Ducommun Incorporated 10-Q Summary
Business Context and Reporting Period
Ducommun Incorporated provides engineering and manufacturing services for aerospace, defense, industrial, natural resources, medical and other high-performance applications through two reportable segments: Ducommun AeroStructures (DAS) and Ducommun LaBarge Technologies (DLT). This unaudited Form 10-Q covers the three months ended March 29, 2014, compared with the three months ended March 30, 2013.
Key Financial Metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $179.8 million | $175.9 million | Up 2.2% |
| Gross profit | $35.1 million | $32.9 million | Up 6.8% |
| Gross margin | 19.5% | 18.7% | Up 0.8 percentage points |
| Operating income | $14.0 million | $10.3 million | Up 35.7% |
| Operating margin | 7.8% | 5.9% | Up 1.9 percentage points |
| Net income | $4.6 million | $3.7 million | Up 24.9% |
| Diluted EPS | $0.42 | $0.35 | Up $0.07 |
| EBITDA | $21.4 million | $17.3 million | Up 23.5% |
| EBITDA margin | 11.9% | 9.9% | Up 2.0 percentage points |
| Cash used in operating activities | $9.7 million | $6.1 million | Higher use of $3.6 million |
Net sales growth reflected higher commercial aerospace, military aircraft and non-aerospace and defense sales, partly offset by lower defense technologies sales. DAS sales increased 12.3% to $81.7 million, while DLT sales declined 5.0% to $98.1 million. DAS operating income increased to $10.2 million from $6.6 million; DLT operating income declined to $7.0 million from $7.9 million.
Cash and cash equivalents declined to $29.4 million at March 29, 2014, from $48.8 million at December 31, 2013. Working-capital investment was significant, including increases of $8.6 million in accounts receivable and $8.4 million in inventories during the quarter.
Total debt was $325.2 million, including $200.0 million of 9.75% senior unsecured notes, $125.1 million of senior secured term debt at a current rate of 4.75%, and $0.1 million of other debt. The company made a voluntary $7.5 million term-loan prepayment. Approximately $58.4 million of revolving-credit capacity remained available after standby letters of credit. Management reported compliance with all debt covenants.
Material Changes Versus the Prior Comparable Period
- Gross margin improved primarily because of favorable product mix and higher sales.
- SG&A declined to $21.1 million from $22.6 million. The prior-year period included approximately $0.5 million of debt-repricing costs, $0.3 million of non-recurring professional fees and higher benefit costs.
- Interest expense declined to $7.1 million from $7.8 million because of lower debt balances and the prior-year term-loan repricing.
- Income tax expense was $2.2 million in 2014 versus a $1.2 million benefit in 2013. The prior-year period included approximately $2.5 million of federal R&D tax-credit benefit, including approximately $2.0 million related to 2012; no federal R&D tax-credit benefit was recognized in Q1 2014.
- Operating cash flow deteriorated because of payment and order timing differences affecting receivables and inventories.
- Backlog was $605.5 million at March 29, 2014, down from $620.0 million at December 31, 2013; approximately $484 million was expected to be delivered during the remainder of 2014.
Outlook, Risks, Contingencies and Unusual Items
- Management expected to repay $25 million to $30 million of term-loan principal during 2014 and spend approximately $16 million on capital expenditures, principally to support new contract awards and higher-complexity programs.
- Management stated that operating cash flow and available revolving-credit capacity were expected to provide sufficient liquidity for the next twelve months, but the company depends on both sources for short-term liquidity.
- Backlog may be affected by delivery delays, order timing and program cancellations and may not directly indicate future sales.
- Customer concentration remained significant: Boeing represented 21% of Q1 sales, Raytheon 8%, and the top ten customers 58%. Boeing and Raytheon represented 16% and 7%, respectively, of accounts receivable.
- The company is defending a False Claims Act qui tam lawsuit involving alleged unapproved parts supplied to Boeing. The government declined to intervene, summary-judgment motions were pending, and the company could not estimate any potential liability.
- Environmental matters included a $1.5 million reserve for groundwater contamination investigations and corrective action and a $0.4 million reserve for the West Covina landfill. The estimated range of future West Covina liabilities was approximately $0.4 million to $3.1 million.
- The company reported an accumulated goodwill balance of $161.9 million, including $80.3 million of prior impairment charges associated with DLT. Contract-loss provisions and inventory valuations depend on estimates of future costs, revenues, demand and manufacturing performance.
- A new income-tax accounting standard reduced deferred tax assets by approximately $0.5 million in Q1 2014; another adopted standard had no material impact.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Reconcile the reported EBITDA measure to GAAP results and avoid treating EBITDA as discretionary cash flow.
- Monitor operating cash flow, receivables, inventories and cash balances relative to scheduled debt repayments and planned capital expenditures.
- Verify the status and potential exposure of the False Claims Act litigation and environmental remediation matters.
- Assess the sustainability of DAS growth and DLT recovery, particularly in defense technologies.
- Review the effect of the expired federal R&D tax credit on the company’s ongoing effective tax rate.
- Track customer concentration, backlog conversion and potential aerospace or defense program delays or cancellations.