Q2 2019 Earnings Call
Welcome to <unk> second quarter earnings Conference call at this time, all I know listen only mode. Later, we'll conduct a question and answer session and instructions will follow at that time.
Anyone should require assistance during the conference. Please stop by then zero on your touched on 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.
With me today are Steve Oswald Chairman, President and CEO , 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. We may make during the prepared remarks for the <unk> 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 or forward looking statements under the federal Private Securities Litigation Reform Act of 90, 95, and therefore are perspective.
These forward looking statements are subject to risks uncertainties and other factors, which could cause actual results to differ materially from 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 risk they seem to common 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 acquisitions the competitions.
These risks and others are described in our annual report on Form 10-K .
And with the FCC 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 are call, except if and as required by regulatory authorities.
This call also includes non-GAAP financial measures. Please refer to our filings with the FCC 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 FCC today, and you will find a link to all our filings on the company's web site under the Investor Relations tab.
I would now like to turn the call over to Mr., Steve <unk> review of the operating results Steve.
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 the other one of accomplishment for ducommun.
As we continue to benefit from strong business execution.
Growth on key platforms.
Diversified customer base.
And robust product demand.
Revenue grew an impressive 16.6% year over year.
So 100.
$80.5 million driven by higher shipments across a variety of large narrow body platforms, such as the Boeing 737 Max.
Aid Airbus Athree hundred 20 family as well as JSF Raytheon missile platforms and the Apache helicopter program.
Revenue related to the 737, Maxs rose at a substantially higher rate year over year.
Reflecting the current build rates of 52 per month at spirit Aero systems.
And 42 per month at Boeing.
Well boy works to address the 737 Max situation, we continue to communicate with them.
And our actually operationally ready to increase production, if and when required.
For the common with strong momentum in revenue and backlog across a variety of amounts of customers.
We do not expect any material issues to our topline view of 7% to 9% growth.
Across our commercial aerospace and military platforms for the rest of 2019.
For the second quarter operating income will substantially increase our 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.
Well the Calvin <unk> 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.
And increased nearly 20% over the comparable period and 2018.
This performance was driven by our structure segment.
Due to higher overall production rates scale.
And the many actions we've taken in the past to streamline the business.
The electronic segment 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 relations both at the OEM, that's the first tier level.
David The Com was also delighted with the announced the last week of our newly side strategic supplier agreement with Raytheon missile systems.
Being the first supplier to be selected by RMS for this initiative is an honor.
That's 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 it compete on every RMS platform, either new or existing.
That includes structural components, which will be a key growth area for the strategic customer and 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's supplier Excellence premiere award winner.
This is our first major customer award for the company since 2017.
We had very good activity toward the Paris Air show and so both interest and enthusiasm for our products and services across the board.
Show, it's 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 this 200 million dollar contract.
Supply Middle River Aerostructures systems.
Leap engine to sell components for the Airbus Athree hundred 20 platform using our proprietary versus core composite process technology.
This is a great development and the common team is working hard Eric why Miss Mexico facility to deliver on this important opportunity.
Now let me provide some additional color on the end markets products and programs.
Beginning with our military and space sector, we posted second quarter revenue of 77.2 million of nearly 10% over 2018, reflecting stronger sales across a number of missile defense programs.
We saw substantial growth in electronics for the Patriot missile.
The joint standoff weapon or Jay so.
The Chinook.
Joint strike fighter and F 15, along with various other applications for Raytheon at L. Three.
Given the recently passed federal budget outlined for fiscal 2020, the market for military spending remains very strong.
I do comment plays a key role in 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, the $92 million.
The growth was primarily fueled by large fixed swaying narrow body aircraft such as the Boeing 737, Airbus Athree hundred 20 family and new Gulf stream models.
Our Athree 20 business grew substantially year over year.
And mostly all our Boeing platforms.
Including not only the 37, but 787 triple seven and 767.
All rose double digits.
As well.
We also posted significantly higher sales to the goals to Gulfstream this quarter.
The Oh, yeah ramps up production on its new models.
In summary, our large fixed wing businesses see 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 who drew 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 Athree 20, as Steve mentioned.
And 6.9 billion of greater sales in the military and space sector, primarily reflecting strong demand for various military programs.
Ducommuns 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 years 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.
As DNA was 24.5 million in the second quarter versus 21.2 million in 2018.
With the increase primarily reflecting onetime severance charges and higher compensation and benefit cost.
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 and lower restructuring charges, partially offset by higher as DNA expense.
On an adjusted basis in the second quarter of 2018 operating income rose $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 66 cents per diluted share compared to net income of $1.6 million or 14 cents 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 SGN a.
Point 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 55 cents per diluted share.
The increase in the second quarter 2019, net income versus 2018 adjusted net income.
It 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 electronics segment assist 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 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 a $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 for 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 cdna.
TJ expense for the second quarter of both 2019, and 2018 was roughly $8.1 million.
Were 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 onetime 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 billion 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 to $18 million. During 2019 in total to support new program wins.
