered products as well as all of electrical products as well throughout the Midwest they're built. And they're seeing terrific growth with the defense business. On the structural side, we do a mix of defense and commercial aerospace. We're certainly seeing some strong orders in Apache and lots of other things I've mentioned in the past. Again, we're a bit challenged this year on commercial aerospace, as everybody knows. But again, we have some great franchises. We certainly have the top performance in the industry in delivering quality. And I must say, 2 years ago, we did not have that. So I think overall, it's very positive. And we're going to come out of this thing and, I think, be in fine-shape. I also just want to mention about our markets. Specifically, around defense, we see considerable upside on defense still as we move forward in time. The budget is certainly at a high point. We're not sure whether it's going to go any higher. But the big opportunity for Ducommun is the share. We're really starting to call our customers we haven't called on before. We're doing a lot of good things now with Lockheed. We're also getting involved in UAVs. I've talked about that last week. So I think that everything is pointing in the right direction for defense, and we're doing our best on commercial aero. And we'll continue to monitor that and continue to adjust accordingly. I do want to mention in my concluding remarks that as we go through this time together, I want to thank our customers, our shareholders and all of our business partners as we work through these difficult times. I also especially want to thank on this call today Ducommun employees. And as I mentioned last week, I'm proud of them and all their efforts, dealing with the many challenges of the pandemic. We have roughly 90% of our team members showing up every day in operations, and I'll stress, getting the job done for customers and our nation. I also want to thank their families for their support as in this, it's never really easy for loved ones to leave their home when shelter-in-place orders are current from the authorities. I also want to mention, as I did last week, the Ducommun Foundation is doing their part. We've pledged $1 million of donations for our local operations and the neighbors that we work with. And we've worked hard on that. We've given out $700,000, and now we have another $300,000 to give out in the next week or so. So we're trying to do our part as best we can as we go through this time. Again, just to wrap it up, though 2019 was a super year, and I think that it will pay off in the long term, we certainly have some challenge right now in commercial aero. But you can see that our defense business, I think, is strong. We're going to get through this portion of the downturn on commercial. We have great franchises like titanium and other things. So I'm very optimistic about the long term. And again, I want to thank our shareholders. I want to thank our Board, thank our leadership for all their efforts as we work through these challenging times and look forward to seeing shareholders -- seeing the shareholders down the road. And with that, I'll conclude the meeting. Thank you very much for your time.

Thank you for participating. You may disconnect at this time.