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. As a reminder, this conference call is being recorded. Would now like to turn the conference over to your host, Mr.
Cliff Siddy. You may begin.
Thank you, and welcome to Ducommun's 2019 Q2 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 and 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 1990 5 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 ks 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?
Thank you, Chris, and thanks to everyone who is joining us today for our Q2 conference call. As usual, I'll begin by providing an update on recent development of the company, after which Chris Wampler, our Interim CFO, will review our financial results in detail. 2nd quarter was another one of accomplishment for Ducommun as we continue 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 $180,500,000 driven by higher shipments across a variety of large narrow body platform 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% to 9% growth across our commercial aerospace and military platforms for the rest of 2019. For the Q2, 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 the Covance operating margin was significantly higher by 3.90 basis points year over year to 7.5%. We posted as well $22,400,000 adjusted EBITDA for the quarter, an increase nearly 20% over the comparable period in 2018.
This performance was driven by our Structures segment due to higher overall production rates, scale and the many actions we've taken in the past to streamline the business. The Electronics segment segment margins were equal to the prior year. We ended the quarter with a backlog of $853,000,000 a decrease from the Q1, 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 relations both at the OEM and at the 1st tier level. Team at the Comm was also delighted with the announcement last week of our newly signed strategic supplier agreement with Raytheon Missile Systems.
Being the 1st 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, and that includes structural components, which will be a key growth area for the strategic customer in 2019 and subsequent years. We also very much appreciate 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 $200,000,000 contract to supply Middle River Aerostructure Systems with lead engine to cell 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 2nd quarter revenue of 77,200,000 dollars 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-fifteen along with various other applications for Raytheon and L3. 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 $366,000,000 which is close to record levels. Within our commercial aerospace operations, 2nd quarter sales rose nearly 30% year over year to $92,000,000 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 in 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 $433,000,000 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 to draw 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 Q2 of 2019 was 180,500,000 dollars versus $154,800,000 in the Q2 of 2018. This performance includes 20,100,000 dollars 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.
And $6,900,000 of greater sales in the military and space sector, primarily reflecting strong demand for various military programs. Ducommun's overall backlog was approximately $853,000,000 as of June 29, 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 2nd 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 and A was $24,500,000 in the 2nd quarter versus $21,200,000 in 2018, with the increase primarily reflecting one time severance charges and higher compensation and benefit costs. The company reported operating income for the Q2 of $13,600,000 or 7.5 percent of revenue compared to $5,600,000 or 3.6 percent 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 $5,400,000 in lower restructuring charges, partially offset by higher SG and A expense. On an adjusted basis, in the Q2 of 20 18, operating income was $11,000,000 or 7.1 percent of sales. The increase in the 2nd quarter 2019 operating income versus 2018 adjusted operating income was $2,600,000 which is an increase of 23.7 percent.
Interest expense was $4,400,000 in the Q2 of 2019 versus $3,800,000 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 Q2 of $7,800,000 or $0.66 per diluted share compared to net income of $1,600,000 or $0.14 per diluted share for the Q2 of 2018. The year over year increase was primarily due to $6,000,000 of higher gross profit. Restructuring charges were also lower year over year by 5 $400,000 partially offset by $3,300,000 of higher SG and A, dollars 700,000 of increased interest expense and greater income taxes of $1,100,000 On an adjusted basis in the Q2 of 2018, net income was $6,400,000 or $0.55 per diluted share. The increase in the Q2 of 2019 net income versus 2018 adjusted net income was $1,500,000 which is an increase of 23.1%.
Adjusted EBITDA for the Q2 of 2019 was $22,400,000 or 12.4 percent of revenue compared to $18,700,000 or 12.1 percent of revenue for the comparable period in 2018, an increase of nearly 20%. Now let me turn to our segment results. Our Electronics segment our Electronics Systems segment posted revenue of $89,300,000 in the Q2 of 2019 versus $84,500,000 in the prior year period. These results reflect a $5,900,000 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 Q2 of $9,900,000 or 11.1 percent of revenue versus $8,700,000 or 10.3 percent of revenue in the prior year period. Excluding restructuring charges last year, Electronics adjusted operating margin was also 11.1% for the 2018 Q2. Our Structural Systems segment posted revenue of $91,200,000 in the Q2 of 2019 versus $70,300,000 last year. The year over year increase was due to $20,000,000 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 $11,800,000 or 12.9 percent of revenue compared to $5,000,000 or 7.1 percent of revenue last year.
