Good afternoon, ladies and gentlemen, and welcome to the Ducommun second quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touch-tone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Chris Witty. You may begin.
Thank you. Welcome to Ducommun's 2019 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, 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 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 Federal Private Securities Litigation Reform Act of 1995 and therefore are 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 level of U.S. government defense spending, legal and regulatory risks, management changes, the cost of expansion and acquisitions, and competitions. 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 as of the time made, and we do not intend to update any statements made in this presentation or call, 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 non-GAAP measures referenced on this call to the most similar GAAP measures. We filed our Form 10-Q with the SEC today, and you will find a link to all our filings on the company's website under the investor relations tab. I would now like to turn the call over to Mr. Steve Oswald for a review of the operating results. Steve, to you.
Thank you, Chris, and thanks to everyone who is joining us today for our second quarter conference call. As usual, I'll begin by providing an update on recent developments of the company, after which Chris Wampler, our Interim CFO, will review our financial results in detail. Second quarter was another one of accomplishment for Ducommun as we continued to benefit from strong business execution, growth on key platforms, a diversified customer base, and robust product demand. Revenue grew an impressive 16.6% year over year to $180.5 million, driven by higher shipments across a variety of large narrow-body platforms such as the Boeing 737 MAX, Airbus A320 family, as well as JSF, Raytheon missile platforms, and the Apache helicopter program.
Revenue related to the 737 MAX rose at a substantially higher rate year-over-year, reflecting the current build rates of 52 per month at Spirit AeroSystems and 42 per month at Boeing. While Boeing works to address the 737 MAX situation, we continue to communicate with them and are operationally ready to increase production if and when required. For Ducommun, with strong momentum in revenue and backlog across a variety of amount of customers, we do not expect any material issues to our top-line view of 7%-9% growth across our commercial aerospace and military platforms for the rest of 2019. For the second quarter, operating income was substantially increased on an adjusted basis by 23.7% from the prior year.
Gross margins also rose again this quarter to 21.1% compared to 20.7% last year, while Ducommun's operating margin was significantly higher by 390 basis points year-over-year to 7.5%. We posted as well $22.4 million adjusted EBITDA for the quarter, an increase of nearly 20% over the comparable period in 2018. This performance was driven by our Structures segment through the higher overall production rates, scale, and the many actions we've taken in the past to streamline the business. The Electronic segment margins were equal to the prior year. We ended the quarter with a backlog of $853 million, a decrease from the first quarter, primarily reflecting some order timing.
Our backlog remains near record levels for the company, underscoring our unique manufacturing services and technologies, engineered products, and strong customer relationships, both at the OEM and at the first-tier level. The team at Ducommun was also delighted with the announcement last week of our newly signed strategic supplier agreement with Raytheon Missile Systems. Being the first supplier to be selected by RMS for this initiative is an honor and a great step forward for a stronger relationship and higher revenue opportunities for the company in the future. This partnership will allow us to collaborate and compete on every RMS platform, either new or existing. That includes structural components, which will be a key growth area for the strategic customer in 2019 and subsequent years.
We also very much appreciated the recognition of our Monrovia, California, performance center being selected in July as a 2019 Raytheon Supplier Excellence Premier Award winner. This is our first major customer award for the company since 2017. We had very good activity, too, at the Paris Air Show, and saw both interest and enthusiasm for our products and services across the board. The show is always great to meet with customers, discuss future growth initiatives, and highlight our technology and value. During the show, we announced that the company was on track with its $200 million contract to supply Middle River Aerostructure Systems with LEAP engine nacelle components for the Airbus A320 platform using our proprietary VersaCore Composite process technology. This is a great development, and Ducommun team is working hard at our Guaymas, Mexico, facility to deliver on this important opportunity.
Now let me provide some additional color on our end markets, products, and programs. Beginning with our military and space sector, we posted second quarter revenue of $77.2 million, up nearly 10% over 2018, reflecting stronger sales across a number of missile and defense programs. We saw substantial growth in electronics for the Patriot missile, the Joint Standoff Weapon, or JSOW, the Chinook, Joint Strike Fighter, and F-15, along with various other applications for Raytheon and L-3. Given the recently passed federal budget outline for fiscal 2020, the market for military spending remains very strong, and Ducommun plays a key role on many of the most important defense programs. We ended the quarter with military and space backlog of approximately $366 million, which is close to record levels. Within our commercial aerospace operations, second quarter sales rose nearly 30% year-over-year to $92 million.
