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Ducommun Reports Results for the Fourth Quarter Ended December 31, 2017

SANTA ANA, Calif., Feb. 28, 2018 (GLOBE NEWSWIRE) -- Ducommun Incorporated (NYSE:DCO) (“Ducommun” or the “Company”) today reported results for its fourth quarter and year ended December 31, 2017.

Fourth Quarter 2017 Recap

  • Revenue of $142.3 million
  • GAAP net income of $9.5 million, or $0.82 per diluted share
  • Adjusted net income for the quarter was $4.6 million, or $0.41 per diluted share, which excludes net of tax, $12.6 million tax benefit from adoption of Tax Cuts Jobs Act, $6.9 million restructuring charges, and $0.9 million inventory purchase accounting adjustment
  • Adjusted EBITDA of $13.6 million
  • Backlog of $726.5 million

“I am happy to report that we closed 2017 with several major accomplishments as we move into a busy year ahead,” said Stephen G. Oswald, the Company’s president and chief executive officer. “Along with posting solid revenue and making progress towards higher margins, our backlog surged to over $720 million this quarter - marking a milestone for the Company that once again illustrates the enduring demand for our applications, the value we provide, and the key programs we serve.

“We took the initial steps this quarter, as previously announced, to further streamline our operations and improve margins, particularly within the structures business. We have a good amount of work to do this year as well but remain on track to reduce some $14 million of annualized cost out of the Company starting in 2019. Overall, I am optimistic about the future for Ducommun as we take additional measures to increase margins, accelerate top line growth, and improve returns to our shareholders.”

Fourth Quarter Results

Net revenue for the fourth quarter of 2017 was $142.3 million, compared to $142.5 million for the fourth quarter of 2016. The decrease year-over-year was primarily due to the following:

  • $1.3 million lower revenue within the Company’s military and space end-use markets mainly due to timing of certain orders which impacted scheduled deliveries on the Company’s fixed-wing and helicopter platforms; partially offset by
  • $0.9 million higher revenue in the Company’s commercial aerospace end-use markets mainly due to added content with existing customers; and
  • $0.2 million higher revenue within the Company’s industrial, medical and other (“Industrial”) end-use markets.

Net income for the fourth quarter of 2017 was $9.5 million, or $0.82 per diluted share, compared to $2.8 million, or $0.25 per diluted share, for the fourth quarter of 2016. Adjusted net income for the fourth quarter 2017 was $4.6 million, or $0.41 per adjusted diluted earnings per share, compared to $4.8 million, or $0.43 per adjusted diluted share for the fourth quarter of 2016. The year-over-year increase in GAAP net income was primarily due to the following:

  • $17.5 million lower income tax expense mainly due to the reduction of the U.S. corporate tax rate as a result of the Tax Cuts and Jobs Act (“Tax Act”) enacted in December 2017 which required the Company to remeasure its deferred tax assets and liabilities at December 31, 2017; partially offset by
  • $8.7 million (of which, $0.5 million was recorded as cost of sales) higher restructuring charges as a result of the Company approving and commencing a restructuring plan in November 2017 that is expected to increase operating efficiencies;
  • $1.4 million higher selling, general, and administrative (“SG&A”) expense mainly due to higher compensation and benefit costs and higher professional service fees; and
  • $1.1 million of inventory purchase accounting adjustments in the fourth quarter of 2017.

Gross profit for the fourth quarter of 2017 was $25.7 million, or 18.1% of revenue, compared to gross profit of $27.8 million, or 19.5% of revenue, for the fourth quarter of 2016. The decrease in gross margin percentage year-over-year was primarily due to unfavorable product mix and, as part of our restructuring activities, $0.5 million in inventory write-offs.

Operating loss for the fourth quarter of 2017 was $(2.7) million, or (1.9)% of revenue, compared to operating income of $9.0 million, or 6.3% of revenue, in the comparable period last year. The year-over-year decrease in operating income in the fourth quarter of 2017 was primarily due to higher restructuring charges of $8.7 million, higher SG&A expenses of $1.4 million, and higher amortization of intangible assets from the acquisition of LDS in the fourth quarter of 2017.

