Ducommun Incorporated — Q2 2023 Form 10-Q Summary
Reporting period: Three and six months ended July 1, 2023, compared with July 2, 2022. The filing was signed August 3, 2023. Ducommun provides engineered products and manufacturing solutions primarily for aerospace and defense, through its Electronic Systems and Structural Systems segments.
Financial Performance and Position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net revenue | $187.3 million | $174.2 million | $368.5 million | $337.7 million |
| Gross profit | $40.1 million | $34.6 million | $76.9 million | $67.1 million |
| Gross margin | 21.4% | 19.9% | 20.9% | 19.9% |
| Operating income | $5.0 million | $7.8 million | $11.4 million | $16.9 million |
| Operating margin | 2.7% | 4.5% | 3.1% | 5.0% |
| Net income | $2.4 million | $4.1 million | $7.6 million | $12.2 million |
| Diluted EPS | $0.17 | $0.34 | $0.58 | $0.99 |
| Adjusted EBITDA | $26.1 million | $24.1 million | $49.2 million | $44.2 million |
| Adjusted EBITDA margin | 13.9% | 13.8% | 13.3% | 13.1% |
Commercial aerospace revenue increased $21.2 million in Q2 and $40.2 million for the six-month period, driven by higher aircraft build rates. Military and space revenue declined $10.8 million in Q2 and $13.7 million for the six months due primarily to lower production rates on certain military, missile and rotary-wing platforms. Industrial revenue increased $2.7 million in Q2 and $4.4 million for the six months.
Electronic Systems revenue declined 2.4% in Q2 but increased 2.7% for the six months. Structural Systems revenue increased 24.4% in Q2 and 19.4% for the six months. Structural Systems operating income improved to $5.4 million in Q2 from $1.3 million, while Electronic Systems operating income declined to $9.5 million from $13.6 million.
Cash Flow, Debt and Liquidity
- Cash used in operating activities was $9.7 million in the first six months of 2023, compared with $6.1 million of cash provided in the prior-year period. Working-capital uses included higher inventories and lower contract liabilities, accounts payable, and accrued liabilities.
- Cash used in investing activities was $125.3 million, including $114.4 million for the BLR Aerospace acquisition and $10.9 million for capital expenditures.
- Cash provided by financing activities was $111.6 million, including $85.1 million of net proceeds from a common-stock offering and net borrowings under the revolving facility.
- Cash and cash equivalents declined to $22.8 million from $46.2 million at December 31, 2022.
- Total debt was $279.1 million, compared with $248.4 million at year-end 2022. The weighted-average interest rate increased to 7.38% from 4.36%.
- The company had $166.0 million of unused revolving-credit capacity, after standby letters of credit, and was in compliance with its debt covenants at July 1, 2023. The term loan and revolving facility mature July 14, 2027.
Material Changes and Unusual Items
- BLR acquisition: On April 25, 2023, Ducommun acquired BLR Aerospace for an initial purchase price of approximately $115.0 million, net of cash acquired. The acquisition added $41.2 million of preliminary goodwill and $55.5 million of intangible assets, and its results were included in Structural Systems from the acquisition date.
- Equity offering: On May 18, 2023, the company issued 2.3 million shares at $40.00 per share, generating $85.1 million of net proceeds. Proceeds and cash on hand were used to repay approximately $85.2 million of revolving debt incurred for the BLR acquisition.
- Restructuring: Restructuring charges were $4.8 million in Q2 and $8.9 million for the first six months, compared with $2.7 million in the prior-year periods. The company expects an additional $5.0 million to $8.0 million of pre-tax charges through 2023, including $4.0 million to $6.0 million of cash costs and $1.0 million to $2.0 million of non-cash charges. Annualized savings are expected to be $11.0 million to $13.0 million.
- Insurance recoveries: Q2 other income included $4.1 million, principally from $3.8 million of recoveries related to the 2020 Guaymas fire and $0.1 million of income from a 2023 fire claim. The Guaymas insurance claim for operating-asset damage and business interruption was deemed final and closed during the quarter.
- Interest expense: Interest expense increased to $5.7 million in Q2 and $10.0 million for the six months, primarily because of higher interest rates and increased debt.
Outlook, Risks and Contingencies
- Management expects 2023 capital expenditures of $18.0 million to $20.0 million, primarily to support new contract awards and higher-level assembly programs.
- The company expects cash generated from operations and available borrowing capacity to provide sufficient liquidity for the next twelve months.
- Remaining performance obligations were $916.7 million at July 1, 2023; approximately 70% was expected to be recognized as revenue over the next 12 months. Backlog was $1.01 billion, including $677.0 million expected to be delivered over the next 12 months.
- Key risks include customer and end-market concentration, aircraft production-rate changes, supply-chain and labor constraints, inflation and rising interest rates, debt covenant compliance, cybersecurity and regulatory requirements, contract cost estimates, restructuring execution, acquisitions, goodwill impairment, environmental liabilities, litigation and potential effects from fires or other operational disruptions.
- Environmental accruals included $1.5 million for groundwater investigation and remediation and $0.4 million for the West Covina landfill. The estimated range of future West Covina liabilities was $0.4 million to $3.1 million.
- The company maintained $5.5 million of unrecognized tax benefits at July 1, 2023, of which $2.8 million would affect the effective tax rate if recognized.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting. No material changes were reported to the risk factors in the 2022 Form 10-K.
Important Facts for Investors to Verify
- Whether commercial aerospace production-rate increases offset weaker military and space volumes and support the reported revenue growth.
- BLR’s ongoing contribution, integration progress, purchase-price allocation and impact on leverage, amortization and margins.
- Execution of the restructuring plan, remaining charges of $5.0 million to $8.0 million and achievement of projected annual savings.
- Operating cash-flow conversion, inventory growth, contract liabilities and reliance on revolving debt for liquidity.
- Exposure to variable interest rates despite the $150.0 million forward interest-rate swaps that become effective January 1, 2024.
- Customer concentration: the top ten customers represented 56.5% of Q2 revenue and 57.4% of six-month revenue.
- Potential environmental, litigation, fire-related and other contingent liabilities beyond recorded accruals and insurance recoveries.