Strong Revenue Growth; Improved Operating Performance; Restructuring on Track
SANTA ANA, Calif., Nov. 05, 2018 (GLOBE NEWSWIRE) -- Ducommun Incorporated (NYSE:DCO) (“Ducommun” or the “Company”) today reported results for its third quarter ended September 29, 2018.
Third Quarter 2018 Highlights
“Ducommun’s third quarter results built on the momentum begun in late 2017, when we started laying the groundwork for higher financial performance based on record backlogs, new program wins, a leaner, more efficient organization, and an effective restructuring strategy,” said Stephen G. Oswald, chairman, president and chief executive officer. “Revenue for the period increased 15.3% over 2017 and margins once again expanded, which is a clear sign of our focus on core technologies and higher operating efficiencies. After booking $3.4 million of restructuring charges this quarter, we remain on track to complete this initiative and along with ramping volumes across key customer platforms, expect further improved bottom line results in 2019.
“Our commercial aircraft business continues to set sales records as the Company benefits from being a leading provider of value-added structural components and electronic systems for large, narrowbody platforms. At the same time, our defense-related shipments are rising due to strong demand and renewed budget priorities, a trend we see continuing. Also, by taking actions expected to save an estimated $14 million annually through our restructuring measures, we are positioning Ducommun into a much leaner, nimbler competitor in the global aerospace and defense industry. We are transforming Ducommun and building a company with strong technical products, improving margins, good cash flow, and higher growth potential heading into next year.”
All financial statements in this report recognize the implementation of the FASB Accounting Standards Codification Topic 606 (“ASC 606”), covering policies on revenue recognition. In some instances herein a reference is made to the prior ASC, Topic 605 (“ASC 605”), for comparative purposes. Please see the non-GAAP measures starting on page 7 herein and the Company’s Annual Report on Form 10-K and Form 10-Q filings with the Securities and Exchange Commission for further description of this change.
Third Quarter Results
Net revenue for the third quarter of 2018 was $159.8 million compared to $138.7 million for the third quarter of 2017. The year-over-year increase of 15.3% was due to the following:
Net income for the third quarter of 2018 was $4.2 million, or $0.36 per diluted share, compared to $4.7 million, or $0.41 per diluted share, for the third quarter of 2017. The year-over-year decrease was due to $3.4 million of restructuring charges recorded in the quarter ended September 29, 2018. The $5.0 million increase in gross profit was due to higher revenue and improved operating performance that was partially offset by $2.3 million of higher selling, general and administrative expenses and a $0.3 million increase in interest expense.
Gross profit for the third quarter of 2018 was $31.1 million, or 19.5% of revenue compared to gross profit of $26.1 million, or 18.8% of revenue, for the third quarter of 2017. The increase in gross margin percentage year-over-year was due to favorable product mix and favorable manufacturing volume, partially offset by an increase in compensation and benefit costs and higher other manufacturing costs.
Operating income for the third quarter of 2018 was $6.8 million, or 4.3% of revenue, compared to $7.3 million, or 5.3% of revenue, in the comparable period last year. The year-over-year decrease of $0.6 million was due to restructuring charges, partially offset by higher revenue.
Interest expense for the third quarter of 2018 was $2.5 million compared to $2.2 million in the comparable period of 2017. The year-over-year increase was due to a higher outstanding balance on the revolving credit facility reflecting the acquisitions of Certified Thermoplastics Co., LLC in April 2018 and Lightning Diversion Systems, LLC in September 2017, and higher interest rates.
Adjusted EBITDA for the third quarter of 2018 was $18.1 million, or 11.3% of revenue, compared to $14.6 million, or 10.5% of revenue, for the comparable period in 2017, an increase of 23.8%.
During the third quarter of 2018, the Company generated $7.2 million of cash flow from operations compared to $11.1 million during the third quarter of 2017. The year-over-year decrease was due to the timing of working capital needs as a result of the timing of revenue.
The Company’s backlog as of September 29, 2018 was $780 million compared to $726 million as of December 31, 2017, an increase of 7.4%.
Electronic Systems segment net revenue for the quarter ended September 29, 2018 was $85.7 million, compared to $79.0 million for the third quarter of 2017. The year-over-year increase was due to the following:
Electronic Systems’ segment operating income was $9.1 million, or 10.6% of revenue, for the third quarter of 2018 compared to $8.3 million, or 10.5% of revenue, for the comparable quarter in 2017. The year-over-year increase of $0.7 million was due to favorable manufacturing volume, partially offset by unfavorable product mix and restructuring charges.
Structural Systems segment net revenue for the quarter ended September 29, 2018 was $74.1 million, compared to $59.7 million for the third quarter of 2017. The year-over-year increase was due to the following:
Structural Systems segment operating income for the quarter ended September 29, 2018 was $4.0 million, or 5.3% of revenue, compared to $3.5 million, or 5.9% of revenue, for the third quarter of 2017. The year-over-year increase of $0.4 million was due to favorable product mix, favorable manufacturing volume, and improved operating performance, partially offset by higher compensation and benefit costs and restructuring charges.
Corporate General and Administrative (“CG&A”) Expenses
CG&A expenses for the third quarter of 2018 were $6.2 million, or 3.9% of total Company revenue, compared to $4.5 million, or 3.2% of total Company revenue, for the comparable quarter in the prior year. The year-over-year increase was due to higher compensation and benefit costs of $0.8 million, restructuring charges of $0.6 million, and higher professional services fees of $0.6 million.
A teleconference hosted by Stephen G. Oswald, the Company’s chairman, president, and chief executive officer, and Douglas L. Groves, the Company’s vice president, chief financial officer and treasurer, will be held today, November 5, 2018 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 3893463. Mr. Oswald and Mr. Groves 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 3893463.
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” 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 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 [benefit] expense, 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 firm 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 backlog amount 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.
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