DUCOMMUN INCORPORATED Overview
Ducommun Incorporated ("Ducommun," "the Company," "we," "us" or "our") is a leading global provider of engineering and manufacturing services for high-performance products and high-cost-of failure applications used primarily in the aerospace and defense ("A&D"), industrial, medical and other industries (collectively, "Industrial"). We differentiate ourselves as a full-service solution-based provider, offering a wide range of value-added products and services in our primary businesses of electronics, structures and integrated solutions. We operate through two primary business segments: Electronic Systems and Structural Systems, each of which is a reportable segment. COVID-19 Pandemic Impact on Our Business The COVID-19 pandemic has had a significant impact on our overall business during the three and nine months endedOctober 2, 2021 . As a result of the COVID-19 pandemic, precautionary measures were instituted by governments and businesses to mitigate its spread, including the imposition of travel restrictions, quarantines, shelter in place directives, and shutting down of non-essential businesses. The safety of our workforce is our top priority. We have implemented numerous well-being protocols related to health and welfare at all of our facilities. Safety protocols consistent with guidelines provided by state and local governments and theCenters for Disease Control and Prevention ("CDC") have been put into practice, including social distancing, provision of personal protective equipment, enhanced cleaning, and flexible work arrangements wherever possible. We have also offered enhanced leave and benefits to our employees and provide frequent updates to ensure our workforce is kept apprised of evolving regulations and safety measures. InMarch 2020 , theU.S. enacted the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") which provides tax relief to individuals and businesses affected by the coronavirus pandemic. We have not requested or accepted any loans or payments that are available under the CARES Act, however, we have exercised the option to defer payment of the employer portion of payroll taxes (Social Security ) that would otherwise be required to be made during the period beginningMarch 27, 2020 toDecember 31, 2020 . One half of the deferred amount is required to be paid byDecember 31, 2021 , with the remaining 50% to be paid byDecember 31, 2022 . As ofOctober 2, 2021 , we have deferred$6.1 million , which is included as part of accrued liabilities and other long-term liabilities on the condensed consolidated balance sheets. The COVID-19 pandemic has and continues to contribute to a general slowdown in the global economy and specifically, the commercial aerospace end-use market. In 2020, both major large aircraft manufacturers, The Boeing Company ("Boeing") and Airbus SE, announced lower build rates for the near and medium future. In its 2020 Annual Report on Form 10-K, Boeing indicated it expects it will take approximately three years for worldwide travel to return to 2019 levels and a few years beyond that for the industry to return to a long-term trend growth of five percent. While the full extent and impact of the COVID-19 pandemic cannot be reasonably estimated with certainty at this time, COVID-19 has had a significant impact on our business, the businesses of our customers and suppliers, as well as our results of operations and financial condition, and may have a material adverse impact on our business, results of operations and financial condition for the remainder of 2021 and beyond. Third quarter 2021 recap: •Revenues of$163.2 million •Net income of$9.6 million , or$0.78 per diluted share •Adjusted EBITDA of$23.9 million , or 14.6% of revenues Non-GAAP Financial Measures Adjusted earnings before interest, taxes, depreciation, amortization, stock-based compensation expense, restructuring charges, andGuaymas fire related expenses ("Adjusted EBITDA") were$23.9 million and$21.6 million for the three months endedOctober 2, 2021 andSeptember 26, 2020 , respectively. When viewed with our financial results prepared in accordance with accounting principles generally accepted inthe United States of America ("GAAP") and accompanying reconciliations, we believe Adjusted EBITDA provides additional useful information that clarifies and enhances the understanding of the factors and trends affecting our past performance and future prospects. We define this measure, explain how it is calculated and provide a reconciliation of this measure to the most comparable GAAP measure in the table below. Adjusted EBITDA and the related financial