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Ducommun Incorporated Reports Results for the Second Quarter Ended June 27, 2020

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Gross Margin Expansion; Military and Space Revenue Growth; Effectively Responding to Rapidly Changing Industry Conditions

SANTA ANA, Calif., July 30, 2020 (GLOBE NEWSWIRE) -- Ducommun Incorporated (NYSE:DCO) (“Ducommun” or the “Company”) today reported results for its second quarter ended June 27, 2020.

Second Quarter 2020 Recap

  • Revenue was $147.3 million

  • Net income of $5.1 million, or $0.43 per diluted share

  • Adjusted net income of $5.6 million, or $0.48 per diluted share

  • Gross margin increased 110 basis points year-over-year to 22.2%

  • Adjusted EBITDA was $20.3 million

“This past quarter proved to be one of the most challenging in our history, but Ducommun's performance highlights both the strength and diversity of our business as well as the many measures taken to streamline and optimize our operations since I joined the Company in 2017,” said Stephen G. Oswald, chairman, president and chief executive officer. “Due to the ongoing COVID-19 pandemic, commercial aerospace demand was negatively impacted but our defense related revenue rose roughly 23% year-over-year, leveraging an array of integral military programs and missile systems. In addition, our military and space backlog* increased to over $500 million, bolstering the outlook across this key part of the business.

“At the same time, despite overall lower revenue, gross margins increased year-over-year due to an improved product mix in defense, effective cost controls, value added pricing and the acquisition of Nobles Worldwide last fall, a key addition to our engineered products portfolio. The team remains focused on rigorous safety protocols, serving our customers, effectively managing working capital, working with the supply base, and reducing costs wherever and whenever possible. We are also confident that Ducommun's strong product portfolio, intellectual property, dedicated staff, and efficient operations will provide positive momentum in the second half of the year and position us for a solid rebound in 2021.”

Second Quarter Results

Net revenue for the second quarter of 2020 was $147.3 million compared to $180.5 million for the second quarter of 2019. The year-over-year decrease of 18.4% was primarily due to the following:

  • $51.6 million lower revenue in the Company’s commercial aerospace end-use markets due to lower build rates on large aircraft platforms; partially offset by

  • $17.4 million higher revenue in the Company’s military and space end-use markets due to additional content and higher build rates on other military and space platforms, and higher build rates on military fixed-wing aircraft platforms and various missile platforms.

Net income for the second quarter of 2020 was $5.1 million, or $0.43 per diluted share, compared to $7.8 million, or $0.66 per diluted share, for the second quarter of 2019. This reflects a $5.4 million decrease in gross profit due to lower revenue, partially offset by lower selling, general and administrative (“SG&A”) expenses of $2.5 million.

Gross profit for the second quarter of 2020 was $32.7 million, or 22.2% of revenue, compared to gross profit of $38.1 million, or 21.1% of revenue, for the second quarter of 2019. The increase in gross profit margin as a percentage of net revenue year-over-year was due to lower compensation and benefit costs and favorable product mix, partially offset by unfavorable manufacturing volume.

Operating income for the second quarter of 2020 was $10.0 million, or 6.8% of revenue, compared to $13.6 million, or 7.5% of revenue, in the comparable period last year. The year-over-year decrease of $3.6 million was due to lower revenue, partially offset by lower SG&A expenses.

Interest expense for the second quarter of 2020 was $3.7 million compared to $4.4 million in the comparable period of 2019. The year-over-year decrease was due to lower interest rates, partially offset by a higher outstanding balance on the Company’s credit facilities driven by the acquisition of Nobles Worldwide, Inc. (“Nobles”) in October 2019, and higher net draw downs on the Company’s revolving credit facility, including $50.0 million during the first quarter of 2020, which remained as cash on hand at the end of the second quarter of 2020.

Adjusted EBITDA for the second quarter of 2020 was $20.3 million, or 13.8% of revenue, compared to $22.4 million, or 12.4% of revenue, for the comparable period in 2019.

During the second quarter of 2020, the net cash provided by operations was $8.6 million compared to $9.7 million during the second quarter of 2019. The change year-over-year was due to higher inventories and lower accounts payable, partially offset by lower accounts receivable.

