U.S. Markets closed

Edited Transcript of DCO earnings conference call or presentation 6-May-19 9:00pm GMT

Q1 2019 Ducommun Inc Earnings Call

CARSON Jun 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Ducommun Inc earnings conference call or presentation Monday, May 6, 2019 at 9:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Douglas L. Groves

Ducommun Incorporated - VP, CFO & Treasurer

* Stephen G. Oswald

Ducommun Incorporated - Chairman, President & CEO

================================================================================

Conference Call Participants

================================================================================

* Becky Vincent

Vincent Enterprises LLC - Managing Partner

* Christian Francisco Herbosa

NOBLE Capital Markets, Inc., Research Division - Defense Technology and Contract Manufacturing Analyst

* Edward James Marshall

Sidoti & Company, LLC - Senior Equity Research Analyst

* Kenneth George Herbert

Canaccord Genuity Limited, Research Division - MD and Senior Aerospace & Defense Analyst

* Michael Frank Ciarmoli

SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst

* Michael Roy Crawford

B. Riley FBR, Inc., Research Division - Senior MD, Co-Head of The Discovery Group & Senior Analyst

* Chris Witty

Darrow Associates Inc. - MD

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, ladies and gentlemen, and welcome to Ducommun First Quarter 2019 Earnings Conference Call. (Operator Instructions)

As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Chris Witty with Investor Relations. Sir, please begin.

--------------------------------------------------------------------------------

Chris Witty, Darrow Associates Inc. - MD [2]

--------------------------------------------------------------------------------

Thank you, and welcome to Ducommun's 2019 First Quarter Conference Call. With me today are Stephen Oswald, Chairman, President and CEO; and Doug Groves, Vice President, Chief Financial Officer and Treasurer.

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 question-and-answer session that follows. Certain statements today that are not historical facts, including any statements as to future market conditions, results of operations, our restructuring plans and financial projections, are forward-looking statements under the Federal Private Securities Litigation Reform Act of 1995 and therefore 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 have been 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 competition. 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 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 we will find -- 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?

--------------------------------------------------------------------------------

Stephen G. Oswald, Ducommun Incorporated - Chairman, President & CEO [3]

--------------------------------------------------------------------------------

Okay. Thanks, Chris and thank you, everyone, for joining us today for our 2019 first quarter conference call. As usual, I'll begin by providing an update on recent developments of the company, after which Doug will review our financial results in detail.

I'm very pleased to announce that we posted a strong start to fiscal 2019 with our overall performance surpassing expectations across the board. First quarter revenue grew roughly 15% year-over-year to $172.6 million driven by continued strong demand across a number of key commercial platforms, particularly the Boeing 737 where revenue grew sharply versus 2018.

737 is a very important program for us as well as our industry, and we are committed to serving Boeing as it deals with a current serious situation. As reported, Boeing is actively engaged in fixing the issues and working with all involved including many regulators to get its plane back in the air as soon as possible.

For Ducommun, let me remind everyone that roughly 40% of our content on the 737 platform goes through Spirit Aerosystems based in Wichita, Kansas, which is not cutting current production rates as previously announced. For Boeing direct, we are working closely with them and balancing support of their current rate requirements while also ensuring readiness, risk mitigation and alignment to the planned forward rates. In addition, our team is actively engaged with Boeing in adjusting current purchase orders as required.

Due to our diverse customer base across Ducommun and the broader array of platforms served, we continue to anticipate 5% to 7% revenue growth across our commercial aerospace programs for the next 3 to 4 quarters. The longer-term outlook after that is dependent on the timing of the 737 MAX returning to service and Boeing's new production schedule.

We ended the quarter with another record backlog of $884 million and a book-to-bill of 111%, again, underscoring the strength of our customer relationships, the value we provide and the technology offerings. In addition, our work to improve profitability continued. Overall gross margins rose an impressive 290 basis points year-over-year to 20.7%. Our op margin reached 7.4% while we posted $21.7 million of adjusted EBITDA.

Results are particularly strong within our Structures segment where operating margins reached 11.9% due to the many actions taken in 2018 to streamline the business. The segment also benefited from higher overall production rates, additional content, lower scrap rates and the associated economies of scale.

In Q1, the company continued to build our innovation processes and a company culture, based on lean principles. We've identified additional future operational improvements and ways to reduce working capital, particularly with regards to scrap and inventory. We are underway to significantly improve those areas. Assessing the business and optimizing all our resources is something done continuously at Ducommun, even as we invest in our technology, operations, and most importantly, our people, to become world-class at everything we do at the company.