ratios, as presented in this Quarterly Report on Form 10-Q ("Form 10-Q"), are supplemental measures of our performance that are not required by, or presented in accordance with, GAAP. They are not a measurement of our financial performance under GAAP and should not be considered as alternatives to net income or any other performance measures derived in accordance with GAAP, or as an alternative to net 19 -------------------------------------------------------------------------------- Table of Contents cash provided by operating activities as measures of our liquidity. The presentation of these measures should not be interpreted to mean that our future results will be unaffected by unusual or nonrecurring items. We use Adjusted EBITDA as a non-GAAP operating performance measure internally as a complementary financial measure to evaluate the performance and trends of our businesses. We present Adjusted EBITDA and the related financial ratios, as applicable, because we believe that measures such as these provide useful information with respect to our ability to meet our operating commitments. Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations include: •It does not reflect our cash expenditures, future requirements for capital expenditures or contractual commitments; •It does not reflect changes in, or cash requirements for, our working capital needs; •It does not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on our debt; •Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements; •It is not adjusted for all non-cash income or expense items that are reflected in our statements of cash flows; •It does not reflect the impact on earnings of charges resulting from matters unrelated to our ongoing operations; and •Other companies in our industry may calculate Adjusted EBITDA differently from us, limiting its usefulness as a comparative measure. As a result of these limitations, Adjusted EBITDA and the related financial ratios should not be considered as measures of discretionary cash available to us to invest in the growth of our business or as a measure of cash that will be available to us to meet our obligations. You should compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA only as supplemental information. See our Condensed Consolidated Financial Statements contained in this Form 10-Q. Even with the limitations above, we believe that Adjusted EBITDA is useful to an investor in evaluating our results of operations as this measure: •Is widely used by investors to measure a company's operating performance without regard to items excluded from the calculation of such terms, which can vary substantially from company to company depending upon accounting methods and book value of assets, capital structure and the method by which assets were acquired, among other factors; •Helps investors to evaluate and compare the results of our operations from period to period by removing the effect of our capital structure from our operating performance; and •Is used by our management team for various other purposes in presentations to our Board of Directors as a basis for strategic planning and forecasting. The following financial items have been added back to or subtracted from our net income when calculating Adjusted EBITDA: •Interest expense may be useful to investors for determining current cash flow; •Income tax expense may be useful to investors because it represents the taxes which may be payable for the period and the change in deferred taxes during the period, and may reduce cash flow available for use in our business; •Depreciation may be useful to investors because it generally represents the wear and tear on our property and equipment used in our operations; •Amortization expense may be useful to investors because it represents the estimated attrition of our acquired customer base and the diminishing value of product rights; •Stock-based compensation may be useful to our investors for determining current cash flow; •Restructuring charges may be useful to our investors in evaluating our core operating performance; and •Guaymas fire related expenses may be useful to our investors in evaluating our core operating performance. 20
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Table of Contents Reconciliations of net income to Adjusted EBITDA and the presentation of Adjusted EBITDA as a percentage of net revenues were as follows:
(Dollars in thousands) (Dollars in thousands)
Three Months Ended Nine Months Ended
October 2, September 26, October 2, September 26,
2021 2020 2021 2020
Net income $ 9,584 $ 6,501 $ 24,702 $ 19,521
Interest expense 2,770 3,101 8,433 11,068
