Ducommun Incorporated Reports Results for the Third Quarter Ended September 28, 2019

Revenue Rises 13%; Company Remains on Track for Strong 2019 Full Year Performance

Carson, California, UNITED STATES


SANTA ANA, Calif., Oct. 30, 2019 (GLOBE NEWSWIRE) -- Ducommun Incorporated (NYSE:DCO) (“Ducommun” or the “Company”) today reported results for its third quarter ended September 28, 2019.

Third Quarter 2019 Highlights

  • Revenue increased 13.3% year-over-year to $181.1 million
  • Net income of $8.3 million, or $0.70 per diluted share
  • Gross margin increased 170 basis points year-over-year to 21.2%
  • Operating margin increased 380 basis points year-over-year to 8.1%
  • Adjusted EBITDA increased 30.8% year-over-year to $23.6 million
  • Acquired Nobles Worldwide, Inc. (“Nobles”) subsequent to quarter end

“I am very happy with the 3rd quarter results and continued strong performance of the company. We now have had five straight quarters of double digit revenue increases averaging 15% with over 85% of the gains being organic growth,” said Stephen G. Oswald, chairman, president and chief executive officer. “Our team continues to do an excellent job as well, relentlessly driving performance and cost through our Performance Center strategy expanding operating margins in the quarter by 380 basis points to 8.1% and achieving earnings of $0.70 per diluted share. Our strong performance also reflects ongoing demand for Ducommun’s broad array of engineering processes, products and aftermarket services along with pricing discipline. Adjusted EBITDA was also strong increasing almost 31% year-over-year to $24 million, and we generated $12.0 million in cash from operations, while our backlog remains near record levels.

“In addition and after the end of the quarter, I was pleased to announce that Ducommun had acquired Nobles Worldwide, a global leader in the design of ammunition handling systems. Nobles has been in business for over 70 years and supplies advanced tactical products for a variety of aircraft, naval vessels, and military vehicles in the U.S. and overseas. It’s a great fit for Ducommun’s defense platform opening new market opportunities while adding on another value-added, engineering products company with aftermarket support. Like our other two recent acquisitions, we believe Nobles will improve our growth profile, help expand margins and bolster our aftermarket services.

“As we look forward, we remain confident on a strong finish for 2019 and continued momentum in 2020 despite the continued uncertainty on the Boeing 737 Max return to service. We see great balance in the portfolio with our defense business and the many other commercial platforms we serve to deliver for Ducommun shareholders. Our team is also energized for the opportunities ahead.”

Third Quarter Results

Net revenue for the third quarter of 2019 was $181.1 million compared to $159.8 million for the third quarter of 2018. The year-over-year increase of 13.3% was primarily due to the following:

  • $12.6 million higher revenue in the Company’s commercial aerospace end-use markets due to additional content and higher build rates on large aircraft platforms; and
  • $9.0 million higher revenue in the Company’s military and space end-use markets due to higher build rates on other military and space platforms and various missile platforms.

Net income for the third quarter of 2019 was $8.3 million, or $0.70 per diluted share, compared to $4.2 million, or $0.36 per diluted share, for the third quarter of 2018. This reflects a $7.2 million increase in gross profit due to higher revenue and the associated operating leverage at the Company’s performance centers and operations performance. Restructuring charges were lower year-over-year by $3.4 million that were offset by $2.8 million of higher selling, general and administrative expenses, $1.9 million of higher interest expense, and $1.8 million of higher income taxes.

Gross profit for the third quarter of 2019 was $38.3 million, or 21.2% of revenue compared to gross profit of $31.1 million, or 19.5% of revenue, for the third quarter of 2018. The increase in gross margin year-over-year was due to improved operating leverage at the Company’s performance centers and improved operations performance. This resulted in favorable manufacturing volume, favorable product mix, and manufacturing efficiencies.

