Ducommun Inc. - University of Oregon Investment Group

Transcription

11/22/11
Aerospace and Defense
Ducommun Inc.
Ticker: DCO
Recommendation: Sell
Current Price: $13.13
Implied Price: $7.54
Investment Thesis
Key Statistics
52 Week Price Range
50-Day Moving Average

$11.99 - $26.08
$XX$XX.XX
$13.75
Estimated Beta
2.5
Dividend Yield
N/A
Market Capitalization


The stock should be sold as Ducommun has put itself in an extremely risky
financial position with an extremely high debt to equity ratio
The Aircraft, Engine and Parts Manufacturing industry is not in the growth
phase
Ducommun has a history of making acquisitions and they are not always
profitable
$138.38 million
DCO 5-YEAR STOCK PRICE
Trading Statistics
Diluted Shares Outstanding
10.54 million
Average Volume (3-Month)
85,109
Institutional Ownership
82.7%
Insider Ownership
6.61%
EV/EBITDA
9.01
Margins and Ratios
Gross Margin
18.64%
EBITDA Margin
11.11%
Net Margin
Debt to Enterprise Value
1.03%
79.46%
Leverage Ratio
2.98
Covering Analyst: Jason Johnson
[email protected]
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University of Oregon Investment Group
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Business Overview
Ducommun was founded in 1849 in California. The modern-day company
evolved out of a hardware supply store started by Charles Ducommun during the
California Gold Rush. Today, Ducommun Inc. designs, engineers and
manufactures aerostructure and electromechanical components and
subassemblies, and provides engineering, technical and program management
services primarily for the aerospace industry.
Over the years Ducommun has made numerous acquisitions. The most recent
acquisition was of LaBarge in June 2011. Prior to that Ducommun acquired
DynaBil Industries in 2008, CMP in September 2006, WiseWave in May 2006,
Miltec in January 2006, and other companies in the past. Ducommun Inc. is
divided into 2 business segments for accounting purposes but is made up of 3
business units. Ducommun Aerostructures Inc. (DAS) engineers and
manufactures aerospace structural components and subassemblies. The second
business segment of Ducommun Inc. is Ducommun LaBarge Technologies
(DLT). This company was formed in June 2011 after the combination of
Ducommun Technologies and LaBarge. The third business unit is Ducommun
Miltec.
Ducommun Aerostructures (DAS) is a manufacturing services company that
specializes in a variety of composite and metal bond structures and assemblies,
including aircraft wing spoilers, large fuselage skins, helicopter blades, flight
control surfaces and engine components, to customers all over the world. DAS
also designs, engineers and manufactures the contoured aluminum, titanium and
Inconel® aerostructure components for the aerospace industry. DAS serves both
commercial and military aerospace markets, including commercial airliners,
regional and business jet aircraft, military aircraft, commercial and military
helicopters, satellites and space launch vehicles. DAS has operation centers in
California, Kansas, New York and Mexico.
Ducommun LaBarge Technologies (DLT) provides electronics manufacturing
services such as the design and manufacture of electromechanical illuminated
push button switches for the aerospace industry, microwave switches and
components for the aerospace and wireless communications industries, and
engineering, technical and program management services principally for the
aerospace industry. Ducommun LaBarge Technologies serves the following
industries: defense, aerospace, industrial, oil-and-gas, mining and medical. DLT
has operation centers in eight different states and in Thailand.
Through its Miltec Division, Ducommun Inc. provides engineering services
engaged in missile and aerospace system design, development, integration, and
test. The Miltec business unit serves NASA and other commercial ventures. The
primary base for Ducommun Miltec’s services is the US Army Space and
Missile Defense Command (SMDC) and the Aviation and Missile Command
(AMCOM). Other major customers include the Missile and Space Intelligence
Center (MSIC), the US Navy, and NASA Marshall Space Flight Center
(MSFC). The Miltec business unit has operations in Alabama, Colorado, and
Mississippi.
The Ducommun business units serve both military and commercial customers.
Sales related to military and space programs made up approximately 60% of
sales in 2010. These military components go into many bombers, helicopters
and support aircraft, and sea-based applications used by the military. The
engineering, technical and program management services are employed mainly
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by United States defense, space and homeland security programs. The
commercial business represented approximately 40% of overall sales in 2010.
Ducommun’s major customers are Boeing (26% of total sales in 2010),
Raytheon (12% of total sales in 2010), United Technologies (8% of total sales in
2010) and the United States Government (4% of total sales in 2010).
Strategic Positioning
2011
2008
2006
2003
2001
1999
1998
1996
1994
ACQUISITION HISTORY
Acquires LaBarge, Inc. for $325.3
million (plus almost 21.5 million in
SG&A related to acquisition
Acquired DynaBil for $46 million;
provides titanium and aluminum
structural components
Miltec acquired for $46.8 million;
Wisewave acquired for $6.83
million;
acquired CMP for $13.8 million
Acquired the assets of DBP
Microwave for $2.32 million in casha
nd $400k in note
Acquired certain assets at the Fort
Defiance AZ operations of Packard
Hughes Interconnect Wiring
systems;
in June 2011 DCO acquired all the
Acquired capital stock of Parsons
Precision Products, Inc;
Apr 99 acquired capital stock of
Sheet Metal Specialties Company
Acquired capital stock of American
Electronics, Inc for $8.165 million in
cash and $1.9 million in liabilities
sold the stock of 3dbm
Acquired all assets of Mechtronics of
Arizona for $8.75 million (8 in cash
and note for $750k);
acquired 3dbm, Inc. for 4.78 million
in cash and $400k note
Acquired capital stock of Brice Mfg
Company for $763k in cash and
$10.365 million in notes
a subsidiary Jay-El products acquire
Dynatech Microwave Technology for
$7.5 million in cash
Historically the DAS segment of Ducommun, which focuses on physical
structures that are incorporated in airplanes and helicopters, has accounted for
roughly 60% of revenues. Now, however, with the formation of Ducommun
LaBarge technologies, percentage of revenue has changed to 60% for the
technology side of the business which includes electronics manufacturing and
engineering, technical, and program management services for the aerospace
industry. Management reports after the first three months of business with
LaBarge incorporated in the corporation the financial results are solid making up
60% of total sales.
This acquisition is part of Ducommun’s strategic expansion plans in more
revenue friendly markets. Historically the DCO side of the business has focused
on both military and commercial aircraft, but with military budgets having been
reduced and now delayed in Congress the DCO business is planning on an
upswing in the commercial market demand through their business with
customers such as Boeing and Airbus. The merger with LaBarge looks to nearly
double total revenues in the coming years. Ducommun has also expanded its
engineering and technology services into other markets including oil and gas
exploration, medical markets, and is currently pursuing seven new start up
programs in the commercial, regional, and military markets.
With the acquisition of LaBarge, Ducommun has made its largest acquisition
ever, spending over 325 million for it. Ducommun will now focus on integrating
the business segments and managing its cash. Acquisitions have formed an
integral part of Ducommun’s business strategy for many years and management
states that acquisitions will continue to form a fundamental part of their strategy.
These acquisitions have at times increased revenue, such as LaBarge is doing
currently, and at other times such acquisitions have not been profitable and
Ducommun has divested itself of those acquired businesses.