* 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 June 27, 2020 was $830.7 million compared to $910.2 million as of December 31, 2019. 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 as of June 27, 2020 were $732.2 million compared to $745.3 million as of December 31, 2019.

Business Segment Information

Electronic Systems

Electronic Systems segment net revenue for the quarter ended June 27, 2020 was $92.0 million, compared to $89.3 million for the second quarter of 2019. The year-over-year increase was primarily due to the following:

  • $7.7 million higher revenue within the Company’s military and space end-use markets due to higher build rates on military fixed-wing aircraft platforms, various missile platforms, and other military and space platforms; partially offset by

  • $6.0 million lower revenue within the Company’s commercial aerospace end-use markets due to lower build rates on other commercial aerospace platforms.

Electronic Systems segment operating income for the quarter ended June 27, 2020 was $10.4 million, or 11.4% of revenue, compared to $9.9 million, or 11.1% of revenue, for the comparable quarter in 2019. The year-over-year increase of $0.5 million was due to lower compensation and benefit costs.

Structural Systems

Structural Systems segment net revenue for the quarter ended June 27, 2020 was $55.4 million, compared to $91.2 million for the second quarter of 2019. The year-over-year decrease was due to the following:

  • $45.5 million lower revenue within the Company’s commercial aerospace end-use markets due to lower build rates on large aircraft platforms; partially offset by

  • $9.7 million higher revenue within the Company’s military and space end-use markets due to additional content and higher build rates on other military and space platforms, and higher build rates on military rotary-wing aircraft platforms and military fixed-wing aircraft platforms.

Structural Systems segment operating income for the quarter ended June 27, 2020 was $6.2 million, or 11.2% of revenue, compared to $11.8 million, or 12.9% of revenue, for the comparable quarter in 2019. The year-over-year decrease of $5.6 million was due to unfavorable manufacturing volume, partially offset by favorable product mix.

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

CG&A expenses for the second quarter of 2020 were $6.6 million, or 4.5% of total Company revenue, compared to $8.1 million, or 4.5% of total Company revenue, for the comparable quarter in the prior year. The decrease in CG&A expenses was due to a one-time severance charges of $1.7 million in the prior year.

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, July 30, 2020 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 10 minutes prior to the conference time. The participant passcode is 9433049. 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 Ducommun.com. Conference call replay will be available after that time at the same link or by dialing 855-859-2056, passcode 9433049.

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 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 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,” “continue” 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; the ultimate geographic spread, duration and severity of the coronavirus (COVID-19) outbreak, and the effectiveness of actions taken, or actions that may be taken, by governmental authorities to contain the outbreak or treat its impact, 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, July 30, 2020, 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).

Note Regarding Non-GAAP Financial Information

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

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


DUCOMMUN INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)

June 27,
2020

December 31,
2019

Assets

Current Assets

Cash and cash equivalents

$

70,828

$

39,584

Accounts receivable, net

67,518

67,133

Contract assets

122,877

106,670

Inventories

128,609

112,482

Production cost of contracts

7,351

9,402

Other current assets

4,548

5,497

Total Current Assets

401,731

340,768

Property and equipment, Net

113,765

115,216

Operating lease right-of-use assets

17,789

19,105

Goodwill

170,907

170,917

Intangibles, net

131,224

138,362

Non-current deferred income taxes

59

55

Other assets

6,162

6,006

Total Assets

$

841,637

$

790,429

Liabilities and Shareholders’ Equity

Current Liabilities

Accounts payable

$

69,068

$

82,597

Contract liabilities

27,082

14,517

Accrued and other liabilities

29,122

37,620

Operating lease liabilities

3,094

2,956

Current portion of long-term debt

7,000

7,000

Total Current Liabilities

135,366

144,690

Long-term debt, less current portion

341,975

300,887

Non-current operating lease liabilities

16,155

17,565

Non-current deferred income taxes

18,755

16,766

Other long-term liabilities

19,779

17,721

Total Liabilities

532,030

497,629

Commitments and contingencies

Shareholders’ Equity

Common stock

117

116

Additional paid-in capital

91,645

88,399

Retained earnings

225,573

212,553

Accumulated other comprehensive loss

(7,728

)