Our 2 recent acquisitions are also adding value to the organization and helping our growth trajectory. We continue to look at additional opportunities that can leverage our applications and strengthen our proprietary technologies offerings to the industry. I think we have also demonstrated to investors in the marketplace a strong track record of integration and driving value once acquired. I look forward to more activity in the future.

Now let me provide some additional color on our end markets, products and programs. Beginning with our military and space sector, we posted first quarter revenue of $76.7 million, up 21% from last year, primarily reflecting stronger sales across a variety of missile applications. Aside from significant growth across such programs as the Patriot, we also noted positive trends with certain military helicopter platforms and the very important F-35 Joint Strike Fighter. Other areas of our defense business were impacted by order timing and transfer of production to Huntsville from our Phoenix facility, but we anticipate higher shipments in the coming quarter. The overall market for our military applications looks bright, given our proposed budget that includes increased spending from various missile programs along with solid demand for the F-15, F-18 and F-35 as well as certain helicopter platforms. We ended the quarter with a military and space backlog of around $347 million, near record levels.

Within our commercial aerospace operations, first quarter sales rose approximately 16% year-over-year to $85.5 million. As I mentioned a moment ago, growth was primarily fueled by large fixed-wing narrow-body aircrafts such as the Boeing 737 and Airbus 320 family. We also saw some nice double-digit growth on the Boeing 787 platform driven by an increase in build rate from 12 to 14 airplanes per month. In total, our large fixed-wing business grew 25% year-over-year. In addition, we're experiencing an uptick in our regional business jet business driven by Gulfstream and other OEMs, where we expect further room for content expansion.

I do want to provide an update on our VersaCore Composite technology as well. The team remains on track with our 10-year $200 million contract to supply nacelle components and are preparing our Guaymas, Mexico facility to begin full production in 2020. Wins such as this and contributions from our recent acquisitions strengthen the outlook for Ducommun while diversifying our base of business.

The backlog within our commercial aerospace grew to just under $500 million at the end of the quarter, representing another new record for the company. We remain upbeat about the outlook for Ducommun's commercial business this year, given the platforms we serve, our customer relationships and the value provided through our technology and breadth of product offerings.

With that, I'll have Doug review our financial results in detail. Doug?

--------------------------------------------------------------------------------

Douglas L. Groves, Ducommun Incorporated - VP, CFO & Treasurer [4]

--------------------------------------------------------------------------------

Thank you, Steve, and good day, everyone. As a reminder, please see the company's filings and today's press release for a further description of matters under discussion during the call. I'll begin with details of our overall results.

Revenue for the first quarter of 2019 was $172.6 million versus $150.5 million in the first quarter of 2018. This performance includes $13.1 million of greater sales to the military and space sector primarily reflecting strong demand for various missile programs and $11.9 million of higher revenue with commercial aerospace customers, due to increased shipments for key narrow-body platforms such as the Boeing 737 and Airbus 320.

Ducommun's overall backlog was approximately $884 million as of March 30, up slightly from the start of the year-end and as Steve mentioned, a new record for the company. As a reminder, the company defines backlog as potential revenue and is based on 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 20.7% in the first quarter versus 17.8% in the prior year's comparable period. The increase of 290 basis points year-over-year was primarily due to higher production volumes and favorable product mix along with the many streamlining measures taken last year, as Steve discussed.

SG&A was $22.8 million in the first quarter versus $19.3 million in 2018 with the increase primarily reflecting higher compensation and benefit costs. The company reported operating income for the first quarter of $12.8 million or 7.4% of revenue compared to $5.3 million or 3.5% 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 $2.2 million in lower restructuring charges partially offset by higher SG&A. On an adjusted basis, operating income was $7.4 million or 4.9% of sales in the first quarter of 2018.

Interest expense was $4.4 million in the first quarter of 2018 versus $2.9 million last year, and this was due to the 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 first quarter of $7.5 million or $0.64 per diluted share compared to net income of $2.6 million or $0.22 per diluted share for the first quarter of 2018. The year-over-year increase was primarily driven by $8.9 million of higher gross profit. Restructuring charges were also lower year-over-year by $2.2 million, offset by a $3.5 million increase in SG&A, $1.5 million of increased interest expense and greater income taxes of $1.3 million. Adjusted net income was $4.4 million or $0.38 per diluted share in the first quarter of 2018.

