Ducommun Incorporated 10-Q Summary
Business context and reporting period
Ducommun provides engineered products and manufacturing solutions primarily for aerospace and defense, with additional industrial, medical and other applications. Operations are reported through Electronic Systems and Structural Systems. This unaudited filing covers the three months ended April 2, 2022, compared with the three months ended April 3, 2021.
Key financial metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net revenue | $163.5 million | $157.2 million | 4.0% increase |
| Gross profit / margin | $32.5 million / 19.9% | $33.1 million / 21.1% | Margin down 120 bps |
| Operating income / margin | $9.1 million / 5.6% | $10.6 million / 6.8% | Income down $1.5 million |
| Net income / margin | $8.1 million / 5.0% | $6.7 million / 4.3% | 24.6% increase |
| Diluted EPS | $0.66 | $0.55 | Increase |
| Adjusted EBITDA / margin | $20.1 million / 12.3% | $21.1 million / 13.5% | Decrease of $1.1 million |
| Net cash used in operating activities | $18.9 million | $23.4 million | Lower use of $4.5 million |
Revenue growth was driven by commercial aerospace revenue, which increased $18.7 million, and industrial revenue, which increased $2.4 million, partly offset by a $14.8 million decline in military and space revenue. Electronic Systems revenue declined 1.7% to $97.5 million, while Structural Systems revenue increased 13.7% to $66.0 million.
Cash and cash equivalents were $19.3 million at April 2, 2022, compared with $76.3 million at December 31, 2021. Total debt was $256.0 million, down from $287.7 million, and the weighted-average interest rate was 3.37%. The company had $99.8 million of unused revolving credit capacity and stated that it was in compliance with its debt covenants.
Working capital consumed cash, including increases of $10.2 million in accounts receivable, $10.8 million in contract assets and $8.9 million in inventories. Capital expenditures were $5.1 million. Financing cash use was $33.4 million, primarily reflecting $30.0 million of term-loan repayments.
Remaining performance obligations were $767.1 million at April 2, 2022, with approximately 70% expected to be recognized as revenue during the following 12 months. Backlog was $942.7 million, including $664.0 million expected to be delivered over the next 12 months.
Material changes versus the prior comparable period
- Revenue increased 4.0%, but gross margin declined because of unfavorable product mix, partially offset by lower compensation and benefits costs.
- Operating income declined 14.0%, reflecting lower segment operating income and $1.2 million of one-time severance charges in SG&A.
- Net income increased primarily because of $3.0 million of other income from Guaymas fire-related business interruption insurance recoveries. This benefit was partly offset by higher SG&A.
- Interest expense declined $0.4 million due primarily to lower debt balances, despite higher interest rates.
- Adjusted EBITDA declined from $21.1 million to $20.1 million, and its margin declined from 13.5% to 12.3%.
- Military and space revenue fell 13.0%, while commercial aerospace revenue increased 52.9%.
- The company recorded $4.9 million of after-tax unrealized gains on cash-flow hedges in other comprehensive income. The related forward interest-rate swaps have a $150.0 million notional amount, become effective January 1, 2024, and carry a weighted-average fixed rate of 1.8%.
Guidance, outlook, risks and unusual items
- In April 2022, after quarter-end, management approved a restructuring plan involving headcount reductions, facility consolidation, inventory write-downs and long-lived-asset impairments. Expected pre-tax charges over the following 12 months are $10.0 million to $14.0 million, including $4.0 million of anticipated cash costs and $6.0 million to $10.0 million of anticipated non-cash charges. Annualized cost savings are expected to be $3.0 million to $4.0 million.
- Management expected 2022 capital expenditures of $16.0 million to $18.0 million, excluding spending to restore the Guaymas manufacturing capability.
- COVID-19 continued to affect operations and commercial aerospace demand. Boeing and Airbus build rates were improving but remained below pre-pandemic levels, and management noted potential material adverse effects on future results and liquidity.
- The Guaymas, Mexico facility remained affected by a 2020 fire. The company received $3.0 million of business-interruption insurance recoveries in the quarter, but the ultimate insurance recovery and potential liability related to the fire remain uncertain. The company could face losses exceeding insurance coverage if it is found responsible for the fire.
- Other contingencies include an accrued $0.8 million tentative wage-and-hour settlement subject to court approval, $1.5 million accrued for environmental remediation at El Mirage and Monrovia, and $0.4 million accrued for the West Covina landfill. The estimated range of West Covina future liability is $0.4 million to $3.1 million.
- The company acquired MagSeal in December 2021 for $69.5 million net of cash acquired. The acquisition added $32.9 million of goodwill and $30.1 million of intangible assets; its reported operating impact was immaterial through the quarter.
- The company stated that operating cash flow and available borrowing capacity should provide sufficient liquidity for the next 12 months, but first-quarter operating cash flow was negative and cash declined substantially during the quarter.
Investor verification priorities
- Verify the timing, total cost and cash impact of the announced restructuring, including whether projected savings materialize.
- Assess whether commercial aerospace recovery offsets continuing weakness in military and space programs and whether backlog converts on schedule.
- Review liquidity and debt maturities, including the December 2024 maturities of the revolving facility and 2019 Term Loan and sensitivity to rising interest rates.
- Monitor working-capital conversion, particularly the large contract-asset balance of $187.2 million, inventory growth and continued negative operating cash flow.
- Separate recurring earnings from the $3.0 million insurance recovery and other unusual adjustments included in adjusted EBITDA.
- Follow the Guaymas insurance claim and potential fire-related liability, environmental matters and the pending wage-and-hour settlement.
- Reconcile non-GAAP Adjusted EBITDA with GAAP results and consider the company’s stated limitations on using it as a liquidity measure.