Operating income for the third quarter of 2019 was $14.6 million, or 8.1% of revenue, compared to $6.8 million, or 4.3% of revenue, in the comparable period last year. The year-over-year increase of $7.8 million was due to higher revenue and the associated operating leverage at the Company’s performance centers, improved operations performance, and lower restructuring charges in the current year.

Interest expense for the third quarter of 2019 was $4.4 million compared to $2.5 million in the comparable period of 2018. The year-over-year increase was due to higher interest rates.

Adjusted EBITDA for the third quarter of 2019 was strong at $23.6 million, or 13.1% of revenue, compared to $18.1 million, or 11.3% of revenue, for the comparable period in 2018, an increase of 30.8%.

During the third quarter of 2019, the net cash provided by operations was $12.0 million compared to $7.2 million during the third quarter of 2018. The change year-over-year was due to higher net income.

Business Segment Information

Electronic Systems

Electronic Systems segment net revenue for the quarter ended September 28, 2019 was $90.6 million, compared to $85.7 million for the third quarter of 2018. The year-over-year increase was primarily due to the following:

  • $5.0 million higher revenue within the Company’s military and space end-use markets due to higher build rates on other military and space platforms and various missile platforms, partially offset by lower military rotary-wing aircraft due to timing of orders; and
  • $0.2 million higher revenue within the Company’s commercial aerospace end-use markets.

Electronic Systems segment operating income was $9.7 million, or 10.7% of revenue, for the third quarter of 2019 compared to $9.1 million, or 10.6% of revenue, for the comparable quarter in 2018. The year-over-year increase of $0.6 million was due to lower restructuring charges.

Structural Systems

Structural Systems segment net revenue for the quarter ended September 28, 2019 was $90.5 million, compared to $74.1 million for the third quarter of 2018. The year-over-year increase was due to the following:

  • $12.4 million higher revenue within the Company’s commercial aerospace end-use markets due to additional content and higher build rates on large aircraft platforms; and
  • $4.0 million higher revenue within the Company’s military and space end-use markets due to higher build rates on military rotary-wing aircraft platforms and various missile platforms.

Structural Systems segment operating income for the quarter ended September 28, 2019 was $12.9 million, or 14.2% of revenue, compared to $4.0 million, or 5.3% of revenue, for the comparable quarter in 2018. The year-over-year increase of $8.9 million was due to improved operating leverage at the Company’s performance centers and improved operations performance. This resulted in favorable manufacturing volume, favorable product mix, and improved manufacturing efficiencies, along with lower restructuring charges in the current year.

Corporate General and Administrative (“CG&A”) Expenses

CG&A expenses for the third quarter of 2019 were $7.9 million, or 4.4% of total Company revenue, compared to $6.2 million, or 3.9% of total Company revenue, for the comparable quarter in the prior year. The year-over-year increase of $1.7 million was due to higher other corporate expenses of $1.0 million and higher compensation and benefit costs of $0.7 million, partially offset by lower restructuring charges in the current year of $0.6 million.

Conference Call

A teleconference hosted by Stephen G. Oswald, the Company’s chairman, president, and chief executive officer, and Christopher D. Wampler, the Company’s vice president, interim chief financial officer and treasurer, and controller and chief accounting officer will be held today, October 30, 2019 at 2:00 p.m. PT (5:00 p.m. ET) to review these financial results. To participate in the teleconference, please call 844-239-5278 (international 574-990-1017) approximately ten minutes prior to the conference time. The participant passcode is 4590999. Mr. Oswald and Mr. Wampler will be speaking on behalf of the Company and anticipate the call (including Q&A) to last approximately 45 minutes.

This call is being webcast and can be accessed directly at the Ducommun website at www.ducommun.com. Conference call replay will be available after that time at the same link or by dialing 855-859-2056, passcode 4590999.