Well once again proud of what our quarterly performance, which puts us on track for solid results in the second half.
I will now turn it back over to Steve for his closing remarks, Steve Okay. Thanks, Chris.
Okay. So looking ahead to the rest of the year as mentioned earlier. We you know we are we continue to be optimistic about our revenue growth, our solid margins and backlog.
I believe the company is very good shape with strong momentum.
So I always like to see in both revenue and earnings.
Ducommuns 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 mentioned that August is the month, we recognize the the founding of ducommun.
And we are very happy to be celebrating the 170 this year for the company.
Which started in 18 49 in California.
The common is proud to be the recognizes the oldest company in the state.
Look forward to many great years and decades ahead.
So with that operator, we'll now open up the call for questions. Thank you.
Absolutely and thank you ladies and gentlemen, if you have a question at this time. Please press Star then the number one key on your Touchstone Palestine. If you got some have been answered or you wish to remove yourself from the queue. Please pass the time.
We have your first question is coming from Edward Marshall with Sidoti and company. Your line is now live.
Hey, good afternoon, guys how are you.
After that and how are you.
Good.
So so yes, some pretty good color on the 737, Max you talked about no material issues for the balance of 2019 and as I as I look through the platform.
You talked about your key customer there theres seem to be some rationalization of costs on their twoq call that they talked about.
What are your contingency plans in the event that.
Production continues to weigh in here or you know 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.
Yeah No problem. So first look you know, we're obviously locked hemisphere it pretty much half of our volume at 52, and then as I mentioned, mostly of 42 and.
So the one nice thing about the comment is you know I think were the right size, we really nimble if we do have to make some changes.
You know 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 as I mentioned earlier, we're very close to the situation that we're certainly hopeful but.
We will be ready if we have to make some changes one way or the other.
As far as the platform.
The nice thing about that I mean, just talking about structures Injectables if were getting fairly we're getting more diversified as we go okay. So yeah, we might see some flattening of the Max takes a little more time than we might have a little bit of a lift there, but we were you know we've got a really good growing business that Airbus.
We had the Gulf stream business.
We you know down the road, we're going to hopefully pick up some structures business the rate down. So I think you know we've got a lot of diversification that I think is going to help.
Okay with that context, if you look at that 7% to 9% rate that you are looking at for commercial 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 that range. We feel we feel like I said very confident about 79 as usual when we think about our following year were right now were mid single.
That's correct and then if you think about if I look at the incremental margins within structures. They have been running in the thirtys to fortys on the oil on the oil.
Side were dropped down to 22 in this particular quarter. I'm wondering has has the majority of the increase is kind of passed or what are the next levers that you're seeing on the margin side. I mean, obviously had a very good margin quarter on the comps are starting to get tougher and tougher. So 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 to the business overall.
Yes, no I had 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 taken hold some that weve been building up over the last several quarters a couple more that we're taking up the 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 to is going to be another another key piece of the puzzle. So.
It's all that again that would sort of the the item that Steve alluded to you know with 737, So thats why we feel comfortable with sort of how we're operating now and and continuing to make to make inroads as we move forward.
Got it got it.
And then finally I guess when it would be silly of us not to talk about Raytheon.
Yes, it sounds like can you talk about frame up it sounds like to me. This is a.
Opportunity to kind of bid on new business or does it come with a mixture.
Extra content on on on existing programs or new programs kind of maybe elaborate just a little bit. Thanks, Yeah. I think it's all the above I think one thing to make note of is.
Yeah, we are the first ones they signed right. So they got lots of RMS is what an eight or 10 billion dollar revenue company. So we're really proud of that that we are the first ones that again, it's got to be for new it's got to be for existing it's their whole portfolio. We're we're excited because you know we do we do pretty heavy things with them in electronics, but.
This new opportunities open up some structures business, we hope right and so working on that for some of the SM SM missiles standard missile so more to come there.
Great. Thanks, guys. Appreciate it okay. Thanks, I think that.
Thank you when you have your next question is coming from Mike Crawford.
Well right now.
Thanks, Stephen you talked about and hopefully picking up from structures business with Raytheon can you.
Would that be versus the core primarily and also could you just maybe differentiate.
What you've been doing with the mix of electronics versus structures with Raytheon today versus what it might be in the future.
Yeah, So just to me I.
Me I get to the second part first pretty much on the structure side rate found its pretty much zero. So you know looking back it really really no action. There, it's mostly all circuit cards connectors boxes that type of thing. So so we're excited about that.
You know it could very well be verse decor. We do you know a lot of work up in New York in fact, he on things and canal and different blends of metals and and that type of thing. So so we think that.
So we're in pretty good shape, there going forward that hopefully we're going to build some of that business.
Okay, Thanks, and then versus the core.
The revenues to date from that product has been about how much and maybe if you could just days what level revenue you think you might see from that this year versus yeah.
Next year into the future.
Yes. So were you know this is sort of top level on rough, but we're running a fourth for that program with the person who are right around 5 million this year and that's going to roughly double next year.
