Ducommun Incorporated 2021 Form 10-K Summary
Business context and reporting period
Ducommun provides engineering and manufacturing services for high-performance aerospace, defense, industrial, medical and other applications through its Electronic Systems and Structural Systems segments. The filing covers the fiscal year ended December 31, 2021, with comparisons primarily to 2020.
- Aerospace and defense represented 94% of 2021 revenue: military and space 70.3%, commercial aerospace 24.1%, and industrial 5.6%.
- Revenue was concentrated among major customers: Raytheon represented 24.4% of revenue, Boeing 7.8%, and the top ten customers 61.1%.
- The company had 2,480 employees at year-end, including 465 covered by collective bargaining agreements.
Financial performance and liquidity
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Net revenue | $645.4 million | $628.9 million | Up 2.6% |
| Gross profit | $142.5 million | $137.7 million | Up 3.4% |
| Gross margin | 22.1% | 21.9% | Up 20 basis points |
| Operating income | $48.9 million | $45.5 million | Up 7.4% |
| Operating margin | 7.6% | 7.2% | Up 40 basis points |
| Net income | $135.5 million | $29.2 million | Up $106.4 million |
| Diluted EPS | $11.06 | $2.45 | Up $8.61 |
| Adjusted EBITDA | $92.8 million | $87.9 million | Up 5.6% |
| Adjusted EBITDA margin | 14.4% | 14.0% | Up 40 basis points |
| Net cash used in operating activities | $0.6 million | Cash provided of $12.6 million | Declined $13.2 million |
| Capital expenditures | $15.9 million | $13.6 million | Up $2.3 million |
Electronic Systems revenue increased 5.1% to $412.6 million and segment operating income increased to $57.6 million from $51.9 million. Structural Systems revenue decreased 1.5% to $232.8 million, while segment operating income increased to $20.2 million from $19.6 million.
Year-end cash and cash equivalents were $76.3 million, compared with $56.5 million in 2020. Total debt was $287.7 million, down from $320.6 million, with a weighted-average interest rate of 3.27%. The company had $99.8 million of unused revolving credit capacity and was in compliance with its debt covenants.
Operating cash flow was adversely affected by increases in contract assets, inventories and accounts receivable. Investing cash flow was positive $57.8 million, primarily because of sale-leaseback proceeds, while financing cash flow was negative $37.3 million due mainly to debt repayments.
Material changes versus the prior comparable period
- Military and space revenue increased $31.0 million, driven by higher build rates on military fixed-wing aircraft and missile platforms.
- Commercial aerospace revenue declined $12.4 million because of lower large-aircraft production rates, reflecting continuing COVID-19 effects.
- Gross margin improved due to favorable product mix and lower manufacturing costs.
- SG&A increased $3.8 million, primarily from higher professional services and compensation costs.
- Restructuring charges declined from $2.4 million in 2020 to zero in 2021.
- Interest expense decreased $2.5 million because of lower debt and lower interest rates.
- Backlog increased to $905.2 million from $807.7 million; $628.0 million was expected to be delivered over the next 12 months. Remaining performance obligations were $814.1 million, with approximately 70% expected to be recognized in 2022.
- Contract assets increased to $176.4 million from $154.0 million, while contract liabilities increased to $42.1 million from $28.3 million.
Guidance, outlook, risks and unusual items
- Management expected 2022 capital expenditures of approximately $16.0 million to $18.0 million, excluding potential spending to restore the Guaymas, Mexico facility.
- Management stated that operating cash flow and available credit facilities should provide sufficient liquidity for obligations during the next 12 months.
- Commercial aerospace recovery remained uncertain. Boeing’s cited outlook anticipated commercial air travel returning to 2019 levels in 2023 to 2024, with additional time for long-term trend growth to resume.
- COVID-19 continued to create risks involving customer demand, aircraft production rates, employee availability and supply-chain disruption.
- On December 16, 2021, Ducommun acquired Magnetic Seal LLC for $69.5 million net of cash acquired. The acquisition added preliminary goodwill of $32.9 million and $30.1 million of intangible assets; its contribution to 2021 results was immaterial.
- On the same date, the company completed a sale-leaseback of its Gardena performance center for $143.1 million and recognized a $132.5 million gain. The facility was leased back for an initial five-year period with aggregate minimum base payments of $19.6 million. This gain was the principal driver of the unusually high 2021 net income and EPS.
- The company entered into forward interest-rate swaps with a $150.0 million notional amount, a weighted-average fixed rate of 1.8%, and an effective date of January 1, 2024. Until then, borrowings remain substantially exposed to variable interest rates and LIBOR transition risk.
- Environmental liabilities included $1.5 million accrued for groundwater contamination at California facilities and $0.4 million for the West Covina landfill. A California wage-and-hour matter had a tentative $0.8 million settlement subject to court approval.
- The Guaymas facility fire from June 2020 continued to affect operations and insurance recovery timing. The company had received $13.5 million of insurance recoveries by year-end 2021, but remaining recoveries were not determinable.
- The company received a $4.0 million Aviation Manufacturing Jobs Protection Program grant, subject to performance requirements through May 14, 2022. It recorded $1.0 million as reductions of expenses in 2021 and reported the remainder in assets and liabilities.
- The company does not pay dividends and did not expect to pay dividends for the foreseeable future.
Most important facts for investors to verify
- Separate recurring operating performance from the $132.5 million sale-leaseback gain when assessing 2021 earnings and valuation.
- Reconcile GAAP earnings with Adjusted EBITDA and review all excluded items, including the sale-leaseback gain, success bonus, fire costs and stock compensation.
- Assess whether commercial aerospace production rates recover as expected and monitor continued COVID-19, supply-chain and customer concentration risks.
- Review debt maturities, including approximately $112.0 million due in 2024 and $161.7 million due in 2025, as well as variable-rate exposure and debt covenant compliance.
- Monitor working-capital conversion, particularly the growth in contract assets, inventories and accounts receivable relative to revenue.
- Evaluate the integration and valuation assumptions for MagSeal, including the $24.8 million customer-relationship intangible asset and $32.9 million preliminary goodwill.
- Track the Guaymas insurance claim, environmental remediation obligations, litigation settlement and the remaining $3.1 million of deferred payroll taxes payable in 2022.