Ducommun Incorporated 2018 Form 10-K Summary
Business context and reporting period
Ducommun provides engineering and manufacturing services for aerospace, defense, industrial, medical and other high-reliability applications through its Electronic Systems and Structural Systems segments. The filing covers the fiscal year ended December 31, 2018. The fourth quarter generated $164.2 million of revenue, $0.7 million of net income and $0.06 of diluted EPS.
- Aerospace and defense represented 92% of 2018 revenue: commercial aerospace 48.4%, military and space 44.0%, and Industrial 7.6%.
- The company acquired Certified Thermoplastics Co., LLC in April 2018 for $30.7 million net of cash acquired, funded with revolver borrowings.
Financial performance and liquidity
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net revenue | $629.3 million | $558.2 million | 12.7% increase |
| Gross profit margin | 19.5% | 18.5% | 100 bps increase |
| Operating income | $23.9 million | $15.6 million | Increase |
| Net income | $9.0 million | $20.1 million | Decrease |
| Diluted EPS | $0.77 | $1.74 | Decrease |
| Adjusted EBITDA | $70.7 million | $54.1 million | 30.7% increase |
| Adjusted EBITDA margin | 11.2% | 9.7% | 150 bps increase |
| Cash flow from operations | $46.2 million | $35.4 million | Increase |
| Capital expenditures | $16.3 million | $26.5 million | Decrease |
Revenue growth was driven primarily by higher commercial aerospace shipments and increased military and space shipments. Structural Systems revenue increased 20.7% and segment operating income increased to $19.1 million from $5.8 million. Electronic Systems revenue increased 6.7%, while segment operating income declined slightly to $30.9 million.
At December 31, 2018, cash and cash equivalents were $10.3 million, unused revolver capacity was $99.7 million, and total debt was $233.0 million at a weighted-average interest rate of 4.71%. Working capital was $160.9 million and total shareholders’ equity was $256.8 million. The company was in compliance with its credit-facility covenants.
Material changes versus the prior comparable period
- Revenue increased $71.1 million, led by a $68.1 million increase in commercial aerospace and an $8.9 million increase in military and space, partly offset by a $5.9 million decline in Industrial revenue.
- Gross margin improved due to favorable product mix and manufacturing volume, despite higher manufacturing costs.
- Net income declined because of $13.7 million of higher tax expense, $6.0 million of higher restructuring charges, $4.2 million of higher interest expense, $4.9 million of higher SG&A and a $0.9 million debt-extinguishment loss.
- Restructuring charges totaled $14.8 million in 2018 versus $8.8 million in 2017. Cumulative restructuring expenses reached $23.6 million through year-end.
- The company refinanced its debt in November 2018 with a $240.0 million senior secured term loan maturing in 2025 and a $100.0 million senior secured revolving facility maturing in 2023.
- Backlog increased to $864.4 million from $726.5 million. Remaining performance obligations were $722.8 million, with approximately $505.0 million expected to be recognized as revenue during 2019.
- ASC 606 was adopted using the modified retrospective method. The filing states that 2018 reported net income would have been $4.4 million rather than $9.0 million without the adoption effect; prior-year figures were not recast.
Guidance, outlook, risks and unusual items
- Management expects restructuring actions to produce approximately $14.0 million of annualized savings beginning in 2019 and plans 2019 capital expenditures of $15.0 million to $17.0 million.
- Management expects operating cash flow and available borrowing capacity to provide sufficient liquidity for the next twelve months.
- Key risks include cyclical aerospace and defense demand, aircraft production-rate changes, dependence on major customers and U.S. Government spending, fixed-price contract execution, supplier disruptions, pricing pressure, acquisition integration, cybersecurity, environmental liabilities and potential goodwill or asset impairments.
- The top ten customers represented 62.9% of 2018 revenue; Boeing represented 17.0% and Raytheon 11.7%.
- Environmental accruals totaled $1.5 million for groundwater contamination at California facilities and $0.4 million for the West Covina landfill matter. The company disclosed a potential West Covina liability range of $0.4 million to $3.1 million.
- Goodwill and other intangible assets totaled $248.1 million, or 38% of total assets; no goodwill impairment was identified in the 2018 annual assessment.
- The company has not paid dividends since the first quarter of 2011 and does not expect to pay dividends for the foreseeable future.
- Management and the independent auditor concluded that internal control over financial reporting was effective as of December 31, 2018.
Important facts for investors to verify
- Reconcile reported 2018 earnings and cash flow to the ASC 606 adoption impacts and confirm comparability with 2017.
- Assess leverage, variable-rate exposure, required amortization, excess-cash-flow payments and covenant headroom under the new credit facilities.
- Validate whether the projected $14.0 million restructuring savings are achieved without additional charges or operating disruption.
- Evaluate backlog and remaining performance obligations for customer cancellations, delivery delays and concentration by aircraft or defense program.
- Monitor commercial aerospace production rates, U.S. defense appropriations and the financial condition of major customers.
- Review the ultimate cost and timing of environmental remediation, pension funding and other contingent obligations.