The growth was primarily fueled by large, fixed-wing, narrow-body aircraft such as the Boeing 737, Airbus A320 family, and new Gulfstream models. Our A320 business grew substantially year-over-year, and mostly all our Boeing platforms, including not only the 37, but 787, 777, and 767 all rose double digit as well. We also posted significantly higher sales to Gulfstream this quarter as the OEM ramps up production on its new models. In summary, our large fixed-wing business is seeing excellent growth, clearly highlighting the key platforms we serve, the value we provide, the overall market conditions, and continued operational improvement at the company. The backlog within our commercial aerospace sector stood at roughly $433 million at the end of the quarter, again, near record levels. We continue to be optimistic about the outlook for this part of our business, as well as the military market.
With that, I'll have Chris review our financial results in detail. Chris?
Thank you, Steve, and good day, everyone. As a reminder, please see the company's filings and today's press release for further description of matters under discussion during the call. I'll begin with details of our overall results. Revenue for the second quarter of 2019 was $180.5 million, versus $154.8 million in the second quarter of 2018. This performance includes $20.1 million of higher revenue with our commercial aerospace customers due to increased shipments for key narrow-body platforms such as the Boeing 737 and Airbus A320, as Steve mentioned. $6.9 million of greater sales in the military and space sector, primarily reflecting strong demand for various military programs. Ducommun's overall backlog was approximately $853 million as of June 29th, down from last quarter's record amount.
As a reminder, the company defines backlog as potential revenue and is based on the customer placed purchase orders and long-term agreements with firm fixed prices and expected delivery dates of 24 months or less. Moving to gross profit, our gross margin was 21.1% in the second quarter versus 20.7% in the prior year's comparable period. The increase year-over-year was primarily due to favorable manufacturing volumes and favorable product mix, along with many streamlining measures taken last year, as previously discussed. SG&A was $24.5 million in the second quarter versus $21.2 million in 2018, with the increase primarily reflecting one-time severance charges and higher compensation and benefit costs. The company reported operating income for the second quarter of $13.6 million, or 7.5% of revenue, compared to $5.6 million, or 3.6% of revenue in the prior year period.
The year-over-year improvement was due to higher revenue and gross profit, as well as the impact of $5.4 million in lower restructuring charges, partially offset by higher SG&A expense. On an adjusted basis in the second quarter of 2018, operating income was $11.0 million or 7.1% of sales. The increase in the second quarter 2019 operating income versus 2018 adjusted operating income was $2.6 million, which is an increase of 23.7%. Interest expense was $4.4 million in the second quarter of 2019 versus $3.8 million last year due to greater utilization of our credit facility for the Certified Thermoplastics acquisition in April 2018, along with higher interest rates. The company reported net income for the second quarter of $7.8 million, or $0.66 per diluted share, compared to net income of $1.6 million, or $0.14 per diluted share for the second quarter of 2018.
The year-over-year increase was primarily due to $6 million of higher gross profit. Restructuring charges were also lower year-over-year by $5.4 million, partially offset by $3.3 million of higher SG&A, $0.7 million of increased interest expense, and greater income taxes of $1.1 million. On an adjusted basis in the second quarter of 2018, net income was $6.4 million or $0.55 per diluted share. The increase in the second quarter of 2019 net income versus 2018 adjusted net income was $1.5 million, which is an increase of 23.1%. Adjusted EBITDA for the second quarter of 2019 was $22.4 million or 12.4% of revenue, compared to $18.7 million or 12.1% of revenue for the comparable period in 2018, an increase of nearly 20%. Now, let me turn to our segment results.
Our Electronic Systems segment posted revenue of $89.3 million in the second quarter of 2019 versus $84.5 million in the prior year period. These results reflect a $5.9 million increase in sales to our military and space customers, slightly offset by lower revenue within our industrial end-use markets. Commercial aerospace shipments were relatively flat year-over-year. Electronic Systems posted operating income for the second quarter of $9.9 million, or 11.1% of revenue, versus $8.7 million or 10.3% of revenue in the prior year period. Excluding restructuring charges last year, Electronics' adjusted operating margin was also 11.1% for the 2018 second quarter. Our Structural Systems segment posted revenue of $91.2 million in the second quarter of 2019 versus $70.3 million last year.
