Ducommun Incorporated 10-Q Summary
Business Context and Reporting Period
Ducommun provides engineering and manufacturing services primarily for aerospace and defense customers, through its Electronic Systems and Structural Systems segments. This unaudited filing covers the three months ended March 28, 2020, compared with the three months ended March 30, 2019.
Key Financial Metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $173.5 million | $172.6 million | 0.5% increase |
| Gross profit | $36.8 million | $35.7 million | 3.1% increase |
| Gross margin | 21.2% | 20.7% | 50 basis-point increase |
| Operating income | $13.6 million | $12.8 million | 6.1% increase |
| Operating margin | 7.8% | 7.5% | 30 basis-point increase |
| Net income | $7.9 million | $7.5 million | 6.1% increase |
| Diluted EPS | $0.67 | $0.64 | Increase |
| Adjusted EBITDA | $23.2 million | $21.1 million | 10.3% increase |
| Adjusted EBITDA margin | 13.4% | 12.2% | 120 basis-point increase |
Electronic Systems revenue increased 16.5% to $98.1 million and segment operating income increased to $15.1 million from $9.2 million, driven by higher military and space volumes, favorable manufacturing volume and product mix. Structural Systems revenue declined 14.7% to $75.4 million and segment operating income declined to $5.4 million from $10.5 million, primarily because of lower commercial aerospace volumes and unfavorable product mix.
Net cash used in operating activities was $12.0 million, compared with $1.7 million used in the prior-year quarter. The deterioration primarily reflected increases in accounts receivable, contract assets and inventories. Capital expenditures were $3.9 million, while the filing separately reports segment capital expenditures of $3.0 million; the filing text does not clearly reconcile the difference.
Cash and cash equivalents were $65.6 million at March 28, 2020, compared with $39.6 million at December 31, 2019. Total debt was $352.6 million, up from $310.0 million, and the weighted-average interest rate declined to 4.49% from 6.87%. The company had $49.8 million of unused revolver capacity, net of standby letters of credit, and was in compliance with its debt covenants.
Material Changes Versus the Prior Comparable Period
- Revenue was essentially flat overall, but the mix shifted materially toward military and space markets, which rose to $100.8 million from $76.7 million, while commercial aerospace revenue declined to $62.5 million from $85.5 million.
- Gross margin and operating margin improved because of lower compensation and benefit costs and stronger Electronic Systems performance.
- Structural Systems results weakened substantially because of lower large-aircraft build rates.
- Top-ten-customer concentration declined to 54.3% of revenue from 67.1%, partly because Boeing and Spirit reduced purchases amid the Boeing 737 MAX grounding and COVID-19-related production shutdowns.
- Backlog declined to $876.4 million from $910.2 million, primarily due to a $55.5 million reduction in Structural Systems commercial aerospace backlog. Approximately $587.0 million of backlog was expected to be delivered over the following 12 months.
- The company drew $50.0 million on its revolving facility and retained the proceeds as cash, contributing to the increase in cash and debt.
Guidance, Outlook, Risks and Unusual Items
- Management expected COVID-19 and Boeing and Spirit production shutdowns to affect second-quarter 2020 results. The company stated that the full-year financial impact could not be reasonably estimated and could be materially adverse for part or all of 2020.
- Commercial aerospace remained exposed to the Boeing 737 MAX grounding, lower aircraft build rates and customer production disruptions. The company also identified risks from supplier disruption, employee illness, operational inefficiencies and a prolonged economic downturn.
- Management expected 2020 capital expenditures of $12.0 million to $14.0 million, although some spending could be delayed because of COVID-19.
- Remaining performance obligations were $726.8 million at March 28, 2020, with approximately 70% expected to be recognized as revenue during the next 12 months. These obligations and backlog remain subject to delivery delays and program cancellations.
- Ducommun acquired Nobles Worldwide in October 2019 for a preliminary net purchase price of $76.8 million. The acquisition added $34.8 million of goodwill and $37.2 million of identifiable intangible assets; the purchase price allocation remained subject to refinement.
- No goodwill impairment was recorded after qualitative assessments of both reporting units. Future deterioration in aerospace markets or operating performance could require an impairment assessment.
- Environmental matters included a $1.5 million accrual for groundwater remediation and a $0.4 million accrual for the West Covina landfill. The estimated potential West Covina liability ranged from $0.4 million to $3.1 million.
- Unrecognized tax benefits were $5.8 million, of which $4.1 million would affect the effective tax rate if recognized. Approximately $2.0 million of decreases were expected over the next 12 months due to expiring statutes of limitation.
Important Facts for Investors to Verify
- Track second-quarter and full-year effects of COVID-19, Boeing and Spirit production changes, and the Boeing 737 MAX program.
- Monitor Structural Systems commercial aerospace revenue, margins and backlog for further deterioration.
- Assess liquidity after the $50.0 million revolver draw, the $12.0 million to $14.0 million capital expenditure plan and negative first-quarter operating cash flow.
- Review debt maturities, mandatory amortization, excess-cash-flow payments, interest-rate exposure and the June 2020 expiration of portions of the $135.0 million interest-rate cap hedges.
- Validate the preliminary Nobles purchase accounting, including goodwill, intangible values and potential integration benefits.
- Evaluate whether COVID-19-related market declines create goodwill, inventory, contract-loss or receivable impairment risks.
- Reconcile the filing’s reported capital expenditure amounts and review contract assets, contract liabilities and remaining performance obligations for cash-conversion implications.