Adjusted operating income for the fourth quarter of 2017 was $7.1 million, or 5.0% of revenue, compared to adjusted operating income of $9.1 million, or 6.4% of revenue, in the comparable period last year.

Interest expense for the fourth quarter of 2017 was $2.7 million compared to $2.0 million in the comparable period of 2016. The year-over-year increase was primarily due to a higher utilization of the Company’s revolving credit facility, mainly for the acquisition of Lightning Diversion Systems, LLC (“LDS”).

Adjusted EBITDA for the fourth quarter of 2017 was $13.6 million, or 9.6% of revenue, compared to $15.1 million, or 10.6% of revenue, for the comparable period in 2016.

The Company’s backlog as of December 31, 2017 was $726.5 million compared to $641.3 million as of December 31, 2016, which reflects an increase of $60.3 million in Commercial aerospace, $21.0 million in military and space, and $3.9 million in Industrial.

Business Segment Information

Structural Systems

Structural Systems reported net revenue for the current quarter of $65.1 million, compared to $60.8 million for the fourth quarter of 2016. The year-over-year increase was primarily due to the following:

  • $4.1 million higher revenue within the Company’s commercial aerospace end-use markets mainly due to build rate increases and added content with existing customers, which favorably impacted the Company’s large airframe platforms; and
  • $0.2 million higher revenue within the Company’s military and space end-use markets mainly due to higher demand, which favorably impacted the Company’s helicopter platforms.

Structural Systems segment operating loss for the current-year fourth quarter was $(2.7) million, or (4.1)% of revenue, compared to operating income of $3.2 million, or 5.2% of revenue, for the fourth quarter of 2016. The year-over-year decrease was primarily due to restructuring charges of $5.8 million.

Adjusted operating income for the fourth quarter of 2017 was $3.1 million, or 4.8% of revenue, compared to adjusted operating income of $3.2 million, or 5.2% of revenue, in the comparable period last year.

Electronic Systems

Electronic Systems reported net revenue for the current quarter of $77.2 million, compared to $81.7 million for the fourth quarter of 2016. The year-over-year decrease was primarily due to the following:

  • $3.2 million lower revenue within the Company’s commercial aerospace end-use markets mainly due to timing of certain orders which impacted scheduled deliveries on certain of the Company’s large airframe programs; and
  • $1.5 million lower revenue within the Company’s military and space end-use markets mainly due to timing of certain orders which impacted scheduled deliveries on certain of the Company’s fixed-wing and helicopter platforms; partially offset by
  • $0.2 million higher revenue within the Company’s Industrial end-use markets.

Electronic Systems operating income for the current year fourth quarter of $6.8 million, or 8.8% of revenue, compared to $9.2 million, or 11.3% of revenue, for the comparable quarter in 2016. The year-over-year decrease was primarily due to restructuring charges of $1.2 million and higher amortization of intangible assets from the acquisition of LDS.

Adjusted operating income for the fourth quarter of 2017 was $9.1 million, or 11.7% of revenue, compared to adjusted operating income of $9.4 million, or 11.5% of revenue, in the comparable period last year.

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

CG&A expense for the fourth quarter of 2017 was $6.9 million, or 4.8% of total Company revenue, compared to $3.4 million, or 2.4% of total Company revenue, in the comparable quarter in the prior year. The increase in CG&A expense in the current year quarter was primarily due to restructuring charges of $1.8 million, higher professional service fees, and higher compensation and benefit costs.

Conference Call

A teleconference hosted by Stephen G. Oswald, the Company’s president and chief executive officer, and Douglas L. Groves, the Company’s vice president, chief financial officer and treasurer, will be held today, February 28, 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 8195996. 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 8195996.

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 or enter into joint ventures, 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 expense, depreciation, amortization, stock-based compensation expense, restructuring charges, and inventory purchase accounting adjustments), adjusted net income (which excludes impact from the adoption of the Tax Cuts and Jobs Act, restructuring charges, inventory purchase accounting adjustments, and divestiture related adjustments), and adjusted operating income (which excludes 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.