Income tax expense 1,205 762 4,126 3,426
Depreciation 3,632 3,419 10,530 10,407
Amortization 3,572 3,659 10,582 11,334
Stock-based compensation expense 2,407 2,076 8,149 6,605
Restructuring charges - 1,107 - 1,768
Guaymas fire related expenses 704 1,022 1,871 1,022
Adjusted EBITDA $ 23,874 $ 21,647 $ 68,393 $ 65,151
% of net revenues 14.6 % 14.4 % 14.2 % 13.8 %
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Results of Operations
Third Quarter of 2021 Compared to Third Quarter of 2020
The following table sets forth net revenues, selected financial data, the
effective tax rate and diluted earnings per share:
(Dollars in thousands, except per share data) (Dollars in thousands, except per share data)
Three Months Ended Nine Months Ended
October 2 , % September 26 , % October 2 , % September 26 , %
2021 of Net Revenues 2020 of Net Revenues 2021 of Net Revenues 2020 of Net Revenues
Net Revenues $ 163,227 100.0 % $ 150,371 100.0 % $ 480,570 100.0 % $ 471,155 100.0 %
Cost of Sales 127,912 78.4 % 116,906 77.7 % 375,373 78.1 % 368,218 78.2 %
Gross Profit 35,315 21.6 % 33,465 22.3 % 105,197 21.9 % 102,937 21.8 %
Selling, General and Administrative
Expenses 21,952 13.4 % 22,093 14.7 % 68,132 14.2 % 67,253 14.3 %
Restructuring Charges - - % 1,107 0.8 % - - % 1,768 0.3 %
Operating Income 13,363 8.2 % 10,265 6.8 % 37,065 7.7 % 33,916 7.2 %
Interest Expense (2,770) (1.7) % (3,101) (2.1) % (8,433) (1.7) % (11,068) (2.4) %
Other Income 196 0.1 % 99 0.1 % 196 - % 99 - %
Income Before Taxes 10,789 6.6 % 7,263 4.8 % 28,828 6.0 % 22,947 4.8 %
Income Tax Expense 1,205 nm 762 nm 4,126 nm 3,426 nm
Net Income $ 9,584 5.9 % $ 6,501 4.3 % $ 24,702 5.1 % $ 19,521 4.1 %
Effective Tax Rate 11.2 % nm 10.5 % nm 14.3 % nm 14.9 % nm
Diluted Earnings Per Share $ 0.78 nm $ 0.54 nm $ 2.02 nm $ 1.64 nm
nm = not meaningful
22-------------------------------------------------------------------------------- Table of Contents Net Revenues by End-Use Market and Operating Segment Net revenues by end-use market and operating segment during the fiscal three and nine months endedOctober 2, 2021 andSeptember 26, 2020 , respectively, were as follows: Three Months Ended Nine Months Ended (Dollars in thousands) % of Net Revenues (Dollars in thousands) % of Net Revenues October 2, September 26, October 2, September 26,
October 2 September 26, October 2 September 26,
Change 2021 2020 2021 2020 Change 2021 2020 2021 2020
Consolidated Ducommun
Military and space $ 2,564 $ 113,622 $ 111,058 69.6 % 73.9 % $ 33,278 $ 340,757 $ 307,479 70.9 % 65.3 %
Commercial aerospace 10,419 41,150 30,731 25.2 % 20.4 % (16,844) 114,104 130,948 23.7 % 27.8 %
Industrial (127) 8,455 8,582 5.2 % 5.7 % (7,019) 25,709 32,728 5.4 % 6.9 %
Total $ 12,856 $ 163,227 $ 150,371 100.0 % 100.0 % $ 9,415 $ 480,570 $ 471,155 100.0 % 100.0 %
Electronic Systems
Military and space $ 1,156 $ 81,365 $ 80,209 77.7 % 77.5 % $ 20,161 $ 243,853 $ 223,692 79.5 % 76.2 %
Commercial aerospace 222 14,901 14,679 14.2 % 14.2 % (60) 37,060 37,120 12.1 % 12.6 %
Industrial (127) 8,455 8,582 8.1 % 8.3 % (7,019) 25,709 32,728 8.4 % 11.2 %
Total $ 1,251 $ 104,721 $ 103,470 100.0 % 100.0 % $ 13,082 $ 306,622 $ 293,540 100.0 % 100.0 %
Structural Systems
Military and space $ 1,408 $ 32,257 $ 30,849 55.1 % 65.8 % $ 13,117 $ 96,904 $ 83,787 55.7 % 47.2 %
Commercial aerospace 10,197 26,249 16,052 44.9 % 34.2 % (16,784) 77,044 93,828 44.3 % 52.8 %
Total $ 11,605 $ 58,506 $ 46,901 100.0 % 100.0 % $ (3,667) $ 173,948 $ 177,615 100.0 % 100.0 %
Net revenues for the three months ended October 2, 2021 were $163.2 million ,
compared to $150.4 million for the three months ended September 26, 2020 . The
year-over-year increase was primarily due to the following:
•$10.4 million higher revenues in our commercial aerospace end-use markets due
to higher build rates on large aircraft platforms and regional and business
aircraft platforms; and
•$2.6 million higher revenues in our military and space end-use markets due to
higher build rates on military fixed-wing aircraft platforms, partially offset
by lower build rates on other military and space platforms.
Net revenues for the nine months ended October 2, 2021 were $480.6 million ,
compared to $471.2 million for the nine months ended September 26, 2020 . The
year-over-year increase was primarily due to the following:
•$33.3 million higher revenues in our military and space end-use markets due to
higher build rates on military fixed-wing aircraft platforms and various missile
platforms; partially offset by
•$16.8 million lower revenues in our commercial aerospace end-use markets due to
lower build rates on large aircraft platforms.