Business Growth Strategies
Ducommun’s growth strategy is based on acquisitions. Since 1994 Ducommun
has made 14 acquisitions. With its latest acquisition—LaBarge, Ducommun
forecasts improved margins due to synergies resulting from this merger. Sales in
Q3 of 2011 rose 10% over Q3 2010, however margins did not track revenue due
to initial start up costs. Ducommun also enjoys a record backlog of orders, 612
million to be exact, more than the 582 million of backlog orders one year ago.
Management feels that due to the acquisition, Ducommun is on track to manage
solid EBITDA numbers in Q4 2011. As Ducommun looks to the future they see
an upswing in the commercial market demand. This demand comes from
forecasted growth at Boeing and Airbus and management feels that there should
be growth over the next few years in this business segment. The growth in
military spending has been slowing as orders for the F15 and F18 airplanes have
slowed.
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There are both positive and negative results from the LaBarge acquisition. Sales
have increased 86% to $185 million, this is over 83$ million in sales than Q3
2010. Margins have increased from 10.2% in Q3 2010 to 11.8% in Q3 2011.
Management reports higher EBITDA levels due to the acquisition. However,
significant start up and integration costs have affected Ducommun in its merger
with LaBarge. Ducommun borrowed $390 million to acquire LaBarge and this
has increased interest expense by $7.8 million. The current plan is to pay back
$30 million each year. Moreover, management states that start up costs have
reduced margins and put pressure on revenue. They feel that this will continue
into Q4 2011 and Q1 2012. Management feels that $4.2 million is a nonrecurring merger related expense. The acquisition has also decimated
Ducommun’s cash and short-term investments.
Despite these setbacks in cash and profit margins Ducommun management
paints a positive picture of future revenues. Management states that their
portfolio has diversified and their commercial aircraft business has been up.
They expect higher builds of 737s and 787s from Boeing. The impact of these
has not come through yet, they say. Ducommun also states that their military
technology products are strong and there is good booking in commercial
products and they feel the oil exploration should grow. Nevertheless, the
services provided to the medical and industrial markets are admittedly soft. The
natural resource business is strong, according to management. There are more
bookings for Schlumberge and management states that Ducommun’s offerings
are more diverse and the oil rig count in North America is rising; as a result next
year looks good in regard to this business segment.
Ducommun is experiencing a low rate of production in some of its businesses
but feels that it will pick up in the last half of 2012. Ducommun’s revenue base
is currently 50% commercial, 30% regional jet, 10% general aviation and 10%
military.
Another concern is that Ducommun is undertaking more start up programs than
in the past. While one or two is common per year, currently there are five. This
is creating inefficiencies and higher costs. Also, after stripping away costs from
the merger it appears that the technology business is down 17%. The DCO side
of the business has suffered a $4 million decline in services. Military delays with
the F-15 orders have hurt as well and it is difficult to forecast revenue from
government-generated orders due to unknowns. The fourth quarter is usually a
good cash flow quarter and Ducommun is looking forward to an uptick in
Boeing orders as Ducommun has a robust build rate for 737s.
Ducommun reports $4-5 million in synergy gains in 2010. Some of the synergy
gains are readily identifiable but other synergies have not yet materialized
because of operations and supply sites being in different locations. Ducommun
feels that it will take another 12 to 15 months to realize these synergies.
Ducommun is confident that they will realize those synergies and the resulting
savings in 2013 and 2014.
Ducommun lost $8 million of sales from American Superconductor but
management says the portfolio has done well to recover from that due to strong
bookings in oil exploration, increases from $350 million to $320 million in
military and space bookings which will provide work in Q4 2011 and Q1 2012.
Management also feels the American Superconductor business will come back.
In regards to the merger, management feels there have been no major surprises
and they are happy with the merger. They believe that there will be positive
results with DLT. As cultures are combined, management feels that another $10
million can be squeezed out from operations and that cash flows from operations
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can continue. Cap ex spending will be limited to $15-20 million, however
acquisitions continue to be an integral part of the strategy and they will not
restrict capital expenditures at the expense of growing the business.
Industry
The aerospace industry exists to provide aircraft for military uses, commercial
purposes, and space exploration. The industry is made up of a few large
manufacturers like Boeing, Lockheed Martin, United Technologies, and
Raytheon. These aircraft manufacturers outsource about 90% of all parts and
components to smaller suppliers like Ducommun. Therefore, their business and
profitability is dependent on the overall aerospace industry.
Aircraft orders have increased since 2006 and are projected to increase through
2016 as the major airlines replace older aircraft with new technology that
provides various benefits to them. These new aircraft are more fuel efficient and
technologically superior. Failure to acquire these new airplanes can be
detrimental to operations. As a result, manufacturers will continue to receive
strong numbers of orders. The growth of the airline industry in China and India
are also drivers of present and future business for aircraft manufacturers. Boeing
estimates that Chinese airlines could be running more than 3,200 large passenger
airplanes by 2025 up from roughly 600 in 2006. Indian airlines are also expected
to purchase 280 new airplanes worth an estimate $15 billion over the next
decade.
Revenue is also picking up speed in the aerospace industry. It is expected to
reach 162.4 billion between 2011 and 2016, which is an annualized increase in
revenue of 2.5%. Profitability is also expected to increase over the next five
years to 2016 partly as a result of new airplane models such as the 787
Dreamliner from Boeing. The regional aircraft market is also growing with new
designs and new models and expects continued profitability. Profitability in the
military sector, however, will decrease slightly as program collaboration
between allied nations splits the risk of new developments. This will mean lower
margins for companies who manufacture such products.
Despite the fact that the overall aerospace industry is expecting growth the
aircraft, engine, and parts manufacturing industry is declining. The indicators of
the declining phase of the economic lifecycle include contracting value added,
falling participation, and increasing levels of import competition. As well,
technological developments have also slowed, leading to diminishing returns on
investment and weak growth in capital expenditure over the last 5 years. Despite
the new products entering the market, per capita consumption of aircraft and
parts is expected to remain steady. The new airplanes that are being produced
are mostly variations of existing airplanes that were introduced to reduce
operating costs. Product development has been slow and limited which is also
characteristic of a declining industry.
In the aircraft, engine, and parts manufacturing industry the largest four
participants hold over 40% of the market as of 2011; Ducummon, being a small
manufacturer makes up a very small percentage of the other companies listed as
industry participants.
The profit margin in the industry is relatively moderate. Earnings before interest
and taxes account for 4.6% of revenue industry-wide. Aircraft, engine, and parts
manufacturing firms profit from the commercial segment based on the volume
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transacted whereas defense contracts are typically awarded with low margins.
Net profit has remained relatively consistent over the last 5 years due to little
fluctuation in aircraft orders.
The competition in this industry is considered medium and varies from
manufacturers of the same products and manufacturers of different products and
foreign manufacturers. The industry is an oligopoly in which only a few large
firms exist and buyers are susceptible to the manufacturers’ price discretion. In
the business and regional market competition is fierce because prices are
cheaper and there are more players in the marketplace.
Barriers to this industry are high due to high startup costs from land acquisitions
and investments in technology, which makes it difficult for new entrants to the
industry. The industry also requires skilled labor and staff who are familiar with
the new technology. Government regulations also act as a barrier to entry.
