Ducommun Incorporated 2012 Form 10-K Summary
Business Context and Reporting Period
Ducommun provides engineering and manufacturing services for high-performance, high-cost-of-failure products, primarily for aerospace and defense, as well as industrial, energy, natural resources and medical markets. Its two reportable segments are Ducommun AeroStructures (DAS) and Ducommun LaBarge Technologies (DLT). The filing covers the fiscal year ended December 31, 2012, including fourth-quarter results. The LaBarge acquisition, completed in June 2011, contributed a full year of operations in 2012.
Financial Performance and Position
| Metric | 2012 | 2011 |
|---|---|---|
| Net sales | $747.0 million | $580.9 million |
| Gross profit / margin | $141.5 million / 18.9% | $105.9 million / 18.2% |
| Operating income (loss) | $54.8 million | $(34.1) million |
| Net income (loss) | $16.4 million | $(47.6) million |
| Diluted earnings (loss) per share | $1.55 | $(4.52) |
| Adjusted EBITDA | $84.9 million, or 11.4% of sales | $57.7 million, or 9.9% of sales |
| Cash flow from operations | $47.5 million | $(3.0) million |
| Capital expenditures | $15.8 million | $14.5 million |
Fourth-quarter 2012 sales were $193.9 million, gross profit was $35.5 million, income before taxes was $6.6 million and net income was $3.4 million, or $0.32 diluted earnings per share. Fourth-quarter 2011 included a $54.3 million pre-tax goodwill impairment charge.
At December 31, 2012, cash and cash equivalents were $46.5 million, working capital was $226.2 million, total assets were $785.1 million and shareholders’ equity was $222.7 million. Total debt was $365.7 million, compared with $392.2 million at year-end 2011. The company had $58.4 million of unused revolving-credit capacity, net of standby letters of credit.
Material Changes Versus the Prior Comparable Period
- Sales increased 28.6%, primarily from the full-year contribution of LaBarge. DLT sales rose to $437.1 million from $288.2 million, while DAS sales increased to $310.0 million from $292.8 million.
- Military and space sales represented 50.9% of 2012 sales, commercial aerospace represented 27.3%, and non-aerospace and defense markets remained weak.
- Gross margin improved by 70 basis points, driven by a higher proportion of higher-margin products and the absence of 2011 acquisition-related inventory step-up charges.
- SG&A was broadly flat despite the full-year inclusion of LaBarge expenses, reflecting the absence of substantial 2011 merger-related costs and integration synergies.
- Interest expense increased to $32.8 million from $18.2 million because of the debt used to finance the LaBarge acquisition.
- Operating cash flow improved by $50.5 million, aided by higher earnings, inventory reductions and improved operating efficiency.
- The company voluntarily prepaid $25.0 million of term-loan principal, reducing debt by $26.5 million overall. The term loan balance was $162.6 million at year-end.
- Backlog reached a record $656.6 million, compared with $636.4 million in 2011; approximately $407.8 million was expected to be delivered during 2013.
Guidance, Outlook, Risks and Unusual Items
- Management expected to make an additional $25 million to $30 million of term-loan prepayments and spend approximately $15 million on capital expenditures in 2013.
- Management stated that operating cash flow and available revolving-credit capacity were expected to provide sufficient liquidity for the next twelve months.
- The company expects to refinance debt in 2015, creating refinancing risk. The senior unsecured notes mature in July 2018, while the term loan matures in June 2017; $3.0 million under a separate promissory note was due in December 2013.
- Debt agreements require defined EBITDA of at least $50 million and contain leverage, capital-expenditure, dividend, acquisition and additional-debt restrictions. The company was in compliance with its covenants at year-end 2012.
- The company suspended dividends after the first quarter of 2011 and did not expect to resume payments in the foreseeable future.
- The 2012 effective tax rate was 25.3%, including a $2.2 million valuation allowance for state research and development credits. The company expected approximately $2.0 million of federal research and development tax benefits in the first quarter of 2013.
- No goodwill impairment was recorded in 2012, but goodwill and other intangible assets totaled $338.3 million, or 43.1% of total assets, leaving exposure to future impairment charges.
- Environmental reserves totaled approximately $1.5 million for groundwater contamination at El Mirage and Monrovia, California, plus approximately $0.4 million for the West Covina landfill. The estimated West Covina liability could range from approximately $0.4 million to $3.1 million.
- The company is a defendant in a False Claims Act qui tam lawsuit involving Boeing. The government declined to intervene, summary-judgment motions were pending, and the company could not estimate any potential liability. Relators alleged damages of $1.6 billion, or alternatively $851 million, before statutory trebling and penalties.
- Key business risks include dependence on aerospace and defense spending, customer and program concentration, fixed-price contract estimates, aircraft production rates, government appropriations, supplier constraints, acquisition integration, competition, interest rates, environmental liabilities and potential litigation.
Important Facts for Investors to Verify
- Reconcile the reported backlog, including the filing’s inconsistent references to the 2011 comparison amount of approximately $634.4 million versus $636.4 million.
- Assess whether the company can sustain cash generation sufficient to fund capital expenditures, pension contributions, debt service and planned $25 million to $30 million annual debt prepayments.
- Review the 2017 term-loan maturity, 2018 notes maturity, covenant thresholds and refinancing assumptions.
- Evaluate the sustainability of 2012 margins and earnings after excluding acquisition-related comparisons, tax benefits, the prior-year goodwill impairment and other unusual items.
- Monitor DLT and DAS exposure to U.S. defense budgets, commercial aircraft build rates and major customers, particularly Boeing, which represented 16.8% of 2012 sales.
- Review developments in the Boeing-related False Claims Act lawsuit and environmental remediation matters, including potential liabilities not fully reflected in recorded reserves.
- Confirm the status of the LaBarge integration, expected synergies and the carrying value and impairment sensitivity of goodwill and acquired intangible assets.