Good afternoon, ladies and gentlemen and welcome to Ducommun Second Quarter Earnings 2019 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 be given at that time. [Operator Instructions]. As a reminder, this conference call is being recorded.

I’d now like to turn the conference over to your host Mr. Chris Witty you may begin..

Thank you and 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 assurances to 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 US 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 the 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?.

Thanks you Chris and thanks 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 accomplishments 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 shipment 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. Well 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 and revenue and backlog across a variety amounts 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 second quarter operating income was substantially increase on 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 and increased nearly 20% over the comparable period in 2018. This performance was driven by our structured segments, due to higher overall production rates, scale and the many actions we’ve taken in the past to streamline the business.

The electronic segments segment margins were equal to the prior year. We ended the quarter with the 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 and at the first-tier level.

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 to fire to be selected by RMS to 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 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 appreciated the recognition of our Monrovia, California performance center being selected in July as a 2019 Raytheon Supplier Excellence PREMIER Award winner. This our first major customer award for the company since 2017.

We had very good activity too at the Paris Air Show and so both interest and enthusiasm for our products and services across the board. The show is great to me 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 supply Middle River Aerostructure Systems with LEAP engine nacelle components for the Airbus A320 platform using our 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 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 strong sales across the number of missile and defense programs.

We saw substantial growth on electronics for the Patriot Missile, the Joy [ph] standoff weapon or JSAW, the Chinook, Joint Strike Fighter and F-15 along with various other applications for Raytheon and L3.

Given the recently passed federal budget outline for fiscal 2020 the market for military spend 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 is 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 the 37 but 787, 777 and 767 all rose double-digit as one. We also posted significantly higher sales to Gulfstream this quarter as the OEM ramps up production on this new models.

In summary, our large fixed wing business is seeing excellent growth clearly highlighting the key platforms that 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 new record levels. We continue to be optimistic about the outlook for this part of our business as well as the military markets. With that, I’ll have Chris to do 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. And $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 29 down from last quarter’s record amount. As a reminder, the company defined 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 in higher compensation of benefit cost. The company report 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 of second quarter of 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 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 the $5.9 million increase in sales through our military and space customers slightly offset by lower revenue within our industrial and used 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 system 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% 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 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 and 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 to $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 acquisition 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. 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 to the rest of the years mentioned earlier, we continue to be optimistic about our revenue growth, our solid margins and backlog. I believe is in very good shape with strong momentum so we always like to see in both revenues 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 positions us well now and, in the years, ahead. Before we go to questions.

I do want to also mention that August is a month we recognize the founding of Ducommun and we’re 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.

So, with that operator we’ll now open up the call for questions. Thank you..

[Operator Instructions] we have your first question coming from Edward Marshall with Sidoti & Company. Your line is now live..

So, you had some pretty good color on 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 seem to be some rationalization of cost on their 2Q call that they talked about.

What are your contingency plans in the event that, production continues to vain here or at the worst-case scenario to 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, we’re obviously locked in with Spirit its pretty much half of our volume at 52 and then as I mentioned Boeing at 42. The one nice thing about Ducommun is, I think we’re the right size if we really nimble, we do have to make some changes if there’s 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 and we’re certainly hopeful but we’ll be ready if we have to make some changes the one way or the other. As far as the platform, the nice thing about us and I mean just talking about structures in general.

We’re getting more diversified as we go. Okay, so we might see some flattening, if the MAX takes a little more time and might have a little bit of lift there but we were – we’ve got a really good growing business there. But we’ve had the Gulfstream business – down the road we’re going to hopefully pick up some structures business at Raytheon’s.

So, I think you know we’ve got a lot of diversification that I think is going to help..

Okay with that in context. If you look at 7% to 9% rate that you’re looking at for commercials 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 got it. 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 [indiscernible] 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 leverage 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 leverage you can pull without kind of thinking about acquisitions and what that might bring to the business overall..