Management and Employee Relations
Joseph C. Berenato Chairman of the Board - 64
Joseph Berenato is the Chairman of the Board of Ducommun Inc. He joined
Ducommun in November 1991 as vice president, chief financial officer and
treasurer, and assumed successively increasing responsibilities before being
appointed president in January 1996. He assumed the additional titles of CEO
and board member in January 1997 and chairman in January 1999. Present he is
a Director or Trustee of certain mutual funds in the American Funds Family
managed by Capital Research & Management Company. He provides the board
with a thorough understanding of the strategic direction of the Corporation and
has experience in all areas of the Corporation’s business.
Mr. Berenato earned a B.S. from the U.S. Military Academy and is a Vietnam
veteran. He holds an M.A. in English from the University of Virginia and an
MBA from New York University. He is also on the Board of Directors at
Federal Reserve Bank of San Francisco.
Annual compensation for Mr. Berenato is $1,023,240 along with 95,000
exercisable options with a market value of $645,200.00 and 75,000
unexercisable options worth $271,800.00.
Anthony J. Reardon, President, CEO, COO, & Director - 60
Mr. Anthony J. Reardon is President, Chief Executive Officer, Director of
Ducommun Inc. He has been President, Chief Operating Officer of Ducommun
Inc. since January 2008 and has been appointed as Chief Executive Officer and
Director effective January 1, 2010. From January 2003 to December 2007 and
Senior Vice President Business Management of Ducommun AeroStructures, Inc.
from 2001 to 2002. As the current Chief Executive Officer of the Corporation,
Mr. Reardon provides an insider’s perspective in Board discussions about the
business and strategic direction of the Corporation and has detailed knowledge
of all aspects of the Corporation’s current operations and business.He received
his undergraduate degree from Loras College and a graduate degree from the
University of Illinois at Urbana-Champaign.
Ducommun Incorporated (NYSE: DCO) announced that its Board of Directors
has unanimously elected Anthony J. Reardon, currently president and chief
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operating officer, to the additional position of chief executive officer as well as a
member of the Board of Directors effective January 1, 2010. Mr. Reardon will
succeed Joseph C. Berenato, who will retain his position as chairman. Mr.
Reardon was named president and chief operating officer of Ducommun in
January 2008. From January 2003 to December 2007, he was president of
Ducommun AeroStructures, Ducommun’s largest subsidiary.
Total compensation is $1,331,310 along with 22,000 exercisable options worth a
market value of $118,320.00, 48,000 unexercisable options with a market value
of $241,560.00 and 15,000 excercised options with a market value of
$39,640.00
Joseph P. Bellino – Vice President & CFO - 60
Mr. Bellino has held this position since September 2008. His leadership role in
the LaBarge acquisition in June 2011 resulted in the company's growth by 80%
to $730 million. A key component of the transaction was raising $450 million in
debt financing. Joe leads the company wide financial and information
technology activities including finance, M&A, strategy, banking, investor
relations, internal controls, external financial reporting and IT infrastructure and
ERP implementation. Joe plays a key role mergers and acquisitions team driving
the growth of the company and strengthening its competitive position.
Mr. Bellino obtained his undergraduate degree from Ohio State University - The
Max M. Fisher College of Business and his MBA in Finance from the same
schoool in 1973.
His total fiscal year compensation is $774,588.
Recent News
“LaBarge Shareholders Approve Sale to Ducommun”
- St. Louis Post-Dispatch
June 23--Shareholders of electronics manufacturer LaBarge Inc. approved the
sale of the Ladue-based company to Ducommun Inc. at a special meeting held
today.
Ducommun, an aerospace supplier based in Carson, Calif., announced in April
that it was buying LaBarge for $340 million. The sale is expected to close on or
about June 28.
LaBarge, which has 40 local employees, will become part of Ducommun's
Technologies subsidiary, which will be renamed Ducommun LaBarge
Technologies. The subsidiary will be headquartered in the St. Louis area,
according to a LaBarge spokeswoman.
Catalysts
Upside





War
Higher defense expenditures approved by Congress
Decrease in steel prices
Higher government expenditures
Increase in world GDP
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Downside










Significant changes in aircraft and/or helicopter production rates at
Boeing, Raytheon and United Technologies
Loss of a key customer
Manufacturing inefficiencies when operating under fixed-price
contracts
Increase in steel and other input materials
Political instabilities in Thailand and Mexico
Unsuccessful acquisition integration
Consolidation of customers, competitors, and suppliers
Environmental liabilities
Economic downturn affecting air travel
Increased fuel costs affecting air travel
Comparable Analysis
The comparable companies that have been used for this report are LMI
Aerospace, Spirit Aerosystems Holdings, Inc. and GenCorp Inc.
LMI Aerospace
LMI Aerospace provides structural components assemblies and kits to the
aerospace defense and technology industries. LMI manufactures, machines,
finishes, and integrates aluminum and alloy components and sheet metal
products for primarily large commercial corporate and military aircraft. LMI
manufactures more than 30,000 products that are integrated into the large
aircraft manufacturers’ production processes. LMI provides similar products to
Ducommun. Such products are destined for aircraft and helicopter
manufacturing. LMI also provides services to the production, assembly, and
distribution of aerospace components such as engineering services, fabrication,
assembly, distribution and others. This business model is very similar to the
Ducommon business model.
LMI and Ducommun are similarly sized firms. LMI has similar risk as
Ducommun as its market cap is close to that of Ducommun (214 million versus
138 million). LMI is a small player, like Ducommon, in the aerospace supply
industry. Despite a larger market cap, LMI’s total revenue is about half that of
Ducommun’s at 273 million. Ducommun’s total revenue is 494.5 million. LMI’s
beta is less than Ducommun’s beta. LMI had a significant backlog of orders, as
of December 2010. This is common in the aircraft parts manufacturing industry
of 221.5 million, similar to that of Ducommun with 325 million in backlog
orders. LMI’s debt to equity ration is virtually zero as it holds no long-term debt
whereas Ducommun’s debt to equity ration is 2.98. The companies are most
similar in the fact that they operate in the same space, have very similar
products, and their size and total revenue are within reason.
The next comparable company is GenCorp, Inc. GenCorp produces very similar
products for the aerospace and defense industry. GenCorp also has a real estate
component however it composes a very small overall percentage of the business
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(specifically between .8%-3% of total revenue over the past 7 years). GenCorp
also is a similarly sized company, giving it similar risk to Ducommun and LMI
Industries. Its market cap is 283.52 million. Its beta is higher than LMI, closer to
the Ducommun beta of 1.83. Total revenue for the most recent quarter end at
August 31, 2011 is 892.2 million. This is roughly 50% more than Ducommun’s
total revenue. Its operating cash flow is 70.6 million to Ducommun’s 290
million.
The third comparable company is Spirit Aerosystems Holdings, Inc. Spirit is
also a supplier of commercial airplane assemblies and components, designing
products for aerospace design, build, support, and also repair needs. Spirit
produces fuselages, under-wing components, composites, wings, spares/repairs.
Spirit Aerosystems is a significantly larger firm in the aerospace industry and
has therefore been weighted accordingly at 20% as opposed to 40% for LMI and
GenCorp. Its total market cap is $2.73 billion, much larger than that of
Ducommun. It has a beta of 1.3; total debt to equity is .053 and its operating
cash flow is $188.3 million.