Excluding restructuring charges and inventory purchase accounting adjustments, Structures adjusted operating margin was 12.7% for the 2018 Q2. Corporate, general and administrative expenses, CG and A. CG and A expense for the Q2 of both 2019 2018 was roughly $8,100,000 or 4.5% and 5.2% of revenue respectively for each year. The year over year results reflect the absence of $1,100,000 in restructuring charges that were incurred in the Q2 of 2018 and the lower professional services fees of $1,000,000 in 20.19, partially offset by one time severance charges of $1,700,000 Turning to liquidity and capital resources, we generated $9,800,000 of cash from operations in the Q2 of 2019 compared with $15,900,000 during the Q2 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 $5,900,000 during the second quarter and expect to spend approximately $16,000,000 to $18,000,000 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. So 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 is in very good shape with strong momentum.
So 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 position 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. And we are very happy to be celebrating the 170th year of the company, which started in 18/49 in California. DeKalb, is proud to be recognized as the oldest company in the state.
Look forward to many great years decades ahead. So with that, operator, we'll now open up the call for questions. Thank you.
Absolutely, and thank you. We have your first question coming from Edward Marshall with Sidoti and Company. Your line is now live.
Hey, good afternoon, guys. How are you?
Afternoon, Ed. How are you?
Good. So 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? And then 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 reaccelerates. Thanks.
Yes. Sure. No problem. So 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 at 42. And the one the nice thing about the comment is, I think we're the right size to be really nimble if we do have to make some changes if there is anything that's going to be happening down the road. We certainly are ready to we're very close to Boeing. And 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 change either one way or the other.
As far as the platform, the nice thing about us and I mean just talking about structures in general is we're getting fairly more we're getting more diversified as we go, okay? So we might see some flattening if the MAX takes a little more time and we might have a little bit of a lift there. But we're we've got a really good growing business at Airbus. We had the Gulfstream business. Down the road, we're going to hopefully pick up some structures business Raytheon.
So 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% to 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 7% to 9% as usual when we think about our following year. Right now, we're mid single.
Mid single. Okay. And then if you think about if I look at the incremental margins within structures, they've been running in the 30s to 40s on the OI side, will drop down to 22 in this particular quarter. I'm wondering, has the majority of the increases passed or what are the next levers that you're seeing on the margin side? I mean, obviously, you had a very good margin quarter and the comps are starting to get tougher and tougher.
So can you talk about maybe what's left in the tank and what levers you can pull without kind of thinking about acquisitions and what that might bring to the business overall?
Yes. No, and a couple of things, I think. First off, we are still on the journey with all the different facilities of fine tuning and finding incremental improvements within. So 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.
And then again, you mentioned the volume impact too is going to be another key piece of the puzzle. So it's all that against sort of the item that Steve alluded to with 737. So 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. And then finally, I guess, it would be silly of us not to talk about Raytheon. It sounds like 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? Kind of maybe elaborate just a little bit.
Thanks.
Yes. I think it's all of the above. And one thing to make note of is we were the first ones they signed, right? So they got lots of RMS is what an $8,000,000,000 or $10,000,000,000 revenue company. So 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 there's new opportunities we open up some structures business we hope, right?
And so we're working on that for some of the SM missiles, standard missiles. So more to come there. Great.
Thanks guys. Appreciate it.
Okay. Thanks, Seth.
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. Can you 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?
Yes. So, guys, let me get to the second one first. Pretty much on the structure side of Raytheon, it's pretty much 0. So looking back, it's really, really no action there. It's mostly all circuit cards, connectors, boxes, that type of thing.