About Ducommun Incorporated

Ducommun Incorporated delivers value-added innovative manufacturing solutions to customers in the aerospace, defense and industrial markets. Founded in 1849, the Company specializes in two core areas - Electronic Systems and Structural Systems - to produce complex products and components for commercial aircraft platforms, mission-critical military and space programs, and sophisticated industrial applications. For more information, visit www.ducommun.com.

Forward Looking Statements

This press release and any attachments include “forward-looking statements,” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, in particular, earnings guidance, the Company’s restructuring plan and any statements about the Company’s plans, strategies and prospects. The Company generally uses the words “may,” “will,” “could,” “expect,” “anticipate,” “believe,” “estimate,” “plan,” “intend,” “look forward” and similar expressions in this press release and any attachments to identify forward-looking statements. The Company bases these forward-looking statements on its current views with respect to future events and financial performance. Actual results could differ materially from those projected in the forward-looking statements. These forward-looking statements are subject to risks, uncertainties and assumptions, including, among other things: whether the anticipated pre-tax restructuring charges will be sufficient to address all anticipated restructuring costs, including related to employee separation, facilities consolidation, inventory write-down and other asset impairments; whether the expected cost savings from the restructuring will ultimately be obtained in the amount and during the period anticipated; whether the restructuring in the affected areas will be sufficient to build a more cost efficient, focused, higher margin enterprise with higher returns for the Company's shareholders; the impact of the Company’s debt service obligations and restrictive debt covenants; the Company’s end-use markets are cyclical; the Company depends upon a selected base of industries and customers; a significant portion of the Company’s business depends upon U.S. Government defense spending; the Company is subject to extensive regulation and audit by the Defense Contract Audit Agency; contracts with some of the Company’s customers contain provisions which give the its customers a variety of rights that are unfavorable to the Company; further consolidation in the aerospace industry could adversely affect the Company’s business and financial results; the Company’s ability to successfully make acquisitions, including its ability to successfully integrate, operate or realize the projected benefits of such businesses; the Company relies on its suppliers to meet the quality and delivery expectations of its customers; the Company uses estimates when bidding on fixed-price contracts which estimates could change and result in adverse effects on its financial results; the impact of existing and future laws and regulations; the impact of existing and future accounting standards and tax rules and regulations; environmental liabilities could adversely affect the Company’s financial results; cyber security attacks, internal system or service failures may adversely impact the Company’s business and operations; and other risks and uncertainties, including those detailed from time to time in the Company’s periodic reports filed with the Securities and Exchange Commission. You should not put undue reliance on any forward-looking statements. You should understand that many important factors, including those discussed herein, could cause the Company’s results to differ materially from those expressed or suggested in any forward-looking statement. Except as required by law, the Company does not undertake any obligation to update or revise these forward-looking statements to reflect new information or events or circumstances that occur after the date of this news release, October 30, 2019, or to reflect the occurrence of unanticipated events or otherwise. Readers are advised to review the Company’s filings with the Securities and Exchange Commission (which are available from the SEC’s EDGAR database at www.sec.gov, at various SEC reference facilities in the United States and through the Company’s website).

Note Regarding Non-GAAP Financial Information

This release contains non-GAAP financial measures, including Adjusted EBITDA (which excludes interest expense, income tax expense [benefit], depreciation, amortization, stock-based compensation expense, restructuring charges, and inventory purchase accounting adjustments).

