Ducommun Incorporated — Form 10-Q Summary
Reporting period: Three and nine months ended October 2, 2021, compared with September 26, 2020. The filing was dated November 2, 2021. Ducommun provides engineering and manufacturing services for aerospace, defense, industrial, medical and other markets through its Electronic Systems and Structural Systems segments.
Key Financial Metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net revenues | $163.2 million | $150.4 million | $480.6 million | $471.2 million |
| Gross profit | $35.3 million | $33.5 million | $105.2 million | $102.9 million |
| Gross margin | 21.6% | 22.3% | 21.9% | 21.8% |
| Operating income | $13.4 million | $10.3 million | $37.1 million | $33.9 million |
| Operating margin | 8.2% | 6.8% | 7.7% | 7.2% |
| Net income | $9.6 million | $6.5 million | $24.7 million | $19.5 million |
| Diluted EPS | $0.78 | $0.54 | $2.02 | $1.64 |
| Adjusted EBITDA | $23.9 million | $21.6 million | $68.4 million | $65.2 million |
| Adjusted EBITDA margin | 14.6% | 14.4% | 14.2% | 13.8% |
Balance Sheet and Liquidity
- Cash and cash equivalents were $9.0 million at October 2, 2021, down from $56.5 million at December 31, 2020.
- Total debt was $299.5 million, compared with $320.6 million at year-end 2020. The weighted-average interest rate was 3.24%, versus 3.59% at year-end.
- The company had $89.8 million of unused revolving-credit capacity, net of standby letters of credit, compared with $74.8 million at December 31, 2020.
- Total assets were $837.8 million and shareholders’ equity was $358.9 million at October 2, 2021.
- The company stated that it was in compliance with all debt covenants and expected operating cash flow and available credit facilities to provide sufficient liquidity for the next 12 months.
Cash Flow and Capital Expenditures
- Net cash used in operating activities was $12.3 million for the first nine months of 2021, compared with $1.5 million of cash provided in the prior-year period.
- Operating cash flow was adversely affected by increases in contract assets, inventories and accounts receivable, together with lower accrued liabilities and contract liabilities.
- Net cash used in investing activities was $9.8 million, including $10.8 million of property and equipment purchases.
- Net cash used in financing activities was $25.4 million, including $15.0 million of voluntary revolving-credit prepayments, $6.2 million of term-loan repayments and $3.0 million of net debt issuance under financing activities as presented in the cash flow statement.
- Management expected 2021 capital expenditures of $16 million to $18 million, excluding expenditures to restore the Guaymas manufacturing capabilities.
Material Changes Versus Prior Comparable Period
- Third-quarter revenue increased 8.5%, primarily from higher commercial aerospace revenue of $10.4 million and higher military and space revenue of $2.6 million.
- For the first nine months, revenue increased 2.0%. Military and space revenue rose $33.3 million, while commercial aerospace revenue declined $16.8 million and industrial revenue declined $7.0 million.
- Third-quarter gross margin declined from 22.3% to 21.6% because of unfavorable product mix. Nine-month gross margin improved modestly from 21.8% to 21.9%.
- Operating income increased 30.2% in the third quarter and 9.3% for the first nine months. The comparison benefited from the absence of prior-year restructuring charges of $1.1 million in the quarter and $1.8 million year to date.
- Interest expense declined by $0.3 million in the third quarter and $2.6 million year to date, reflecting lower debt balances and interest rates.
- Electronic Systems revenue increased 1.2% in the third quarter and 4.5% year to date. Structural Systems revenue increased 24.7% in the third quarter but declined 2.1% year to date.
- Backlog increased to $835.5 million from $807.7 million at December 31, 2020; $593.0 million was expected to be delivered within the next 12 months.
Outlook, Risks and Unusual Items
- Remaining performance obligations totaled $736.0 million at October 2, 2021; management expected approximately 70% to be recognized as revenue during the following 12 months.
- COVID-19 continued to affect operations, customers and suppliers, particularly commercial aerospace. The company warned that the pandemic could materially affect business, results and financial condition during the remainder of 2021 and beyond.
- The June 2020 fire at the Guaymas, Mexico performance center continued to generate expenses and insurance matters. The company had received $13.5 million of general insurance recoveries as of October 2, 2021, but the timing and amount of remaining recoveries, including business-interruption claims, were not known.
- Guaymas fire-related expenses were $0.7 million in the third quarter and $1.9 million for the first nine months of 2021. The company stated that production was being absorbed by other facilities.
- The company recorded environmental remediation accruals of $1.5 million for groundwater contamination and $0.4 million for the West Covina landfill. Estimated potential West Covina liabilities ranged from $0.4 million to $3.1 million.
- A California wage-and-hour representative action was pending without an accrual because the company could not reasonably estimate the likelihood or amount of loss.
- Deferred employer payroll taxes under the CARES Act totaled $6.1 million; half was due by December 31, 2021 and the remainder by December 31, 2022.
- Five customers represented 49.6% of third-quarter revenue, and the top ten customers represented 62.4%, indicating significant customer concentration. Raytheon Technologies accounted for 25.0% of third-quarter revenue.
- The company provided no formal revenue or earnings guidance in the filing. Management said some planned capital expenditures could be delayed because of the pandemic.
Investor Verification Priorities
- Verify the sustainability of revenue recovery in commercial aerospace and the continued strength of military and space programs.
- Track conversion of the $736.0 million remaining performance obligations and $835.5 million backlog into revenue and cash flow.
- Assess working-capital requirements, particularly the $182.8 million of contract assets and $144.2 million of inventories, given negative operating cash flow.
- Review debt maturities, variable-rate exposure, covenant compliance and available revolver capacity.
- Monitor Guaymas insurance recoveries, restoration costs and operational effects.
- Follow developments in the California wage-and-hour litigation and environmental remediation matters.
- Reconcile Adjusted EBITDA to GAAP results; the measure excludes interest, taxes, depreciation, amortization, stock compensation, restructuring charges and Guaymas-related expenses and is not a GAAP liquidity measure.