DCO-Q2 2014 10-Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 _________________________________________________________
FORM 10-Q
 _________________________________________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 28, 2014
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number 1-8174
 _________________________________________________________
DUCOMMUN INCORPORATED
(Exact name of registrant as specified in its charter)
 _________________________________________________________
Delaware
 
95-0693330
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
23301 Wilmington Avenue, Carson, California
 
90745-6209
(Address of principal executive offices)
 
(Zip code)
Registrant’s telephone number, including area code: (310) 513-7200

(Former name, former address and former fiscal year, if changed since last report)
 _________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x  No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 
¨
Accelerated filer
 
x
 
 
 
 
Non-accelerated filer
 
¨
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
As of July 14, 2014, the registrant had 10,897,147 shares of common stock outstanding.

Table of Contents

DUCOMMUN INCORPORATED AND SUBSIDIARIES
 
 
 
Page
Part I. FINANCIAL INFORMATION
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
PART II. OTHER INFORMATION
 
 
 
 
 
Item 1.
 
 
 
 
 
Item 1A.
 
 
 
 
 
Item 4.
 
 
 
 
 
Item 6.
 
 
 


2
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Part I. FINANCIAL INFORMATION

Ducommun Incorporated and Subsidiaries
Condensed Consolidated Income Statements
(Unaudited)
(In thousands, except per share amounts)

 
 
Three Months Ended
 
Six Months Ended
 
 
June 28,
2014
 
June 29,
2013
 
June 28,
2014
 
June 29,
2013
Net Revenues
 
$
186,516

 
$
191,472

 
$
366,269

 
$
367,387

Cost of Sales
 
149,073

 
154,156

 
293,756

 
297,218

Gross Profit
 
37,443

 
37,316

 
72,513

 
70,169

Selling, General and Administrative Expenses
 
20,868

 
22,273

 
41,955

 
44,824

Operating Income
 
16,575

 
15,043

 
30,558

 
25,345

Interest Expense
 
6,994

 
7,442

 
14,119

 
15,265

Income Before Taxes
 
9,581

 
7,601

 
16,439

 
10,080

Income Tax Expense
 
3,109

 
2,097

 
5,338

 
869

Net Income
 
$
6,472

 
$
5,504

 
$
11,101

 
$
9,211

Earnings Per Share
 
 
 
 
 
 
 
 
Basic earnings per share
 
$
0.60

 
$
0.52

 
$
1.02

 
$
0.87

Diluted earnings per share
 
$
0.59

 
$
0.51

 
$
1.00

 
$
0.86

Weighted-Average Number of Common Shares Outstanding
 
 
 
 
 
 
 
 
Basic
 
10,871

 
10,648

 
10,864

 
10,624

Diluted
 
11,045

 
10,790

 
11,122

 
10,731

See accompanying notes to condensed consolidated financial statements.

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Ducommun Incorporated and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
(In thousands)
 
 
 
Three Months Ended
 
Six Months Ended
 
 
June 28,
2014
 
June 29,
2013
 
June 28,
2014
 
June 29,
2013
Net Income
 
$
6,472

 
$
5,504

 
$
11,101

 
$
9,211

Other Comprehensive Loss
 
 
 
 
 
 
 
 
Amortization of actuarial loss and prior service costs, net of tax benefit of approximately $48 and $102 for the three months ended June 28, 2014 and June 29, 2013, respectively, and approximately $84 and $204 for the six months ended June 28, 2014 and June 29, 2013, respectively
 
(57
)
 
(172
)
 
(126
)
 
(344
)
Other Comprehensive Loss
 
(57
)
 
(172
)
 
(126
)
 
(344
)
Comprehensive Income
 
$
6,415

 
$
5,332

 
$
10,975

 
$
8,867

See accompanying notes to condensed consolidated financial statements.

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Ducommun Incorporated and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except share and per share data)

 
 
June 28,
 
December 31,
 
 
2014
 
2013
Assets
 
 
 
 
Current Assets
 
 
 
 
Cash and cash equivalents
 
$
43,751

 
$
48,814

Accounts receivable, net of allowance for doubtful accounts of $254 and $489 at June 28, 2014 and December 31, 2013, respectively
 
105,209

 
91,909

Inventories
 
142,201

 
140,507

Production cost of contracts
 
11,023

 
11,599

Deferred income taxes
 
11,513

 
10,850

Other current assets
 
20,602

 
27,085

Total Current Assets
 
334,299

 
330,764

Property and Equipment, Net
 
94,070

 
96,090

Goodwill
 
161,940

 
161,940

Intangibles, Net
 
160,285

 
165,465

Other Assets
 
8,660

 
9,940

Total Assets
 
$
759,254

 
$
764,199

Liabilities and Shareholders’ Equity
 
 
 
 
Current Liabilities
 
 
 