Adjusted EBITDA for the first quarter of 2019 was $21.7 million or 12.6% of revenue compared to $14.5 million or 9.6% of revenue for the comparable period in 2018, an increase of 50%.

Now let me turn to the segment results. Turning to Electronic Systems segment. Our Electronic Systems segment posted revenue of $84.2 million in the first quarter of 2019 versus $82.4 million in the prior year period. These results reflect an $8.5 million increase in sales to our military and space customers, $3.8 million of lower shipments within the commercial aerospace market reflecting order timing and $2.9 million of lower sales in the industrial end-use market as expected. Electronic Systems posted operating income for the first quarter of $9.2 million or 10.9% of revenue versus $5.7 million or 7% of revenue in the prior year period. Excluding the restructuring charges last year, Electronic's adjusted operating margin was 7.6% for the 2018 first quarter. The year-over-year margin improvement was due to manufacturing efficiencies and product mix.

Our Structural Systems segment posted revenue of $88.4 million in the first quarter of 2019 versus $68 million last year. This year-over-year increase was due to $15.7 million of higher sales across our commercial aerospace applications, particularly large airframe single-aisle platforms and $4.6 million of increased revenue within the company's military and space markets.

Structural Systems posted operating income for the quarter of $10.5 million or 11.9% of revenue compared to $4.4 million or 6.5% of revenue last year. Excluding the restructuring charges, Structure's adjusted operating margin was 8.7% for the 2018 first quarter. The year-over-year margin improvement reflects higher operating leverage, manufacturing efficiencies and product mix.

CG&A, corporate, general and administrative expense for the first quarter was $6.9 million or 4% of revenue versus $4.9 million or 3.2% of revenue last year. The year-over-year increase was primarily due to higher compensation and benefit costs of $1.6 million.

Now turning to liquidity and capital resources. We used $1.7 million of cash from operations in the first quarter of 2019 compared with generating $10.3 million of operating cash during the first quarter of 2018. The change year-over-year was due to a decrease in accrued and other liabilities for incentive compensation payments that were substantially larger in the current quarter compared to 2018 Q1, and this was 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 operating cash flow to further reduce the company's leverage this year.

In terms of capital expenditures, we spent $3.2 million during the first quarter and expect to spend approximately $15 million to $17 million in 2019 to support our new program wins.

We're very proud of the first quarter performance, which puts us on track for a very solid year ahead. With that, I'll now turn it back over to Steve for his closing remarks. Steve?

--------------------------------------------------------------------------------

Stephen G. Oswald, Ducommun Incorporated - Chairman, President & CEO [5]

--------------------------------------------------------------------------------

Okay. Thanks, Doug. Before we turn it over, the call for questions, just say a few words here.

First, the quarter's performance really reflects a lot of the initiatives we implemented over the last 2 years, so I'm absolutely thrilled. I set out to streamline the organization, bring in new talent, focus the team on providing excellent customer service while vastly improving the bottom line results.

Given the current outlook for the diverse array of platforms we serve, both the defense and commercial aerospace sectors, we expect the company will continue expanding its market share, post solid margins and drive solid top line growth. In addition, Ducommun will also work, as in the past, to enhance and optimize our product portfolio to provide innovative, value-added applications that ensure repeat business, attractive results and a solid return for our shareholders.

So in closing, I think we're off to a great start in 2019. And as always, I want to thank our shareholders for their continued support.

With that, operator, let's now open up for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from Edward Marshall of Sidoti & Co.

--------------------------------------------------------------------------------

Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [2]

--------------------------------------------------------------------------------

So the start of -- the start -- or the focus I'd like to start with is the commercial revenue within structures. Pretty good bounce back there on the revenue. I'm curious, if we look at that 5% to 7% growth that you talk about for the next 3 to 4 quarters, it suggests a significant or material slowdown from the $72 million that you did in this quarter. I'm just trying to get a sense as to what you're trying to tell us, kind of how the run rate works for the remainder of the year, et cetera, and this is specifically commercial aero within AeroStructures.