The Company believes the presentation of these non-GAAP measures provide important supplemental information to management and investors regarding financial and business trends relating to its financial condition and results of operations. The Company’s management uses these non-GAAP financial measures along with the most directly comparable GAAP financial measures in evaluating the Company’s actual and forecasted operating performance, capital resources and cash flow. The non-GAAP financial information presented herein should be considered supplemental to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. The Company discloses different non-GAAP financial measures in order to provide greater transparency and to help the Company’s investors to more meaningfully evaluate and compare Ducommun’s results to its previously reported results. The non-GAAP financial measures that the Company uses may not be comparable to similarly titled financial measures used by other companies. We define backlog as potential revenue and is based on customer placed purchase orders and long-term agreements (“LTAs”) with firm fixed price and expected delivery dates of 24 months or less. The majority of the LTAs do not meet the definition of a contract under ASC 606 and thus, the backlog amount disclosed herein is greater than the remaining performance obligations disclosed under ASC 606. Backlog is subject to delivery delays or program cancellations, which are beyond our control. Backlog is affected by timing differences in the placement of customer orders and tends to be concentrated in several programs to a greater extent than our net revenues. Backlog in industrial markets tends to be of a shorter duration and is generally fulfilled within a three month period. As a result of these factors, trends in our overall level of backlog may not be indicative of trends in our future net revenues.

CONTACTS:

Christopher D. Wampler, Vice President, Interim Chief Financial Officer and Treasurer, and Controller and Chief Accounting Officer, 657.335.3665
Chris Witty, Investor Relations, 646.438.9385, cwitty@darrowir.com

[Financial Tables Follow]

 
DUCOMMUN INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
  September 28,
 2019
 December 31,
 2018
Assets    
Current Assets    
Cash and cash equivalents $6,381  $10,263 
Restricted cash 361   
Accounts receivable, net 77,002  67,819 
Contract assets 102,475  86,665 
Inventories 109,848  101,125 
Production cost of contracts 10,704  11,679 
Other current assets 5,947  6,531 
Total Current Assets 312,718  284,082 
Property and equipment, Net 112,597  107,045 
Operating lease right-of-use assets 18,602   
Goodwill 136,057  136,057 
Intangibles, net 103,977  112,092 
Non-current deferred income taxes 313  308 
Other assets 5,290  5,155 
Total Assets $689,554  $644,739 
Liabilities and Shareholders’ Equity    
Current Liabilities    
Accounts payable $78,310  $69,274 
Contract liabilities 11,850  17,145 
Accrued and other liabilities 37,701  37,786 
Operating lease liabilities 2,915   
Current portion of long-term debt 2,281  2,330 
Total Current Liabilities 133,057  126,535 
Long-term debt 222,600  228,868 
Non-current operating lease liabilities 17,156   
Non-current deferred income taxes 18,107  18,070 
Other long-term liabilities 14,855  14,441 
Total Liabilities 405,775  387,914 
Commitments and contingencies    
Shareholders’ Equity    
Common stock 116  114 
Additional paid-in capital 86,828  83,712 
Retained earnings 203,682  180,356 
Accumulated other comprehensive loss (6,847) (7,357)
Total Shareholders’ Equity 283,779  256,825 
Total Liabilities and Shareholders’ Equity $689,554  $644,739 


 
DUCOMMUN INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except per share amounts)
 
  Three Months Ended Nine Months Ended
  September 28,
 2019
 September 29,
 2018
 September 28,
 2019
 September 29,
 2018
Net Revenues $181,101  $159,842  $534,162  $465,124 
Cost of Sales 142,774  128,726  422,076  375,225 
Gross Profit 38,327  31,116  112,086  89,899 
Selling, General and Administrative Expenses 23,724  20,956  71,031  61,476 
Restructuring Charges   3,373    10,784 
Operating Income 14,603  6,787  41,055  17,639 
Interest Expense (4,363) (2,497) (13,140) (9,159)
Income Before Taxes 10,240  4,290  27,915  8,480 
Income Tax Expense 1,937  119  4,325  118 
Net Income $8,303  $4,171  $23,590  $8,362 
Earnings Per Share        
Basic earnings per share $0.72  $0.37  $2.05  $0.73 
Diluted earnings per share $0.70  $0.36  $2.00  $0.72 
Weighted-Average Number of Common Shares Outstanding        
Basic 11,551  11,404  11,501  11,382 
Diluted 11,794  11,683  11,784  11,639 
         
