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TOP CONTRIBUTORS

Snapshot

Ducommun Incorporated serves the global aerospace industry by manufacturing structural and electronic components and assemblies for commercial and military aircrafts, and by providing engineering services for missile and space programs.

Business Overview

Ducommun Inc. started with a store that was opened by Charles Ducommun in Los Angeles during the California Gold rush. From providing aircraft aluminum to Lockheed, the company helped assist the birth of the aerospace industry. Ducommun is the oldest company in California, as it was found in 1849. It was initially incorporated in California in 1907, but it was reincorporated in Delaware in 1970 for tax purposes.

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Top 6 Programs

Today, Ducommun is the leading global provider of innovative, value-added products and solutions to the aerospace and defense industries. It serves the global aerospace industry by manufacturing structural and electronic components and assemblies for commercial and military aircrafts, and by providing engineering services for missile and space programs. The company's programs are split between commercial and military/space categories. The top 5 programs in terms of revenues to the company include Boeing 737NG, Sikorsky UH-60 Blackhawk, Boeing C-17 Globemaster III, Boeing AH-64 Apache, and Boeing F-15 eagle. [1]

The company's growth is driven by the following two strategic business units:

Ducommun Aerostructures (DAS)

DAS engineers and manufactures aerospace structural components and subassemblies for domestic and foreign commercial and military aircraft, helicopter and space markets. The company produces some of the largest, most complex structural component as DAS has a array of patented integrated processes. Products of DAS include aircraft wing spoilers, helicopter blades, flight control surfaces, and engine components. Facilities of DAS are located in El Mirage, CA; Gardena, CA; Monrovia, CA; Orange, CA; Parsons, KS; Coxsackie, NY; and Guaymas, Mexico. [2]

Ducommun Technologies (DTI)

DTI designs, engineers, and manufactures electromechanical subassemblies, and provides engineering, technical and program management services principally for the aerospace and military markets. A principle role of DTI is in manufacturing complex mechanical and electromechanical enclosure products. More specifically, these products include electromechanical illuminated push button switches, advanced microwave switches, and high-performance motors and resolvers. Through its Miltec subsidiary, DTI offers missile and aerospace systems design, development, integration and testing. DTI facilities are strategically placed in Carson, CA; Newbury Park, CA; Phoenix, AZ Huntsville, AL; Colorado Springs, CO; Iuka, MS; and Oxford, MS ; and Thailand. [3]

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Industry Analysis

Porter's Five Forces

Threat of Entry

Low: Entering the Aerospace and Defense services industry requires a substantial amount of capital requirements. Ducommun's main reason for success has been its historical record of over 160 years. For example, Ducommun occupies approximately 21 facilities with a total office and manufacturing area of over 1,458,000 square feet, including both owned and leased properties. [1] A start up company would require exceptional amount of human and financial capital to even considering opening a single manufacturing facility. Ducommun also prides itself on its strong brand identity. It is very hard for a start up company to build that reputation and gain the respect by its customers, suppliers, and competitors.

Competitive Rivalry

High: The aerospace and defense industry is highly competitive, and the products and services are affected by varying degrees of competition. Ducommun's direct competitors focus on offering the same services such as manufacturing aerostructure components or electromechanical components. On the other hand, Ducommun has competitors worldwide, some of which are much larger with respect to resources available to them. They have greater financial, technical, and personnel advantages than what Ducommun operates with. These larger competitors also offer a wider variety of products and service. This can be a problem for Ducommun due to the competitor's ability to offer customers bundled products.

Threat of Substitutes

Med: Products offered by Ducommun to the commercial and military markets are also offered by other competitors. However, Ducommun is a proven leader in terms of quality with the products that it sells. The company has right to various patents that allow it to maintain its competitive advantage on its products. DAS has some of the largest and most sophisticated stretch-forming presses in the United States. These patented processes allow DAS to form the aerostructural components at a higher quality than the available substitutes.

Blue Chip Customers
Blue Chip Customers

Bargaining power of suppliers

Low: Ducommun is not materially dependent upon any individual raw-material supplier. A majority of the products are obtained on the open-markets domestically and internationally. Therefore, no supplier offers a unique enough product for Ducommun to rely on.