Net Revenues by Major Customers
A significant portion of our net revenues are from our top ten customers as
follows:
Three Months Ended Nine Months Ended
October 2, September 26, October 2, September 26,
2021 2020 2021 2020
Boeing Company 8.7 % 8.1 % 8.4 % 9.7 %
Lockheed Martin Corporation 4.0 % 5.7 % 4.6 % 5.1 %
Northrop Grumman Corporation 6.6 % 14.9 % 6.7 % 8.5 %
Raytheon Technologies Corporation 25.0 % 21.1 % 23.3 % 20.3 %
Spirit AeroSystems Holdings, Inc. 5.3 % 0.9 % 3.9 % 2.6 %
Total top ten customers (1) 62.4 % 63.7 % 60.4 % 58.4 %
(1)Includes The Boeing Company ("Boeing"), Lockheed Martin Corporation
("Lockheed"), Northrop Grumman Corporation ("Northrop"), and Raytheon
Technologies Corporation ("Raytheon") for the three months and nine months ended
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and September 26, 2020 , and Spirit AeroSystems Holdings, Inc. ("Spirit") for the
three months and nine months ended October 2, 2021 , and the nine months ended
September 26, 2020 .
Boeing, Lockheed, Northrop, Raytheon, and Spirit represented the following
percentages of total accounts receivable:
October 2, December 31,
2021 2020
Boeing 6.0 % 4.8 %
Lockheed 2.3 % 2.4 %
Northrop 5.0 % 12.3 %
Raytheon 15.0 % 15.0 %
Spirit 1.2 % 1.1 %
The net revenues and accounts receivable from Boeing, Lockheed, Northrop,
Raytheon, and Spirit are diversified over a number of commercial, military and
space programs and were generated by both operating segments.
Gross Profit
Gross profit consists of net revenues less cost of sales. Cost of sales includes
the cost of production of finished products and other expenses related to
inventory management, manufacturing quality, and order fulfillment. Gross profit
as a percentage of net revenues decreased year-over-year with the three months
ended October 2, 2021 of 21.6%, compared to the three months ended September 26,
2020 of 22.3% primarily due to unfavorable product mix.
Gross profit as a percentage of net revenues increased year-over-year with the
nine months ended October 2, 2021 of 21.9%, compared to the nine months ended
September 26, 2020 of 21.8% primarily due to favorable product mix and lower
compensation and benefits costs, partially offset by unfavorable manufacturing
volume.
Selling, General and Administrative ("SG&A") Expenses
SG&A expenses decreased $0.1 million year-over-year in the three months ended
October 2, 2021 compared to the three months ended September 26, 2020 primarily
due to lower compensation and benefits costs of $0.8 million and lower other
expenses of $0.5 million , partially offset by higher professional services fees
of $1.3 million .
SG&A expenses increased $0.9 million year-over-year in the nine months ended
October 2, 2021 compared to the nine months ended September 26, 2020 primarily
due to higher compensation and benefits costs of $0.5 million .
Interest Expense
Interest expense decreased $0.3 million and $2.6 million in the three and nine
months ended October 2, 2021 , respectively, compared to the three and nine
months ended September 26, 2020 due to lower interest rates and a lower
outstanding debt balance.
Income Tax Expense
We recorded income tax expense of $1.2 million for the three months ended
October 2, 2021 , compared to $0.8 million for the three months ended
September 26, 2020 . The increase in income tax expense for the third quarter of
2021 compared to the third quarter of 2020 was primarily due to higher pre-tax
income for the third quarter of 2021 compared to the third quarter of 2020. The
increase in income tax expense was partially offset by higher income tax
benefits recognized in the third quarter of 2021 mainly related to the U.S.
Federal research and development tax credit.
We recorded income tax expense of $4.1 million for the nine months ended
October 2, 2021 , compared to $3.4 million for the nine months ended
September 26, 2020 . The increase in income tax expense for the first nine months
of 2021 compared to the first nine months of 2020 was primarily due to higher
pre-tax income for the first nine months of 2021 compared to the first nine
months of 2020. The increase in income tax expense was partially offset by
higher income tax benefits related to the U.S. Federal research and development
tax credit and higher discrete income tax benefits related to net tax windfalls
from stock-based compensation.
