Ducommun Incorporated 2020 Form 10-K Summary
Business context and reporting period
Ducommun provides engineering and manufacturing services for aerospace, defense, industrial, medical and other high-performance applications through its Electronic Systems and Structural Systems segments. The filing covers the fiscal year ended December 31, 2020, compared primarily with fiscal 2019.
Aerospace and defense represented 94% of 2020 revenue: military and space accounted for 67%, commercial aerospace 27%, and industrial markets 6%. The company had 2,450 employees and operated 27 facilities.
Key financial metrics
| Metric | 2020 | 2019 | Change/comment |
|---|---|---|---|
| Net revenue | $628.9 million | $721.1 million | Down 12.8% |
| Gross profit / margin | $137.7 million / 21.9% | $152.2 million / 21.1% | Margin improved on product mix |
| Operating income / margin | $45.5 million / 7.2% | $56.2 million / 7.8% | Down due to lower volume and restructuring |
| Net income / margin | $29.2 million / 4.6% | $32.5 million / 4.5% | Down 10.1% |
| Diluted EPS | $2.45 | $2.75 | Down from prior year |
| Adjusted EBITDA | $87.9 million / 14.0% | $92.3 million / 12.8% | Down 4.7%; margin expanded |
| Cash flow from operations | $12.6 million | $51.0 million | Lower because of contract assets, inventories and payables |
| Capital expenditures | $13.6 million | $18.8 million | Down $5.2 million |
| Cash and equivalents | $56.5 million | $39.6 million | Increased $16.9 million |
| Total debt | $320.6 million | $310.0 million | Average interest rate fell to 3.59% from 6.87% |
Electronic Systems revenue increased 9.0% to $392.6 million and segment operating income increased to $51.9 million from $38.6 million. Structural Systems revenue decreased 34.5% to $236.3 million and segment operating income declined to $19.6 million from $46.8 million.
At December 31, 2020, the company had $74.8 million of unused revolving-credit capacity, after letters of credit, and was in compliance with all debt covenants. Contract assets increased to $154.0 million from $106.7 million, while inventories increased to $129.2 million from $112.5 million.
Material changes versus the prior comparable period
- Commercial aerospace revenue declined $180.4 million because of lower large-aircraft production rates, primarily affecting Structural Systems.
- Military and space revenue increased $99.1 million because of higher production rates, additional content and missile-program activity.
- Top-ten-customer concentration decreased to 61.1% of revenue from 65.4%. Raytheon represented 20.9% of revenue, Boeing 10.5%, and Northrop Grumman 9.1%.
- Backlog declined to $822.0 million from $910.2 million, principally because of commercial aerospace. Remaining performance obligations were $779.7 million, of which management expected to recognize approximately 65%, or $507.0 million, in 2021.
- SG&A decreased $6.2 million, but the company recorded $2.4 million of restructuring charges related primarily to commercial-aerospace headcount reductions.
- Interest expense declined $4.6 million due mainly to lower borrowing rates, despite higher debt associated with the 2019 Nobles acquisition.
- Net cash provided by operations fell sharply, while investing cash usage improved because the prior year included the $76.8 million Nobles acquisition.
Guidance, outlook, risks and unusual items
The filing does not provide formal revenue or earnings guidance. Management expects 2021 capital expenditures of approximately $16 million to $18 million, excluding spending to restore the Guaymas facility, and expects operating cash flow and available borrowing capacity to fund obligations for the next twelve months.
- COVID-19 materially reduced commercial air travel, airline financial capacity and customer production rates. Management expects the effects may continue to adversely affect results through 2021 and beyond.
- On June 29, 2020, a fire severely damaged the Guaymas, Mexico facility. The company wrote off $7.1 million of property, equipment and tooling and $3.4 million of inventory; insurance recoveries offset the recognized loss in the income statement. It had received $13.5 million of general insurance recoveries by year-end, but the timing and amount of remaining recoveries, including business-interruption claims, were unresolved.
- Debt is variable-rate, secured and concentrated in maturities in 2024 and 2025. The company faces refinancing, covenant, interest-rate and future LIBOR-transition risks.
- Environmental liabilities include a $1.5 million accrual for groundwater contamination at El Mirage and Monrovia, plus a $0.4 million accrual for the West Covina landfill; the estimated future liability for that landfill was $0.4 million to $3.1 million.
- A California Private Attorneys General Act wage-and-hour action was served in January 2021. No liability was accrued because the company could not reasonably estimate the likelihood or amount of loss.
- Goodwill and intangible assets totaled $295.6 million, or approximately 35% of total assets. No goodwill impairment was recorded; Structural Systems’ tested fair value exceeded carrying value by 69%, but the assessment depends on assumptions regarding revenue, margins, growth and discount rates.
- The company had $6.1 million of deferred employer payroll taxes under the CARES Act, payable in 2021 and 2022, and had not accepted CARES Act loans or payments.
- The company has not paid dividends since the first quarter of 2011 and does not expect to pay dividends in the foreseeable future.
PricewaterhouseCoopers LLP issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. The auditor identified goodwill impairment testing for Structural Systems as a critical audit matter.
Important facts for investors to verify
- Whether commercial aerospace production rates and customer orders recover sufficiently to stabilize Structural Systems revenue and backlog.
- The timing and ultimate amount of Guaymas insurance and business-interruption recoveries, and the cost and timing of facility restoration.
- Debt maturity and refinancing plans for the approximately $299.6 million scheduled to mature in 2024–2025, together with covenant headroom and variable-rate exposure.
- Whether the significant increase in contract assets and inventories converts to cash without margin deterioration or contract losses.
- Potential outcomes of the California wage-and-hour litigation and environmental remediation obligations.
- The sustainability of 2020’s 21.9% gross margin and 14.0% Adjusted EBITDA margin after excluding restructuring and fire-related items.
- Customer concentration and exposure to Boeing, Raytheon, Northrop Grumman and other major aerospace and defense customers.