--------------------------------------------------------------------------------

Douglas L. Groves, Ducommun Incorporated - VP, CFO & Treasurer [3]

--------------------------------------------------------------------------------

Sure, Ed. So we had a really strong quarter. Really 3 things driving that. Of course, we had the acquisition of CTP that wasn't in the first quarter of 2018, which added to that growth, and then you had the rates going from 47 to 52 on the 737, 12 to 14 on the 787, and of course the A320 for us, while a newer program, rates increasing significantly there. So the comparisons in the second half get a little tougher just because we won't have that necessarily rate impact at least on that major platform, the 737, at least for now pending resolution with Boeing and the regulators. So I think we're trying to moderate that the compares get a little tougher on the second half in that part of the business.

--------------------------------------------------------------------------------

Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [4]

--------------------------------------------------------------------------------

Okay. Okay. So this is kind of the run rate you somewhat expect, maybe not the growth rate but the run rate you kind of expect, that $70 million plus for the remainder of the year.

--------------------------------------------------------------------------------

Douglas L. Groves, Ducommun Incorporated - VP, CFO & Treasurer [5]

--------------------------------------------------------------------------------

Correct.

--------------------------------------------------------------------------------

Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [6]

--------------------------------------------------------------------------------

Okay. Good. You mentioned and you gave some good color on the MAX and talking about being your biggest platform. I'm curious, I know there's been several comments from suppliers from Boeing. I guess the way I'll ask it is, were you originally at the 52 rate. Were you able to produce somewhere -- the Tier 1, Tier 2 suppliers above you, were they producing at the 52 run rate per month on the 737 MAX?

--------------------------------------------------------------------------------

Stephen G. Oswald, Ducommun Incorporated - Chairman, President & CEO [7]

--------------------------------------------------------------------------------

Yes, this is Steve. I mean as far as we can tell, we were pretty much running at 52, okay? I really can't speak for the first tiers or what else is going on up ahead of us, but we were pretty much [meeting] rate. And that's -- we saw the revenue.

--------------------------------------------------------------------------------

Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [8]

--------------------------------------------------------------------------------

And when you think about your contingency plans maybe for the remainder of the year, depending upon how Boeing kind of sends out, what contingency plans, what kind of thoughts have gone through your head, furloughs, et cetera, to kind of work with the cost structure here as we think about the MAX?

--------------------------------------------------------------------------------

Douglas L. Groves, Ducommun Incorporated - VP, CFO & Treasurer [9]

--------------------------------------------------------------------------------

Ed, we are -- we're actively working of course with our supply chain as we get new information from Boeing and working through this. Again a reminder, 40% of the platform revenue is going through Spirit with no rate impacts. On the remaining 60%, we're running through several different scenarios with our supply chain, our workforce, and it's being managed accordingly based upon our biggest customer's needs.

--------------------------------------------------------------------------------

Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [10]

--------------------------------------------------------------------------------

Got it. And then finally on the electronics piece, I just wanted a comment, did I hear that you said that there was a timing -- a shipment timing that caused the impact on the commercial side for electronics?

--------------------------------------------------------------------------------

Douglas L. Groves, Ducommun Incorporated - VP, CFO & Treasurer [11]

--------------------------------------------------------------------------------

That's right. That revenue was down a little bit, but if you look at the backlog, it still remained strong. The industrial revenue was down, but that was as expected, so it was purely timing on the electronics commercial work.

--------------------------------------------------------------------------------

Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [12]

--------------------------------------------------------------------------------

And if we look at the run rate for that business from the second half of last year and we think about maybe that $6 million, $7 million delta, does that come in 2Q? Or is that spread evenly throughout the remainder of the year?

--------------------------------------------------------------------------------

Douglas L. Groves, Ducommun Incorporated - VP, CFO & Treasurer [13]

--------------------------------------------------------------------------------

It comes back throughout the remainder of the year.

--------------------------------------------------------------------------------

Operator [14]

--------------------------------------------------------------------------------

And our next question comes from Ken Herbert of Canaccord.

--------------------------------------------------------------------------------

Kenneth George Herbert, Canaccord Genuity Limited, Research Division - MD and Senior Aerospace & Defense Analyst [15]

--------------------------------------------------------------------------------

Really nice quarter. Well, I just wanted to ask again on the 737. I mean it sounds -- you're pretty clear that you're shipping at rate 52 to Spirit, but it sounds like you're fairly ambiguous on what you want to comment on what your shipments are directly to Boeing or other suppliers. Is it fair to say that for the other 60% you're probably somewhere shipping between 42 and 52? Or are you also at 52 on that other 60%?

