Ducommun Incorporated 10-Q Summary
Business Context and Reporting Period
Ducommun provides engineered products and manufacturing solutions primarily for aerospace and defense, with additional industrial and medical exposure. Operations are reported through Electronic Systems and Structural Systems. The filing covers the three and six months ended July 2, 2022, compared with July 3, 2021. The filing was signed August 4, 2022.
Financial Performance and Position
| Metric | Q2 2022 | Q2 2021 | Six Months 2022 | Six Months 2021 |
|---|---|---|---|---|
| Net revenue | $174.2 million | $160.2 million | $337.7 million | $317.3 million |
| Gross profit | $34.6 million | $36.8 million | $67.1 million | $69.9 million |
| Gross margin | 19.9% | 23.0% | 19.9% | 22.0% |
| Operating income | $7.8 million | $13.1 million | $16.9 million | $23.7 million |
| Net income | $4.1 million | $8.4 million | $12.2 million | $15.1 million |
| Diluted EPS | $0.34 | $0.69 | $0.99 | $1.23 |
| Adjusted EBITDA | $24.1 million | $23.4 million | $44.2 million | $44.5 million |
| Adjusted EBITDA margin | 13.8% | 14.6% | 13.1% | 14.0% |
- Commercial aerospace revenue increased $19.5 million, or approximately 52%, in the second quarter and $38.2 million in the first six months, driven by higher aircraft build rates.
- Military and space revenue declined $6.3 million in the quarter and $21.1 million year to date, primarily from lower build rates on certain rotary-wing, missile and fixed-wing platforms.
- Electronic Systems second-quarter revenue increased 6.7% to $109.7 million; segment operating income decreased to $13.6 million from $14.4 million.
- Structural Systems second-quarter revenue increased 12.3% to $64.5 million; segment operating income fell to $1.3 million from $5.6 million, primarily due to unfavorable product mix.
- Cash and cash equivalents were $37.5 million at July 2, 2022, down from $76.3 million at December 31, 2021.
- Total debt was $254.2 million, compared with $287.7 million at year-end 2021. The weighted-average interest rate was 3.80%, versus 3.27% at year-end.
- Unused revolving credit capacity was $99.8 million at quarter end. The company reported compliance with its debt covenants.
- Net cash provided by operating activities was $6.1 million for the first six months, compared with cash used of $17.8 million in the prior-year period. Capital expenditures were $10.5 million.
- Net cash used in financing activities was $36.3 million, including $33.5 million of term-loan repayments. Management expects 2022 capital expenditures of $17 million to $19 million, excluding Guaymas restoration spending.
- Remaining performance obligations were $879.4 million at July 2, 2022, with approximately 70% expected to be recognized as revenue in the next 12 months. Backlog was $976.5 million, including $686.0 million expected to be delivered within 12 months.
Material Changes Versus the Prior Comparable Period
- Revenue increased 8.7% in the second quarter and 6.4% for the first six months, but gross margin declined by 3.1 percentage points in both comparison periods due primarily to unfavorable product mix.
- Operating income declined 40.8% in the quarter and 28.8% year to date. Results included $3.2 million of restructuring charges in 2022.
- Net income declined 50.8% in the quarter and 19.0% year to date. Year-to-date results benefited from $3.0 million of other income related to Guaymas business-interruption insurance recoveries.
- Adjusted EBITDA increased modestly in the quarter but declined year to date, and its margin contracted from 14.6% to 13.8% in the quarter and from 14.0% to 13.1% year to date.
- Accounts receivable, contract assets and inventories increased from year-end, contributing to working-capital requirements. Contract assets rose to $182.5 million from $176.4 million, while inventories rose to $164.2 million from $150.9 million.
- The company acquired Magnetic Seal LLC in December 2021 for approximately $69.1 million net of cash acquired. Its contribution to 2022 results was immaterial.
Guidance, Outlook, Risks and Unusual Items
- Management expects the April 2022 restructuring plan to produce annualized cost savings of $3 million to $4 million. Remaining pre-tax restructuring charges are estimated at $3 million to $5 million through 2023, including $2 million to $3 million of cash costs and $1 million to $2 million of non-cash impairment charges.
- COVID-19 continued to affect commercial aerospace, supply chains, customers and suppliers. Management stated that the pandemic could materially adversely affect 2022 and future results.
- The company remains exposed to unfavorable product mix, aircraft production rates, customer concentration and contract-estimate changes. The top ten customers represented 61.4% of second-quarter revenue; Raytheon represented 21.9%.
- On July 14, 2022, after quarter end, Ducommun refinanced its debt with a $250 million senior secured term loan and a $200 million senior secured revolving facility, both maturing July 14, 2027. The company used the term loan and cash to repay existing debt and stated that the new facilities had a lower interest-rate spread at the same leverage ratio.
- The company amended $150 million of forward interest-rate swaps from LIBOR to Term SOFR in connection with the refinancing. The swaps have a 1.8% weighted-average fixed rate, become effective January 1, 2024 and terminate January 1, 2031.
- The company recorded $3.2 million of restructuring charges in the quarter and $3.0 million of Guaymas business-interruption insurance recovery year to date. These items affect comparability with the prior period.
- Contingencies include a tentative $0.9 million wage-and-hour settlement subject to court approval, $1.5 million accrued for groundwater remediation, and $0.4 million accrued for the West Covina landfill. Potential future environmental liabilities are estimated at $0.4 million to $3.1 million for that landfill.
- The cause and ultimate financial impact of the 2020 Guaymas fire remain unresolved. The company stated that liability could exceed insurance coverage and materially affect liquidity or results, although no probable and reasonably estimable additional loss was recorded.
- Management stated that cash generated from operations and available borrowing capacity are expected to provide sufficient liquidity for the next twelve months.
Investor Verification Checklist
- Verify the terms, pricing, covenants and leverage implications of the July 14, 2022 refinancing.
- Track whether restructuring savings materialize and whether the remaining $3 million to $5 million of charges remain within management's estimate.
- Assess whether commercial aerospace recovery offsets weaker military and space demand and unfavorable product mix.
- Monitor cash conversion, contract assets, inventories, backlog quality and customer concentration.
- Review the resolution and potential insurance recovery associated with the Guaymas fire.
- Evaluate environmental, wage-and-hour and other litigation exposures, including amounts beyond recorded accruals.
- Consider the effect of rising interest rates despite the refinancing and the company's $150 million interest-rate hedge.