Ducommun Incorporated — FY2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019, including fourth-quarter results. Ducommun provides engineering and manufacturing services primarily for aerospace and defense customers through its Electronic Systems and Structural Systems segments.
Key Financial Metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net revenues | $721.1 million | $629.3 million | 14.6% increase |
| Gross profit | $152.2 million | $122.6 million | 24.1% increase |
| Gross margin | 21.1% | 19.5% | Up 160 basis points |
| Operating income | $56.2 million | $23.9 million | Increase of $32.3 million |
| Net income | $32.5 million | $9.0 million | Increase of $23.4 million |
| Diluted EPS | $2.75 | $0.77 | Increase of $1.98 |
| Adjusted EBITDA | $92.3 million | $70.7 million | Margin increased to 12.8% from 11.2% |
| Cash flow from operations | $51.0 million | $46.2 million | Increase of $4.8 million |
| Capital expenditures | $18.8 million | $16.3 million | Increase of $2.5 million |
Business Mix and Operating Performance
- Aerospace and defense represented 93% of 2019 revenue: commercial aerospace was 48.3%, military and space was 44.9%, and Industrial markets were 6.8%.
- Electronic Systems revenue increased 6.7% to $360.4 million, with segment operating income rising to $38.6 million from $30.9 million.
- Structural Systems revenue increased 23.8% to $360.7 million, with segment operating income rising to $46.8 million from $19.1 million. The improvement reflected favorable product mix, higher manufacturing volume, lower restructuring charges, and improved operating performance.
- Boeing, Raytheon, and Spirit AeroSystems represented 16.6%, 11.0%, and 12.2% of revenue, respectively. The top ten customers accounted for 63.5% of revenue.
- Backlog was $910.2 million at December 31, 2019, compared with $863.6 million in 2018. Remaining performance obligations were $745.3 million, of which approximately 65%, or $484.0 million, was expected to be recognized in 2020.
Liquidity, Debt, and Balance Sheet
- Cash and cash equivalents were $39.6 million, compared with $10.3 million at year-end 2018.
- Total debt was $310.0 million, compared with $233.0 million in 2018. The weighted-average interest rate increased to 6.87% from 4.71%.
- The company had $99.8 million of unused revolving-credit capacity, net of standby letters of credit.
- On December 20, 2019, Ducommun refinanced debt with a $140.0 million term loan and a $100.0 million revolving facility. The existing $240.0 million term loan remained outstanding. The facilities mature in 2024 and 2025.
- Management stated that operating cash flow and available borrowing capacity were expected to provide sufficient liquidity for the next twelve months. The company was in compliance with its debt covenants at year-end.
- Working capital increased to $196.1 million from $157.5 million. Total assets increased to $790.4 million from $644.7 million, primarily reflecting the Nobles acquisition and related goodwill and intangible assets.
- No dividends have been paid since the first quarter of 2011, and management did not expect dividends in the foreseeable future.
Material Changes Versus 2018
- Revenue growth was driven by higher military and space production rates and increased commercial aerospace content and build rates.
- Gross margin improved due to favorable product mix and manufacturing volume, partly offset by higher manufacturing costs.
- Restructuring charges fell to zero from $14.7 million. The 2017 restructuring plan was completed by December 31, 2018.
- SG&A increased by approximately $12.0 million because of higher compensation and benefits, severance, and acquisition-related costs.
- Interest expense increased by $5.3 million because of higher debt balances and interest rates.
- Cash flow from investing activities increased to a use of $94.9 million, primarily because of the $76.6 million cash purchase of Nobles Worldwide.
- Ducommun adopted ASC 842 lease accounting in 2019, recording operating lease right-of-use assets and liabilities. The adoption reduced opening retained earnings by $0.3 million.
Acquisition, Outlook, and Risks
- On October 8, 2019, Ducommun acquired Nobles Worldwide for $77.0 million, net of cash acquired. Nobles manufactures ammunition handling systems for military platforms and was included in Structural Systems. The preliminary purchase accounting recorded $34.9 million of goodwill and $37.7 million of intangible assets.
- Management expected 2020 capital expenditures of $16.0 million to $18.0 million, primarily to support new aerospace and defense contract awards.
- Boeing’s 737 MAX production suspension was identified as a significant near-term risk because Boeing was the largest customer and the 737 MAX was the company’s highest-revenue platform. Ducommun expected lower production beginning in January 2020 and anticipated mitigating much of the impact through growth in other commercial and defense programs.
- The company’s business is exposed to commercial aerospace cyclicality, aircraft production rates, U.S. defense spending, government appropriations, customer concentration, fixed-price contract execution, supplier constraints, and competitive pricing pressure.
- Debt service and covenant compliance remain important risks. Approximately 30% of borrowings bore variable interest rates, and the company disclosed LIBOR transition risk. Interest-rate cap hedges covered $81.0 million of debt at year-end and had final quarterly maturities in June 2020.
- Environmental liabilities included a $1.5 million accrual for groundwater contamination at California facilities and a $0.4 million accrual for the West Covina landfill. The company estimated its potential West Covina liability at $0.4 million to $3.1 million.
- Goodwill and other intangible assets totaled $309.3 million, or 39% of total assets. No goodwill impairment was identified in the 2019 testing.
- PricewaterhouseCoopers LLP issued an unqualified audit opinion and concluded that internal control over financial reporting was effective as of December 31, 2019.
Investor Verification Priorities
- Verify the pace of Boeing 737 MAX production recovery and the resulting effect on Ducommun’s commercial aerospace revenue and margins.
- Assess whether the Nobles acquisition delivers expected growth, aftermarket opportunities, synergies, and cash flow sufficient to support the additional debt.
- Monitor debt repayment, interest expense, variable-rate exposure, refinancing requirements, and compliance with leverage covenants.
- Reconcile adjusted EBITDA to GAAP results and evaluate the sustainability of 2019 margin improvement after the absence of restructuring charges.
- Review customer concentration and changes in production rates at Boeing, Spirit, Raytheon, and other major programs.
- Track backlog conversion and remaining performance obligations, recognizing that orders and long-term agreements may be delayed, canceled, or rescheduled.
- Review environmental remediation costs, government-contract audits, fixed-price contract estimates, supplier constraints, and potential impairment of goodwill or intangible assets.