--------------------------------------------------------------------------------

Douglas L. Groves, Ducommun Incorporated - VP, CFO & Treasurer [16]

--------------------------------------------------------------------------------

Ken, I would say it's a dynamic situation. I mean, we've got literally hundreds of different SKUs and part numbers that are being worked through with Boeing. So it's evolving as we work through this. It's not at the either end of that spectrum.

--------------------------------------------------------------------------------

Stephen G. Oswald, Ducommun Incorporated - Chairman, President & CEO [17]

--------------------------------------------------------------------------------

We don't view it as material.

--------------------------------------------------------------------------------

Douglas L. Groves, Ducommun Incorporated - VP, CFO & Treasurer [18]

--------------------------------------------------------------------------------

Yes. As we look at the whole year, we don't think it's going to have a material impact at 42 per month on the company as a whole.

--------------------------------------------------------------------------------

Kenneth George Herbert, Canaccord Genuity Limited, Research Division - MD and Senior Aerospace & Defense Analyst [19]

--------------------------------------------------------------------------------

Okay. That's helpful. And as you look at your supply chain on the MAX in particular, have you seen any changes in your suppliers in any maybe incremental risk that when rates do go up that there should be something else we should be thinking about in terms of either your suppliers or what you've seen at sort of the lower level of the supply chain?

--------------------------------------------------------------------------------

Douglas L. Groves, Ducommun Incorporated - VP, CFO & Treasurer [20]

--------------------------------------------------------------------------------

No, nothing at this point. I mean, as a reminder, everybody was getting ready to go to 57 before this happened in midyear, so I think this is just a matter of taking a deep breath and stepping back a little bit. But no, we don't see anything that we can't manage with the supply chain.

--------------------------------------------------------------------------------

Kenneth George Herbert, Canaccord Genuity Limited, Research Division - MD and Senior Aerospace & Defense Analyst [21]

--------------------------------------------------------------------------------

Okay. No, that's helpful. And then if I could, you obviously had really nice growth. Missile systems, you called out and specifically, your largest customer there, one of your largest customers, Raytheon, has had some execution issues. And I know you're shifting work, it sounds like, from Phoenix out to Huntsville. But has that been at all an issue this quarter in terms of just your customers' execution? Or is that a risk potentially here in the next few quarters that we should think about? Or how is that impacting you, if at all?

--------------------------------------------------------------------------------

Douglas L. Groves, Ducommun Incorporated - VP, CFO & Treasurer [22]

--------------------------------------------------------------------------------

No, I don't think that really has a big impact on us. I mean obviously, we're very focused on being sure we execute for Raytheon as one of our biggest customers. But we're low enough down on the supply chain that as long as we're getting our components in there, it's probably if there's an execution risk, it's probably higher up the assembly line in -- within Raytheon itself.

--------------------------------------------------------------------------------

Stephen G. Oswald, Ducommun Incorporated - Chairman, President & CEO [23]

--------------------------------------------------------------------------------

And Ken, this is Steve. Part of that business in Huntsville actually doesn't go to the missile systems, missile systems division. It goes to another division, so it's not RMS.

--------------------------------------------------------------------------------

Kenneth George Herbert, Canaccord Genuity Limited, Research Division - MD and Senior Aerospace & Defense Analyst [24]

--------------------------------------------------------------------------------

Okay. So some protection there. Okay. Great. And just finally, Steve, you specifically called out some opportunities in scrap and inventory as you look to continue to sort of drive costs out of working capital. Can you provide any more detail on timing of some of that or maybe the magnitude of where you see the opportunity either this year or next, or how we could think about what you view is the opportunity specifically within working capital?

--------------------------------------------------------------------------------

Stephen G. Oswald, Ducommun Incorporated - Chairman, President & CEO [25]

--------------------------------------------------------------------------------

Yes, I think it's more second half, Ken, and in 2020. We're just kind of getting started here. I really can't provide too much color right now as we're just putting the spade in the ground as they say. So -- but I would say later 2019 but certainly 2020.

--------------------------------------------------------------------------------

Kenneth George Herbert, Canaccord Genuity Limited, Research Division - MD and Senior Aerospace & Defense Analyst [26]

--------------------------------------------------------------------------------

Okay. That's great. And just one final question. Just consistent commentary on sort of the M&A outlook for you. Have you noticed or anything you can comment on in maybe the sort of the opportunities you're looking at in terms of the number of opportunities or how we should -- how you're thinking about that pipeline maybe relative to coming out of 2018 and maybe where you're seeing opportunities or not seeing opportunities? Or any other color around that, Steve, would be great.

