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Rating Action:

Moody's changes Ducommun outlook to negative; affirms B2 CFR and assigns B2 rating to new revolver and new term loan A

20 Dec 2019

New York, December 20, 2019 -- Moody's Investors Service, ("Moody's") affirmed its ratings for Ducommun Incorporated ("Ducommun"), including the company's B2 Corporate Family Rating (CFR) and B2-PD Probability of Default Rating. Concurrently, Moody's assigned B2 ratings to the company's new senior secured revolving credit facility and new senior secured term loan A, and also affirmed the B2 rating on the senior secured term loan B. Ratings on the existing revolving credit facility will be withdrawn at payoff. Moody's speculative grade liquidity (SGL) rating has been downgraded to SGL-3, from SGL-2. The rating outlook has been changed to negative from stable.

The outlook revision reflects Ducommun's exposure to the 737 MAX (more than 15% of sales) and the recent announcements by The Boeing Company and Spirit AeroSytems, Inc. that they will be halting production of the platform in January 2020. Moody's expects the production halt to result in earnings and cash flow headwinds that will diminish Ducommun's liquidity and financial flexibility, potentially through the first half of 2020. The negative outlook also reflects lingering uncertainty as to the timing of the ungrounding of the MAX by various regulators, as well as the risk that production on the important program is not resumed by Boeing and Spirit in relatively short order.

RATINGS RATIONALE

The B2 CFR balances Ducommun's small size, exposure to cyclical end-markets, and comparatively low margins against moderate levels of financial leverage, favorable near-term growth prospects, and a relatively well-positioned set of credit metrics. Moody's recognizes Ducommun's content on a number of key commercial aerospace and defense platforms, as well as a favorable operating environment, which combined should continue to support mid-single-digit topline growth over the next few years, particularly if the MAX-related issues are resolved. Moody's also recognizes Ducommun's sales and earnings growth over the last few quarters, along with a relatively moderate level of financial leverage (Moody's-adjusted debt-to-EBITDA of 3.8x as of December 2019) and historically healthy levels of cash generation. Even so, the rating agency expects cash flow to be weaker in 2020 as a result of the extended MAX grounding and end-customer production shut-down. Moody's also considers the likelihood of Ducommun continuing to make bolt-on acquisitions that could result in periodic draws on its revolving credit facility, and temporary associated increases in execution risk and financial leverage. Furthermore, Ducommun's comparatively low levels of profitability (EBITDA margins around 12%) speak to a highly competitive operating environment and a product portfolio that includes some low-value work, notwithstanding ongoing efforts to move up the value chain. The company's dependence on cyclical aerospace OEM markets (50% of sales) that are prone to downturns and vulnerable to pricing pressure from large-sized customers is an additional tempering rating consideration.

The SGL-3 speculative grade liquidity rating denotes Moody's expectation of an adequate liquidity profile over the next 12 months. Moody's expects free cash flow to approximate the mid-single-digit range as a percent of sales for the full year of 2019, but lower cash flow is expected to be generated in 2020 as a result of reduced production rates on the MAX program. External liquidity is provided by a $100 million revolving credit facility that expires in 2024. Moody's anticipates periodic usage under the facility to support the funding of bolt-on acquisitions, and potentially to support operations during the first half of 2020 when the impact of the MAX production halt will likely be most pronounced. The revolver contains a maintenance-based maximum total net leverage ratio of 4.75x, and Moody's expects the company to maintain adequate cushions relative to the covenant.

The negative outlook reflects heightened uncertainty and elevated financial and operational risk related to Ducommun's exposure to the 737 MAX program (more than 15% of sales) following the recent announcements by Boeing and Spirit that production will be halted in January 2020, and the anticipated earnings and cash flow headwinds that will ensue to the detriment of Ducommun's liquidity profile. The negative outlook also reflects uncertainty as to the timing of the ungrounding of the MAX, as well the risk of Boeing and Spirit resuming production later than expected.

Given Ducommun's comparatively modest size, Moody's expects the company to maintain credit metrics that are stronger than levels typically associated with companies at the same rating level. The ratings could be upgraded on expectations of a conservative financial policy with Moody's-adjusted debt-to-EBITDA expected to remain below 3.5x. Maintenance of a strong liquidity profile would be a prerequisite to an upgrade, with free cash flow-to-debt expected to remain in the high single-digits as a percent of sales coupled with substantial availability on the company's revolver. Strong operating performance across structures and electronics, robust levels of backlog and a larger scale with less reliance on OEMs and greater exposure to aftermarkets would also be supportive of an upgrade.

The ratings could be downgraded if Moody's-adjusted debt-to-EBITDA was expected to remain above 5.5x, or if the suspension of MAX production continues into the second half of 2020. A weakening liquidity profile involving free cash flow-to-debt consistently in the low single-digit range as a percent of sales and/or increased reliance on revolver borrowings, or expectations of non-compliance with financial covenants, would create downward ratings pressure. A deterioration in operating performance that led to a weakening of margins, the loss of a large customer, or unanticipated leveraging transactions either in the form of acquisitions or shareholder distributions could also result in a downgrade of ratings.

The following is a summary of today's rating actions:

Issuer: Ducommun Incorporated

Corporate Family Rating, affirmed B2

Probability of Default Rating, affirmed B2-PD

$100 million senior secured revolving credit facility due 2024, assign B2 (LGD3)

$140 million senior secured term loan A due 2024, assign B2 (LGD3)

$240 million senior secured term loan B due 2025, affirmed B2 (LGD3)

Speculative Grade Liquidity Rating, downgraded to SGL-3 from SGL-2

Outlook, Changed to Negative from Stable

Ducommun Incorporated (NYSE: DCO), headquartered in Santa Ana, California, is a provider of engineering and manufacturing services to aerospace, defense and industrial markets. The company operates two segments: Electronic Systems (50% of sales) and Structural Systems (50% of sales). Electronic Systems designs, engineers and manufactures electronic and electromechanical products such as cable assemblies and interconnect systems, printed circuit board assemblies and lighting diversion systems. Structural Systems designs, engineers and manufactures structural components and structural assemblies such as winglets, engine components and fuselage structural panels. Revenues for the twelve months ended September 2019 were almost $700 million.

The principal methodology used in these ratings was Aerospace and Defense Industry published in March 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Eoin Roche
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Russell Solomon
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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