Discounted Cash Flow Analysis
The calculations for the discounted cash flow analysis presented a significant
challenge due to the recent acquisition of LaBarge. The first quarterly revenue
numbers were reported in the 10Q on November 7, 2011. This quarterly report
represents the first quarter of numbers with Ducommun and Labarge acting as
one company. As a result of this merger, Ducommun’s sales on the technology
side of the business, now known as DLT (Ducommun Labarge Technologies)
have nearly doubled. This has presented a challenge in making projections for
the future. Virtually, a separate DCF analysis had to be prepared for each
company to gain an understanding of what each company brings to the financial
picture, where that will take the projections, and how this will all coalesce under
Ducommun’s management and business strategy.
35
Cash & ST Investments
30
25
Millions
20
15
10
5
0
Beginning with revenue, Ducommun’s total revenue at the end of 2010 was
$408.4 million and Labarge’s total revenue in 2010 was $289.3 million. The
projections for gross revenue were then calculated by each Ducommun business
segment after the LaBarge acquisition. For the DLT segment, the past 6 years of
revenue figures were utilized and to them the past 6 years (which is the
maximum useable period in which LaBarge had positive revenue) and added the
figures together. Then, to account for ineffiencies and attrition of some
customers, each figure was multiplied by 80%. Thereafter, a scatter plot was
graphed with this data set. A straight-line regression yielded a slope line used to
project future growth. This growth was then compared to the Ducommun
Aerostructures side of the business. Again, revenues over the last 20 years of
DCO Aerostructures were graphed in a scatter plot and the resulting regression
line was then used to project DCO Aerostructure revenues through 2020. These
figures were then added together, combining DLT and DCO numbers to project
revenue figures throught 2020 for the combined companies. After that, these
numbers were modified to reflect a stabilized and slightly declining growth rate
after 2016 when it is likely that revenue in the industry will contract.
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Projections for categories other categories of assets and liabilities were
calculated in a similar fashion. The percentage of each category to revenue of its
respective company was calculated and then all of those percentages of segment
revenue were added together and divided by the total number of years for both
LaBarge and Ducommun. After summing these figures for both LaBarge and
Ducommun, the percentages were weight averaged based on the percentage of
revenue that both Ducommun and LaBarge contribute to the overall company.
LaBarge represens 37.6% of and 72.4% of the combination of the new
Ducommun with the LaBarge acquisition.
25,000.00
Capital Expenditures
22,500.00
20,000.00
Beta was calculated using both the regression method and the Hamada method.
The regression method was calculated as a 5-year weekly and monthly beta,
based on the S&P 500 closing prices; a 3-year weekly and monthly beta was
also calculate; moreover, a 1-year weekly beta was calculated versus S&P
closing prices. The fact that Ducommun, as of July 1, 2011, is a 66% larger
company the beta is challenging to compute based on historical prices. As a
result, the Hamada beta was also calculated in order to factor in the massive debt
that Ducommun has assumed. Due to Ducommun’s heavily leveraged position,
its debt to equity is 2.98. This causes the Hamada beta to shoot up to 3.164.
Inherent in this calculation is the risk factor that exists with Ducommun if it
were to fail to fulfill its massive $390 million loan obligation. The Hamada beta
was then tempered slightly, from 3.164 down to 2.5, given that the regressed
beta lies in the 1.27 to 1.56 range.
Arbitrary upper line
Arbitrary lower line
TOP LINE PROJECTIONS
17,500.00
BOTTOM LINE PROJECTIONS
Linear (Arbitrary upper line)
15,000.00
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Linear (Arbitrary lower line)
12,500.00
y = 480.77x -952173
10,000.00
7,500.00
5,000.00
y = 516.67x -1E+06
2,500.00
0.00
1985
1990
1995
2000
2005
2010
2015
2020
2025
The revenue model was calculated based on a historic average of growth for
both LaBarge and Ducommun. Despite the fact that neither LaBarge nor
Ducommun have had consistent year over year growth in the past but rather
varied rates of growth, an average of 20 years of Ducommun growth figures and
6 years of LaBarge growth figures and weighted according to the percent of
revenue that each company accounts for is what has led to the revenue
projections for Ducommun in the next few years, tapering off after 2016 and
receding to a conservative estimate as the terminal year approaches. These
projections are difficult to make given Ducommun’s history of acquisitons and
vocalized future intent to continue to employ acquisitions as a growth strategy.
In fact, management’s goal, as posted on its web page is to reach $1 billion in
revenue.
Management states in the most recent conference call that they plan to limit cap
ex to $15-20 million per year but they will not restrict cap ex at the expense of
growing the business. Given Ducommun’s history of acquisitions every one to
two to three years it is likely that they will continue to make acquisitions that
will cause their cash flows to vary greatly. Management estimates that they will
be in the 29-31% tax bracket.
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Recommendation
As a result of the foregoing it is my recommendation that our holdings of
Ducommun Inc. should be sold for the main reason that Ducommun is in an
extremely risky position having taken on such a large quantity of debt. If it fails
to meet these debt payments it could quickly be in bankruptcy and equity
holders would stand to receive very little, if anything.
Implied Price Calculation
Weighting
Discounted Cash Flows Analysis Implied Price $
8.25
50%
Comparables Analysis Implied Price
$
6.52
50%
Current Price
$ 13.13
Implied Price
$
Overvalued
7.39
(43.75%)
Secondly, despite the fact that the outlook is positive for the overall aircraft
manufacturing industry, the aircraft, engine, and parts manufacturing is in
decline. Its profits are not predicted to increase significantly. Therefore, even if
Ducommun is able to meet its debt obligations it is not likely that its market
value will increase significantly.
Moreover, Ducommun has shown a history of making money, building up its
cash reserves and then spending the majority of that cash on acquisitions. These
acquisitions are not always profitable. As a result, the realistic growth for
Ducommun, because of its acquisition strategy does not make it worth the risk.
Again, it is my recommendation that Ducommun be sold.
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Appendix 1 – Comparables Analysis
Comparables Analysis
($ in thousands)
Stock Characteristics
Current Price
50 Day Moving Average
200 Day Moving Average
Beta
Size
Short-Term Debt
Long-Term Debt
Cash and Cash Equivalent
Non-Controlling Interest
Preferred Stock
Diluted Basic Shares
Market Capitalization
Enterprise Value
Profitability Margins
Gross Margin
EBIT Margin
EBITDA Margin
Net Margin
Credit Metrics
Interest Expense
Debt/EV
Leverage Ratio
Interest Coverage Ratio
Operating Results
Revenue
Gross Profit
EBIT
EBITDA
Net Income
Valuation
EV/Revenue
EV/Gross Profit
EV/EBIT
EV/EBITDA
EV/Net Income
DCO
Ducommun
Max
$20.64
18.61
20.77
2.50
Min
Weight Avg.
$4.97
$14.09
4.47
12.58
5.40
14.27
1.11
1.44
Median
$19.25
16.75
19.90
1.30
$13.13
14.65
19.41
2.50
SPR
LMIA
Spirit
AeroSystems
LMI Aerospace
Holdings Inc.
Inc.
20.00%
40.00%
$19.25
$20.64
16.75
18.61
20.77
19.90
1.30
1.11
GY
GenCorp Inc.
