Ducommun Incorporated 10-Q Summary
Business Context and Reporting Period
Ducommun Incorporated supplies engineered and manufactured structural, electronic, electromechanical and interconnect products primarily to the aerospace and defense industries, with additional exposure to industrial, natural resources, medical and other commercial markets. Operations are reported through Ducommun AeroStructures (DAS) and Ducommun LaBarge Technologies (DLT).
This unaudited Form 10-Q covers the three months ended March 31, 2012, compared with the three months ended April 2, 2011. DLT includes LaBarge, acquired on June 28, 2011 for $325.3 million, so reported year-over-year comparisons are significantly affected by the acquisition.
Financial Performance and Key Metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $184.3 million | $99.6 million | 85.2% increase |
| Gross profit | $34.5 million | $18.4 million | 87.8% increase |
| Gross margin | 18.7% | 18.5% | 20 basis-point increase |
| Operating income | $11.9 million | $4.3 million | 178.4% increase |
| Interest expense | $8.2 million | $0.3 million | Substantial increase |
| Income before taxes | $3.6 million | $4.0 million | Decrease |
| Net income | $2.4 million | $2.9 million | 18.2% decrease |
| Diluted EPS | $0.23 | $0.27 | Decrease |
- Product sales increased to $177.5 million from $91.3 million, while service revenue declined to $6.8 million from $8.2 million.
- SG&A increased to $22.6 million from $14.1 million, but declined as a percentage of sales to 12.3% from 14.2%.
- The effective tax rate increased to 34.0% from 26.9%, partly because Q1 2012 included no current-year federal research and development tax benefit.
- Reported EBITDA was approximately $18.7 million and adjusted EBITDA approximately $19.0 million. The filing contains minor inconsistencies, citing $18.657 million and $19.024 million in one discussion and $18.663 million and $19.030 million in the reconciliation.
- Cash used in operating activities improved to $4.8 million from $25.3 million. Investing cash use was $4.9 million, primarily for capital expenditures of $4.9 million. Financing cash use was $0.5 million.
- Cash and cash equivalents declined to $31.2 million at March 31, 2012 from $41.4 million at December 31, 2011.
- Total debt was $391.7 million, consisting primarily of $200.0 million of senior unsecured notes and $188.6 million of senior secured term debt. The weighted average borrowing rate was 7.67%.
- The company had $58.4 million of unused revolving credit capacity after standby letters of credit, no outstanding revolver borrowings, and was in compliance with debt covenants.
Material Changes Versus the Prior Comparable Period
- DLT sales increased 302.4% to $110.1 million, primarily from $84.4 million of acquired LaBarge revenue. DAS sales increased 2.9% to $74.3 million.
- DLT operating income increased to $8.3 million from $2.1 million, while DAS operating income declined to $6.6 million from $7.1 million because of a higher mix of lower-margin products.
- Military and space sales declined to $87.5 million from $54.3 million on a consolidated basis as a percentage of total sales, while commercial aerospace sales increased to $51.3 million from $45.3 million. Newly reported markets contributed $45.6 million of sales.
- Firm backlog increased to $647.3 million from $636.4 million at December 31, 2011; approximately $365.0 million was expected to be delivered during 2012.
- Capital expenditures increased to $4.9 million from $1.5 million. Management expected approximately $19.0 million of capital expenditures for full-year 2012.
- Interest expense rose sharply because of acquisition-related debt. The company also made its first interest payment on the senior unsecured notes in January 2012.
- The company recorded a $0.4 million charge for engineering research and development costs that had been improperly capitalized in prior periods; management concluded the error was immaterial to previously reported periods.
Outlook, Risks, Contingencies and Unusual Items
- Management expected operating cash flow and available bank capacity to provide sufficient liquidity for obligations during the next twelve months, while continuing to invest in capacity, tooling, facilities and offshore manufacturing.
- Backlog may not translate directly into future sales because of order timing, delivery delays, program cancellations and concentration in several programs.
- Key business risks include dependence on aerospace and defense markets, commercial aircraft production rates, government defense spending, major customers and successful integration of LaBarge. Major customers included Boeing, Raytheon, Schlumberger, Owens-Illinois and Spirit AeroSystems.
- The company faces a False Claims Act lawsuit alleging that unapproved parts were sold to Boeing for aircraft ultimately sold to the U.S. government. The case covers 21 aircraft; the government declined to intervene. A relators’ expert estimated government damages at $833 million, but the company stated that it could not estimate any potential liability.
- A shareholder class action relating to the LaBarge acquisition was settled in January 2012, including $0.6 million of plaintiffs’ attorney fees.
- Environmental matters include groundwater contamination at El Mirage and Monrovia, California, for which the company had a reserve of approximately $1.5 million, and the West Covina landfill, where estimated future liability ranged from $0.6 million to $3.3 million and a $0.6 million reserve was recorded.
- Contractual obligations totaled approximately $608.5 million, including $391.7 million of debt, $180.1 million of future interest, operating leases, pension liabilities and uncertain tax-position liabilities.
- The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important Facts for Investors to Verify
- Reconcile the filing’s inconsistent EBITDA and adjusted EBITDA amounts.
- Assess whether the LaBarge acquisition’s revenue contribution, integration benefits and diversification justify the increased leverage and interest burden.
- Review debt maturities, covenant requirements, mandatory term-loan payments and the $200.0 million senior-note maturity in 2018.
- Evaluate cash conversion, inventory growth and the company’s ability to fund approximately $19.0 million of planned 2012 capital expenditures.
- Monitor the False Claims Act litigation and environmental contingencies, for which potential exposure may exceed recorded reserves.
- Verify the sustainability of backlog, particularly its concentration in commercial aerospace and military programs and the portion expected to be delivered in 2012.