The year-over-year increase was due to $20 million of higher sales across our commercial aerospace applications, particularly large airframe single-aisle platforms, and a slight increase in revenue within the company's military and space markets. Structural systems posted operating income for the quarter of $11.8 million, or 12.9% of revenue, compared to $5 million or 7.1% of revenue last year. Excluding restructuring charges and inventory purchase accounting adjustments, structures' adjusted operating margin was 12.7% for the 2018 second quarter. Corporate general and administrative expenses, CG&A. CG&A expense for the second quarter of both 2019 and 2018 was roughly $8.1 million, or 4.5% and 5.2% of revenue, respectively, for each year. The year-over-year results reflect the absence of $1.1 million in restructuring charges that were incurred in the second quarter of 2018 and the lower professional services fees of $1 million in 2019, partially offset by one-time severance charges of $1.7 million.
Turning to liquidity and capital resources, we generated $9.8 million of cash from operations in the second quarter of 2019, compared with $15.9 million during the second quarter of 2018. The decline year-over-year was primarily due to an increase in working capital investment to support growth, partially offset by higher net income. We expect more typical cash flow patterns for the remainder of 2019 and, excluding any unforeseen acquisitions, anticipate using cash to further reduce the company's leverage this year. In terms of capital expenditures, we spent $5.9 million during the second quarter and expect to spend approximately $16 million-$18 million during 2019 in total to support new program wins. We're once again proud of our quarterly performance, which puts us on track for solid results in the second half. I'll now turn it back over to Steve for his closing remarks. Steve?
Okay. Thanks, Chris. Okay, looking into the rest of the year, as mentioned earlier, we continue to be optimistic about our revenue growth, our solid margins, and backlog. I believe the company's in very good shape with strong momentum, which we always like to see in both revenue and earnings. Ducommun's innovative technology and the value we provide, along with our strong relationships, as I mentioned earlier, with Boeing, Raytheon, Airbus, Gulfstream, and many others in aerospace defense, I think, has positioned us well now and in the years ahead. Before we go to questions, I do want to also mention that August is the month we recognize the founding of Ducommun. We are very happy to be celebrating the 170th year of the company, which started in 1849 in California. Ducommun is proud to be recognized as the oldest company in the state.
We look forward to many great years and decades ahead. With that, operator, we'll now open up the call for questions. Thank you.
Absolutely, thank you. Ladies and gentlemen, if you have a question at this time, please press the star and then the number one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. We have your first question coming from Edward Marshall with Sidoti & Company. Your line is now live.
Hey, good afternoon, guys. How are you?
Afternoon, Ed. How are you?
Good. You had some pretty good color on the 737 MAX. You talked about no material issues for the balance of 2019, and as I look through the platform, you talked about your key customer there. There seemed to be some rationalization of costs on their 2Q call that they talked about. What are your contingency plans in the event that production continues to wane here or, at the worst case scenario, does stop briefly? Ultimately, when you look at the platform longer term, how do you think about the growth rate there? I imagine it eventually gets flattened out for a while before it re-accelerates. Thanks.
Yeah, sure. No problem. First, look, we're obviously locked in with Spirit. It's pretty much half of our volume at 52, and then as I mentioned, Boeing is 42. The one nice thing about Ducommun is, I think we're the right size to be really nimble if we do have to make some changes if there's anything that's going to be happening down the road. We certainly are ready. We're very close to Boeing, and as I mentioned earlier, we're very close to the situation, and we're certainly hopeful, but we'll be ready if we have to make some changes one way or the other. As far as the platform, the nice thing about us, Ed, I mean, just talking about structures in general, is we're getting more diversified as we go. Okay?
We might see some flattening if the 737 MAX takes a little more time, and we might have a little bit of a lift there, but we've got a really good growing business at Airbus. We got the Gulfstream business. Down the road, we're going to hopefully pick up some structures business at Raytheon. I think we've got a lot of diversification that I think is going to help.
Okay. With that in context, if you look at that 7%-9% rate that you're looking at for commercial and within structures, do you think as we move into 2020 without a rate increase, you could see that on the lower end, or would it fall short of that range?
We feel, like I said, very confident about seven and nine. As usual, when we think about our following year, right now, we're mid-single.
