Ducommun Incorporated: FY2016 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, 2016; fourth-quarter 2016 results are also presented.
- Aerospace and defense represented 89% of 2016 revenue: commercial aerospace 48% and military and space 41%; Industrial markets represented 11%.
- The company employed approximately 2,700 people and operated 25 facilities totaling approximately 1.9 million square feet.
- 2016 included the sale of the Pittsburgh operation in January and the Miltec operation in March, both within Electronic Systems.
Financial performance and liquidity
| Metric | 2016 | 2015 | Change or context |
|---|---|---|---|
| Net revenue | $550.6 million | $666.0 million | Down 17.3% |
| Gross profit | $106.2 million | $100.8 million | Margin increased to 19.3% from 15.1% |
| Operating income (loss) | $28.6 million | $(75.3) million | 2015 included major impairment charges |
| Net income (loss) | $25.3 million | $(74.9) million | Diluted EPS was $2.24 versus $(6.78) |
| Adjusted EBITDA | $54.8 million | $49.5 million | 10.0% versus 7.4% of revenue |
| Cash flow from operations | $43.3 million | $23.7 million | Improved by $19.6 million |
| Capital expenditures | $18.7 million | $16.0 million | Primarily supporting new awards |
| Cash and equivalents | $7.4 million | $5.5 million | Year-end balance |
| Total debt | $170.0 million | $245.0 million | $75.0 million voluntary term-loan repayment |
| Working capital | $139.6 million | $179.7 million | Declined year over year |
Fourth-quarter 2016 revenue was $142.5 million, gross profit was $27.8 million and net income was $2.8 million, or $0.25 diluted EPS.
At December 31, 2016, the company had $199.0 million of unused revolving-credit capacity, after $1.0 million of standby letters of credit. The senior secured term loan and revolving facility mature June 26, 2020. The weighted-average debt interest rate was 3.25%; $135.0 million of debt was subject to interest-rate cap hedges. The company was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Revenue declined $115.4 million, primarily from a $70.5 million reduction in Industrial revenue following the Pittsburgh divestiture and Houston closure, and a $59.1 million reduction in military and space revenue from the Miltec divestiture, program delays and budget changes. Commercial aerospace revenue increased $14.2 million.
- Structural Systems revenue declined 9.8% to $246.5 million, while segment operating income improved to $16.5 million from a $53.0 million loss, largely because 2015 included a $57.2 million goodwill impairment and substantial regional-jet contract charges.
- Electronic Systems revenue declined 22.5% to $304.2 million, while segment operating income improved to $29.0 million from a $4.5 million loss. The prior year included a $32.9 million trade-name impairment.
- Gross margin improved by 4.2 percentage points, reflecting the absence of the 2015 regional-jet forward-loss reserve and lower material costs as a percentage of revenue.
- Interest expense decreased $10.4 million due to lower debt and lower average borrowing costs. The company made $75.0 million of voluntary term-loan prepayments.
- Backlog increased to $600.3 million from $574.4 million; $480.2 million was expected to be delivered during 2017. The company cautions that backlog may be delayed, canceled or concentrated among specific programs and customers.
Guidance, outlook, risks and unusual items
- Management expected 2017 capital expenditures of $22 million to $26 million, principally for expansion of the Parsons, Kansas facility, new contract awards and increased tooling and engineering content.
- Management expected operating cash flow and available borrowing capacity to provide sufficient liquidity for obligations during the following twelve months.
- Key outlook risks include cyclicality in commercial aerospace and defense markets, U.S. defense-budget uncertainty and sequestration, customer and program concentration, production-rate changes, fixed-price contract cost overruns, supplier constraints, pricing pressure and customer cancellations or delays.
- The top ten customers represented 58.6% of 2016 revenue; Boeing represented 17.3%, Raytheon 8.4%, Spirit AeroSystems 8.2% and United Technologies 6.0%.
- 2016 included a $17.6 million net pre-tax gain on divestitures. 2015 included $57.2 million of goodwill impairment, $32.9 million of intangible-asset impairment and a $14.7 million loss on debt extinguishment; these items affect year-over-year comparability.
- Environmental reserves totaled $1.5 million for groundwater matters at California facilities and $0.4 million for the West Covina landfill. The company estimated total potential West Covina liability at $0.4 million to $3.1 million.
- The company disclosed a material weakness in internal control over financial reporting related to quarterly and annual income-tax accounting and disclosures. The 2015 financial statements were revised for a $1.6 million tax-accounting error. Management expected remediation efforts to support a conclusion during 2017 but provided no assurance of successful or timely remediation.
- The company has an underfunded pension obligation of approximately $11.1 million and expected 2017 pension contributions of $0.9 million.
- No dividends have been paid since the first quarter of 2011, and management did not expect dividends in the foreseeable future.
Most important facts for investors to verify
- Whether revenue and cash flow recover after the divestitures and defense-program delays, particularly in Electronic Systems.
- Whether the $600.3 million backlog converts to revenue as expected and whether the $480.2 million scheduled for 2017 is exposed to cancellations or delays.
- Progress in reducing the $170.0 million term loan, compliance with leverage covenants and refinancing capacity before the June 2020 maturity.
- Whether the company achieves its $22 million to $26 million 2017 capital-spending plan while maintaining adequate liquidity.
- Remediation and auditor confirmation of the income-tax internal-control material weakness.
- Potential additional losses on fixed-price contracts, impairment charges, environmental liabilities and pension funding requirements.
- Ongoing dependence on a concentrated aerospace and defense customer base and the effect of aircraft production rates and U.S. defense spending.