On March 11, 2021 , the U.S. enacted the American Rescue Plan Act of 2021
("Rescue Plan") aimed at mitigating the continuing effects of the COVID-19
pandemic. We considered the provisions of the Rescue Plan and determined they do
not have a material impact on our income taxes.
Our total amount of unrecognized tax benefits was $4.5 million and $4.1 million
as of October 2, 2021 and December 31, 2020 , respectively. If recognized, $2.8
million would affect the effective tax rate. We record interest and penalty
charges, if any, related to uncertain tax positions as a component of tax
expense and unrecognized tax benefits. The amounts accrued for interest and
penalty charges as of October 2, 2021 and December 31, 2020 were not
significant. We do not expect the total amount of unrecognized tax benefits to
increase or decrease by a material amount in the next twelve months.
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We file U.S. Federal and state income tax returns. We are subject to examination
by the Internal Revenue Service ("IRS") for tax years after 2016 and by state
taxing authorities for tax years after 2015. While we are no longer subject to
examination prior to those periods, carryforwards generated prior to those
periods may still be adjusted upon examination by the IRS or state taxing
authorities if they either have been or will be used in a subsequent period. We
believe we have adequately accrued for tax deficiencies or reductions in tax
benefits, if any, that could result from the examination and all open audit
years.
Net Income and Earnings per Share
Net income and earnings per share for the three months ended October 2, 2021
were $9.6 million , or $0.78 per diluted share, compared to $6.5 million , or
$0.54 per diluted share, for the three months ended September 26, 2020 . The
increase in net income for the three months ended October 2, 2021 compared to
the three months ended September 26, 2020 was primarily due to $1.9 million of
higher gross profit as a result of higher revenues and lower restructuring
charges of $1.1 million .
Net income and earnings per share for the nine months ended October 2, 2021 were
$24.7 million , or $2.02 per diluted share, compared to $19.5 million , or $1.64
per diluted share, for the nine months ended September 26, 2020 . The increase in
net income for the nine months ended October 2, 2021 compared to the nine months
ended September 26, 2020 was primarily due to lower interest expense of $2.6
million and $2.3 million of higher gross profit as a result of higher revenues.
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Business Segment Performance
We report our financial performance based upon the two reportable operating
segments: Electronic Systems and Structural Systems. The results of operations
differ between our reportable operating segments due to differences in
competitors, customers, extent of proprietary deliverables and performance. The
following table summarizes our business segment performance for the three and
nine months ended October 2, 2021 and September 26, 2020 :
Three Months Ended Nine Months Ended
% (Dollars in thousands) % of Net Revenues % (Dollars in thousands) % of Net Revenues
October 2 , September 26 , October 2 , September 26 , October 2 , September 26 , October 2 , September 26 ,
Change 2021 2020 2021 2020 Change 2021 2020 2021 2020
Net Revenues
Electronic Systems 1.2 % $ 104,721 $ 103,470 64.2 % 68.8 % 4.5 % $ 306,622 $ 293,540 63.8 % 62.3 %
Structural Systems 24.7 % 58,506 46,901 35.8 % 31.2 % (2.1) % 173,948 177,615 36.2 % 37.7 %
Total Net Revenues 8.5 % $ 163,227 $ 150,371 100.0 % 100.0 % 2.0 % $ 480,570 $ 471,155 100.0 % 100.0 %
Segment Operating Income
Electronic Systems $ 15,319 $ 14,867 14.6 % 14.4 % $ 42,185 $ 40,427 13.8 % 13.8 %
Structural Systems 4,457 1,769 7.6 % 3.8 % 15,177 13,373 8.7 % 7.5 %
19,776 16,636 57,362 53,800
Corporate General and
Administrative Expenses (1) (6,413) (6,371) (3.9) % (4.2) % (20,297) (19,884) (4.2) % (4.2) %
Total Operating Income $ 13,363 $ 10,265 8.2 % 6.8 % $ 37,065 $ 33,916 7.7 % 7.2 %
Adjusted EBITDA
Electronic Systems
Operating Income $ 15,319 $ 14,867 $ 42,185 $ 40,427
Other Income 196 - 196 -
Depreciation and
Amortization 3,547 3,492 10,396 10,591
Restructuring Charges - 304 - 332
19,062 18,663 18.2 % 18.0 % 52,777 51,350 17.2 % 17.5 %
Structural Systems
Operating Income 4,457 1,769 15,177 13,373
Depreciation and
Amortization 3,599 3,528 10,540 10,956
Restructuring Charges - 803 - 1,436
Guaymas fire related
expenses 704 1,022 1,871 1,022
8,760 7,122 15.0 % 15.2 % 27,588 26,787 15.9 % 15.1 %
Corporate General and
Administrative Expenses (1)
Operating Loss (6,413) (6,371) (20,297) (19,884)
Other Income - 99 - 99
Depreciation and
Amortization 58 58 176 194
Stock-Based Compensation
Expense 2,407 2,076 8,149 6,605
(3,948) (4,138) (11,972) (12,986)
Adjusted EBITDA $ 23,874 $ 21,647 14.6 % 14.4 % $ 68,393 $ 65,151 14.2 % 13.8 %
Capital Expenditures
Electronic Systems $ 1,964 $ 586 $ 3,865 $ 3,518
Structural Systems 1,598 1,796 6,154 4,400
Corporate Administration - - - -
Total Capital Expenditures $ 3,562 $ 2,382 $ 10,019 $ 7,918
(1)Includes costs not allocated to either the Electronic Systems or Structural
Systems operating segments.