40.00%
$4.97
4.47
5.40
1.83
62,000.00
1,189,600.00
239,000.00
500.00
0.00
151,900.00
2,924,075.00
3,990,575.00
57.00
0.00
8,298.00
0.00
0.00
10,538.99
138,376.90
237,079.28
27,762.80
368,360.00
126,579.20
100.00
0.00
59,006.17
803,384.96
1,073,028.56
14,700.00
326,100.00
138,300.00
0.00
0.00
59,679.00
301,104.63
450,204.63
2,191.00
391,164.00
31,350.00
0.00
0.00
10,538.99
138,376.90
500,381.90
14,700.00
1,189,600.00
138,300.00
500.00
0.00
151,900.00
2,924,075.00
3,990,575.00
57.00
0.00
8,298.00
0.00
0.00
11,886.43
245,320.28
237,079.28
62,000.00
326,100.00
239,000.00
0.00
0.00
59,679.00
301,104.63
450,204.63
23.21%
8.99%
12.08%
6.03%
11.70%
4.64%
7.66%
0.20%
16.72%
6.99%
9.66%
3.31%
12.73%
7.69%
8.85%
4.11%
18.64%
7.47%
11.11%
1.03%
11.70%
7.69%
8.85%
4.11%
23.21%
8.99%
12.08%
6.03%
12.73%
4.64%
7.66%
0.20%
$80,100.00
86.21%
7.16
5014.00%
$557.00
.02%
0.00
214.78%
$28,962.80
40.53%
2.85
2195.68%
$31,800.00
30.18%
2.89
520.85%
$10,160.00
78.61%
7.16
540.53%
$80,100.00
30.18%
2.89
520.85%
$557.00
.02%
0.00
5014.00%
$31,800.00
86.21%
5.68
214.78%
$231,243.00 $1,392,577.20
$53,672.00
$177,248.80
$20,784.00
$97,393.60
$27,928.00
$121,931.20
$1,800.00
$45,073.60
$892,200.00
$113,600.00
$41,400.00
$68,300.00
$13,934.00
$494,446.00
$92,149.00
$36,919.00
$54,918.00
$5,070.00
$4,716,000.00
$551,700.00
$362,600.00
$417,200.00
$193,900.00
$231,243.00
$53,672.00
$20,784.00
$27,928.00
$13,934.00
$892,200.00
$113,600.00
$41,400.00
$68,300.00
$1,800.00
0.85x
4.42x
11.01x
8.49x
20.58x
1.01
5.43
13.55
9.11
98.69
0.85
7.23
11.01
9.57
20.58
1.03
4.42
11.41
8.49
17.01
0.50
3.96
10.87
6.59
250.11
$4,716,000.00
$551,700.00
$362,600.00
$417,200.00
$193,900.00
1.03x
7.23x
13.55x
9.57x
250.11x
0.50x
3.96x
10.87x
6.59x
17.01x
0.78x
4.80x
11.11x
7.95x
110.97x
Multiple
EV/Revenue
EV/Gross Profit
EV/EBIT
EV/EBITDA
EV/Net Income
Price Target
Current Price
Overvalued
Implied Price
Weight
$2.30
0.00%
$7.61
15.00%
$4.58
25.00%
$7.05
60.00%
$19.03
0.00%
UOIG
$6.52
13.13
12
(50.35%)
11/22/11
Appendix 2 – Discounted Cash Flows Analysis
Discounted Cash Flow Analysis
($ in thousands)
Total Revenue
% YoY Growth
Cost of Goods Sold
2007A
367,297.00
2008A
403,803.00
2009A
430,748.00
2010A
408,406.00
Q1
Q2
Q3
Q4
03/31/2011A
06/30/2011A
09/30/2011A
12/31/2011E
2011E
2012E
2013E
2014E
2015E
2016E
2017E
2018E
189,707.00
585,645.10
736,531.00
763,155.07
789,572.65
814,827.68
838,203.20
858,621.94
876,045.94
99,553.00
108,043.00
185,080.00
2019E
2020E
891,150.45
902,031.37
15.13%
9.94%
6.67%
-5.19%
-2.50%
8.53%
71.30%
2.50%
43.40%
25.76%
3.61%
3.46%
3.20%
2.87%
2.44%
2.03%
1.72%
1.22%
291,456.00
321,900.00
351,915.00
328,260.00
81,145.00
87,039.00
150,891.00
153,050.06
472,481.35
600,272.76
621,971.39
643,501.71
668,158.70
687,326.62
706,001.89
722,124.67
735,466.47
745,077.91
% Revenue
79.35%
79.72%
81.70%
80.38%
81.51%
80.56%
81.53%
80.68%
80.68%
81.50%
81.50%
81.50%
82.00%
82.00%
82.23%
82.43%
82.53%
82.60%
Gross Profit
$75,841.00
$81,903.00
$78,833.00
$80,146.00
$18,408.00
$21,004.00
$34,189.00
$36,656.94
$113,163.75
$136,258.24
$141,183.69
$146,070.94
$146,668.98
$150,876.58
$152,620.05
$153,921.27
$155,683.98
$156,953.46
20.65%
20.28%
18.30%
19.62%
18.49%
19.44%
18.47%
19.32%
19.32%
18.50%
18.50%
18.50%
18.00%
18.00%
17.78%
17.57%
17.47%
17.40%
36,079.00
40,071.00
36,065.00
40,081.00
10,738.00
19,991.00
17,102.00
18,325.52
56,572.77
73,653.10
76,315.51
78,957.27
78,711.59
80,969.65
82,942.08
84,625.22
86,084.30
87,135.39
9.82%
9.92%
8.37%
9.81%
10.79%
18.50%
9.24%
9.66%
9.66%
10.00%
10.00%
10.00%
9.66%
9.66%
9.66%
9.66%
9.66%
9.66%
10112.00
10477.00
13550.00
13597.00
3411.00
3606.00
7455.00
5829.83
77763.89
81709.96
87901.81
94333.86
48566.27
25948.93
28004.88
26648.77
28757.32
30829.29
Gross Margin
Selling General and Administrative Expense
(minus Depreciation & Amortization)
% Revenue
Depreciation and Amortization
% Revenue
Other Expense
% Revenue
Other Expense
% Revenue
Earnings Before Interest & Taxes
% Revenue
Interest Expense
% Revenue
Earnings Before Taxes
% Revenue
Less Taxes (Benefits)
Tax Rate
Net Income
Net Margin
Add Back: Depreciation and Amortization
Add Back: Interest Expense*(1-Tax Rate)
Operating Cash Flow
% Revenue
Current Assets
% Revenue
Current Liabilities
% Revenue
Net Working Capital
% Revenue
2.75%
2.59%
3.15%
3.33%
3.43%
3.34%
4.03%
3.07%
13.28%
11.09%
11.52%
11.95%
5.96%
3.10%
3.26%
3.04%
3.23%
3.42%
0.00
13064.00
12936.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00%
3.24%
3.00%
0.00%
0.00%
0.00%
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
$12,501.58 ($21,172.91) ($19,104.83) ($23,033.63) ($27,220.19)
$38,988.78
0.00
0.00
0.00
0.00
0.00
0.00
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
$18,291.00
$16,282.00
$26,468.00
$4,259.00
($2,593.00)
$9,632.00
$19,391.12
$43,958.00
$41,673.09
$42,647.28
$40,842.37
0.04529684 0.037799363 0.064808059