So 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 in Canal and different blendings of metals and that type of thing. So we think that we're in pretty good shape there going forward and hopefully we're going to build some of that business.
Okay. Thanks. And then VersaCore, the revenues to date from that product have been about how much? And maybe if you could just gauge what level of revenue you think you might see from that this year versus next year into the future?
Yes. So we're this is sort of top level and rough, but we're running for that program with the VersaCore right around $5,000,000 this year and that's going to roughly double next year. And then so we got I think we got some nice things setting up for 2020, Mike. Okay,
great. And then last question is, I know you had the favorable manufacturing mix, the healthy gross margin this quarter. But based on general outlook and assuming that the 737 MAX kind of resolves itself in the next 6 months, how much variance would you expect around that gross margin number quarter to quarter?
Yes. Mike, so as we move as I mentioned, as we move forward, I mean, I think it will 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. So we're expecting over a longer period to be able to keep it moving in the right direction. But as we work through the second half of this year, we expect we were running at a pretty strong level.
We had our highest compare to prior year in Q2 and we build upon that compare and we're looking to do that or more in the next couple of quarters.
Well, Chris, just let me just continue on that. Sure. Because the gross margin is higher than we've had in our model and yet maybe if you had maybe a less favorable manufacturing mix like how much might how many basis points is it like? Are we talking like 100 or a few 100 that it could actually dip down the other way with the most tractable mix?
Yes. I mean if things go against us, I think we're talking a range now of sort of 100. That's Yes.
Mike, I think that 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 structures margin. So let's say at this point.
All right. Awesome. Thank you.
Thanks.
Thank you. And 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. Steve, just on the Raytheon supplier agreement, can you give maybe a little bit more? I mean, 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?
Yes. It's a real good question. I just 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. What about even with in the context of Raytheon, maybe there's definitely some scrutiny around this merger with United Technologies. I mean, how do you guys view that? Because certainly, I think the perception is there's not going to be a lot of internal synergies. I mean, optically, does it create more opportunities for you?
I mean, I'm sure it's probably still very early, but what are the initial thoughts there?
Yes. I think, look, it's early in the game. As you know, it won't close till next year. And obviously, Tom Kenny will be with the company, right, for a while too, so on the defense side. So but 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. And then structural, just back to the margins, the 12.9% operating margins, I think certainly a multi year high there. Hard to tell, I mean, MAX, if you don't get any increased volume, if you stay at these lower levels, I mean, do you think you can hold these margins here? I mean, certainly, it sounds like one of your big customers, Spirit, 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 compete at.
But how are you guys thinking about the maybe the sensitivity on margins given some of these unknowns on the MAX?
Yes. No, I mean, just alluding back to what Steve said earlier in the call, I mean, 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 1 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.
And I'll 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. We've got believe it or not, we've got 767 business, 87 business, 777, but everything is obviously, we have concerns and there's variability possibly with the 37, but Spirit's half the book and then we got these other platforms. So we overall, we feel good, Mike.
Got it. Perfect. Thanks a lot, guys.
Okay, Your next question comes from Austin Moller with Canaccord Genuity. Your line is now live.
Hi, guys. This is Austin on for Ken.
Hi, Austin.
Hi. So I just wanted to expand a little more on the your relationship with Raytheon. And so 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?
Yes. Look, we feel good about it. Obviously, there's a component of Raytheon which is FMS, right? So there is some opportunistic business that runs through RMS. But if you look at their recent performance, their bookings, we're happy that we're going to continue to grow with Raytheon.
Obviously, this agreement is going to I think be great for us because it's not only going to tie the teams together in a sort of working format, it's also going to tie myself and the leadership at RMS as far as how we're going to grow the business. So as far as numbers, I'd say it's certainly it's got to be high single as we move forward.
Okay, great. And so you guys have content on the standard missile in Aegis. Do you also have any content on other missile defense systems like THAAD or Patriot or just specifically Standard and AAGES?
No, 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, and we're working on many, 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, but 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 4, 5, 6 quarters that are really coming through on the margin side. But 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. So 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.