--------------------------------------------------------------------------------

Stephen G. Oswald, Ducommun Incorporated - Chairman, President & CEO [27]

--------------------------------------------------------------------------------

I think it's -- the answer there, what we see right now coming out of 2018 now, it's fairly steady. So we're -- as we've talked about, we have our model. We have our discipline around that and we continue to pursue things obviously. But I don't really have much more to comment on that other than we still see a decent number of acquisitions in the market.

--------------------------------------------------------------------------------

Operator [28]

--------------------------------------------------------------------------------

And our next question comes from Michael Ciarmoli of SunTrust.

--------------------------------------------------------------------------------

Michael Frank Ciarmoli, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [29]

--------------------------------------------------------------------------------

Maybe, Steve, not to harp on it, but on the 737, the MAX, I think you actually said -- so that 60% of business that goes to Boeing, it sounded like you were adjusting some of your POs. I was just wondering what else -- any other contract provisions you guys might have for these rate changes. If they are going to step you down to 42, are you protected there? Is there any pricing? Do you have any other provisions that might protect you from raw materials purchases that you may have made already?

--------------------------------------------------------------------------------

Douglas L. Groves, Ducommun Incorporated - VP, CFO & Treasurer [30]

--------------------------------------------------------------------------------

No, I mean the framework on -- with which we're working is really a set of agreements we've had in place for a few years with Boeing. So there is flexibility for them to adjust rate up or down. And obviously with adequate notice, then we can react to that with our supply chain. So we're not seeing a huge impact on the company this year as these individual POs get adjusted as needed to meet Boeing's needs.

--------------------------------------------------------------------------------

Michael Frank Ciarmoli, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [31]

--------------------------------------------------------------------------------

Okay. And then nothing either on -- so it sounds like this framework encompasses a range of 42 per month up to 57, so there's no flexing or shifting in pricing on product you're shipping directly to Boeing.

--------------------------------------------------------------------------------

Douglas L. Groves, Ducommun Incorporated - VP, CFO & Treasurer [32]

--------------------------------------------------------------------------------

No.

--------------------------------------------------------------------------------

Stephen G. Oswald, Ducommun Incorporated - Chairman, President & CEO [33]

--------------------------------------------------------------------------------

No.

--------------------------------------------------------------------------------

Michael Frank Ciarmoli, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [34]

--------------------------------------------------------------------------------

Okay. Then just on -- I mean the margins were fantastic in this quarter. I think it was a record. Was there any drag on the margins from that timing of revenue that didn't hit in the Electronic Systems segment? I'm just trying to get a sense of could they have been better. And should we expect this type of performance? Certainly with the operational improvement initiatives you have, should we expect this to continue going forward?

--------------------------------------------------------------------------------

Douglas L. Groves, Ducommun Incorporated - VP, CFO & Treasurer [35]

--------------------------------------------------------------------------------

Well, I think on the electronics, we've been pretty steady posting 10% to 11% operating margins in that business. It moves around quarter to quarter depending upon product mix. I think we were -- structures has been the real story that you've heard us talk about the last several quarters in trying to move that business from a high single digit as we exited last year to a double digit. And again, I think with the volume we saw and the addition of CTP, there was a little bit of a tailwind for us. So we're moving in the right direction with that segment as well.

--------------------------------------------------------------------------------

Michael Frank Ciarmoli, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [36]

--------------------------------------------------------------------------------

Got it. So there wasn't any drag from that timing at all. That's the (inaudible)?

--------------------------------------------------------------------------------

Douglas L. Groves, Ducommun Incorporated - VP, CFO & Treasurer [37]

--------------------------------------------------------------------------------

No, no.

--------------------------------------------------------------------------------

Michael Frank Ciarmoli, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [38]

--------------------------------------------------------------------------------

Okay. Last one from me on the -- looking for content expansion. I think Ken mentioned Raytheon. But the other big missile player out there, I know you've been trying to penetrate Lockheed a little bit more. Their missile and fires control is just kind of hitting on all cylinders. Can you just maybe talk about what else is being done to penetrate that potential customer there?

--------------------------------------------------------------------------------

Stephen G. Oswald, Ducommun Incorporated - Chairman, President & CEO [39]

--------------------------------------------------------------------------------

Yes, sure. So look, we have a relationship with Lockheed on the F-35. We certainly do work for them and we have, I think, some real good progress. We actually are -- we have marketing initiatives now around Lockheed where, quite frankly, in the past, we did not. So we are -- we're in Lockheed. We absolutely 100% agree with your point about the opportunities in the missile programs, and we are hard at work.

