Ducommun Incorporated — Q1 2021 Form 10-Q Summary
Business Context and Reporting Period
Ducommun provides engineering and manufacturing services for high-performance, high-cost-of-failure products, primarily serving aerospace and defense, industrial, medical and other markets. Operations are reported through Electronic Systems and Structural Systems. The filing covers the three months ended April 3, 2021, compared with the three months ended March 28, 2020. The financial statements are unaudited.
Key Financial Metrics
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $157.2 million | $173.5 million |
| Gross profit / margin | $33.1 million / 21.1% | $36.8 million / 21.2% |
| Operating income / margin | $10.6 million / 6.8% | $13.6 million / 7.8% |
| Net income / margin | $6.7 million / 4.3% | $7.9 million / 4.6% |
| Diluted EPS | $0.55 | $0.67 |
| Adjusted EBITDA / margin | $21.1 million / 13.5% | $23.2 million / 13.4% |
| Cash used in operating activities | $23.4 million | $12.0 million |
| Capital expenditures | $4.5 million cash purchases | $3.9 million cash purchases |
At April 3, 2021, cash and cash equivalents were $17.0 million, compared with $56.5 million at December 31, 2020. Total debt was $313.0 million, down from $320.6 million, with a weighted-average interest rate of 3.16%. The company reported $79.8 million of unused revolving credit capacity and compliance with all debt covenants. Total assets were $825.9 million and shareholders’ equity was $335.6 million.
Working capital uses increased, including contract assets of $173.9 million, up from $154.0 million, and inventories of $138.3 million, up from $129.2 million. Accounts receivable were $61.1 million. Contract liabilities declined to $24.3 million from $28.3 million.
Material Changes Versus the Prior Comparable Period
- Revenue decreased 9.4%, primarily because commercial aerospace revenue fell $25.2 million as aircraft build rates declined. Military and space revenue increased $12.2 million.
- Electronic Systems revenue increased 1.0% to $99.1 million, while segment operating income declined to $12.5 million from $15.1 million due primarily to unfavorable manufacturing volume and product mix.
- Structural Systems revenue decreased 23.0% to $58.0 million, primarily from a $22.1 million commercial aerospace decline. Segment operating income decreased modestly to $5.1 million from $5.4 million.
- Gross margin was essentially stable, but operating margin declined because lower gross profit was not fully offset by lower SG&A. SG&A decreased $0.7 million.
- Net income declined 15.6%; lower gross profit was partially offset by a $1.4 million reduction in interest expense and lower income taxes.
- Operating cash use increased by $11.3 million, driven by higher contract assets, inventories and lower accrued liabilities, partially offset by higher accounts payable.
- Debt declined through mandatory term-loan payments, a $0.9 million annual excess-cash-flow payment and $5.0 million of voluntary revolver prepayments.
Guidance, Outlook, Risks and Unusual Items
- Management expects 2021 capital expenditures of $16 million to $18 million, excluding spending to restore the Guaymas, Mexico performance center; some spending could be delayed because of COVID-19.
- No specific revenue, earnings or margin guidance was provided. Management stated that operating cash flow and borrowing capacity are expected to provide sufficient liquidity for the next twelve months.
- Remaining performance obligations were $690.3 million at April 3, 2021, with approximately 70% expected to be recognized as revenue over the following 12 months. Backlog was $810.1 million, including $555.0 million expected to be delivered within 12 months.
- COVID-19 continued to negatively affect the business, especially commercial aerospace. Lower aircraft production rates, customer and supplier impacts, workforce constraints and possible further pandemic effects could materially affect results.
- The June 2020 Guaymas facility fire continued to affect Structural Systems. Production has been absorbed by other facilities. The company had received $13.5 million of general insurance recoveries by April 3, 2021, but the timing and amount of remaining recoveries, including business-interruption proceeds, were not known.
- Adjusted EBITDA included $0.5 million of Guaymas fire-related expenses and is a non-GAAP measure that does not represent cash available for debt service, capital expenditures or working capital.
- A California Private Attorneys General Act wage-and-hour action was pending with no liability accrued because the company could not reasonably estimate the likelihood or amount of loss.
- Environmental matters included a $1.5 million accrual for groundwater investigation and remediation and a $0.4 million accrual for the West Covina landfill; the estimated West Covina exposure ranged from $0.4 million to $3.1 million.
- Goodwill was $170.8 million and was not impaired. The company identified no material changes to previously disclosed risk factors or critical accounting policies.
Most Important Facts to Verify
- Whether commercial aerospace demand and aircraft build-rate reductions continue to pressure Structural Systems revenue and margins.
- Whether the substantial increase in contract assets, inventories and negative operating cash flow converts to cash without requiring additional borrowing.
- Debt maturities, interest-rate exposure, covenant headroom and the availability of the revolving facility.
- The timing and total amount of remaining Guaymas insurance recoveries and restoration costs.
- The outcome and potential financial exposure from the California wage-and-hour litigation and environmental matters.
- Whether the $690.3 million of remaining performance obligations and $810.1 million backlog convert to revenue as expected, given potential delays or cancellations.