Mid-single. Okay. If I look at the incremental margins within structures, they've been running in the 30s to 40s on the OI side. We're dropped down to 22 in this particular quarter. I'm wondering, has the majority of the increases kind of passed, or what are the next levers that you're seeing on the margin side? Obviously, you had a very good margin quarter, and the comps are starting to get tougher and tougher. Can you talk about maybe what's left in the tank, what levers you can pull without thinking about acquisitions and what that might bring to the business overall?
Yeah. No, Edward, a couple things, I think. First off, we are still on the journey with all the different facilities of fine-tuning and finding incremental improvements within. As some of these newer platforms are taking hold, some that we've been building up over the last several quarters, a couple more that we're taking up to rate over the next few quarters, that's going to continue to be a little bit of a lift there. Again, you mentioned the volume impact, too, is going to be another key piece of the puzzle. It's all that against sort of the item that Steve alluded to with 737. That's why we feel comfortable with sort of how we're operating now and continuing just to make inroads as we move forward.
Got it. Then finally, I guess it would be silly of us not to talk about Raytheon.
Yeah.
Can you talk about and frame up? It sounds like to me, this is an opportunity to kind of bid on new business, or does it come with extra content on existing programs or new programs? Can you maybe elaborate just a little bit?
Yeah, sure.
Thanks.
Yeah. I think it's all of the above. I think one thing to make note of is we were the first ones they signed, right? They got lots of RMSs, what an $8 or $10 billion revenue company. We're really proud of that we're the first ones out of the gate. It's going to be for new, it's going to be for existing. It's their whole portfolio. We're excited because we do pretty heavy things with them in electronics, but this new opportunity to open up some structures business we hope, right? We're working on that for some of the SM missiles, Standard Missiles. More to come there.
Great. Thanks, guys. Appreciate it.
Okay. Thanks, Ed.
Yep. Thanks, Ed.
Thank you. We have your next question coming from Mike Crawford with B. Riley. Your line is now live.
Thanks. Stephen, you talked about hopefully picking up some structures business with Raytheon.
Sure.
Would that be VersaCore primarily, and also could you just maybe differentiate what you've been doing, the mix of electronics versus structures with Raytheon today versus what it might be in the future?
Yeah. Let me get to the second one first. Pretty much on the structure side of Raytheon, it's pretty much zero. Looking back, it really no action there. It's mostly all circuit cards, connectors, boxes, that type of thing. We're excited about that. It could very well be VersaCore. We do a lot of work up in New York and Kentucky on things, Inconel and different blendings of metals and that type of thing. We think that we're in pretty good shape there going forward, that hopefully we're going to build some of that business.
Okay, thanks. Then VersaCore, the revenues to date from that product have been about how much? Maybe if you could just gauge what level of revenue you think you might see from that this year versus-
Yeah
next year into the future.
Yeah. This is sort of top level and rough, but we're running, for that program with the VersaCore, right around $5 million this year, and that's going to roughly double next year.
Okay.
From there, I think we got some nice things setting up for 2020, Mike.
Okay, great. Last question is, I know you had the favorable manufacturing mix that helped the gross margin this quarter, but based on general outlook and assuming that the 737 MAX kind of resolves itself in the next six months, how much variance would you expect around that gross margin number quarter to quarter?
Yeah. No, Mike, as I mentioned, I think it'll continue to strengthen, but no huge step function. It's going to be continued work in making each location a little better, and again, getting some of the goodness that happens with the increased volume. We're expecting over a longer period to be able to keep it moving in the right direction. As we work through the second half of this year, we were running at a pretty strong level. We had our highest compare to prior year in Q2. We build upon that compare, and we're looking to do that or more in the next couple of quarters.
Well, Chris, let me just continue on that.
Sure.
Because the gross margin's higher than we've had in our model, and yet maybe if you had maybe a less favorable manufacturing mix, how many basis points is it? Are we talking like 100 or a few hundred that it could actually dip down the other way?
Well, yeah.
a less favorable mix?
Yeah. If things go against us, I think we're talking a range now of sort of 100.
Yeah. Mike.
We're moving in the right direction.
Mike, I think it's minimal. I think, to be honest with you, I see more runway in the future for structured margin. I'll say at this point.
All right, awesome. Thank you.
Thanks.
Thank you. We have your next question coming from Michael Ciarmoli with SunTrust. Your line is now live.
Hey, good evening, guys. Thanks for taking the question.
Sure.
Mike Ciarmoli here. Steve, just on the Raytheon supplier agreement, can you give maybe a little bit more, obviously you've been a big supplier to them, but was there more of a push, sort of with the DoD looking to shore up their defense electronic supply chains and go all domestic? Was that a factor in anything behind the supplier agreement?
