Ducommun Incorporated 2013 Form 10-K Summary
Business context and reporting period
Ducommun provides engineering and manufacturing services for aerospace, defense, industrial, natural resources, medical and other high-reliability applications through Ducommun AeroStructures (DAS) and Ducommun LaBarge Technologies (DLT). The filing covers the fiscal year ended December 31, 2013, including fourth-quarter results. Approximately 83% of 2013 revenue came from aerospace and defense markets, including 54% from military and space and 29% from commercial aerospace.
Financial performance and liquidity
| Metric | 2013 | 2012 |
|---|---|---|
| Net sales | $736.7 million | $747.0 million |
| Gross profit | $122.4 million; 16.6% margin | $141.5 million; 18.9% margin |
| Operating income | $37.6 million | $54.8 million |
| Net income | $9.3 million | $16.4 million |
| Diluted EPS | $0.86 | $1.55 |
| Cash from operating activities | $46.0 million | $47.5 million |
| Capital expenditures | $12.4 million | $15.8 million |
| Adjusted EBITDA | $75.5 million; 10.2% of sales | $84.9 million; 11.4% of sales |
| Total debt | $332.7 million | $365.7 million |
| Cash and cash equivalents | $48.8 million | $46.5 million |
| Working capital | $227.2 million | $223.8 million |
DAS revenue increased 1.7% to $315.2 million, while DLT revenue decreased 3.6% to $421.4 million. Commercial aerospace and defense technologies grew, but lower natural resources, industrial and other non-aerospace revenue more than offset that growth. Boeing represented 18% of 2013 sales and Raytheon 10%; the top ten customers represented 57%.
Debt reduction was a central objective. The company made $30.0 million of voluntary term-loan prepayments and paid off a $3.0 million promissory note, reducing total debt by approximately $33.0 million. At year-end, debt consisted principally of $200.0 million of 9.75% senior unsecured notes and $132.6 million of senior secured term-loan borrowings at 4.75%. The company had $58.4 million of unused revolving-credit capacity, net of standby letters of credit, and was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Sales declined 1.4%, while gross margin decreased 230 basis points, primarily because of unfavorable mix, weaker non-aerospace markets and contract-related charges.
- Net income declined 43% and diluted EPS declined from $1.55 to $0.86.
- Interest expense fell from $32.8 million to $29.9 million due to lower debt balances and the 2013 term-loan repricing.
- Backlog declined from $656.6 million to $620.0 million, primarily because of lower defense-technology backlog. Approximately $496.0 million was expected to be delivered in 2014.
- Operating cash flow remained strong at $46.0 million, while inventories and accounts receivable declined, reflecting improved working-capital management.
- Total shareholders’ equity increased from $222.7 million to $239.7 million. The company paid no dividends and did not expect to resume dividends in the foreseeable future.
Guidance, outlook, risks and unusual items
- Management expected to make an additional $25.0 million to $30.0 million of voluntary term-loan prepayments in 2014, spend approximately $16.0 million on capital expenditures and use operating cash flow and borrowing capacity to meet near-term liquidity needs.
- Management expected reduced or delayed U.S. Department of Defense awards as a result of sequestration and lower defense spending, although missile-defense spending was viewed as relatively stable.
- The company recorded $14.1 million of fourth-quarter charges related to the Embraer Legacy 450/500 and Boeing 777 wing-tip contracts: $7.0 million of production-contract asset impairments, $5.2 million of forward-loss reserves and $1.9 million of inventory write-offs. The contracts were expected to be unprofitable over their remaining terms, and further losses remained possible.
- The Embraer charges included cost overruns associated with customer-driven changes. Ducommun had asserted claims against Embraer, but the filing did not provide a clear expected recovery or resolution.
- The company recorded a $1.7 million income-tax benefit in 2013, including $4.5 million of federal research-and-development tax credits. The benefit was not necessarily indicative of the recurring tax rate.
- Goodwill was $161.9 million and other intangible assets were $165.5 million at year-end. No goodwill or indefinite-lived intangible impairment was recorded in 2013, but impairment testing depended on forecasts, market conditions and valuation assumptions.
- Ducommun accrued approximately $1.5 million for groundwater contamination at El Mirage and Monrovia, California, and approximately $0.4 million for the West Covina landfill. The estimated range of future West Covina liability was approximately $0.4 million to $3.1 million.
- A pending qui tam False Claims Act lawsuit involving Boeing alleged damages of up to $1.6 billion, or alternatively $851 million, plus treble damages, penalties and costs. The government declined to intervene, summary-judgment motions were pending, and Ducommun could not estimate potential liability.
- Principal financial risks included leverage and refinancing needs, variable-rate debt, restrictive covenants, defense-budget reductions, customer concentration, fixed-price contract execution, supplier constraints, environmental liabilities, litigation and cyclical aerospace markets.
Most important facts for investors to verify
- Whether the company achieved the planned 2014 term-loan prepayments and maintained compliance with increasingly restrictive leverage and EBITDA covenants.
- The maturity and refinancing plan for the $132.6 million term loan due in 2017 and the $200.0 million senior notes due in 2018.
- Whether the Embraer and Boeing 777 contracts generated additional losses or produced recoveries from customer claims.
- Trends in commercial aerospace production rates, defense awards following sequestration and the recovery of non-aerospace markets.
- Backlog conversion, customer concentration and any changes in Boeing or Raytheon purchasing levels.
- Developments in the False Claims Act litigation and environmental remediation obligations.
- The sustainability of operating cash flow, adjusted EBITDA and the favorable 2013 tax rate.