Bargaining power of customers

High: Boeing Company (BA), Raytheon, and United Technologies (UTX) accounted for 46% of the companies total revenues in 2010. During 2010, sales to Boeing were $107,466,000, or approximately 26% of total sales; sales to Raytheon were $48,198,000, or approximately 12% of total sales; sales to the United Technologies were $30,680,000, or approximately 8% of total sales.[1] The fact that just under half of the overall revenues come from three companies, these customers have a large influence on the operations of DuCommun.

Competitors

LMI Aerospace, Inc. (LMIA)

LMI Aerospace, Inc. is a leading provider of design engineering services, structural assemblies, kits and components to the aerospace, defense and technology markets. LMIA provides a broad array of manufacturing capabilities, as well as engineering and value-added services to the commercial and military aircraft markets. In addition, the company also provides prototyping, testing and design capabilities to customers in support of new product development. LMIA was founded in 1948 and is based in St. Charles, Missouri.

Astronics Corporation (ATRO)

Founded in 1968, Astronics Corporation, designs and manufactures products for the aerospace and defense industries. It provides electrical power generation systems, lighting systems, electrical power distribution systems, and aircraft safety systems. The company also provides military test, training, and simulation equipment, as well as commercial aviation safety equipment and airfield lighting systems. Astronics Corporation sells its products worldwide to airframe manufacturers in the commercial transport, business jet, and military markets. It is based in East Aurora, New York.

Spirit Aerosystems (SPR)

Headquartered in Wichita, Kansas, Spirit AeroSystems Inc. is a non-original equipment manufacturer aircraft parts designers and manufacturers of commercial aerostructures to Boeing. In addition, SPR is a supplier of aerostructures to Airbus. The company manufactures aerostructures for every Boeing commercial aircraft in production, including the airframe content for the Boeing B737. In addition, SPR is one of the largest independent suppliers of aerostructures to Airbus.

Business Analysis

Marketing

Product

DAS

  • Stretch-Forming, Hot-Forming and Machining

DAS supplies its target industry with engineering and manufacturing of complex components using stretch-forming and hot-forming processes and computer-based machining. Stretch-forming is a process for manufacturing complex structural shapes primarily from aluminum sheet metal extrusions. Hot-forming is a metal working process conducted at high temperature for manufacturing close-tolerance titanium and aluminum components. [4]

  • Composites and Metal Bonding

DAS produces helicopter main and tail rotor blades, and adhesive bonded assemblies, including winglets, spoilers, and fuselage structural panels for aircraft.

  • Chemical Milling

Chemical milling is used to remove materials in specific areas to reduce weights in regions where full thickness in materials is not required. Some of the products that use this type of milling are jet engine components, wing leading edges, and fuselage skins. [5]

DTI

  • Panels and Switches

DTI offers manufactures illuminated switches, switch assemblies, keyboard panels, edge lit panels, microwave and millimeterwave switches.

  • Mechanical and Electromechanical Subassemblies

DTI's products include sophisticated radar enclosures, gyroscopes and indicators, aircraft avionics racks, and shipboard communications and control enclosures.

  • Engineering, Technical and Program Management Services

These services are offered principally for advanced weapons systems and missile defense primarily for United States defense, space and homeland security programs. [1]

Price

As with many other aerospace services companies in the industry, Ducommun will rarely, if ever, market any of their products based on price. It would be quite uncommon for any firm in this industry to market their products with a low price strategy as means to attract new customers. Ducommun makes multiyear firm, fixed-price commitments to its customers.[1] However, without assurance to the company's anticipated production costs, the company faces a risk of experiencing negative losses.

Place

Ducommun provides its products and services both domestically in the United States, and internationally. The Company has manufacturing facilities in Thailand and Mexico. In 2010, sales to foreign customers worldwide were $37,970,000, or 3% of total revenues. [1]

Promotion

In respect of the current customers, Ducommun promotes its products through its reputation of superior quality products. In order to attract new contracts, Ducommun relies on presentations at aerospace and defense conferences. However, the marketing for companies in this industry is a very difficult area to measure. The data provided in the 2010 annual report did not provide much information to give more insight for a better understanding of Ducommun marketing techniques.

