Ducommun Incorporated 10-Q Summary
Business context and reporting period
Ducommun provides engineering and manufacturing services for high-performance, high-cost-of-failure applications, primarily in aerospace and defense, with additional industrial and other end markets. Its reportable segments are Electronic Systems and Structural Systems. This unaudited Form 10-Q covers the quarter and six months ended July 3, 2021, compared with June 27, 2020.
Key financial metrics
| Metric | Three months ended July 3, 2021 | Three months ended June 27, 2020 | Six months ended July 3, 2021 | Six months ended June 27, 2020 |
|---|---|---|---|---|
| Net revenues | $160.2 million | $147.3 million | $317.3 million | $320.8 million |
| Gross profit / margin | $36.8 million / 23.0% | $32.7 million / 22.2% | $69.9 million / 22.0% | $69.5 million / 21.7% |
| Operating income / margin | $13.1 million / 8.2% | $10.0 million / 6.8% | $23.7 million / 7.5% | $23.7 million / 7.4% |
| Net income / margin | $8.4 million / 5.3% | $5.1 million / 3.5% | $15.1 million / 4.8% | $13.0 million / 4.1% |
| Diluted EPS | $0.69 | $0.43 | $1.23 | $1.10 |
| Adjusted EBITDA / margin | $23.4 million / 14.6% | $20.3 million / 13.8% | $44.5 million / 14.0% | $43.5 million / 13.6% |
Six-month operating cash flow was negative $17.8 million, compared with negative $3.4 million in the prior-year period. Investing cash use was $6.8 million, including $7.4 million of property and equipment purchases. Financing cash use was $19.8 million, compared with $39.4 million of financing cash provided in the prior-year period. Cash declined to $12.0 million from $56.5 million at December 31, 2020.
At July 3, 2021, total debt was $306.2 million, down from $320.6 million at year-end 2020, and the weighted-average interest rate was 3.23%. The company reported $84.8 million of unused revolving-credit capacity, after standby letters of credit. Management stated that all debt covenants were satisfied.
Current assets were $410.6 million and current liabilities were $133.6 million. Contract assets increased to $172.9 million from $154.0 million, while inventories increased to $144.6 million from $129.2 million. Shareholders’ equity increased to $345.5 million from $329.3 million.
Material changes versus the prior comparable period
- Second-quarter revenue increased 8.7%, primarily from a $18.5 million increase in military and space revenue, partly offset by a $2.1 million decline in commercial aerospace revenue.
- Six-month revenue declined 1.1% because commercial aerospace revenue decreased $27.3 million and industrial revenue decreased $6.9 million, partly offset by a $30.7 million increase in military and space revenue.
- Electronic Systems revenue increased 11.8% in the quarter and 6.2% year to date; segment operating income increased to $14.4 million in the quarter and $26.9 million year to date.
- Structural Systems revenue increased 3.7% in the quarter but declined 11.7% year to date. Segment operating income declined to $5.6 million in the quarter and $10.7 million year to date, reflecting unfavorable product mix and lower commercial aerospace volume.
- Gross margin improved by 80 basis points in the quarter and 30 basis points year to date. Management attributed the quarterly improvement primarily to favorable manufacturing volume and the year-to-date improvement to favorable product mix and lower compensation costs.
- Interest expense declined by $0.9 million in the quarter and $2.3 million year to date because of lower interest rates and lower debt balances.
- The restructuring plan initiated in 2020 in response to the commercial aerospace downturn was completed by December 31, 2020; no restructuring charges were recorded in 2021.
Guidance, outlook, risks, contingencies, and unusual items
- Management expects 2021 capital expenditures of approximately $16 million to $18 million, excluding spending to restore the Guaymas facility, primarily to support new contract awards. Some spending could be delayed because of COVID-19.
- Remaining performance obligations were $728.9 million at July 3, 2021, with approximately 70% expected to be recognized as revenue during the next 12 months. Backlog was $814.2 million, including $576.0 million expected to be delivered over the next 12 months.
- COVID-19 continued to pressure commercial aerospace demand, customer and supplier operations, and the broader economy. Management warned that the pandemic could materially adversely affect results and financial condition during the remainder of 2021 and beyond.
- A June 2020 fire severely damaged the Guaymas, Mexico performance center. The company has received $13.5 million of insurance recoveries, but the timing and amount of remaining recoveries, including business-interruption recoveries, were not known.
- The company deferred $6.1 million of employer payroll taxes under the CARES Act; one-half is due by December 31, 2021 and the remainder by December 31, 2022.
- Environmental liabilities included a $1.5 million accrual for groundwater remediation and a $0.4 million accrual for the West Covina landfill. The estimated potential West Covina liability ranged from $0.4 million to $3.1 million.
- A California wage-and-hour representative action was pending, but the company had insufficient information to estimate a probable loss and recorded no accrual.
- Adjusted EBITDA included $0.7 million of Guaymas fire-related expenses in the quarter and $1.2 million year to date. This non-GAAP measure should not be viewed as a substitute for GAAP earnings or operating cash flow.
- The company had $4.2 million of unrecognized tax benefits at July 3, 2021, of which $2.5 million would affect the effective tax rate if recognized.
- Interest-rate exposure arises from variable-rate debt. Management stated that a hypothetical 10% change in interest rates would have an immaterial effect on financial condition and results of operations.
Important facts for investors to verify
- Whether commercial aerospace build rates recover as expected and whether military and space growth offsets continuing commercial and industrial weakness.
- The conversion of the $728.9 million of remaining performance obligations and $814.2 million of backlog into revenue, including potential delays or cancellations.
- Working-capital requirements, particularly the growth in contract assets, inventories, and receivables, and the impact on operating cash flow.
- Debt maturities, variable interest rates, covenant compliance, and the adequacy of $12.0 million of cash plus $84.8 million of unused revolver capacity.
- The timing and ultimate amount of insurance recoveries and restoration costs related to the Guaymas fire.
- The outcome and potential exposure from environmental matters and the California wage-and-hour litigation.
- The company’s reconciliation of Adjusted EBITDA to GAAP results and the extent to which stock-based compensation and other excluded items affect comparability.