CONTACTS:

Douglas L. Groves, Vice President, Chief Financial Officer and Treasurer, 657.335.3665
Chris Witty, Investor Relations, 646.438.9385, cwitty@darrowir.com


[Financial Tables Follow]
DUCOMMUN INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
December 31,
2017
December 31,
2016
Assets
Current Assets
Cash and cash equivalents $2,150 $7,432
Accounts receivable, net 74,064 76,239
Inventories 122,161 119,896
Production cost of contracts 11,204 11,340
Other current assets 11,435 11,034
Total Current Assets 221,014 225,941
Property and Equipment, Net 110,252 101,590
Goodwill 117,435 82,554
Intangibles, Net 114,693 101,573
Non-Current Deferred Income Taxes 261 286
Other Assets 3,098 3,485
Total Assets $566,753 $515,429
Liabilities and Shareholders’ Equity
Current Liabilities
Current portion of long-term debt $ $3
Accounts payable 51,907 57,024
Accrued liabilities 28,329 29,279
Total Current Liabilities 80,236 86,306
Long-Term Debt, Less Current Portion 216,055 166,896
Non-Current Deferred Income Taxes 15,981 31,417
Other Long-Term Liabilities 18,898 18,707
Total Liabilities 331,170 303,326
Commitments and Contingencies
Shareholders’ Equity
Common stock 113 112
Additional paid-in capital 80,223 76,783
Retained earnings 161,364 141,287
Accumulated other comprehensive loss (6,117) (6,079)
Total Shareholders’ Equity 235,583 212,103
Total Liabilities and Shareholders’ Equity $566,753 $515,429


DUCOMMUN INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Quarterly Information Unaudited)
(In thousands, except per share amounts)
Three Months Ended Years Ended
December 31,
2017
December 31,
2016
December 31,
2017
December 31,
2016
Net Revenues $142,258 $142,486 $558,183 $550,642
Cost of Sales 116,565 114,700 455,363 444,449
Gross Profit 25,693 27,786 102,820 106,193
Selling, General and Administrative Expenses 20,074 18,647 79,435 77,443
Restructuring Charges 8,360 182 8,360 182
Operating (Loss) Income (2,741) 8,957 15,025 28,568
Interest Expense (2,673) (1,995) (8,261) (8,274)
(Loss) Gain on Divestitures, Net (1,211) 17,604
Other Income, Net 357 74 845 215
(Loss) Income Before Taxes (5,057) 5,825 7,609 38,113
Income Tax (Benefit) Expense (14,541) 2,989 (12,468) 12,852
Net Income $9,484 $2,836 $20,077 $25,261
Earnings Per Share
Basic earnings per share $0.84 $0.25 $1.78 $2.27
Diluted earnings per share $0.82 $0.25 $1.74 $2.24
Weighted-Average Number of Common Shares Outstanding
Basic 11,246 11,182 11,290 11,151
Diluted 11,504 11,383 11,558 11,299
Gross Profit % 18.1% 19.5% 18.4% 19.3%
SG&A % 14.1% 13.1% 14.2% 14.1%
Operating (Loss) Income % (1.9)% 6.3% 2.7% 5.2%
Net Income % 6.7% 2.0% 3.6% 4.6%
Effective Tax (Benefit) Rate (287.5)% 51.3% (163.8)% 33.7%