0.042781232
-0.023999704
0.05204236
6.59%
(3.62%)
(2.59%)
(3.02%)
(3.45%)
2.38%
5.24%
4.85%
4.87%
4.58%
4.32%
260.00
1531.00
8256.00
8200.00
18,247.00
24,940.35
20,484.38
16,028.40
11,572.43
7,116.46
4,265.40
4,351.96
4,426.99
4,481.05
$29,650.00
0.080724863
2395.00
1242.00
2522.00
1805.00
.65%
.31%
.59%
.44%
.26%
1.42%
4.46%
4.32%
3.12%
3.39%
2.68%
2.03%
1.42%
.85%
.50%
.50%
.50%
.50%
27,255.00
17,049.00
13,760.00
24,663.00
3,999.00
-4,124.00
1,376.00
4,301.58
(39,419.91)
(44,045.18)
(43,518.01)
(43,248.59)
7,818.69
36,841.54
37,407.69
38,295.32
36,415.37
34,507.73
7.42%
4.22%
3.19%
6.04%
4.02%
(3.82%)
.74%
2.27%
(6.73%)
(5.98%)
(5.70%)
(5.48%)
.96%
4.40%
4.36%
4.37%
4.09%
3.83%
7634.00
3937.00
3577.00
4855.00
1076.00
-1151.00
415.00
1116.93
-10120.51
-11470.41
-11336.03
-11659.02
2108.35
9884.80
9858.79
10114.03
9655.86
9173.38
25.97%
25.67%
26.04%
26.05%
26.96%
26.97%
26.83%
26.35%
26.41%
26.52%
26.58%
$3,184.65 ($29,299.40) ($32,574.77) ($32,181.98) ($31,589.57)
$5,710.34
$26,956.74
$27,548.90
$28,181.29
$26,759.51
$25,334.36
28.01%
23.09%
26.00%
19.69%
26.91%
27.91%
30.16%
$19,621.00
$13,112.00
$10,183.00
$19,808.00
$2,923.00
($2,973.00)
$961.00
5.34%
3.25%
2.36%
4.85%
2.94%
-2.75%
0.52%
1.68%
-5.00%
-4.42%
-4.22%
-4.00%
0.70%
3.22%
3.21%
3.22%
3.00%
2.81%
10,112.00
10,477.00
13,550.00
13,597.00
3,411.00
3,606.00
7,455.00
5,829.83
77,763.89
81,709.96
87,901.81
94,333.86
48,566.27
25,948.93
28,004.88
26,648.77
28,757.32
30,829.29
1,724.17
955.19
5,766.00
6,070.82
13,562.34
18,445.29
15,148.39
11,707.44
8,451.87
5,207.07
3,141.26
3,202.58
3,253.14
3,289.83
14182 15085.30554 62026.82775 67580.48546 70868.22237 74451.73465 62728.47672 58112.73563 58695.03488 58032.64581
58769.9633
59453.47125
31457.17153 24544.19409
1,866.39
$25,599.39
1,449.68
190.04
1,103.70
34854.67928
6524.042511
1736.701018
8.56%
6.08%
5.94%
8.53%
6.55%
1.61%
7.66%
7.95%
10.59%
9.18%
9.29%
9.43%
7.70%
6.93%
6.84%
6.62%
6.59%
6.59%
157,236.00
159,173.00
164,091.00
161,392.00
173,934.00
346,496.00
331,345.00
295,272.11
295,272.11
315,654.35
318,286.57
329,480.55
340,308.48
349,810.49
358,408.31
365,720.33
371,973.20
371,973.20
50.70% 0.504182663 0.428568994 0.417066698 0.417289721 0.417644722 0.417333756 0.417422729 0.417467069
42.81%
39.42%
38.09%
39.52%
43.68%
83.45%
67.51%
0.417407851
0.412372793
79,533.00
89,501.00
78,266.00
71,286.00
61,427.00
133,743.00
120,940.00
117,749.43
120,033.44
134,808.36
138,596.97
142,356.19
145,949.98
149,276.32
152,181.90
154,661.34
156,810.71
156,810.71
21.65%
22.16%
18.17%
17.45%
15.43%
35.84%
24.64%
62.07%
20.50%
18.30%
18.16%
18.03%
17.91%
17.81%
17.72%
17.65%
17.60%
17.38%
$77,703.00
$69,672.00
$85,825.00
$90,106.00
$112,507.00
$212,753.00
$210,405.00
$177,522.68
$175,238.66
$180,845.99
$179,689.60
$187,124.36
$194,358.50
$200,534.17
$206,226.41
$211,059.00
$215,162.49
$215,162.49
21.16%
17.25%
19.92%
22.06%
113.01%
196.92%
113.68%
93.58%
29.92%
24.55%
23.55%
23.70%
23.85%
23.92%
24.02%
24.09%
24.14%
23.85%
-8031
16153
4281
22401
100246
-2348
-32882.32
-2284.02
5607.32
-1156.39
7434.76
7234.14
6175.67
5692.24
4832.58
4103.49
0.00
12418
7689
7106
1509
4294
5382.00
5815.00
17,000.00
17,757.33
18,514.66
19,271.99
20,029.32
20,786.65
20,786.65
20,786.65
20,786.65
20,786.65
Change in Working Capital
11261
% Revenue
3.07%
3.08%
1.79%
1.74%
1.52%
3.97%
2.91%
3.07%
2.90%
2.41%
2.43%
2.44%
2.46%
2.48%
2.42%
2.37%
2.33%
2.30%
0.00
46283.00
0.00
0.00
400.00
325315.00
0.00
0.00
325,715.00
0.00
13,355.21
13,817.52
14,259.48
14,668.56
15,025.88
15,330.80
15,595.13
15,785.55
Acquisitions
% Revenue
Unlevered Free Cash Flow
0.00%
11.46%
0.00%
0.00%
.40%
301.10%
20196.17
-26125.81
1757.39
23467.68
-17785.96
-428118.30
11148.00
Discounted Free Cash Flow
EBITDA
EBITDA Margin
Reinvestment Rate
55.62%
0.00%
1.75%
1.75%
1.75%
1.75%
1.75%
1.75%
1.75%
1.75%
42152.63 -278,404.16
44,215.83
40,154.74
33,927.46
21,205.54
16,481.86
17,190.27
17,082.61
18,284.69
22,881.28
39,714.19
36,849.46
27,964.93
17,858.22
12,467.03
13,285.13
11,857.83
12,967.76
14,575.57
41,257.05
1.0896967
0.25
1.25
1.00
2.25
2.00
3.25
3.00
4.25
4.00
5.25
39762.0
28768.0
29832.0
40065.0
7670.0
1013.0
17087.0
18331.4
56591.0
62605.1
64868.2
67113.7
67957.4
69906.9
69678.0
69296.1
69599.7
69818.1
10.83%
7.12%
6.93%
9.81%
7.70%
0.94%
9.23%
9.66%
9.66%
8.50%
8.50%
8.50%
8.34%
8.34%
8.12%
7.91%
7.81%
7.74%
0.92039718 0.27069318 4.172520776 587.2435712
0.065829418 -2.1059542 7.61889487 0.04504067 0.16293087 0.30790046 0.57274755 0.67777705 0.66500078 0.66501101 0.642490978 0.553605372
UOIG 13
11/22/11
Appendix 3 – Revenue Model
Revenue Model
($ in thousands)
DCO Aerostructures
Q1
2007A
219095
% Growth
DLT
148202
% Growth
Total Revenue
% Growth
367297
2008A
2009A
2010A
251198
286857
271572
14.65%
14.20%
(5.33%)
152605
143891
136834
2.97%
(5.71%)
(4.90%)
403803
430748
408406
9.94%
6.67%
(5.19%)
Q2
Q3
Q4