Yeah. It's a real good question. I can't answer that. I feel like what my view would be is that Raytheon is really looking to get to the next level with suppliers, and they're looking to find people they can work with that can really provide value, but also provide a big time portfolio, right, to help them get to the next level. Can't give you any insight into DoD.
Got it.
Good question.
What about even within the context of Raytheon, maybe there's definitely some scrutiny around this merger with United Technologies? How do you guys view that? Certainly I think, the perception is there's not going to be a lot of internal synergies. Optically, does it create more opportunities for you? I'm sure it's probably still very early, but what are the initial thoughts there?
Yeah. I think, look, it's early in the game. As you know, it won't close till next year. Obviously, Tom Kennedy will be with the company, right, for a while too, on the defense side. I would say this, I would say that we do have Raytheon, we do have Collins Aerospace, so I feel like over the long term, we're hopeful. That's what I would say at this point.
Okay. Structural, just back to the margins, the 12.9% operating margins, I think certainly a multi-year high there. Hard to tell, 737 MAX, if you don't get any increased volume or if you stay at these lower levels, do you think you can hold these margins here? Certainly it sounds like one of your big customers, Spirit AeroSystems, looks like they're going to be staying at 52 all of next year regardless. Not sure what's going to change on the Boeing side from what they can see that. How are you guys thinking about maybe the sensitivity on margins given some of these unknowns on the 737 MAX?
Just alluding back to what Steve said earlier in the call, our size and the number of various products that we have sort of in play that we can move around and sort of make work for our model in a given facility in a given month, gives us a lot of ability, I think, to manage through. We've gone through one quarter sort of with this uncertainty. We've managed through in a pretty strong fashion. We look forward to the next couple of quarters and feel like we've got ability to manage through again, to any ebb and flow that sort of comes through from them.
This is Steve. I also say, look, we're also, as I mentioned in the calls in the past and over the last couple of years, we're really starting to build our business with Airbus. We've got the G500, G600 going up. Okay. Believe it or not, we've got 767 business, 787 business, 777 business. Obviously we have concerns and there's variability possibly with the 737, but Spirit's half the book, and then we got these other platforms. Overall, we feel good, Mike. Got it. Perfect. Thanks, Luca.
Okay. Later, thanks.
Thank you. Again, ladies and gentlemen, if you have a question at this time, please press star and then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Your next question comes from Austin Miller with Canaccord Genuity. Your line is now live.
Hi, guys. This is Austin on for Ken.
Hi, Austin.
Hi, Austin. Hi. I just wanted to expand a little more on your relationship with Raytheon. I was wondering what the growth profile looks for you guys, in missile markets and more specifically, missile defense sales, given your work and content on the Standard Missile, and what that growth profile looks like over the next few quarters for you guys.
Yeah, look, we feel good about it. Obviously, there's a component of Raytheon, which is FMS, right? There is some opportunistic business that runs through RMS. If you look at their recent performance, their bookings, we're happy that we're gonna continue to grow with Raytheon. Obviously, this agreement is going to, I think, be great for us because it's not only gonna tie the teams together in a sort of working format, it's also gonna tie myself and the leadership at RMS as far as how we're gonna grow the business. As far as numbers, I'd say it's certainly gonna be high single as we move forward.
Okay, great. You guys have content on Standard Missile and Aegis. Do you also have any content on other missile defense systems like THAAD or Patriot or just specifically Standard and Aegis?
We absolutely have business on the Patriot, big. We have Paveway, which is not a missile defense program, but it's a big Raytheon program. JSOW. We're working on many others.
Okay, great. Thank you.
Okay. Thanks for joining us, Austin.
Thanks.
Thank you. I am showing no further questions at this time. I would now like to turn the conference back to Mr. Steve Oswald for any closing remarks.
Okay, thank you very much. I want to thank everybody for joining us today. Thank you for your questions too. I think overall we're still early innings on our journey here. Certainly pleased with the quarter. I think one thing to take note of, obviously we've worked hard on lots of things in the last maybe four, five, six quarters that are really coming through on the margin side. The thing that really is encouraging is our growth on the top line. I think that says a lot about our position, where we are, and hopefully, I'm confident where we're going. I'll leave it with that. Again, thank you very much and have a good rest of the day or evening.
Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.