Ducommun Incorporated 2017 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, 2017; fourth-quarter data are also presented. Aerospace and defense represented approximately 90% of 2017 revenue, comprising 43% commercial aerospace and 47% military and space. Industrial markets represented 10%.
In September 2017, the company acquired Lightning Diversion Systems, LLC (“LDS”), a provider of aerospace and defense lightning-protection systems, for $60.0 million net of cash acquired. LDS results were included from the acquisition date in Electronic Systems.
Key financial metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Net revenue | $558.2 million | $550.6 million | 1.4% increase |
| Gross profit / margin | $102.8 million / 18.4% | $106.2 million / 19.3% | Margin down 0.9 points |
| Operating income / margin | $15.0 million / 2.7% | $28.6 million / 5.2% | Decline |
| Net income | $20.1 million | $25.3 million | Decline |
| Diluted EPS | $1.74 | $2.24 | Decline |
| Adjusted EBITDA | $53.5 million / 9.6% | $54.8 million / 10.0% | Decline |
| Cash flow from operations | $35.4 million | $43.3 million | Decline |
| Capital expenditures | $26.5 million | $18.7 million | Increase |
Fourth-quarter 2017 revenue was $142.3 million, gross profit was $25.7 million, pretax loss was $5.1 million, and net income was $9.5 million, or $0.82 diluted EPS. Fourth-quarter net income benefited from a $14.5 million income-tax benefit, including the Tax Cuts and Jobs Act remeasurement benefit.
At December 31, 2017, cash and cash equivalents were $2.2 million, working capital was $140.8 million, total assets were $566.8 million, and shareholders’ equity was $235.6 million. Total debt was $218.1 million, consisting of $160.0 million under the term loan and $58.1 million under the revolving facility. The weighted-average interest rate was 3.73%; $141.6 million remained available under the revolving facility. The debt facilities mature June 26, 2020, and the company was in compliance with its covenants at year-end.
Material changes versus the prior comparable period
- Revenue increased modestly as military and space revenue rose $30.6 million, partly offset by a $15.9 million decline in commercial aerospace and a $7.2 million decline in industrial revenue.
- Electronic Systems revenue increased 4.1% to $316.7 million and segment operating income increased to $30.9 million from $29.0 million, primarily on higher manufacturing volume and military-program demand.
- Structural Systems revenue declined 2.0% to $241.5 million and segment operating income fell to $5.5 million from $16.5 million, reflecting restructuring charges, lower manufacturing volume and new-program development costs.
- Gross margin declined because of unfavorable product mix. Operating income was additionally reduced by $8.4 million of restructuring charges, compared with $0.2 million in 2016.
- 2016 included a $17.6 million pretax gain on divestitures; no comparable gain occurred in 2017.
- Operating cash flow decreased by $7.8 million. Investing cash flow changed to a use of $86.2 million, primarily because of the LDS acquisition and higher capital expenditures; 2016 investing cash flow benefited from $51.9 million of divestiture proceeds.
- Debt increased by approximately $48.1 million, primarily to fund the LDS acquisition, despite a $10.0 million voluntary term-loan repayment.
- Backlog increased to $726.5 million from $641.3 million. Management expected $544.0 million of backlog to be delivered during 2018.
Guidance, outlook, risks and unusual items
- Management expected 2018 capital expenditures of $15.0 million to $17.0 million, funded by operating cash flow, and stated that operating cash flow and borrowing capacity should provide sufficient liquidity for the next twelve months.
- The November 2017 restructuring plan is expected to generate total pretax charges of $19.0 million to $22.0 million through 2018. Management estimated annualized savings of approximately $14.0 million beginning in 2019.
- The Tax Cuts and Jobs Act produced a provisional $13.0 million deferred-tax remeasurement benefit in 2017. The company stated that the tax accounting remained subject to further analysis and possible material adjustments during 2018.
- Revenue recognition was expected to change materially upon adoption of ASC 606 in 2018. The company anticipated that most revenue would be recognized over time, with reductions in work-in-process and finished-goods inventory and increases in unbilled receivables; the exact opening-balance-sheet impact had not been determined.
- Key risks include customer and industry concentration, cyclical aircraft production, U.S. defense-budget uncertainty, government-contract audits and termination rights, fixed-price contract cost overruns, supplier disruptions, acquisition integration, restructuring execution, potential goodwill or asset impairment, environmental liabilities, cybersecurity, labor negotiations and refinancing or covenant risk.
- Top ten customers represented 62.5% of 2017 revenue. Boeing represented 16.4%, Raytheon 13.5%, Spirit AeroSystems 8.2%, and Lockheed Martin 5.5%.
- The company accrued $1.5 million for groundwater investigation and corrective action at California facilities and $0.4 million for a West Covina landfill matter. The estimated potential range for the latter was $0.4 million to $3.1 million.
- Goodwill and other intangible assets totaled $232.1 million, or 41% of total assets. No goodwill impairment was identified in the 2017 annual assessment.
- The company paid no dividends and did not expect to pay dividends for the foreseeable future.
- A material weakness in income-tax controls identified in 2016 was reported as remediated as of December 31, 2017. Management and the independent auditor concluded that internal control over financial reporting was effective at year-end.
Important facts for investors to verify
- Whether the restructuring program delivers the projected $14.0 million of annualized savings and whether additional 2018 charges remain within the $19.0 million–$22.0 million estimate.
- The final tax accounting effects of the Tax Cuts and Jobs Act and the sustainability of the unusually large 2017 tax benefit.
- The actual ASC 606 transition adjustment, changes to inventory and contract assets, and effects on reported revenue and earnings.
- Progress in reducing the $218.1 million debt balance before the June 2020 maturity and continued compliance with leverage covenants.
- Whether the $726.5 million backlog converts to revenue as expected, particularly the $544.0 million scheduled for 2018.
- Electronic Systems’ integration and performance following the LDS acquisition and the related goodwill and intangible-asset carrying values.
- Commercial aerospace production rates, regional-jet program wind-down effects, defense appropriations, customer concentration and fixed-price contract profitability.