Electronic Systems
Electronic Systems net revenues in the three months ended October 2, 2021
compared to the three months ended September 26, 2020 increased $1.3 million
primarily due to the following:
•$1.2 million higher revenues in our military and space end-use markets due to
higher build rates on military fixed-wing aircraft platforms, partially offset
by lower build rates on other military and space platforms; and
•$0.2 million higher revenues in our commercial aerospace end-use markets.
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Electronic Systems net revenues in the nine months ended October 2, 2021
compared to the nine months ended September 26, 2020 increased $13.1 million
primarily due to the following:
•$20.2 million higher revenues in our military and space end-use markets due to
higher build rates on military fixed-wing aircraft platforms; partially offset
by
•$7.0 million lower revenues in our industrial markets; and
•$0.1 million lower revenues in our commercial aerospace end-use markets.
Electronic Systems segment operating income in the three months ended October 2,
2021 compared to the three months ended September 26, 2020 increased $0.5
million primarily due to favorable product mix, partially offset by unfavorable
manufacturing volume.
Electronic Systems segment operating income in the nine months ended October 2,
2021 compared to the nine months ended September 26, 2020 increased $1.8 million
primarily due to favorable product mix, lower other manufacturing costs, and
lower compensation and benefits costs, partially offset by unfavorable
manufacturing volume.
Structural Systems
Structural Systems net revenues in the three months ended October 2, 2021
compared to the three months ended September 26, 2020 increased $11.6 million
primarily due to the following:
•$10.2 million higher revenues in our commercial aerospace end-use markets due
to higher build rates on large aircraft platforms and regional and business
aircraft platforms; and
•$1.4 million higher revenues in our military and space end-use markets due to
higher build rates on other military and space platforms, partially offset by
lower build rates on military rotary-wing aircraft platforms.
Structural Systems net revenues in the nine months ended October 2, 2021
compared to the nine months ended September 26, 2020 decreased $3.7 million
primarily due to the following:
•$16.8 million lower revenues in our commercial aerospace end-use markets due to
lower build rates on large aircraft platforms and regional and business aircraft
platforms; partially offset by
•$13.1 million higher revenues in our military and space end-use markets due to
higher build rates on various missile platforms.
The Structural Systems segment operating income in the three months ended
October 2, 2021 compared to the three months ended September 26, 2020 increased
$2.7 million primarily due to favorable manufacturing volume, partially offset
by unfavorable product mix.
The Structural Systems segment operating income in the nine months ended
October 2, 2021 compared to the nine months ended September 26, 2020 increased
$1.8 million primarily due to favorable product mix and lower compensation and
benefits costs, partially offset by unfavorable manufacturing volume.
In June 2020 , a fire severely damaged our performance center in Guaymas, Mexico ,
which is part of our Structural Systems segment. There were no injuries,
however, property and equipment, inventory, and tooling in this leased facility
were damaged. We have insurance coverage and expect the majority, if not all, of
these items will be covered, less our deductible. The full financial impact
cannot be estimated at this time as we are currently working with our insurance
carriers to determine the cause of the fire. Our Guaymas performance center is
comprised of two buildings with an aggregate total of 62,000 square feet. The
loss of production from the Guaymas performance center is being absorbed by our
other existing performance centers. See Note 8 to our condensed consolidated
financial statements included in Part I, Item 1 of this Form 10-Q.