03/31/2011A 06/30/2011A 09/30/2011A 12/31/2011E
72204
27349
99553
76575
31468
108043
75076
110004
185080
76952.9
112754.1
189707
2011E
2012E
2013E
2014E
2015E
326286.075 333790.6547 340132.6772
2016E
2017E
346595.198 351100.9356
2018E
2019E
2020E
304070
319575
354611.945 357803.4525 359771.3715
11.97%
5.10%
2.10%
2.30%
1.90%
1.90%
1.30%
1.00%
.90%
.55%
281,575
416,956
436,869
455,782
474,695
491,608
507,521
521,434
533,347
542,260
105.78%
48.08%
4.78%
4.33%
4.15%
3.56%
3.24%
2.74%
2.28%
1.67%
585645.1
736531
43.40%
25.76%
763155.075 789572.6547 814827.6772
3.61%
3.46%
3.20%
UOIG 14
838203.198 858621.9356
2.87%
2.44%
876045.945 891150.4525 902031.3715
2.03%
1.72%
1.22%
11/22/11
Appendix 4 – Working Capital Model
Working Capital Model
($ in thousands)
Total Revenue
Current Assets
Cash & Cash Equivalents
% of Revenue
Accounts Receivable
Days Sales Outstanding A/R
% of Revenue
Inventory
% of Revenue
Prepaid Expenses (deferred income taxes)
% of Revenue
Other Assets (production cost of contracts)
Days COGS Outstanding
% of Revenue
Other Assets (unspecified)
% of Revenue
Total Current Assets
% of Revenue
Long Term Assets
Net PP&E Beginning
Acquisitions (70%)
Depreciation and Amortization
Net PP&E Ending
Total Current Assets & Net PP&E
% of Revenue
Current Liabilities
Accounts Payable
Days Payable Outstanding
% of Revenue
Accrued Charges
% of Revenue
Income Taxes Payable
% of Revenue
Current Portion of Long Term Debt
% of Revenue
Other Liabilities
% of Revenue
Total Current Liabilities
% of Revenue
2007A
2008A
2009A
2010A
Q1
Q2
Q3
Q4
03/31/2011A
06/30/2011A
09/30/2011A
12/31/2011E
2011E
2012E
2013E
2014E
2015E
2016E
2017E
2018E
2019E
2020E
$367,297.00
$403,803.00
$430,748.00
$408,406.00
$99,553.00
$108,043.00
$185,080.00
$189,707.00
$585,645.10
$736,531.00
$763,155.07
$789,572.65
$814,827.68
$838,203.20
$858,621.94
$876,045.94
$891,150.45
$902,031.37
31571.00
8.60%
44841.00
N/A
12.21%
67769.00
18.45%
7727.00
2.10%
0.00
3508.00
0.87%
57164.00
51.7
14.16%
83157.00
20.59%
9172.00
2.27%
0.00
18629.00
4.32%
52585.00
44.6
12.21%
67749.00
15.73%
4794.00
1.11%
12882.00
10268.00
2.51%
51805.00
46.3
12.68%
72597.00
17.78%
5085.00
1.25%
16889.00
1069.00
0.27%
62021.00
31350.00
7.55%
108717.00
19376.00
3.95%
97429.00
14670.23
2.52%
89389.00
15.57%
81115.00
20.37%
6026.00
1.51%
17509.00
26.18%
161784.00
38.97%
12731.00
3.07%
15286.00
19.85%
168161.00
34.26%
11119.00
2.27%
16672.00
15.35%
145000.00
24.90%
11359.86
1.95%
16707.35
14670.23
2.50%
89389.00
55.71
15.26%
145000.00
24.76%
11359.86
1.94%
16707.35
18553.22
2.52%
94381.48
46.77
12.81%
146685.30
19.92%
14296.62
1.94%
17183.98
11599.96
1.52%
97793.17
46.77
12.81%
151987.68
19.92%
14812.26
1.94%
17805.15
12001.50
1.52%
101178.41
46.77
12.81%
157248.92
19.92%
15325.12
1.94%
18421.50
12385.38
1.52%
104414.67
46.77
12.81%
162278.64
19.92%
15815.30
1.94%
19010.72
12740.69
1.52%
107410.08
46.77
12.81%
166934.03
19.92%
16269.00
1.94%
19556.09
13051.05
1.52%
110026.60
46.77
12.81%
171000.57
19.92%
16665.32
1.94%
20032.48
13315.90
1.52%
112259.37
46.77
12.81%
174470.68
19.92%
17003.51
1.94%
20439.00
13545.49
1.52%
114194.91
46.77
12.81%
177478.85
19.92%
17296.68
1.94%
20791.41
13545.49
1.50%
114194.91
46.21
12.66%
177478.85
19.68%
17296.68
1.92%
20791.41
0.00%
5328.00
1.45%
157236.00
42.81%
0.00%
6172.00
1.53%
159173.00
39.42%
2.99%
7452.00
1.73%
164091.00
38.09%
4.14%
4748.00
1.16%
161392.00
39.52%
4.40%
6194.00
1.56%
173934.00
43.68%
3.68%
16628.00
4.00%
346496.00
83.45%
3.40%
18588.00
3.79%
331345.00
67.51%
2.87%
2.85%
2.33%
2.33%
2.33%
2.33%
18145.67
18145.67
24553.75
24288.35
25305.10
26403.78
3.12%
3.10%
3.33%
3.18%
3.20%
3.24%
295272.11
295272.11
315654.35
318286.57
329480.55
340308.48
50.70% 5.29059E-08 4.52622E-08 4.17035E-08 4.05905E-08 3.97681E-08
2.33%
2.33%
2.33%
26900.59
27632.28
28231.87
3.21%
3.22%
3.22%
349810.49
358408.31
365720.33
3.8288E-08 3.74811E-08 3.67863E-08
2.33%
28665.86
3.22%
371973.20
3.60963E-08
2.30%
28665.86
3.18%
371973.20
3.52307E-08
11261
12418
7689
7106
1509
4294
5382
10112.0
10477.0
13550.0
13597.0
56,294
61,954
60,923
59,461
213530
221127
225014
220853
0.153265613 0.153426299 0.141435364 0.145592866
3411.0
58,976
232910
0.592408064
3606.0
97,880
444376
0.9059356
7455
99,122
430467
0.535563
33845.00
35358.00
39434.00
39925.00
41.4
37.5
39.1
43
9.21%
8.76%
9.15%
9.78%
25170.00
25176.00
22158.00
22388.00
6.85%
6.23%
5.14%
5.48%
1681.00
2895.00
413.00
3062.00
0.46%
0.72%
0.10%
0.75%
1859.00
2420.00
4963.00
187.00
0.51%
0.60%
1.15%
0.05%
16978.00
23652.00
11298.00
5724.00
4.62%
5.86%
2.62%
1.40%
79533.00
89501.00
78266.00
71286.00
0.216535937 0.221645208 0.181697884 0.174546897
35060.00
73439.00
59708.00
8.80%
26187.00
6.58%
0.00
N/A
180.00
0.05%
0.00
N/A
61427.00
0.617028116
17.69%
58113.00
14.00%
0.00
N/A
2191.00
0.53%
0.00
N/A
133743.00
1.237868256
12.16%
59271.00
12.08%
0.00
N/A
1961.00
0.40%
0.00