--------------------------------------------------------------------------------

Michael Frank Ciarmoli, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [40]

--------------------------------------------------------------------------------

Got it. Great quarter, guys. Thanks.

--------------------------------------------------------------------------------

Operator [41]

--------------------------------------------------------------------------------

And our next question comes from Mike Crawford of B. Riley FBR.

--------------------------------------------------------------------------------

Michael Roy Crawford, B. Riley FBR, Inc., Research Division - Senior MD, Co-Head of The Discovery Group & Senior Analyst [42]

--------------------------------------------------------------------------------

Just to continue along with the MAX discussion, is it fair to say that the difference to Ducommun -- of a -- if -- of a shipment rate moving from 52 to 57 versus moving from 52 -- if it moved to 42 and stayed there for a while would be about $20 million impact a year maybe?

--------------------------------------------------------------------------------

Douglas L. Groves, Ducommun Incorporated - VP, CFO & Treasurer [43]

--------------------------------------------------------------------------------

For a full year, it could be that large if it stayed down there for that long because, remember, there's only 60% going direct to Boeing. And as you know, Spirit has signed an agreement with Boeing to be at 52 through the end of April of next year, so it would probably be a little less than that, Mike.

--------------------------------------------------------------------------------

Michael Roy Crawford, B. Riley FBR, Inc., Research Division - Senior MD, Co-Head of The Discovery Group & Senior Analyst [44]

--------------------------------------------------------------------------------

Okay. And then 2 kind of related questions. Well, I mean if for some reason Boeing did stay down, then Spirit would stay at 52. Until then, there would be some adjustment. Well, I guess that's more of an observation. But also, don't you supply some Boeing 737 or at least Boeing content to Triumph? Or is that -- is the 737 just Spirit and direct?

--------------------------------------------------------------------------------

Douglas L. Groves, Ducommun Incorporated - VP, CFO & Treasurer [45]

--------------------------------------------------------------------------------

No, it's primarily the -- what we supply to Triumph is very small. It's minuscule. It's on the 747 platforms, which, as you know, they really have mothballed for the most part.

--------------------------------------------------------------------------------

Michael Roy Crawford, B. Riley FBR, Inc., Research Division - Senior MD, Co-Head of The Discovery Group & Senior Analyst [46]

--------------------------------------------------------------------------------

And then just can you remind us the difference in the $3.2 million in CapEx you're showing in the statement of cash flows versus the $4.5 million of CapEx you show on the segment breakdown on that schedule later in your 10-Q?

--------------------------------------------------------------------------------

Douglas L. Groves, Ducommun Incorporated - VP, CFO & Treasurer [47]

--------------------------------------------------------------------------------

Sure. In the cash flow, it's cash actually out the door. You'll see later in the 10-Q the amount of PP&E that was not paid for in the quarter, so that's basically the difference. It's sitting in accounts payable as opposed to cash out the door for CapEx.

--------------------------------------------------------------------------------

Operator [48]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question comes from Christian Herbosa of NOBLE Capital Markets.

--------------------------------------------------------------------------------

Christian Francisco Herbosa, NOBLE Capital Markets, Inc., Research Division - Defense Technology and Contract Manufacturing Analyst [49]

--------------------------------------------------------------------------------

Just one question from me. So on the last call, you mentioned you had some success in growing your market share with Airbus and that you hope to build on that in 2019. Can you give us an update on how your business development efforts with Airbus have progressed so far?

--------------------------------------------------------------------------------

Stephen G. Oswald, Ducommun Incorporated - Chairman, President & CEO [50]

--------------------------------------------------------------------------------

Yes, sure. So just for background, I mean until probably 2017 when I showed up, maybe a little bit before that, we really didn't do much with Airbus, on the structures side or really any side of our business. So we continue to work with them. We're heavy in the A320 family, and we continue to build that relationship and build that book of business. I would just say, good report going into the middle of the year. We think we still have upside there as we go forward for further penetration of structures products for Airbus, so more to come.

--------------------------------------------------------------------------------

Operator [51]

--------------------------------------------------------------------------------

And our next question comes from Becky Vincent of Vincent Enterprises.