 
Current portion of long-term debt
 
$
26

 
$
25

Accounts payable
 
53,749

 
58,111

Accrued liabilities
 
47,973

 
45,453

Total Current Liabilities
 
101,748

 
103,589

Long-Term Debt, Less Current Portion
 
317,664

 
332,677

Deferred Income Taxes
 
69,747

 
68,489

Other Long-Term Liabilities
 
17,456

 
19,750

Total Liabilities
 
506,615

 
524,505

Commitments and Contingencies (Notes 8, 10)
 

 

Shareholders’ Equity
 
 
 
 
Common stock - $0.01 par value; 35,000,000 shares authorized; 10,892,133 and 10,960,054 issued at June 28, 2014 and December 31, 2013, respectively
 
109

 
110

Treasury stock, at cost; zero and 143,300 shares at June 28, 2014 and December 31, 2013, respectively
 
—

 
(1,924
)
Additional paid-in capital
 
70,337

 
70,542

Retained earnings
 
185,929

 
174,828

Accumulated other comprehensive loss
 
(3,736
)
 
(3,862
)
Total Shareholders’ Equity
 
252,639

 
239,694

Total Liabilities and Shareholders’ Equity
 
$
759,254

 
$
764,199

See accompanying notes to condensed consolidated financial statements.

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Ducommun Incorporated and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
 
 
 
Six Months Ended
 
 
June 28,
2014
 
June 29,
2013
Cash Flows from Operating Activities
 
 
 
 
Net Income
 
$
11,101

 
$
9,211

Adjustments to Reconcile Net Income to
 
 
 
 
Net Cash Provided by Operating Activities:
 
 
 
 
Depreciation and amortization
 
15,125

 
14,173

Stock-based compensation expense
 
1,288

 
805

Deferred income taxes
 
595

 
1,615

Recovery of doubtful accounts
 
(235
)
 
(34
)
Other
 
1,111

 
809

Changes in Assets and Liabilities:
 
 
 
 
Accounts receivable
 
(13,066
)
 
(8,243
)
Inventories
 
(1,694
)
 
(588
)
Production cost of contracts
 
(1,734
)
 
(1,843
)
Other assets
 
6,563

 
(3,473
)
Accounts payable
 
(4,363
)
 
(1,714
)
Accrued and other liabilities
 
835

 
(3,775
)
Net Cash Provided by Operating Activities
 
15,526

 
6,943

Cash Flows from Investing Activities
 
 
 
 
Purchases of property and equipment
 
(5,997
)
 
(5,253
)
Proceeds from sale of assets
 
51

 
111

Net Cash Used in Investing Activities
 
(5,946
)
 
(5,142
)
Cash Flows from Financing Activities
 
 
 
 
Repayment of term loan and other debt
 
(15,012
)
 
(15,012
)
Debt issue cost paid
 
—

 
(181
)
Net proceeds from issuance of common stock under stock plans
 
369

 
365

Net Cash Used in Financing Activities
 
(14,643
)
 
(14,828
)
Net Decrease in Cash and Cash Equivalents
 
(5,063
)
 
(13,027
)
Cash and Cash Equivalents at Beginning of Period
 
48,814

 
46,537

Cash and Cash Equivalents at End of Period
 
$
43,751

 
$
33,510

Supplemental Disclosures of Cash Flow Information
 
 
 
 
Interest paid
 
$
1,440

 
$
1,951

Taxes paid
 
$
3,249

 
$
1,743

Non-cash activities:
 
 
 
 
     Purchases of property and equipment not paid
 
$
722

 
$
—

See accompanying notes to condensed consolidated financial statements.

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Ducommun Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1. Summary of Significant Accounting Policies
Basis of Presentation
The unaudited condensed consolidated financial statements include the accounts of Ducommun Incorporated and its subsidiaries (“Ducommun,” the “Company,” “we,” “us” or “our”), after eliminating intercompany balances and transactions. The December 31, 2013 condensed consolidated balance sheet data was derived from audited financial statements, but does not contain all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”).
Our significant accounting policies were described in Part IV, Item 15(a)(1), “Note 1. Summary of Significant Accounting Policies” in our Annual Report on Form 10-K for the year ended December 31, 2013. We followed the same accounting policies for interim reporting. The financial information included in this Quarterly Report on Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2013.
In the opinion of management, all adjustments, consisting of recurring accruals, have been made that are necessary to fairly state our condensed consolidated financial position, statements of income, comprehensive income and cash flows in accordance with GAAP for the periods covered by this Quarterly Report on Form 10-Q. The results of operations for the three and six months ended June 28, 2014 are not necessarily indicative of the results to be expected for the full year ending December 31, 2014.
Our fiscal quarters end on the Saturday closest to the end of March, June and September for the first three fiscal quarters of each year, and ends on December 31 for our fourth fiscal quarter.
Certain reclassifications have been made to prior period amounts to conform to the current year’s presentation.
Use of Estimates
Certain amounts and disclosures included in the unaudited condensed consolidated financial statements required management to make estimates and judgments that affect the amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
Description of Business
We are a leading global provider of engineering and manufacturing services for high-performance products and high-cost-of failure applications used primarily in the aerospace, defense, industrial, natural resources, medical and other industries. Our subsidiaries are organized into two strategic businesses: Ducommun AeroStructures (“DAS”) and Ducommun LaBarge Technologies (“DLT”), each of which is a reportable operating segment. DAS designs, engineers and manufactures large, complex contoured aerospace structural components and assemblies and supplies composite and metal bonded structures and assemblies. DAS products are used on commercial aircraft, military fixed-wing aircraft and military and commercial rotary-wing aircraft. DLT designs, engineers and manufactures high-reliability products used in worldwide technology-driven markets including aerospace and defense, natural resources, industrial and medical and other end-use markets. DLT’s product offerings range from prototype development to complex assemblies. All reportable operating segments follow the same accounting principles.
Earnings Per Share
Basic earnings per share are computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding in each period. Diluted earnings per share are computed by dividing income available to common shareholders plus income associated with dilutive securities by the weighted-average number of common shares outstanding, plus any potential dilutive shares that could be issued if exercised or converted into common stock in each period.
The net earnings, weighted-average number of common shares outstanding used to compute earnings per share were as follows:
 