Corporate General and Administrative ("CG&A") Expenses
CG&A expenses were essentially flat for the three months ended October 2, 2021
compared to the three months ended September 26, 2020 .
CG&A expenses increased by $0.4 million for the nine months ended October 2,
2021 compared to the nine months ended September 26, 2020 primarily due to
higher compensation and benefits costs of $1.0 million , partially offset by
lower other corporate expenses of $0.8 million .
Backlog
We define backlog as customer placed purchase orders ("POs") 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 below is greater
than the remaining performance obligations amount disclosed in Note 1 to our
condensed consolidated financial statements included in Part I, Item 1 of this
Form 10-Q. Backlog is subject to delivery delays or program
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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.
The increase in backlog was primarily in the industrial end-use markets and
commercial aerospace end-use markets. $593.0 million of total backlog is
expected to be delivered over the next 12 months. The following table summarizes
our backlog as of October 2, 2021 and December 31, 2020 :
(Dollars in thousands)
October 2, December 31,
Change 2021 2020
Consolidated Ducommun
Military and space $ (17,871) $ 497,525 $ 515,396
Commercial aerospace 18,105 286,431 268,326
Industrial 27,564 51,583 24,019
Total $ 27,798 $ 835,539 $ 807,741
Electronic Systems
Military and space $ 11,522 $ 401,399 $ 389,877
Commercial aerospace (6,160) 50,559 56,719
Industrial 27,564 51,583 24,019
Total $ 32,926 $ 503,541 $ 470,615
Structural Systems
Military and space $ (29,393) $ 96,126 $ 125,519
Commercial aerospace 24,265 235,872 211,607
Total $ (5,128) $ 331,998 $ 337,126
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Liquidity and Capital Resources
Available Liquidity
Total debt, the weighted-average interest rate, cash and cash equivalents and
available credit facilities were as follows:
(Dollars in millions)
October 2, December 31,
2021 2020
Total debt, including long-term portion $ 299.5 $ 320.6
Weighted-average interest rate on debt 3.24 % 3.59 % Term Loans interest rate 3.22 % 3.81 % Cash and cash equivalents$ 9.0 $ 56.5 Unused Revolving Credit Facility$ 89.8 $
74.8
InDecember 2019 , we completed the refinancing of a portion of our existing debt by entering into a new revolving credit facility ("2019 Revolving Credit Facility") to replace the then existing revolving credit facility that was entered into inNovember 2018 ("2018 Revolving Credit Facility") and entered into a new term loan ("2019 Term Loan"). The 2019 Revolving Credit Facility is a$100.0 million senior secured revolving credit facility that will mature onDecember 20, 2024 , replacing the$100.0 million 2018 Revolving Credit Facility that would have matured onNovember 21, 2023 . The 2019 Term Loan is a$140.0 million senior secured term loan that will mature onDecember 20, 2024 . We also have an existing$240.0 million senior secured term loan that was entered into inNovember 2018 that will mature onNovember 21, 2025 ("2018 Term Loan"). The original amounts available under the 2019 Revolving Credit Facility, 2019 Term Loan, and 2018 Term Loan (collectively, the "Credit Facilities") in aggregate, totaled$480.0 million . We are required to make installment payments of 1.25% of the original outstanding principal balance of the 2019 Term Loan amount on a quarterly basis, on the last day of the calendar quarter. We made the mandatory quarterly principal prepayment under the 2019 Term Loan during the three and nine months endedOctober 2, 2021 of$1.8 million and$5.3 million , respectively. In addition, if we meet the annual excess cash flow threshold, we are required to make an annual additional principal payment on the 2018 Term Loan based on the consolidated adjusted leverage ratio. During the first quarter of 2021, we made the required 2020 annual excess cash flow principal payment of$0.9 million . Further, the undrawn portion of the commitment of the 2019 Revolving Credit Facility is subject to a commitment fee ranging from 0.175% to 0.275%, based upon the consolidated total net adjusted leverage ratio. As ofOctober 2, 2021 , we were in compliance with all covenants required under the Credit Facilities. See Note 5 to our condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q for further information. During the three and nine months endedOctober 2, 2021 , we made net voluntary prepayments totaling$5.0 million and$15.0 million , respectively, on the 2019 Revolving Credit Facility. InNovember 2018 , we completed credit facilities to replace the then existing credit facilities. TheNovember 2018 credit facilities consisted of the 2018 Term Loan and the 2018 Revolving Credit Facility (collectively, the "2018 Credit Facilities"). We were required to make installment payments of 0.25% of the outstanding principal balance of the 2018 Term Loan