Ducommun Incorporated: INC / DE / Discussion and analysis by management of the financial position and operating results (Form 10-Q)

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 months ended April 3, 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 the Centers 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.
In March 2020, the U.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 utilized 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 beginning March 27, 2020 to December 31, 2020. One half of the deferred
amount is required to be paid by December 31, 2021, with the remaining 50% to be
paid by December 31, 2022. As of April 3, 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 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
reminder of 2021 and beyond.
First quarter 2021 recap:
•Revenues of $157.2 million
•Net income of $6.7 million, or $0.55 per diluted share
•Adjusted EBITDA of $21.1 million, or 13.5% of revenues
Non-GAAP Financial Measures
Adjusted earnings before interest, taxes, depreciation, amortization,
stock-based compensation expense, and Guaymas fire related expenses ("Adjusted
EBITDA") was $21.1 million and $23.2 million for the three months ended April 3,
2021 and March 28, 2020, respectively.
When viewed with our financial results prepared in accordance with accounting
principles generally accepted in the United States of America ("GAAP") and
accompanying reconciliations, we believe Adjusted EBITDA provides additional
useful information to clarify and enhance 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
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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.
Because 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.
However, in spite of the above limitations, we believe that Adjusted EBITDA is
useful to an investor in evaluating our results of operations because 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; and
•Guaymas fire related expenses may be useful to our investors in evaluating our
core operating performance.
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Table of Contents The reconciliations between net income and Adjusted EBITDA and the presentation of Adjusted EBITDA as a percentage of net sales were as follows:

                                         (Dollars in thousands)
                                           Three Months Ended
                                        April 3,         March 28,
                                          2021             2020
Net income                           $     6,695        $  7,930
Interest expense                           2,806           4,246

Income tax expense                         1,109           1,450
Depreciation                               3,423           3,436
Amortization                               3,499           3,900
Stock-based compensation expense           3,133           2,279

Guaymas fire related expenses                475               -

Adjusted EBITDA                      $    21,140        $ 23,241
% of net revenues                           13.5   %        13.4  %



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Results of Operations
First Quarter of 2021 Compared to First 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)
                                                                                                  Three Months Ended
                                                                 April 3,                     %                   March 28,                   %
                                                                   2021                of Net  Revenues              2020              of Net  Revenues
Net Revenues                                                 $   157,151                          100.0  %       $ 173,475                        100.0  %
Cost of Sales                                                    124,051                           78.9  %         136,671                         78.8  %
Gross Profit                                                      33,100                           21.1  %          36,804                         21.2  %
Selling, General and Administrative Expenses                      22,490                           14.3  %          23,178                         13.4  %

Operating Income                                                  10,610                            6.8  %          13,626                          7.8  %
Interest Expense                                                  (2,806)                          (1.8) %          (4,246)                        (2.4) %

Income Before Taxes                                                7,804                            5.0  %           9,380                          5.4  %
Income Tax Expense                                                 1,109                                nm           1,450                              nm
Net Income                                                   $     6,695                            4.3  %       $   7,930                          4.6  %

Effective Tax Rate                                                  14.2    %                           nm            15.5  %                           nm
Diluted Earnings Per Share                                   $      0.55                                nm       $    0.67                              nm


nm = not meaningful
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Net Revenues by End-Use Market and Operating Segment
Net revenues by end-use market and operating segment during the fiscal three
months ended April 3, 2021 and March 28, 2020, respectively, were as follows:
                                                                                                     Three Months Ended
                                                                                       (Dollars in thousands)                        % of Net Revenues
                                                                                     April 3,             March 28,           April 3,             March 28,
                                                                Change                 2021                  2020               2021                 2020
Consolidated Ducommun
Military and space                                           $  12,228          $    114,127             $ 101,899                72.6  %               58.7  %
Commercial aerospace                                           (25,205)               35,377                60,582                22.5  %               34.9  %
Industrial                                                      (3,347)                7,647                10,994                 4.9  %                6.4  %
Total                                                        $ (16,324)         $    157,151             $ 173,475               100.0  %              100.0  %

Electronic Systems
Military and space                                           $   7,416          $     81,733             $  74,317                82.5  %               75.7  %
Commercial aerospace                                            (3,085)                9,724                12,809                 9.8  %               13.1  %
Industrial                                                      (3,347)                7,647                10,994                 7.7  %               11.2  %
Total                                                        $     984          $     99,104             $  98,120               100.0  %              100.0  %

Structural Systems
Military and space                                           $   4,812          $     32,394             $  27,582                55.8  %               36.6  %
Commercial aerospace                                           (22,120)               25,653                47,773                44.2  %               63.4  %
Total                                                        $ (17,308)         $     58,047             $  75,355               100.0  %              100.0  %