DUCOMMUN INCORPORATED AND SUBSIDIARIES
BUSINESS SEGMENT PERFORMANCE
(Unaudited) (In thousands)
Three Months Ended Years Ended
%
Change
December 31,
2017
December 31,
2016
%
of Net Revenues
2017
%
of Net Revenues
2016
%
Change
December 31,
2017
December 31,
2016
%
of Net Revenues
2017
%
of Net Revenues
2016
Net Revenues
Structural Systems 7.0% $65,088 $60,823 45.8% 42.7% (2.0)% $241,460 $246,465 43.3% 44.8%
Electronic Systems (5.5)% 77,170 81,663 54.2% 57.3% 4.1% 316,723 304,177 56.7% 55.2%
Total Net Revenues (0.2)% $142,258 $142,486 100.0% 100.0% 1.4% $558,183 $550,642 100.0% 100.0%
Segment Operating (Loss) Income
Structural Systems $(2,670) $3,150 (4.1)% 5.2% $5,477 $16,497 2.3% 6.7%
Electronic Systems 6,782 9,214 8.8% 11.3% 30,940 28,983 9.8% 9.5%
4,112 12,364 36,417 45,480
Corporate General and Administrative Expenses (1) (6,853) (3,407) (4.8)% (2.4)% (21,392) (16,912) (3.8)% (3.1)%
Total Operating (Loss) Income $(2,741) $8,957 (1.9)% 6.3% $15,025 $28,568 2.7% 5.2%
Adjusted EBITDA
Structural Systems
Operating (Loss) Income $(2,670) $3,150 $5,477 $16,497
Other Income 200 141
Depreciation and Amortization 1,981 2,005 8,860 8,688
Restructuring Charges 5,802 5,866
5,113 5,155 7.9% 8.5% 20,403 25,326 8.4% 10.3%
Electronic Systems
Operating Income 6,782 9,214 30,940 28,983
Other Income 357 645
Depreciation and Amortization 3,681 3,426 13,888 14,087
Restructuring Charges 1,190 182 1,190 182
Inventory Purchase Accounting Adjustments 1,111 1,235
13,121 12,822 17.0% 15.7% 47,898 43,252 15.1% 14.2%
Corporate General and Administrative Expenses (1)
Operating loss (6,853) (3,407) (21,392) (16,912)
Other Income 74 74
Depreciation and Amortization 34 9 97 85
Stock-Based Compensation Expense 411 428 4,675 3,007
Restructuring Charges 1,782 1,782
(4,626) (2,896) (14,838) (13,746)
Adjusted EBITDA $13,608 $15,081 9.6% 10.6% $53,463 $54,832 9.6% 10.0%
Capital Expenditures
Structural Systems $3,462 $5,512 $20,679 $15,661
Electronic Systems 763 1,331 5,019 3,032
Corporate Administration 775
Total Capital Expenditures $4,225 $6,843 $26,473 $18,693

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


DUCOMMUN INCORPORATED AND SUBSIDIARIES
GAAP TO NON-GAAP EARNINGS AND EARNINGS PER SHARE RECONCILIATION
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended Years Ended
GAAP To Non-GAAP Earnings December 31,
2017
December 31,
2016
December 31,
2017
December 31,
2016
GAAP Net income $9,484 $2,836 $20,077 $25,261
Adjustments:
Tax Cuts Jobs Act (1) (12,590) (12,590)
Restructuring charges (2) 6,879 6,929
Inventory purchase accounting adjustments (2) 871 968
Divestiture of Miltec operation net working capital adjustment (3) 1,211 1,211
Divestiture of Miltec operation tax basis adjustment (4) 795 795
Gain on divestitures, net (4) (13,625)
Total adjustments (4,840) 2,006 (4,693) (11,619)
Adjusted net income $4,644 $4,842 $15,384 $13,642


Three Months Ended Years Ended
GAAP Earnings Per Share To Non-GAAP Earnings Per Share December 31,
2017
December 31,
2016
December 31,
2017
December 31,
2016
GAAP Diluted Earnings Per Share (“EPS”) $0.82 $0.25 $1.74 $2.24
Adjustments:
Tax Cuts Jobs Act (1) (1.09) (1.09)
Restructuring charges (2) 0.60 0.60
Inventory purchase accounting adjustments (2) 0.08 0.08
Divestiture of Miltec operation net working capital adjustment (3) 0.11 0.11
Divestiture of Miltec operation tax basis adjustment (4) 0.07 0.07
Gain on divestitures, net (4) (1.21)
Total adjustments (0.41) 0.18 (0.41) (1.03)
Adjusted Diluted EPS $0.41 $0.43 $1.33 $1.21
Shares used for adjusted diluted EPS 11,504 11,383 11,558 11,299

(1) Net impact of Tax Cuts Jobs Act and $0.5 million in 2016 state income tax adjustments.

