Ducommun Incorporated — Q1 2013 Form 10-Q Summary
Business context and reporting period
Ducommun provides engineering and manufacturing products and services primarily to the aerospace and defense industries, operating through Ducommun AeroStructures (DAS) and Ducommun LaBarge Technologies (DLT). The filing covers the three months ended March 30, 2013, compared with the three months ended March 31, 2012. The financial statements are unaudited.
Key financial metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $175.9 million | $184.3 million | Down 4.6% |
| Gross profit | $32.9 million | $34.5 million | Down 4.7% |
| Gross margin | 18.7% | 18.7% | Flat |
| Operating income | $10.3 million | $11.9 million | Down 13.1% |
| Operating margin | 5.9% | 6.4% | Down 50 basis points |
| Net income | $3.7 million | $2.4 million | Up 55.2% |
| Diluted EPS | $0.35 | $0.23 | Up $0.12 |
| Adjusted EBITDA | $17.3 million | $19.0 million | Down 8.9% |
| Adjusted EBITDA margin | 9.9% | 10.3% | Down 40 basis points |
Net income benefited from a $1.2 million income tax benefit, including $2.0 million of retroactive federal research and development tax credits related to 2012. Excluding this tax benefit, reported earnings would have been materially lower. Interest expense declined to $7.8 million from $8.2 million, primarily due to lower debt balances.
Net cash used in operating activities was $6.1 million, compared with $4.8 million used in the prior-year quarter. Capital expenditures were $2.6 million, down from $4.9 million. Cash used in financing was $7.8 million, including a voluntary $7.5 million term-loan prepayment. Cash and cash equivalents declined to $30.0 million from $46.5 million at December 31, 2012.
At March 30, 2013, total debt was $358.2 million, including $155.1 million of floating-rate term-loan borrowings and $200.0 million of 9.75% senior unsecured notes. The weighted-average interest rate was 7.54%. The company had $58.4 million of unused revolving-credit capacity, net of standby letters of credit, and was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Sales declined in both segments: DAS sales decreased 2.1% to $72.7 million, while DLT sales decreased 6.2% to $103.2 million.
- Sales weakness reflected non-aerospace and defense markets, lower defense-structures sales from schedule delays, and lower natural-resources and industrial demand. These declines were partly offset by higher defense-technologies sales and higher commercial-aircraft activity.
- Defense-technologies sales increased 15% within DLT, while DLT sales to non-aerospace and defense markets declined 32%.
- DAS segment operating income increased slightly to $6.6 million, while DLT segment operating income declined to $7.9 million from $8.3 million. Corporate general and administrative expense increased to $4.3 million from $3.0 million.
- Operating results included approximately $0.5 million of financing and legal costs related to the March debt repricing and $0.3 million of non-recurring professional fees.
- Backlog decreased to $637.5 million from $656.6 million at December 31, 2012. Approximately $350 million was expected to be delivered during the remainder of 2013.
Guidance, outlook, commentary, risks and unusual items
- Management expected to repay approximately $25 million to $30 million of term-loan principal during 2013 and spend approximately $15 million on capital expenditures.
- Management stated that operating cash flow and available revolving-credit capacity were expected to provide sufficient liquidity for the next twelve months.
- Defense-structures sales were expected to benefit from schedule-slipped shipments in the second half of fiscal 2013. Management continued to characterize non-aerospace and defense markets as weak.
- The March 2013 debt repricing reduced the interest-rate spread on the term loan and revolving facility by 50 basis points and the interest-rate floor by 25 basis points. The term-loan rate was 4.75% at quarter-end, exposing the company to changes in U.S. interest rates.
- A pending qui tam False Claims Act lawsuit alleges that Ducommun sold unapproved parts incorporated into 21 Boeing aircraft. The government declined to intervene, summary-judgment motions were pending, and the company could not estimate any potential liability. The relators alleged damages of $1.6 billion, or alternatively $851 million, before statutory multipliers and penalties.
- The company had environmental obligations relating to groundwater contamination and landfill sites. Reserves included approximately $1.5 million for El Mirage and Monrovia groundwater remediation and $0.4 million for the West Covina landfill; estimated West Covina exposure was approximately $0.4 million to $3.1 million.
- The filing notes that quarterly results are not necessarily indicative of full-year results. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Assess whether the reported earnings improvement is sustainable after the $2.0 million retroactive tax benefit and other unusual items.
- Monitor cash conversion, including operating cash usage, production-contract costs, inventory, and the decline in cash balances.
- Verify progress toward the planned $25 million to $30 million term-loan repayment and approximately $15 million of 2013 capital expenditures.
- Evaluate refinancing and interest-rate risk associated with the $155.1 million floating-rate term loan and the $200.0 million senior unsecured notes.
- Track backlog conversion, schedule delays, customer concentration, and Boeing exposure; Boeing represented 18.6% of Q1 sales and 16.2% of accounts receivable.
- Monitor the pending False Claims Act litigation and environmental matters for changes in estimated exposure or reserves.