(8,268

)

Total Shareholders’ Equity

309,607

292,800

Total Liabilities and Shareholders’ Equity

$

841,637

$

790,429

DUCOMMUN INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except per share amounts)

Three Months Ended

Six Months Ended

June 27,
2020

June 29,
2019

June 27,
2020

June 29,
2019

Net Revenues

$

147,309

$

180,495

$

320,784

$

353,061

Cost of Sales

114,641

142,430

251,312

279,302

Gross Profit

32,668

38,065

69,472

73,759

Selling, General and Administrative Expenses

21,982

24,461

45,160

47,307

Restructuring Charges

661

661

Operating Income

10,025

13,604

23,651

26,452

Interest Expense

(3,721

)

(4,426

)

(7,967

)

(8,777

)

Income Before Taxes

6,304

9,178

15,684

17,675

Income Tax Expense

1,214

1,363

2,664

2,388

Net Income

$

5,090

$

7,815

$

13,020

$

15,287

Earnings Per Share

Basic earnings per share

$

0.44

$

0.68

$

1.12

$

1.33

Diluted earnings per share

$

0.43

$

0.66

$

1.10

$

1.30

Weighted-Average Number of Common Shares Outstanding

Basic

11,665

11,513

11,638

11,475

Diluted

11,828

11,758

11,845

11,754

Gross Profit %

22.2

%

21.1

%

21.7

%

20.9

%

SG&A %

15.0

%

13.6

%

14.1

%

13.4

%

Operating Income %

6.8

%

7.5

%

7.4

%

7.5

%

Net Income %

3.5

%

4.3

%

4.1

%

4.3

%

Effective Tax Rate

19.3

%

14.9

%

17.0

%

13.5

%

DUCOMMUN INCORPORATED AND SUBSIDIARIES
BUSINESS SEGMENT PERFORMANCE
(Unaudited)
(Dollars in thousands)

Three Months Ended

Six Months Ended

%
Change

June 27,
2020

June 29,
2019

%
of Net Revenues
2020

%
of Net Revenues
2019

%
Change

June 27,
2020

June 29,
2019

%
of Net Revenues
2020

%
of Net Revenues
2019

Net Revenues

Electronic Systems

3.0

%

$

91,950

$

89,260

62.4

%

49.5

%

9.6

%

$

190,070

$

173,457

59.3

%

49.1

%

Structural Systems

(39.3

)%

55,359

91,235

37.6

%

50.5

%

(27.2

)%

130,714

179,604

40.7

%

50.9

%

Total Net Revenues

(18.4

)%

$

147,309

$

180,495

100.0

%

100.0

%

(9.1

)%

$

320,784

$

353,061

100.0

%

100.0

%

Segment Operating Income

Electronic Systems

$

10,438

$

9,912

11.4

%

11.1

%

$

25,560

$

19,093

13.4

%

11.0

%

Structural Systems

6,214

11,773

11.2

%

12.9

%

11,604

22,322

8.9

%

12.4

%

16,652

21,685

37,164

41,415

Corporate General and Administrative Expenses(1)

(6,627

)

(8,081

)

(4.5

)%

(4.5

)%

(13,513

)

(14,963

)

(4.2

)%

(4.2

)%

Total Operating Income

$

10,025

$

13,604

6.8

%

7.5

%

$

23,651

$

26,452

7.4

%

7.5

%

Adjusted EBITDA

Electronic Systems

Operating Income

$

10,438

$

9,912

$

25,560

$

19,093

Depreciation and Amortization

3,524

3,531

7,099

7,033

Restructuring Charges

28

28

13,990

13,443

15.2

%

15.1

%

32,687

26,126

17.2

%

15.1

%

Structural Systems

Operating Income

6,214

11,773

11,604

22,322

Depreciation and Amortization

3,739

3,400

7,428

6,400

Restructuring Charges

633

633

10,586

15,173

19.1

%

16.6

%

19,665

28,722

15.0

%

16.0

%

Corporate General and Administrative Expenses(1)