Gross Profit % 21.2% 19.5% 21.0% 19.3%
SG&A % 13.1% 13.1% 13.3% 13.2%
Operating Income % 8.1% 4.3% 7.7% 3.8%
Net Income % 4.6% 2.6% 4.4% 1.8%
Effective Tax Rate 18.9% 2.8% 15.5% 1.4%


 
DUCOMMUN INCORPORATED AND SUBSIDIARIES
BUSINESS SEGMENT PERFORMANCE
(Unaudited)
(Dollars in thousands)
 
  Three Months Ended Nine Months Ended
  %
Change
 September 28,
 2019
 September 29,
 2018
 %
of Net  Revenues
2019
 %
of Net  Revenues
2018
 %
Change
 September 28,
 2019
 September 29,
 2018
 %
of Net  Revenues
2019
 %
of Net  Revenues
2018
Net Revenues                    
Electronic Systems 5.7% $90,588  $85,696  50.0% 53.6% 4.5% $264,045  $252,606  49.4% 54.3%
Structural Systems 22.1% 90,513  74,146  50.0% 46.4% 27.1% 270,117  212,518  50.6% 45.7%
Total Net Revenues 13.3% $181,101  $159,842  100.0% 100.0% 14.8% $534,162  $465,124  100.0% 100.0%
Segment Operating Income                    
Electronic Systems   $9,657  $9,050  10.7% 10.6%   $28,750  $23,463  10.9% 9.3%
Structural Systems   12,877  3,963  14.2% 5.3%   35,199  13,380  13.0% 6.3%
    22,534  13,013        63,949  36,843     
Corporate General and Administrative Expenses(1)   (7,931) (6,226) (4.4)% (3.9)%   (22,894) (19,204) (4.3)% (4.1)%
Total Operating Income   $14,603  $6,787  8.1% 4.3%   $41,055  $17,639  7.7% 3.8%
Adjusted EBITDA                    
Electronic Systems                    
Operating Income   $9,657  $9,050        $28,750  $23,463     
Depreciation and Amortization   3,569  3,707        10,602  11,022     
Restructuring Charges     1,150          2,406     
    13,226  13,907  14.6% 16.2%   39,352  36,891  14.9% 14.6%
Structural Systems                    
Operating Income   12,877  3,963        35,199  13,380     
Depreciation and Amortization   3,350  2,576        9,750  7,510     
Restructuring Charges     1,612          6,748     
Inventory Purchase Accounting Adjustments     293          622     
    16,227  8,444  17.9% 11.4%   44,949  28,260  16.6% 13.3%
Corporate General and Administrative Expenses(1)                    
Operating loss   (7,931) (6,226)       (22,894) (19,204)    
Depreciation and Amortization   73  37        399  103     
Stock-Based Compensation Expense   2,051  1,299        5,322  3,414     
Restructuring Charges     611          1,798     
    (5,807) (4,279)       (17,173) (13,889)    
Adjusted EBITDA   $23,646  $18,072  13.1% 11.3%   $67,128  $51,262  12.6% 11.0%
Capital Expenditures                    
Electronic Systems   $1,768  $879        $4,820  $5,091     
Structural Systems   2,747  3,935        10,108  6,565     
Corporate Administration     185          375     
Total Capital Expenditures   $4,515  $4,999        $14,928  $12,031     

(1)   Includes costs not allocated to either the Electronic Systems or Structural Systems operating segments.