amount on a quarterly basis, however, in conjunction with the 2019 refinancing where we paid down$56.0 million on the 2018 Term Loan, it paid all the required quarterly installment payments on the 2018 Term Loan until maturity. InOctober 2015 , we entered into interest rate cap hedges that were designated as cash flow hedges, which matured during our second quarter of 2020. We expect to spend a total of$16.0 million to$18.0 million for capital expenditures in 2021 (excluding capital expenditures we will spend to restore the manufacturing capabilities related to ourGuaymas performance center that was severely damaged by fire inJune 2020 ), financed by cash generated from operations, principally to support new contract awards in Electronic Systems and Structural Systems. As part of our strategic plan to become a supplier of a wider range of higher-level assemblies and win new contract awards, additional up-front investment in tooling will be required for newer programs which have higher engineering content and higher levels of complexity in assemblies. However, some portion of the expected capital expenditures in 2021 could be delayed as a result of the COVID-19 pandemic. We believe the ongoing aerospace and defense subcontractor consolidation makes acquisitions an increasingly important component of our future growth. We will continue to make prudent acquisitions and capital expenditures for manufacturing equipment and facilities to support long-term contracts for commercial and military aircraft and defense programs. We monitor our asset base, including the market dynamics of the properties we own, and we may sell such properties and/or enter into sale-leaseback transactions. Such transactions would provide cash for various capital deployment options. 29
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Table of Contents We continue to depend on operating cash flow and the availability of our Credit Facilities to provide short-term liquidity. Cash generated from operations and bank borrowing capacity is expected to provide sufficient liquidity to meet our obligations during the next twelve months from the date of issuance of these financial statements. Cash Flow Summary Net cash used in operating activities for the nine months endedOctober 2, 2021 was$12.3 million , compared to net cash provided by operating activities of$1.5 million for the nine months endedSeptember 26, 2020 . The higher net cash used in operating activities during the first nine months of 2021 was mainly due to higher contract assets, higher inventories, higher accounts receivable, lower accrued and other liabilities, and lower contract liabilities, partially offset by higher net income. Net cash used in investing activities was$9.8 million for the nine months endedOctober 2, 2021 , compared to$5.3 million in the nine months endedSeptember 26, 2020 . The higher net cash used during the first nine months of 2021 compared to the prior year period was mainly due to higher purchases of property and equipment. Net cash used in financing activities was$25.4 million for the nine months endedOctober 2, 2021 , compared to net cash provided by financing activities of$38.7 million for the nine months endedSeptember 26, 2020 . The higher net cash used in financing activities during the first nine months of 2021 was mainly due to the$50.0 million draw down on the 2019 Revolving Credit Facility during the first quarter of 2020 to hold as cash on hand that did not reoccur in 2021 and lower net draw downs on the 2019 Revolving Credit Facility, partially offset by lower repayments of term loans. Off-Balance Sheet Arrangements Our off-balance sheet arrangements consist of operating and finance leases not recorded as a result of the practical expedients utilized, right of offset of industrial revenue bonds and associated failed sales-leasebacks on property and equipment, and indemnities, none of which we believe may have a material current or future effect on our financial condition, liquidity, capital resources, or results of operations. Critical Accounting Policies The preparation of our condensed consolidated financial statements in accordance with accounting principles generally accepted inthe United States requires estimation and judgment that affect the reported amounts of net revenues, expenses, assets and liabilities. For a description of our critical accounting policies, please refer to "Critical Accounting Policies" in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2020 Annual Report on Form 10-K. There have been no material changes in any of our critical accounting policies during the three months endedOctober 2, 2021 . Recent Accounting Pronouncements See "Part I, Item 1.Ducommun Incorporated and Subsidiaries-Notes to Condensed Consolidated Financial Statements-Note 1. Summary of Significant Accounting Policies-Recent Accounting Pronouncements" for further information.
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