Net revenues for the three months ended April 3, 2021 were $157.2 million,
compared to $173.5 million for the three months ended March 28, 2020. The
year-over-year decrease was primarily due to the following:
•$25.2 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
•$12.2 million higher revenues in our military and space end-use markets due to
higher build rates on military fixed-wing aircraft platforms and other military
and space platforms.
Net Revenues by Major Customers
A significant portion of our net revenues are from our top ten customers as
follows:
                                                          Three Months Ended
                                                       April 3,           March 28,
                                                         2021               2020
          Boeing Company                                       7.4  %         8.4  %
          Lockheed Martin Corporation                          5.3  %       

4.1%

          Northrop Grumman Corporation                         6.1  %       

5.6%

          Raytheon Technologies Corporation                   22.7  %       

18.4%

          Spirit AeroSystems Holdings, Inc.                    2.7  %       

5.6%

          Total top ten customers (1)                         58.5  %       

56.7%

(1) Includes The Boeing Company (“Boeing”), Lockheed Martin Corporation (“Lockheed”), Northrop Grumman Corporation (“Northrop”), Raytheon Technologies Corporation (“Raytheon”) and Spirit AeroSystems Holdings, Inc. (“Spirit”) ).

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Table of Contents Boeing, Lockheed, Northrop, Raytheon and Spirit accounted for the following percentages of total accounts receivable:

               April 3,      December 31,
                 2021            2020
Boeing            6.1  %            4.8  %
Lockheed          1.7  %            2.4  %
Northrop          9.7  %           12.3  %
Raytheon         12.6  %           15.0  %
Spirit            0.9  %            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 was essentially flat year-over-year with the
three months ended April 3, 2021 of 21.1%, compared to the three months ended
March 28, 2020 of 21.2% primarily due to unfavorable manufacturing volume,
partially offset by favorable product mix and lower compensation and benefit
costs.
Selling, General and Administrative ("SG&A") Expenses
SG&A expenses decreased $0.7 million year-over-year in the three months ended
April 3, 2021 compared to the three months ended March 28, 2020 primarily due to
lower professional services fees of $0.4 million and lower compensation and
benefit costs of $0.3 million.
Interest Expense
Interest expense decreased in the three months ended April 3, 2021 compared to
the three months ended March 28, 2020 due to lower interest rates and a lower
outstanding debt balance.
Income Tax Expense
We recorded income tax expense of $1.1 million for the three months ended
April 3, 2021, compared to $1.5 million for the three months ended March 28,
2020. The decrease in income tax expense for the first quarter of 2021 compared
to the first quarter of 2020 was primarily due to lower pre-tax income for the
first quarter of 2021 compared to the first quarter of 2020 and higher discrete
tax benefits recognized in the first quarter of 2021 for net tax windfalls
related to stock-based compensation.
We evaluated the amendments in ASU 2019-12 for the three months ended April 3,
2021 and determined they do not have an impact on our income taxes.
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 $4.1 million as of both
April 3, 2021 and December 31, 2020. If recognized, $2.4 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 April 3,
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.
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
authority 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 April 3, 2021 were
$6.7 million, or $0.55 per diluted share, compared to $7.9 million, or $0.67 per
diluted share, for the three months ended March 28, 2020. The decrease in net
income for the three months ended April 3, 2021 compared to the three months
ended March 28, 2020 was due to $3.7 million of lower gross profit as a result
of lower revenues, partially offset by lower interest expense of $1.4 million.
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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 months
ended April 3, 2021 and March 28, 2020:
                                                                                                     Three Months Ended
                                                              %                   (Dollars in thousands)                            % of Net Revenues
                                                                                April 3,             March 28,                April 3,                 March 28,
                                                           Change                 2021                  2020                    2021                     2020
Net Revenues
Electronic Systems                                            1.0  %       $     99,104             $  98,120                         63.1  %               56.6  %
Structural Systems                                          (23.0) %             58,047                75,355                         36.9  %               43.4  %
Total Net Revenues                                           (9.4) %       $    157,151             $ 173,475                        100.0  %              100.0  %
Segment Operating Income
Electronic Systems                                                         $     12,491             $  15,122                         12.6  %               15.4  %
Structural Systems                                                                5,128                 5,390                          8.8  %                7.2  %
                                                                                 17,619                20,512
Corporate General and Administrative Expenses (1)                                (7,009)               (6,886)                        (4.5) %               (4.0) %
Total Operating Income                                                     $     10,610             $  13,626                          6.8  %                7.8  %
Adjusted EBITDA
Electronic Systems
Operating Income                                                           $     12,491             $  15,122

Depreciation and Amortization                                                     3,423                 3,575

                                                                                 15,914                18,697                         16.1  %               19.1  %
Structural Systems
Operating Income                                                                  5,128                 5,390

Depreciation and Amortization                                                     3,440                 3,689