And then okay.
You know so if we got 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 on that help the gross margin this quarter, but based on general outlook and assuming that the 737, Max kind of resolve itself in the next six months.
How much variance, where do you expect around that gross margin number quarter to quarter.
Yes.
Mike So as we move ahead as I mentioned as we move forward I mean, I think it'll it'll continue to strengthen but no no huge step function, it's going to be continued work in making each location, a little better and and again getting some of the goodness that happens with the increased with the increased volume so.
So we're expecting over a longer period to be able to keep it moving in the right direction.
But it 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 you know 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.
Because the gross margins higher than we've had in our model and yet maybe if you had maybe a less favorable manufacturing mix like how much you know might how many basis points sizzling are we talking like 100 or a few hundred that it could actually.
Dip down the other way well, yes, no mix.
Yeah, I mean, if things go against US I think we're talking a range now it's sort of a 100.
That's.
But Mike I think that we're moving in the right direction. My I think it's minimal I think you know to be outside the 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.
We have next question coming from Michael Ciarmoli with Suntrust. Your line is now.
Hey, good evening guys. Thanks for taking the question on travel there.
Steve just on the 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 DRD looking to shore up their defense electronics supply chains and go all domestic win was that a factor in anything behind the.
The supplier agreement.
Yeah. It's a really good question I, just I can't I can't answer that I feel like what my view would be is that.
Raytheon is really looking to get to the next low with suppliers and they're looking to find people. They work. They can work with that can really provide value, but also provide.
A big time portfolio right and get to the next level can't give you any insight into DLD.
Got it.
What about even with the in the context of Raytheon.
Maybe just you know there's definitely some scrutiny around this merger with United Technologies, I mean, how do you guys view that equal. It's certainly I think you know the perception is theres theres not going to be a lot of internal synergies I mean optically. It does it 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 I think as you look it's early in the game as you sell more closer to next year and you know obviously.
You know Tom can it 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 you know.
We do everything we do have Collins aerospace.
So you know I feel like.
So over the long term, we're hopeful that's what I would say at this point.
Okay.
And then structural just back to the the margins the 12.9% operating margins I think certainly 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 you can hold these margins here I mean, certainly it sounds like one of your big customer spirit looks like they're going to be staying at 52 all of next year regardless.
I'm not sure what's going to change on a Boeing side from from what they can see that but.
How are you guys thinking about that maybe the sensitivity on margins given given some of these unknowns on the Max.
Yes, no. It was 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 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.
They'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 our we've got ability to manage through again.
You know to any to any ebb and flow that sort of come through from from Uh Huh.
Then I'll mills. So this is Steve I also say look we're also as I mentioned in the calls in the past.
Well last couple years are really starting to build our business with Airbus.
The G 500, G 600 going up Okay. We've got.
Believe it or not we've got 767 business 87 business Triple 7 billion all everything is.
You know obviously, we have concerns in this variability, possibly with the 37, but.
Spirits half the book and we got these other platforms. So we overall, we feel good night.
Got it perfect. Thanks, a lot guys.
Okay. Thanks.
Thank you and again, ladies and gentlemen, if you have a question that this is Brian . Please press Star then the number one key on your Touchstone telephone. If your question has been answered are you wish to remove yourself from the queue you tell the parents.
Your next question comes from Matt Aspinall, <unk> with Canaccord Genuity. Your line is now.
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 refi on 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 in content on the standard missile and what that.
That growth profile looks like over the next few quarters for you guys.
Yes look we feel we feel good about it you know we obviously there is a component of a break downloads is fms right. So it's there is some opportunistic business that runs through RMS and but if you look at their recent you know.
Formants their bookings you know, we're we're happy that we're going to continue to grow with Raytheon obviously this agreement.
It's got to.
Thank the great for us because it's all not only going to tie the teams together in a sort of working format. It's also going to tie myself and and the leadership at RMS as far as how we're going to grow the business. So far as a you know numbers I'd say you know it certainly got to be high single.
As we move forward.
Okay, great and so you know.
You guys have content on standard missile and agents do you also have any content on other missile defense systems, like Fad or Patriot or just specifically standard and paid in ages.
No. We absolutely have this is on the business on the Patriot.
Big we have.
Pave way, which is not a missile defense program, but it's a big Raytheon program.
Jay Sal.
When we're working on many many others.
Okay, great. Thank you.
Hey, thanks for joining us often.
Thanks.
Thank you I'm showing no further questions at this time I would now like to turn the conference back to Mr., Steve I suppose 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 a with a quarter I think one thing to take note of obviously, we've worked hard on lots of things in the last maybe four or five six quarters that are really coming through on the margin side, but the thing that really is encouraging is our is our growth on the topline.
I think that says a lot about our position, where we are and hopefully you know.
I am confident where we're going so I'll leave it with that again. Thank you very much and have a good the rest of the day or evening.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful. Thank you may all disconnect.
Thanks.
Okay.
Thank you Laura.