--------------------------------------------------------------------------------

Becky Vincent, Vincent Enterprises LLC - Managing Partner [52]

--------------------------------------------------------------------------------

Steve, this is Becky Vincent. My question is really about the unmanned aircraft market. I -- everything that you talked about seemed to be more for manned aircraft. I wondered if Ducommun pursued the autonomous aircraft market like General Atomics, Northrop Grumman.

--------------------------------------------------------------------------------

Stephen G. Oswald, Ducommun Incorporated - Chairman, President & CEO [53]

--------------------------------------------------------------------------------

Yes. Thanks for the question. Yes.

--------------------------------------------------------------------------------

Douglas L. Groves, Ducommun Incorporated - VP, CFO & Treasurer [54]

--------------------------------------------------------------------------------

Thank you, Becky. No, we continue to look at opportunities there, although I will tell you that the vast majority of our business is on the large airframes just because of the type of materials that we're used to working with. We think there's some -- probably application with our new VersaCore Composites technology as well as some -- the things we do in our electronics segment, but it's not a big part of our business today. But yes, I mean we're not opposed to it. We're just -- we've got a lot going on right now and certainly, we always have our eyes open for new things down the road. So if something develops, we'll let everybody know.

--------------------------------------------------------------------------------

Operator [55]

--------------------------------------------------------------------------------

And our next question is from Michael Ciarmoli of SunTrust.

--------------------------------------------------------------------------------

Michael Frank Ciarmoli, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [56]

--------------------------------------------------------------------------------

I'm just wondering if you could comment -- Steve, one thing you talked about looking for potential content expansion in the bizjet market. So what kind of you're seeing in that marketplace? And then, I know you guys aren't going to look for any deals in the larger scale structure marketplace, but it certainly looks like there's a lot of, call it, turmoil there. Triumph has got the -- announced strategic alternatives, I think Bombardier looking to get out of their structures business. So does that create more opportunities for you guys on the types of structures, smaller scale that you'd be looking for?

--------------------------------------------------------------------------------

Stephen G. Oswald, Ducommun Incorporated - Chairman, President & CEO [57]

--------------------------------------------------------------------------------

Well, I'll handle the biz jet first. So a lot of activity with the G500, G600. We're also -- we also play in the 650, so we've got, I think, more momentum there with Gulfstream. And so I think hopefully with these new programs coming on, we could get a little bit more content, a little bit more share. So that's the comment on that. Doug, you want to handle the other side?

--------------------------------------------------------------------------------

Douglas L. Groves, Ducommun Incorporated - VP, CFO & Treasurer [58]

--------------------------------------------------------------------------------

Sure. Yes. So Mike, over time, we've seen our structures business evolve to where over half of it is now titanium-based and of course, we've got our new VersaCore Composites coming on. So those larger big AeroStructure franchises that are in the market are not something necessarily that we would be focused on. We like things that are a little bit nichier than that, so we're not really looking too hard and that -- build the print space of AeroStructures. We've got better prospects with some of the more niche things that we're doing right now.

--------------------------------------------------------------------------------

Michael Frank Ciarmoli, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [59]

--------------------------------------------------------------------------------

Got it. Yes. And that's [going to obviously] the big and some of that nichier stuff, whatever it was, [titanium] or insulation or flooring, but it sounds like you won't even be looking at any of that stuff either.

--------------------------------------------------------------------------------

Stephen G. Oswald, Ducommun Incorporated - Chairman, President & CEO [60]

--------------------------------------------------------------------------------

No, we're happy where -- this is Steve. We're happy with where we are and where -- we've got our game plan. So we keep caution to that.

--------------------------------------------------------------------------------

Operator [61]

--------------------------------------------------------------------------------

And this concludes the Q&A portion. I would like to turn the call back over to Mr. Steve Oswald for closing comments.

--------------------------------------------------------------------------------

Stephen G. Oswald, Ducommun Incorporated - Chairman, President & CEO [62]

--------------------------------------------------------------------------------

Thank you very much. Okay. Just first, thank you to everyone attending. We also thank you for your questions. As I mentioned in my remarks, I'm thrilled that we are really starting to see some benefit for all the hard work the last couple years and showing in the numbers obviously. We've got a lot of confidence with this year, and we look forward to connecting again soon. So again, my thanks to everyone for their support. Have a great rest of the day and evening.

--------------------------------------------------------------------------------

Operator [63]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for your participation in today's conference. You may now disconnect. Everyone, have a wonderful day.