Supply Chain

The Ducommun supply chain team works with the global supply base to ensure the highest level of performance in the areas of quality, cost, delivery, and service. Ducommun continues to develop mutually benefit supplier relationships resulting in positive growth for all members of the supply chain. Cost reductions are being accomplished through commodity management and resulting in an increase of long term agreements and supplier alliances.

Human Resources

Ducommun's success is powered by the development and full commitment of its employees. At the end of 2010, the company reported a total of 1,815 employees. [6]


Key Personnel

Image:KeypersonVS.jpg[7]

Executive Compensation

Image:ExCompVS.jpg [8]

Ducommun acquisitions in the past five years
Ducommun acquisitions in the past five years[1]

Acquisitions

Ducommun has deployed more than $110 million in the last five years, completing multiple strategic acquisitions.

  • Dynabill Industries is a leading provider of titanium and aluminum structural components and assemblies for commercial and military aerospace applications. The company was acquired for $45,386,000.
  • CMP Display System was bought by Ducommun for $13,804,000. CMP manufactures incandescent, electroluminescent and LED edge lit panels and assemblies for the aerospace and defense industries.
  • Wisewave is a manufacturer of microwave and millimeterwave products for both aerospace and non-aerospace applications. The price of the transaction to Ducommun was $6,827,000.
  • Miltec provides its services through engineering, technical and program management. This includes design, development, integration and test of prototype product, mainly for the aerospace and military segment. This company was bought for $46,811,000.[1]

Strategy Analysis

Strengths

Patented processes and technical superiority

The company has several patents that allow their products to be of top quality. Despite having a wide array of patents, Ducommun does not believe that its operations are dependent on any single patent or group of patents. Rather, the company prides itself on its technical superiority, continual product improvement, exclusive product features, superior lead time, on-time delivery performance, quality and customer relationships to maintain its competitive advantage.

2012 Growth Initiative
2012 Growth Initiative

Strong order backlog

The order backlog is the value of the orders that a manufacturer has signed but not completed and been paid for yet. At the end of 2010, backlog was approximately $328,045,000, compared to $367,138,000 at the end of 2009. This value of unfilled orders assures the company a steady stream of revenues in the future years despite any occurrences of unusual events.[9]

Focus on organic and inorganic growth

The company follows its operations to be in line with its strategic long term goals. The company had revenues of $408 million in 2010. Ducommun currently has a growth initiative to raise this revenue level to the $1 billion mark by the end of 2012. [10] It plans to achieve this through a combination of organic and inorganic growth. Organic growth is the growth rate that a company can achieve by increasing output and enhancing sales with the current resources it has. On the other hand, inorganic growth is growth in the operations of a business that arises from mergers or takeovers, rather than an increase in the companies own business activity.

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Weaknesses

High reliance on defense spending by military/space products

In 2010 approximately 60% of sales were derived from military and space markets. These markets largely depend on government spending, particularly the United States government. Despite forecasts of increasing defense spending, forecasts are just forecasts.

High dependence on Boeing, Raytheon, and United Technologies

In 2010, Ducommun sales were approximately 26% for Boeing aircraft programs, 12% for Raytheon military aircraft programs and 8% for United Technologies, specifically the Sikorsky Blackhawk helicopter program. [1] With just under 50% of the entire revenues coming from three companies, Ducommun loses a lot of supplier power to these companies.

Losses on fixed-price contracts

Ducommun sells many of its products under fixed-price contracts. This means that the company would be receiving a set revenue for the contract despite the costs incurred by the company. As a result, if any manufacturing inefficiencies, start-up costs, or other factors cause an increase in production costs, Ducommun is very susceptible to experiencing losses.