N/A
120940.00
0.653447158
10.00%
9.94%
6.84%
58238.30
58238.30 $28,356.44
10.00%
10%
3.85%
0.00
$2,284.02
$2,872.47
N/A
0.39%
0.39%
1272.83
1272.83 $30,000.00
0.36%
0.22%
4.07%
0.00
$0.00 $23,200.73
N/A
N/A
3.15%
117749.43
120033.44
134808.36
0.620690994 0.204959355 0.183031483
% of Accounts Receivable Quick
85%
% of Inventory Quick
65%
99122.0
99107 266343.7778
5815
17000
17757
0
228001
0
-5829.8 -77763.88889
-81709.96
99,107
266,344
202,391
394379.2727 561615.8838 518045.495
0.522422297 0.454786999 0.274789717
58238.30
58238.30
$50,378.72
202391.1449
18515
9349
-87901.80829
142,353
460639.2118
0.186531741
142352.6448
19272
9672
-94333.86444
76,963
406443.5862
0.097474289
76963.03299
20029
9982
-48566.26819
58,408
398716.1992
0.071681071
58407.72071
20787
10268
-25948.92834
63,513
413323.9165
0.075773306
63513.42763
21544
10518
-28004.87842
67,571
425978.9549
0.078696619
67570.64323
22301
10732
-26648.77267
73,955
439675.0711
0.084418789
73954.73791
23059
10917
-28757.31534
79,173
451145.8451
0.08884319
79172.6
23816
11050
-30829.3
83,209
455182.4056
0.09224647
$52,199.81
$54,006.77
$55,734.21
$57,333.10
$58,729.74
$59,921.54
$60,954.69
$60,954.69
6.84%
6.84%
6.84%
6.84%
6.84%
6.84%
$29,381.47 $30,398.55 $31,370.87 $32,270.82 $33,056.94 $33,727.77
3.85%
3.85%
3.85%
3.85%
3.85%
3.85%
$2,976.30
$3,079.33
$3,177.83
$3,268.99
$3,348.63
$3,416.58
0.39%
0.39%
0.39%
0.39%
0.39%
0.39%
$30,000.00 $30,000.00 $30,000.00 $30,000.00 $30,000.00 $30,000.00
3.93%
3.80%
3.68%
3.58%
3.49%
3.42%
$24,039.38 $24,871.54 $25,667.07 $26,403.40 $27,046.59 $27,595.45
3.15%
3.15%
3.15%
3.15%
3.15%
3.15%
138596.97
142356.19
145949.98
149276.32
152181.90
154661.34
0.18161049 0.180295237 0.179117601 0.178090844 0.177239708 0.176544779
6.84%
$34,309.29
3.85%
$3,475.49
0.39%
$30,000.00
3.37%
$28,071.24
3.15%
156810.71
0.175964349
6.76%
$34,309.29
3.85%
$3,475.49
0.39%
$30,000.00
3.33%
$28,071.24
3.15%
156810.71
0.173841747
Quick Ratio
1.430044133 1.186014123 1.371771906 1.423705917
1.733954124
1.71163388
1.748762196
1.570291114 1.540411358 1.439991672 1.396250907 1.406436553 1.415683387 1.423845301 1.430682852 1.436314416
1.441052194
1.441052194
Current Ratio
1.976990683 1.778449403 2.096580891 2.264006958
2.831556156
2.59075989
2.739746982
2.507630952 2.459915342 2.341504244 2.296490129
2.372116019
2.372116019
2.31448001 2.331678854 2.343375697 2.355130987 2.364652589
UOIG 15
11/22/11
Appendix 5 – Discounted Cash Flows Analysis Assumptions
Discounted Free Cash Flow Assumptions
Tax Rate
Risk Free Rate
Beta
Market Risk Premium
26.58% Terminal Growth Rate
2.09% Terminal Value
2.50 PV of Terminal Value
7.00% Sum of PV Free Cash Flows
Considerations
3.00%
394,791
251,485
228,797
% Equity
26.02% Firm Value
480,282
% Debt
73.98% Total Debt
393,355
Cost of Debt
7.13% Cash & Cash Equivalents
31,350
CAPM
19.59% Market Capitalization
86,927
WACC
9.0% Fully Diluted Shares
10,539
Implied Price
Current Price
Overvalued
8.25
13.13
(37.18%)
UOIG 16
11/22/11
Appendix 6 –Sensitivity Analysis
Implied Price
Undervalued/(Overvalued)
Adjusted Beta
Terminal Growth Rate
Terminal Growth Rate
8
2.0%
2.5%
3.0%
3.5%
4.0%
2.30
6.27
8.16
10.40
13.07
16.32
2.40
5.42
7.20
9.29
11.77
14.77
2.50
4.63
6.30
8.25
10.56
13.33
2.60
3.87
5.44
7.27
9.42
11.99
2.70
3.14
4.63
6.34
8.35
10.74
UOIG 17
11/22/11
Appendix 8 – Sources
IBIS World
S&P Net Advantage
Factset
Google Finance
Yahoo Finance
Ducommun Investor Relations page
Ducommun Q3 conference call
Factset
St. Louis Post-Dispatch
LMI Industries “About LMI” page
UOIG 18
11/22/11
Appendix 9 – Projected Total Revenue vs. Gross Profit
Total Revenue vs. Gross Profit
2011-2020
1000000
900000
800000
700000
600000
500000
Total Revenue
Gross Profit
400000
300000
200000
100000
0
UOIG 19
11/22/11
Appendix 10 – Cap Exp Projections
25,000.00
22,500.00
20,000.00
Arbitrary upper line
Arbitrary lower line
TOP LINE PROJECTIONS
17,500.00
BOTTOM LINE PROJECTIONS
Linear (Arbitrary upper line)
15,000.00
Linear (Arbitrary lower line)
12,500.00
y = 480.77x - 952173
10,000.00
7,500.00
5,000.00
y = 516.67x - 1E+06
2,500.00
0.00
1985
1990
1995
2000
2005
2010
2015
2020
2025
UOIG 20
11/22/11
Appendix 11 – Historic Cash and Short Term Investments
35
Cash & ST Investments
30
25
Millions
20
15
10
5
0
UOIG 21
11/22/11
Appendix 12 – Comparison of Total Revenue Growth to Gross Income, EBIT, EBITDA, Net Income
500,000.00
Revenue / Gross Income /
EBIT / EBITDA / Net Income
450,000.00
400,000.00
350,000.00
Sales / Revenue
gross income
300,000.00
EBIT
EBITDA
250,000.00
Net Income
200,000.00
150,000.00
100,000.00
50,000.00
0.00
-50,000.00
UOIG 22
11/22/11
Appendix 13 – Number of Ducommun Employees and Acquisition Years
2500
2500
2000
2000
1500
1500
1000
1000
Employees
Acquisitions
500
0
500
0
UOIG 23

Ducommun Inc. - University of Oregon Investment Group

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