DUCOMMUN INCORPORATED AND SUBSIDIARIES
GAAP TO NON-GAAP OPERATING INCOME RECONCILIATION
(Unaudited)
(Dollars in thousands)
 
  Three Months Ended Nine Months Ended
GAAP To Non-GAAP Operating Income September 28,
 2019
 September 29,
 2018
 %
of Net  Revenues
2019
 %
of Net  Revenues
2018
 September 28,
 2019
 September 29,
 2018
 %
of Net  Revenues
2019
 %
of Net  Revenues
2018
GAAP Operating income $14,603  $6,787      $41,055  $17,639     
                 
GAAP Operating income - Electronic Systems $9,657  $9,050      $28,750  $23,463     
Adjustments:                
Restructuring charges   1,150        2,406     
Adjusted operating income - Electronic Systems 9,657  10,200  10.7% 11.9% 28,750  25,869  10.9% 10.2%
                 
GAAP Operating income - Structural Systems 12,877  3,963      35,199  13,380     
Adjustments:                
Restructuring charges   1,612        6,748     
Inventory purchase accounting adjustments   293        622     
Adjusted operating income - Structural Systems 12,877  5,868  14.2% 7.9% 35,199  20,750  13.0% 9.8%
                 
GAAP Operating loss - Corporate (7,931) (6,226)     (22,894) (19,204)    
Adjustment:                
Restructuring charges   611        1,798     
Adjusted operating loss - Corporate (7,931) (5,615)     (22,894) (17,406)    
Total adjustments   3,666        11,574     
Adjusted operating income $14,603  $10,453  8.1% 6.5% $41,055  $29,213  7.7% 6.3%


 
DUCOMMUN INCORPORATED AND SUBSIDIARIES
GAAP TO NON-GAAP EARNINGS AND EARNINGS PER SHARE RECONCILIATION
(Unaudited)
(Dollars in thousands, except per share amounts)
 
  Three Months Ended Nine Months Ended
GAAP To Non-GAAP Earnings September 28,
 2019
 September 29,
 2018
 September 28,
 2019
 September 29,
 2018
GAAP Net income $8,303  $4,171  $23,590  $8,362 
Adjustments:        
Restructuring charges (1)   2,800    9,090 
Inventory purchase accounting adjustments (1)   243    516 
Total adjustments   3,043    9,606 
Adjusted net income $8,303  $7,214  $23,590  $17,968 


  Three Months Ended Nine Months Ended
GAAP Earnings Per Share To Non-GAAP Earnings Per Share September 28,
 2019
 September 29,
 2018
 September 28,
 2019
 September 29,
 2018
GAAP Diluted earnings per share (“EPS”) $0.70  $0.36  $2.00  $0.72 
Adjustments:        
Restructuring charges (1)   0.24    0.78 
Inventory purchase accounting adjustments (1)   0.02    0.04 
Total adjustments   0.26    0.82 
Adjusted diluted EPS $0.70  $0.62  $2.00  $1.54 
         
Shares used for adjusted diluted EPS 11,794  11,683  11,784  11,639 

(1)   Includes effective tax rate of 17.0% for 2018 adjustments.


 
DUCOMMUN INCORPORATED AND SUBSIDIARIES
NON-GAAP BACKLOG* BY REPORTING SEGMENT
(Unaudited)
(Dollars in thousands)
 
  (In thousands)
  September 28,
 2019
 December 31,
 2018
Consolidated Ducommun    
Military and space $372,492  $339,443 
Commercial aerospace 429,368  487,232 
Industrial 33,314  37,774 
Total $835,174  $864,449 
Electronic Systems    
Military and space $255,769  $241,196 
Commercial aerospace 68,100  48,032 
Industrial 33,314  37,774 
Total $357,183  $327,002 
Structural Systems    
Military and space $116,723  $98,247 
Commercial aerospace 361,268  439,200 
Total $477,991  $537,447 

* The Company defines backlog as potential revenue and is based on customer placed purchase orders and long-term agreements (“LTAs”) with firm fixed price and expected delivery dates of 24 months or less. Backlog as of as of September 28, 2019 was $835.2 million compared to $864.4 million as of December 31, 2018. Under ASC 606, the Company defines remaining performance obligations as customer placed purchase orders with firm fixed price and firm delivery dates. The remaining performance obligations disclosed under ASC 606 were $682.2 million.