Ducommun Incorporated 2020 Q3 Form 10-Q Summary
Business Context and Reporting Period
Ducommun provides engineering and manufacturing services for high-performance aerospace, defense, industrial, medical and other applications through its Electronic Systems and Structural Systems segments. The filing covers the unaudited three and nine months ended September 26, 2020, compared with September 28, 2019.
Key Financial Metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Net revenue | $150.4 million | $181.1 million | $471.2 million | $534.2 million |
| Gross profit | $33.5 million | $38.3 million | $102.9 million | $112.1 million |
| Gross margin | 22.3% | 21.2% | 21.8% | 21.0% |
| Operating income | $10.3 million | $14.6 million | $33.9 million | $41.1 million |
| Operating margin | 6.8% | 8.1% | 7.2% | 7.7% |
| Net income | $6.5 million | $8.3 million | $19.5 million | $23.6 million |
| Diluted EPS | $0.54 | $0.70 | $1.64 | $2.00 |
| Adjusted EBITDA | $21.6 million | $23.6 million | $65.2 million | $67.1 million |
| Adjusted EBITDA margin | 14.4% | 13.1% | 13.8% | 12.6% |
Revenue declined 17.0% in the quarter and 11.8% year to date. Commercial aerospace revenue fell $62.9 million in the quarter and $138.1 million year to date, primarily because of lower large-aircraft build rates. Military and space revenue increased $33.4 million in the quarter and $75.8 million year to date.
Electronic Systems revenue increased 14.2% in Q3 and 11.2% year to date, while segment operating income increased to $14.9 million from $9.7 million in Q3 and to $40.4 million from $28.8 million year to date. Structural Systems revenue decreased 48.2% in Q3 and 34.2% year to date, while segment operating income declined to $1.8 million from $12.9 million in Q3 and to $13.4 million from $35.2 million year to date.
Cash Flow, Balance Sheet, Debt and Liquidity
- Cash provided by operating activities was $1.5 million for the first nine months of 2020, down from $20.1 million in the prior-year period. Working capital uses included increases of $34.0 million in contract assets and $18.0 million in inventories.
- Capital expenditures were $7.9 million year to date, compared with $14.9 million in the prior-year period. Investing cash outflow was $5.3 million.
- Financing activities provided $38.7 million, primarily reflecting net revolver borrowings. Cash increased to $74.6 million from $39.6 million at December 31, 2019.
- Total debt was $349.1 million at September 26, 2020, compared with $310.0 million at year-end 2019. The weighted-average interest rate declined to 3.72% from 6.87%.
- Unused revolving credit capacity was $49.8 million after $0.2 million of standby letters of credit. The company stated that it was in compliance with all debt covenants.
- Current assets were $425.1 million and current liabilities were $137.9 million. Contract assets increased to $140.7 million from $106.7 million, while contract liabilities increased to $26.8 million from $14.5 million.
Material Changes and Unusual Items
- Management initiated restructuring in May 2020, primarily in Structural Systems, in response to the commercial aerospace downturn. Restructuring charges were $1.1 million in Q3 and $1.8 million year to date.
- A June 29, 2020 fire severely damaged the Guaymas, Mexico performance center. The company wrote off $6.8 million of property and equipment and tooling and $3.4 million of inventory. It had received $5.0 million of insurance recoveries by quarter-end, but the timing and amount of remaining recoveries, including business-interruption proceeds, were not known.
- The company acquired Nobles Worldwide in October 2019 for a final purchase price of approximately $76.8 million net of cash acquired. Nobles is included in Structural Systems.
- Goodwill was not deemed impaired despite the pandemic-related operating pressure. Goodwill and intangible assets totaled $298.8 million at quarter-end.
- Interest-rate cap hedges matured during the second quarter of 2020, leaving no derivative instruments outstanding at September 26, 2020.
Backlog, Outlook and Risks
Remaining performance obligations were $746.1 million, with management expecting approximately 70% to be recognized as revenue over the following 12 months. Reported backlog was $532.0 million expected for delivery over the next 12 months and $681.0 million overall at September 26, 2020, down from $795.995 million at December 31, 2019. The decline was concentrated in commercial aerospace, partially offset by military and space orders.
Management expected 2020 capital expenditures of $12.0 million to $14.0 million, excluding spending to restore Guaymas manufacturing capabilities, although some spending could be delayed because of COVID-19. The company stated that operating cash flow and available borrowing capacity were expected to provide sufficient liquidity for the next 12 months. No formal revenue or earnings guidance was provided.
Primary risks include the continuing COVID-19 impact on commercial aerospace demand, customer production-rate reductions, supply-chain and workforce disruptions, concentration among major customers, contract-estimate risk, variable-rate debt and potential delays or uncertainty in Guaymas insurance recoveries. Environmental matters include a $1.5 million accrual for groundwater remediation and a $0.4 million accrual for the West Covina landfill, with estimated future West Covina liabilities ranging from $0.4 million to $3.1 million.
Investor Verification Checklist
- Verify the pace of commercial aerospace recovery and whether military and space growth can offset continued commercial declines.
- Monitor backlog conversion, remaining performance obligations and customer cancellations or delivery delays.
- Track operating cash conversion, contract assets, inventory levels and accounts payable.
- Confirm debt covenant compliance, revolver availability, mandatory amortization and exposure to variable interest rates.
- Verify the final amount and timing of Guaymas insurance recoveries and the cost and timing of restoring production.
- Assess whether restructuring actions and cost reductions are sufficient to protect Structural Systems margins.
- Review the potential impact of environmental liabilities, unrecognized tax benefits and other contingencies.