Opportunities

Rising global defense spending

The United States remains the global leader in defense spending, surpassing the next closest country by more than eight times. The global financial and economic crisis has resulted in many nations cutting back on all sorts of public spending , and yet military spending seems to be increasing. [11]

Growing demand of commercial airplanes

The growth in commercial airplane market is be $2.8 trillion by 2027. By that year , the commercial airplane fleet globally is expected increase to twice the size as compared to the current fleet size. It is forecasted that the passenger traffic would grow at around 5% annually till 2027, requiring approximately 28,600 additional commercial airplanes to meet the rising traffic. The Asia-Pacific region is projected to be the largest market, making up 36% of the $2.8 trillion market. North America is second with 26% of the market share. [12]

Threats

Consolidation in the Aerospace Industry

The industry that Ducommun operates in is experiencing significant consolidation. This includes the company's suppliers, customers, and competitors. If the suppliers face consolidation, Ducommun faces the threat of fewer resources of supply and/or higher costs. Consolidation in the customers has the potential to result in delays in the time Ducommun takes to receive a contract award or the loss of existing/potential customers. Consolidation in the competitors may create competitors with higher resources and therefore cause a loss in the company's market share.

Financial Analysis

General

Image:GeneralVS.jpg [13]

Ducommon is on the smaller end when compared in market capitalization to the industry. However, it is very similar to its two competitors, LMIA and ATRO. Looking at the Beta, the average of DCO and its competitors is a little below 1.5, showing very a higher than usual sensitivity to the market conditions. One thing to note from the above comparable is that DCO has a large number of employees compared to LMIA and ATRO, which are similar market cap companies.

Valuation

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Due the Ducommun’s positive earnings, P/E Price to Book, and EV/EBITDA ratios are the most appropriate valuation measures. The Price to Sales ratio is less informative than the PE since the company has positive earnings. Comparing DCO to its competitors and the industry, we see that the company is undervalued in all measures. This can be a good sign showing that the company is expected by the financial markets to record high earnings and sales, and eventually increase its book value.

Growth and Profitability

Image:GrowthVS.jpg [13]

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DCO Revenue vs. Net Income 2001-2010[13]

The company’s margin percentages are slightly lower when compared to the industry and competitor averages. A point to note from the image on the right is that the company had a compound annual growth rate of 6.3% in the past 10 years. 2010 was the first time in 6 years where the revenue had a negative growth. However, on a more positive note, DCO grew earnings in the face of decreased revenues over the past twelve months. This is a trend that is not sustainable if profits are to continue to decrease at this rate. However, this result was better than that of the average company in the Aerospace & Defense industry.

Financial Strength

Image:FinanceVS.jpg [13]

DCO uses little debt in its capital structure. At a total debt/total capital ratio of 1.27%, the company is substantially less exposed to debt compared to the competitors and industry. It has been also decreasing its debt quarter over quarter at a faster rate than the industry. Overall, DCO has less financial risk than the industry aggregate. DCO also has very good liquidity ratios. With a quick ratio of 1.25 and an interest coverage of 38.53, the company should be able to comfortably pay back any short term obligations.

Management Effectiveness

Image:EffectVS.jpg [13]

DCO is doing an acceptable job in comparison to its peers with a return on assets and return on investment of 5.66% and 7.21% respectively. Despite average performance at managing their resources, the company is below average at generating revenues from employees and managing their owner's equity compared to other companies in the Aerospace & Defense industry. DCO has a ROE of 8.12% compared to the industry average of 18.4%. Revenue per employee at DCO equals $225,017.10, much below the $316,538.27 average of the industry. Overall, DCO is not managing its resources as effectively as its competitors and the industry as a whole.

References

  1. 1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 Ducommun Inc 10-K 2010 Annual Report
  2. DAS Facilities
  3. DTI Facilities
  4. DAS Capabilities
  5. Chemical Milling
  6. Yahoo! Finance DCO Company Profile
  7. Google Finance DCO Company Profile
  8. Forbes Corporate Executives and Directors
  9. Ducommun ends year with record backlog
  10. Ducommun company site
  11. U.S. Defense Budget Forecast
  12. Boeing Long-Term Market Forecast
  13. 13.0 13.1 13.2 13.3 13.4 13.5 Bloomberg Professional Service
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