Operating loss

(6,627

)

(8,081

)

(13,513

)

(14,963

)

Depreciation and Amortization

64

73

136

326

Stock-Based Compensation Expense

2,250

1,807

4,529

3,271

(4,313

)

(6,201

)

(8,848

)

(11,366

)

Adjusted EBITDA

$

20,263

$

22,415

13.8

%

12.4

%

$

43,504

$

43,482

13.6

%

12.3

%

Capital Expenditures

Electronic Systems

$

2,117

$

2,216

$

2,932

$

3,052

Structural Systems

467

3,672

2,604

7,361

Corporate Administration

Total Capital Expenditures

$

2,584

$

5,888

$

5,536

$

10,413

(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

Six Months Ended

GAAP To Non-GAAP Operating Income

June 27, 2020

June 29, 2019

%
of Net Revenues
2020

%
of Net Revenues
2019

June 27, 2020

June 29, 2019

%
of Net Revenues
2020

%
of Net Revenues
2019

GAAP Operating income

$

10,025

$

13,604

$

23,651

$

26,452

GAAP Operating income - Electronic Systems

$

10,438

$

9,912

$

25,560

$

19,093

Adjustments:

Restructuring charges

28

28

Adjusted operating income - Electronic Systems

10,466

9,912

11.4

%

11.1

%

25,588

19,093

13.5

%

11.0

%

GAAP Operating income - Structural Systems

6,214

11,773

11,604

22,322

Adjustments:

Restructuring charges

633

633

Adjusted operating income - Structural Systems

6,847

11,773

12.4

%

12.9

%

12,237

22,322

9.4

%

12.4

%

GAAP Operating loss - Corporate

(6,627

)

(8,081

)

(13,513

)

(14,963

)

Adjustment:

Restructuring charges

Adjusted operating loss - Corporate

(6,627

)

(8,081

)

(13,513

)

(14,963

)

Total adjustments

661

661

Adjusted operating income

$

10,686

$

13,604

7.3

%

7.5

%

$

24,312

$

26,452

7.6

%

7.5

%

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

Six Months Ended

GAAP To Non-GAAP Earnings

June 27,
2020

June 29,
2019

June 27,
2020

June 29,
2019

GAAP Net income

$

5,090

$

7,815

$

13,020

$

15,287

Adjustments:

Restructuring charges (1)

535

535

Total adjustments

535

535

Adjusted net income

$

5,625

$

7,815

$

13,555

$

15,287


Three Months Ended

Six Months Ended

GAAP Earnings Per Share To Non-GAAP Earnings Per Share

June 27,
2020

June 29,
2019

June 27,
2020

June 29,
2019

GAAP Diluted earnings per share (“EPS”)

$

0.43

$

0.66

$

1.10

$

1.30

Adjustments:

Restructuring charges (1)

0.05


0.05


Total adjustments

0.05


0.05


Adjusted diluted EPS

$

0.48

$

0.66

$

1.15

$

1.30

Shares used for adjusted diluted EPS

11,828

11,758

11,845

11,754

(1) Includes effective tax rate of 19.0% for 2020 adjustments.

DUCOMMUN INCORPORATED AND SUBSIDIARIES
NON-GAAP BACKLOG* BY REPORTING SEGMENT
(Unaudited)
(Dollars in thousands)

(In thousands)

June 27,
2020

December 31,
2019

Consolidated Ducommun

Military and space

$

505,189

$

451,293

Commercial aerospace

306,874

430,642

Industrial

18,597

28,286

Total

$

830,660

$

910,221

Electronic Systems

Military and space

$

356,046

$

311,027

Commercial aerospace

68,336

75,719

Industrial

18,597

28,286

Total

$

442,979

$

415,032

Structural Systems

Military and space

$

149,143

$

140,266

Commercial aerospace

238,538

354,923

Total

$

387,681

$

495,189

* 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 June 27, 2020 was $830.7 million compared to $910.2 million as of December 31, 2019. 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 $732.2 million.