Ducommun Incorporated 2013 Second-Quarter 10-Q Summary
Business Context and Reporting Period
Ducommun Incorporated is a global engineering and manufacturing provider serving primarily the aerospace and defense industries through Ducommun AeroStructures (DAS) and Ducommun LaBarge Technologies (DLT). The filing covers the three and six months ended June 29, 2013, compared with June 30, 2012. The financial statements are unaudited.
Key Financial Metrics
| Metric | Q2 2013 | Q2 2012 | Six Months 2013 | Six Months 2012 |
|---|---|---|---|---|
| Net sales | $191.5 million | $184.7 million | $367.4 million | $369.0 million |
| Gross profit | $37.3 million | $36.0 million | $70.2 million | $70.4 million |
| Gross margin | 19.5% | 19.5% | 19.1% | 19.1% |
| Operating income | $15.0 million | $14.0 million | $25.3 million | $25.9 million |
| Operating margin | 7.9% | 7.6% | 6.9% | 7.0% |
| Net income | $5.5 million | $5.5 million | $9.2 million | $7.9 million |
| Diluted EPS | $0.51 | $0.52 | $0.86 | $0.75 |
| Adjusted EBITDA | $22.2 million | $21.3 million | $39.5 million | $40.4 million |
- Second-quarter operating cash flow was $13.1 million; six-month operating cash flow was $6.9 million versus $5.7 million in the prior-year period.
- Capital expenditures were $2.6 million in the second quarter and $5.3 million year to date, compared with $8.8 million in the first six months of 2012.
- Cash and cash equivalents were $33.5 million at June 29, 2013, down from $46.5 million at December 31, 2012.
- Total debt was $350.7 million, including $200.0 million of 9.75% senior unsecured notes, $147.6 million of senior secured term-loan debt and $3.1 million of other debt.
- The weighted-average interest rate on debt was 7.60%. The term-loan rate was 4.75% after the March 2013 repricing.
- Unused revolving-credit capacity was $58.4 million after standby letters of credit. The company was in compliance with all debt covenants.
- Firm backlog was $632.2 million at quarter-end, including approximately $260 million expected to be delivered during the remainder of 2013.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales increased 3.7%, driven primarily by DAS growth in large commercial aircraft products and higher DLT defense electronics and commercial aerospace sales.
- Six-month sales declined 0.5% because DLT weakness in natural resources and industrial markets more than offset aerospace and defense growth.
- DAS sales increased 9.2% in the quarter and 3.7% year to date; segment operating income increased to $9.5 million from $7.6 million in the quarter.
- DLT sales decreased 0.3% in the quarter and 3.3% year to date, while segment operating income increased to $11.2 million from $10.5 million in the quarter, reflecting product mix and cost synergies.
- Consolidated quarterly operating income increased 7.4%, but year-to-date operating income declined 2.0% due partly to higher corporate expenses.
- Interest expense decreased by $0.8 million in the quarter and $1.2 million year to date, primarily because of lower debt balances and the lower term-loan rate.
- Quarterly net income was essentially unchanged and diluted EPS declined because the 2012 quarter included a favorable state-tax benefit of approximately $0.15 per share.
- Year-to-date net income and diluted EPS increased partly because 2013 included $2.5 million of federal research and development tax credits, including $2.0 million related to 2012, while 2012 included a $1.6 million state-tax benefit.
- Total debt declined $15.0 million from year-end after two voluntary $7.5 million term-loan prepayments.
- Backlog declined $24.4 million from December 31, 2012, with reductions in defense technologies, commercial aerospace, natural resources and industrial markets.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management expected total 2013 term-loan paydowns of $25 million to $30 million and capital expenditures of approximately $13 million, financed by operating cash flow.
- Management stated that operating cash flow and available revolving-credit capacity were expected to provide sufficient liquidity for the following twelve months.
- Backlog remained solid in aerospace and defense but weak in non-aerospace and defense markets. Management cautioned that backlog may not predict future sales because of delivery delays, program cancellations, order timing and concentration in several programs.
- The company expects continued federal research and development tax benefits of approximately $0.5 million per quarter during 2013, subject to the applicable tax-credit extension.
- Corporate expenses included a $0.6 million workers’ compensation insurance payroll-audit charge, higher professional fees and $0.5 million of debt-repricing costs year to date.
- The company faces a qui tam False Claims Act lawsuit alleging the sale of unapproved parts to Boeing. The government declined to intervene, summary-judgment motions were pending, and the company could not estimate any potential liability.
- Environmental matters include groundwater investigation and corrective action reserves of approximately $1.5 million and a West Covina landfill reserve of approximately $0.4 million. The estimated range of potential West Covina liabilities was approximately $0.4 million to $3.1 million.
- The company’s main market risk is exposure to U.S. interest-rate changes on the $147.6 million variable-rate term loan.
- Management reported effective disclosure controls and no material change in internal control over financial reporting.
Investor Verification Items
- Verify the sustainability and conversion of the $632 million backlog, particularly the approximately $260 million scheduled for delivery in the remainder of 2013.
- Assess DLT’s continuing exposure to declining natural-resources and industrial demand and the concentration of sales among major customers; Boeing and Raytheon represented 15.9% and 10.1% of second-quarter sales, respectively.
- Monitor compliance with increasingly restrictive leverage requirements and the planned $25 million to $30 million of 2013 debt repayment.
- Separate recurring operating performance from tax benefits, debt-repricing costs, workers’ compensation charges and other unusual items.
- Review developments in the False Claims Act litigation and environmental matters, for which potential liabilities were not fully estimable.
- Reconcile non-GAAP Adjusted EBITDA with GAAP net income and operating cash flow before using it to assess debt-service capacity.