(2) Includes effective tax rate of 21.6% for 2017 adjustments.

(3) Net working capital adjustment did not have an impact on our effective tax rate and thus, no effective tax rate was applied to this item.

(4) Includes effective tax rate of 22.6% for 2016 adjustments.


DUCOMMUN INCORPORATED AND SUBSIDIARIES
GAAP TO NON-GAAP OPERATING INCOME AND AS A PERCENTAGE OF NET REVENUES RECONCILIATION
(Unaudited)
(In thousands)
Three Months Ended Years Ended
GAAP To Non-GAAP Operating Income December 31,
2017
December 31,
2016
December 31,
2017
December 31,
2016
GAAP Operating (loss) income $(2,741) $8,957 $15,025 $28,568
GAAP Operating (loss) income - Structural Systems $(2,670) $3,150 $5,477 $16,497
Adjustment:
Restructuring charges 5,802 5,866
Adjusted operating income - Structural Systems 3,132 3,150 11,343 16,497
GAAP Operating income - Electronic Systems 6,782 9,214 30,940 28,983
Adjustments:
Restructuring charges 1,190 182 1,190 182
Inventory purchase accounting adjustments 1,111 1,235
Adjusted operating income - Electronic Systems 9,083 9,396 33,365 29,165
GAAP Operating loss - Corporate (6,853) (3,407) (21,392) (16,912)
Adjustment:
Restructuring charges 1,782 1,782
Adjusted operating income - Corporate (5,071) (3,407) (19,610) (16,912)
Total adjustments $9,885 $182 $10,073 $182
Adjusted operating income $7,144 $9,139 $25,098 $28,750


Three Months Ended Years Ended
GAAP To Non-GAAP Operating Income As A Percentage of Net Revenues December 31,
2017
December 31,
2016
December 31,
2017
December 31,
2016
GAAP Operating (loss) income as a % of net revenues (1.9)% 6.3% 2.7% 5.2%
GAAP Operating (loss) income - Structural Systems (4.1)% 5.2% 2.3% 6.7%
Adjustment:
Restructuring charges 8.9% % 2.4% %
Adjusted operating income - Structural Systems 4.8% 5.2% 4.7% 6.7%
GAAP Operating income - Electronic Systems 8.8% 11.3% 9.8% 9.5%
Adjustments:
Restructuring charges 1.5% 0.2% 0.4% 0.1%
Inventory purchase accounting adjustments 1.4% % 0.4% %
Adjusted operating income - Electronic Systems 11.7% 11.5% 10.6% 9.6%
GAAP Operating loss - Corporate (4.8)% (2.4)% (3.8)% (3.1)%
Adjustment:
Restructuring charges 1.3% % 0.3% %
Adjusted operating income - Corporate (3.5)% (2.4)% (3.5)% (3.1)%
Total adjustments 6.9% 0.1% 1.8% %
Adjusted operating income as a % of net revenues 5.0% 6.4% 4.5% 5.2%


DUCOMMUN INCORPORATED AND SUBSIDIARIES
BACKLOG BY REPORTING SEGMENT
(Unaudited)
(In thousands)
(In thousands)
December 31,
2017 2016
Consolidated Ducommun
Military and space
Defense electronics $216,508 $197,577
Defense structures 60,921 58,877
Commercial aerospace 417,981 357,668
Industrial 31,068 27,130
Total $726,478 $641,252
Structural Systems
Military and space (defense structures) $60,921 $58,877
Commercial aerospace 361,586 319,518
Total $422,507 $378,395
Electronic Systems
Military and space (defense electronics) $216,508 $197,577
Commercial aerospace 56,395 38,150
Industrial 31,068 27,130
Total $303,971 $262,857


Source:Ducommun Incorporated