Business Context and Reporting Period
Ducommun Incorporated is an aerospace and defense-focused engineering and manufacturing company operating through Ducommun AeroStructures (DAS) and Ducommun LaBarge Technologies (DLT). The unaudited Form 10-Q covers the three and six months ended July 4, 2015, with prior-year comparisons restated. Products also serve commercial aerospace, industrial, natural resources, medical and other markets.
Key Financial Metrics
| Metric | Q2 2015 | Q2 2014 | Six Months 2015 | Six Months 2014 |
|---|---|---|---|---|
| Net revenue | $174.8 million | $186.5 million | $347.8 million | $366.3 million |
| Gross profit / margin | $31.2 million / 17.8% | $37.7 million / 20.2% | $58.0 million / 16.7% | $73.6 million / 20.1% |
| Operating income / margin | $10.8 million / 6.2% | $16.8 million / 9.0% | $14.5 million / 4.2% | $31.6 million / 8.6% |
| Net income (loss) | $1.8 million | $6.6 million | $(0.2) million | $11.8 million |
| Diluted EPS | $0.16 | $0.60 | $(0.02) | $1.06 |
| EBITDA | $18.9 million / 10.8% | $24.5 million / 13.1% | $29.4 million / 8.5% | $46.8 million / 12.8% |
Six-month operating cash flow was $17.6 million, compared with $15.5 million in the prior-year period. Capital expenditures were $7.8 million, compared with $6.0 million. Cash used in financing was $30.3 million, primarily reflecting debt repayment and refinancing activity. Cash declined to $26.8 million at July 4, 2015, from $45.6 million at December 31, 2014.
Total debt was $265.0 million at July 4, 2015, compared with $290.1 million at year-end 2014. The company had $132.3 million of unused revolving credit capacity after standby letters of credit. Total assets were $710.0 million and shareholders’ equity was $258.5 million.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue decreased 6.3%; six-month revenue decreased 5.1%. Military and space revenue declined approximately 17% in the quarter and 20% year to date, while commercial aerospace revenue increased approximately 9% and 12%, respectively.
- Gross margin declined because of lower volume, manufacturing inefficiencies, unfavorable product mix and higher forward-loss reserves. DAS and DLT segment operating income both declined.
- SG&A decreased slightly in the quarter but increased year to date because of higher compensation and professional service costs.
- Interest expense declined due to lower debt balances. Results included a $2.8 million loss on extinguishment of debt and $1.5 million of insurance recoveries related to property and equipment.
- Backlog declined to $523.9 million from $559.3 million at December 31, 2014; approximately $419 million was expected to be delivered within the next 12 months.
Guidance, Outlook, Risks and Unusual Items
- Management expected 2015 capital expenditures of approximately $15.0 million, principally to support new contract awards and tooling requirements.
- Management stated that operating cash flow and available revolving capacity were expected to provide sufficient liquidity for the next 12 months, but the company remains dependent on those sources to meet short-term obligations.
- In June 2015, the company completed new $275 million term-loan and $200 million revolving-credit facilities, both maturing in 2020. Mandatory term-loan amortization applies. The company was in covenant compliance at July 4, 2015.
- After quarter-end, on July 27, 2015, the company redeemed its $200 million senior unsecured notes using a new term-loan draw. It expected to recognize a $9.75 million call premium and approximately $2.1 million of additional debt-issuance-cost write-offs in the third quarter.
- Prior-period financial statements were restated for misconduct involving direct-labor charges to a long-term contract and errors in tax-account reconciliations. The company’s disclosure controls were not effective at July 4, 2015 because related material weaknesses had not been remediated.
- Management was implementing additional contract-loss-reserve and tax controls and expected to complete planned remediation during 2015, but provided no assurance that completion would occur on schedule.
- A qui tam lawsuit involving alleged unapproved parts sold to Boeing had been dismissed on summary judgment, but former plaintiffs had appealed. Environmental matters included approximately $1.5 million reserved for groundwater remediation and $0.4 million reserved for a West Covina landfill matter; the estimated West Covina exposure ranged from approximately $0.4 million to $3.1 million.
- Revenue concentration remained significant: the top ten customers represented 57% of second-quarter revenue and 55% of six-month revenue; Boeing represented 18% and 17%, respectively.
Important Facts for Investors to Verify
- Confirm the third-quarter accounting effects of the July 27 note redemption, including the call premium and debt-issuance-cost write-offs.
- Monitor remediation of the material weaknesses and whether management ultimately determines the controls operate effectively.
- Assess whether lower military and space demand, unfavorable mix, forward-loss reserves and reduced manufacturing utilization continue to pressure margins.
- Track backlog conversion, customer concentration and any program delays or cancellations, particularly in commercial aerospace and defense programs.
- Reconcile liquidity needs with mandatory term-loan amortization, variable-rate exposure and planned capital expenditures.
- Evaluate the assumptions underlying contract-loss reserves, inventory valuations and environmental contingencies, as actual costs may differ from estimates.