Guaymas fire related expenses                                                       475                     -

                                                                                  9,043                 9,079                         15.6  %               12.0  %
Corporate General and Administrative Expenses (1)
Operating Loss                                                                   (7,009)               (6,886)

Depreciation and Amortization                                                        59                    72
Stock-Based Compensation Expense                                                  3,133                 2,279

                                                                                 (3,817)               (4,535)
Adjusted EBITDA                                                            $     21,140             $  23,241                         13.5  %               13.4  %

Capital Expenditures
Electronic Systems                                                         $        624             $     815
Structural Systems                                                                1,989                 2,137
Corporate Administration                                                              -                     -
Total Capital Expenditures                                                 $      2,613             $   2,952


(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 April 3, 2021 compared
to the three months ended March 28, 2020 increased $1.0 million primarily due to
the following:
•$7.4 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
•$3.1 million lower revenues in our commercial aerospace end-use markets due to
lower build rates on large aircraft platforms, regional and business aircraft
platforms, and other commercial aerospace platforms.
Electronic Systems segment operating income in the three months ended April 3,
2021 compared to the three months ended March 28, 2020 decreased $2.6 million
primarily due to unfavorable manufacturing volume and unfavorable product mix,
partially offset by lower compensation and benefit costs.
Structural Systems
Structural Systems net revenues in the three months ended April 3, 2021 compared
to the three months ended March 28, 2020 decreased $17.3 million due to the
following:
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•$22.1 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
•$4.8 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
April 3, 2021 compared to the three months ended March 28, 2020 decreased $0.3
million primarily due to unfavorable manufacturing volume, partially offset by
favorable product mix and lower compensation and benefit costs.
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 April 3, 2021
compared to the three months ended March 28, 2020.
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 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. $555.0
million of total backlog is expected to be delivered over the next 12 months.
The following table summarizes our backlog as of April 3, 2021 and December 31,
2020:

                                      (Dollars in thousands)
                                          April 3,       December 31,
                             Change         2021             2020
Consolidated Ducommun
Military and space         $  1,028      $ 516,424      $     515,396
Commercial aerospace         (1,926)       266,400            268,326
Industrial                    3,290         27,309             24,019
Total                      $  2,392      $ 810,133      $     807,741
Electronic Systems
Military and space         $ (4,251)     $ 385,626      $     389,877
Commercial aerospace         (2,620)        54,099             56,719
Industrial                    3,290         27,309             24,019
Total                      $ (3,581)     $ 467,034      $     470,615
Structural Systems
Military and space         $  5,279      $ 130,798      $     125,519
Commercial aerospace            694        212,301            211,607
Total                      $  5,973      $ 343,099      $     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)
                                                April 3,             December 31,
                                                  2021                   2020
Total debt, including long-term portion      $    313.0             $     

320.6

Weighted-average interest rate on debt             3.16   %                3.59  %
Term Loans interest rate                           3.23   %                3.81  %

Cash and cash equivalents                    $     17.0             $      56.5
Unused Revolving Credit Facility             $     79.8             $      

74.8


In December 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 in November 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 on
December 20, 2024, replacing the $100.0 million 2018 Revolving Credit Facility
that would have matured on November 21, 2023. The 2019 Term Loan is a $140.0
million senior secured term loan that will mature on December 20, 2024. We also
have an existing $240.0 million senior secured term loan that was entered into
in November 2018 that will mature on November 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 months
ended April 3, 2021 of $1.8 million. 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 of April 3, 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.
We drew down $50.0 million on the 2019 Revolving Credit Facility during the
first quarter of 2020 to hold as cash on hand, $25.0 million of which was repaid
during the fourth quarter of 2020. We made net voluntary prepayments of $5.0
million on the 2019 Revolving Credit Facility during the first quarter of 2021.
In November 2018, we completed credit facilities to replace the then existing
credit facilities. The November 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.
In October 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 our Guaymas performance center that
was severely damaged by fire in June 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.
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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 three months ended April 3, 2021
was $23.4 million, compared to $12.0 million for the three months ended
March 28, 2020. The higher cash used in operating activities during the first
three months of 2021 was due to higher contract assets, lower accrued and other
liabilities, and higher inventories, partially offset by higher accounts
payable.
Net cash used in investing activities was $4.5 million for the three months
ended April 3, 2021, compared to $3.7 million in the three months ended
March 28, 2020. The higher net cash used during the first three months of 2021
compared to the prior year period was due to higher purchases of property and
equipment.
Net cash used in financing activities was $11.6 million for the three months
ended April 3, 2021, compared to net cash provided by financing activities of
$41.7 million for the three months ended March 28, 2020. The higher net cash
used in financing activities during the first three months of 2021 was mainly
due to 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 in the 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 ended
April 3, 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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