Ducommun Incorporated 2011 Form 10-K Summary
Business context and reporting period
Ducommun provides engineering and manufacturing services primarily to the aerospace and defense industries through two reportable segments: Ducommun AeroStructures (DAS) and Ducommun LaBarge Technologies (DLT). Products include aerostructures, electronics, electromechanical assemblies, interconnect systems, and technical and program management services.
The filing covers the fiscal year ended December 31, 2011, compared primarily with fiscal 2010. On June 28, 2011, Ducommun acquired LaBarge, Inc. for $325.3 million, net of cash acquired and excluding acquisition costs. LaBarge results were consolidated from the acquisition date.
Financial performance and position
| Metric | 2011 | 2010 | Change or comment |
|---|---|---|---|
| Net sales | $580.9 million | $408.4 million | Up 42.2%; included $175.4 million of LaBarge sales |
| Gross profit | $105.9 million | $80.1 million | Gross margin declined to 18.2% from 19.6% |
| Operating income/(loss) | $(34.1) million | $26.5 million | Impacted by goodwill impairment and acquisition costs |
| Net income/(loss) | $(47.6) million | $19.8 million | Basic and diluted loss per share was $4.52 |
| Operating cash flow | $(3.0) million | $26.5 million | Excluding merger-related expenses, 2011 operating cash flow was $22.6 million |
| Capital expenditures | $14.5 million | $7.1 million | Management expected approximately $21 million in 2012 |
| Cash and equivalents | $41.4 million | $10.3 million | Increased primarily from acquisition financing |
| Total debt | $392.2 million | $3.3 million | Substantially increased to finance LaBarge |
| Shareholders’ equity | $204.3 million | $254.2 million | Reduced primarily by the net loss and pension-related comprehensive loss |
Adjusted EBITDA was $3.5 million in 2011 versus $40.1 million in 2010. The company reported EBITDA of $(12.7) million. These are non-GAAP measures and exclude selected items; they should not be viewed as substitutes for GAAP earnings or operating cash flow.
Liquidity included $41.4 million of cash and approximately $58.4 million of unused revolver capacity after standby letters of credit. The company reported no outstanding revolver borrowings and compliance with its debt covenants at December 31, 2011. The weighted-average interest rate on borrowings was 7.66%.
Material changes versus the prior comparable period
- DLT sales increased 110.6% to $288.2 million, primarily because of the LaBarge acquisition. DAS sales increased 7.8% to $292.8 million.
- Military and space represented approximately 51.6% of 2011 sales, commercial aerospace 32.0%, and natural resources, industrial, medical and other markets the remainder.
- Gross margin declined because of $8.8 million of DAS start-up costs, a higher mix of lower-margin products, and LaBarge inventory step-up charges.
- SG&A increased to $85.8 million, or 14.8% of sales, from $53.7 million, or 13.1%, reflecting LaBarge expenses, amortization, and approximately $16.1 million of acquisition-related expenses.
- The company recorded a $54.3 million pre-tax, non-cash goodwill impairment charge in DLT during the fourth quarter. The charge followed a decline in market value after the acquisition and a softening defense market.
- Interest expense increased to $18.2 million from $1.8 million due to acquisition-related debt and financing-cost write-offs.
- Firm backlog rose to $636.4 million from $328.0 million, including $265.4 million attributable to LaBarge. Approximately $421 million was expected to be delivered during 2012, although backlog remained subject to delays and cancellations.
- The quarterly dividend was suspended after the first quarter of 2011; total 2011 dividends were $0.07 per share.
Guidance, outlook, commentary, risks and unusual items
Management expected operating cash flow and available bank capacity to provide sufficient liquidity for the following twelve months and planned approximately $21 million of 2012 capital expenditures to support new contracts, LaBarge operations, and offshore manufacturing expansion. Management also expected strategic benefits from LaBarge, including market diversification, increased electronics and assembly content, expanded program capabilities, and potential synergies.
Key risks include integration of LaBarge, retention of key employees and customers, realization of acquisition synergies, substantial leverage, variable-rate debt exposure, restrictive debt covenants, and the ability to maintain required EBITDA and leverage levels. The debt facilities require compliance with specified covenants, including a minimum consolidated EBITDA of $50 million on a trailing four-quarter basis under the applicable provisions.
Revenue is exposed to commercial aircraft production rates, U.S. defense spending, government appropriations, customer concentration, competitive pricing, fixed-price contract cost overruns, manufacturing inefficiencies, supplier constraints, and program cancellations. Boeing represented approximately 19.3% of 2011 sales and Raytheon approximately 8.7%.
Material contingencies include an unresolved False Claims Act lawsuit involving alleged unapproved parts sold to Boeing. The government declined to intervene; the company stated that it could not estimate any potential liability. One relators’ expert estimated government damages at $833 million, but the filing does not establish that amount as a probable loss.
Environmental reserves included approximately $1.5 million for groundwater matters and approximately $0.7 million for the West Covina landfill. The preliminary estimated range of West Covina liabilities was $0.7 million to $3.3 million. A LaBarge shareholder class-action settlement approved in January 2012 required $0.6 million of plaintiffs’ attorney fees.
The company corrected an $0.8 million fourth-quarter 2011 inventory valuation error without restating prior periods. Internal control over financial reporting was assessed as effective, but LaBarge, representing approximately 50% of consolidated assets and 30% of consolidated revenues, was excluded from the 2011 controls assessment because of the timing of the acquisition.
Most important facts for an investor to verify
- Whether LaBarge integration produces sustainable operating improvements and restores DLT profitability.
- Whether cash generation is sufficient to service approximately $392.2 million of debt and comply with debt covenants.
- The terms, maturity profile, and interest-rate exposure of the $200 million 9.75% senior notes and $189.1 million senior secured term loan.
- The sustainability and conversion of the $636.4 million backlog into revenue and cash flow, including the portion expected in 2012.
- The effect of customer concentration, particularly Boeing, Raytheon, United Technologies, Spirit AeroSystems, and Owens-Illinois.
- The potential for additional goodwill or intangible-asset impairment, given the DLT impairment and remaining goodwill of $163.8 million.
- The ultimate exposure from the Boeing-related False Claims Act litigation and environmental matters.
- Whether the planned $21 million of 2012 capital expenditures and ongoing working-capital requirements can be funded without additional borrowing.