Yes, I know and couple things. I think first off, we’re 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 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 with sort of the item that Steve alluded to with 737, so that’s how 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 when 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 – one thing to make note of, is we’re the first ones they signed, right? So they got RMS’s [ph] is what an $8 billion or $10 billion revenue company so we’re really proud of that, 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 opportunities you open up some structures business we hope, right? So we’re working on that for some of the SM missiles, standard missiles so more to come there..

Great. Thanks guys appreciated..

Thank you. We have your next question coming from Mike Crawford with B. Riley. Your line is now live..

Steve, when you talked about hopefully picking up some structures business with Raytheon.

Can you – would that be VersaCore primarily and also, can 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?.

Yes, so maybe I’ll get to the second one, first. Pretty much on the structure side Raytheon is pretty much zero. So looking back it really, really no action. There’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, tachyon [ph] things in [indiscernible] and different blendings [ph] of metal and that type of thing. So we think that we’re in pretty good shape there going forward 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 gage what level of revenue you think you might see from that this year versus year next year into the future?.

Yes, so we’re – this is sort of top level on rough. But we’re running for that program with VersaCore right around $5 million this year and that’s going to roughly double next year and then [indiscernible] so we’ve got – I think we’ve 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 help in 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?.

As we move, as I mentioned as we move forward. 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 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 and 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, how many basis points was it like, are we talking like 100 or few hundred that it could actually dip down the other way, with the [indiscernible] mix?.

Yes, I mean if things go against this. I think we’re talking a range now of sort of 100, that’s..

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 margins, [indiscernible] on this point..

All right, awesome. Thank you..

Thank you and we have your next question coming from Michael Ciarmoli with SunTrust. Your line is now live..

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 electronics supply chains and go all domestic, would that factor in anything behind the supplier agreement?.

Yes, 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 of suppliers and looking to find people they can work with, that can really provide value but also provide a big time portfolio, right? [Indiscernible] next level, can’t give you any insight of the DOD.

But good question..

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, [indiscernible] still very early but what would be in the [indiscernible] there?.

I think certainly in the game, as you know more close to next year. Obviously, Tom Kenneth [ph] will be with the company right for a while too, so on the defense side. But I would say that, we do have Raytheon, we do have 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 12.9% operating margin. I think certainly a multi-year high there. Hard to tell, I mean MAX, if you don’t get any increased volume or 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 customer Spirit it looks like they’re going to be staying 52 all of next year regardless. I’m not sure what’s going to change on the Boeing side from what they complete at. But how are you guys thinking about to maybe the sensitivity on margins given some of these unknowns to the 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 are 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 this uncertainty we manage through in a pretty strong fashion. We look forward to 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..

So, Steve, I might also say, we’re also as I mentioned in the calls in the past and the last couple of years are 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, 87 business, 777 – everything is obviously we have concerns in this variability possibly with the 37.

Spirits’ have to book and then we’ve got these other platforms. Overall, we feel good Mike..

Got it. Perfect. Thanks a lot guys..

[Operator Instructions] your next question comes from Austin Moore [ph] with Canaccord Genuity. Your line is now live..

Hi, guys this is Austin on for Ken..

Hi Austin..

Hi Austin..

So I just wanted to expand a little more on the – your relationship with Raytheon.

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?.

We feel good about it.

Obviously, there’s a component of Raytheon which is FMS, right? They’re just some opportunistic business that runs through RMS and you know 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 all the teams together sort of working format, it’s also going to tie myself and the leadership that 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 going to be high single as we move forward..

Okay, great and so you guys have content on standard missile in Aegis [ph]. Do you also have any content on other missile defense systems like FAD [ph] or Patriot or just specifically standard in patent in Aegis [ph]..

No we absolutely have, we have business on the Patriot, big – we have Paveway which is not a missile defense program. But it’s a big Raytheon program, JSAW and we’re working on many, many others..

Okay, great. Thank you..

Thanks for joining us Austin [ph]..

Thank you. I’m 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 you’re only 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 or five, six quarters that are really coming through on the margin side. But I think 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 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..