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(In thousands, except per share data)
Three Months Ended
 
(In thousands, except per share data)
Six Months Ended
 
 
June 28,
2014
 
June 29,
2013
 
June 28,
2014
 
June 29,
2013
Net earnings
 
$
6,472

 
$
5,504

 
$
11,101

 
$
9,211

Weighted-average number of common shares outstanding
 
 
 
 
 
 
 
 
Basic weighted-average common shares outstanding
 
10,871

 
10,648

 
10,864

 
10,624

Dilutive potential common shares
 
174

 
142

 
258

 
107

Diluted weighted-average common shares outstanding
 
11,045

 
10,790

 
11,122

 
10,731

Earnings per share
 
 
 
 
 
 
 
 
Basic
 
$
0.60

 
$
0.52

 
$
1.02

 
$
0.87

Diluted
 
$
0.59

 
$
0.51

 
$
1.00

 
$
0.86

Potentially dilutive stock options and stock units to purchase common stock, as shown below, were excluded from the computation of diluted earnings per share because their inclusion would have been anti-dilutive. However, these shares may be potentially dilutive common shares in the future.
 
 
(In thousands)
Three Months Ended
 
(In thousands)
Six Months Ended
 
 
June 28,
2014
 
June 29,
2013
 
June 28,
2014
 
June 29,
2013
Stock options and stock units
 
248

 
578

 
177

 
595

Cash and Cash Equivalents
Our cash accounts are not reduced for checks written until the checks are presented for payment and paid by our bank. Cash equivalents consist of highly liquid instruments purchased with original maturities of three months or less. These assets are valued at cost, which approximates fair value, which we classify as Level 1. See Fair Value below.
Provision for Estimated Losses on Contracts
Provisions for estimated losses on contracts are recorded during the period in which it is determined that total anticipated contract costs will exceed total anticipated contract revenues. The provisions for estimated losses on contracts require management to make certain estimates and assumptions, including those with respect to the future revenue under a contract and the future cost to complete the contract. Management's estimate of the future cost to complete a contract may include assumptions as to improvements in manufacturing efficiency, reductions in operating and material costs, and our ability to resolve claims and assertions with our customers. If any of these or other assumptions and estimates do not materialize in the future, we may be required to record additional provisions for estimated losses on contracts.
Inventory Valuation
Inventories are stated at the lower of cost or market, cost being determined on a first-in, first-out basis. Market value for raw materials is based on replacement costs, and is based on net realizable value for other inventory classifications. Inventoried costs include raw materials, outside processing, direct labor and allocated overhead, adjusted for any abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) incurred. Costs under long-term contracts are accumulated into, and removed from, inventory on the same basis as other contracts. We assess the inventory carrying value and reduce it, if necessary, to its net realizable value based on customer orders on hand, and internal demand forecasts using management’s best estimates given information currently available. We maintain an allowance for potentially excess and obsolete inventories and inventories that are carried at costs that are higher than their estimated net realizable values.
Out of Period Adjustments
During the third quarter of 2013, we determined that approximately $1.1 million of inventory had not been valued correctly at our DLT operating segment for periods originating in 2010 through the second quarter of 2013. The errors were attributed to the following quarters; $0.3 million in Q2 2010, $0.5 million in Q2 2011, $0.1 million in Q4 2012, $0.1 million in Q1 2013 and $0.1 million in Q2 2013. We assessed the materiality of these errors and concluded they were immaterial to currently reported annual amounts and previously reported annual and interim amounts. We corrected the errors in the third quarter of 2013 and recorded a $1.1 million charge for inventory reserves for the DLT operating segment and did not restate our consolidated financial statements for the prior annual or interim periods.

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Production Cost of Contracts
Production cost of contracts includes non-recurring production costs, such as design and engineering costs, and tooling and other special-purpose machinery necessary to build parts as specified in a contract. Production costs of contracts are recorded to cost of goods sold using the units of delivery method. We review long-lived assets within production costs of contracts for impairment on an annual basis (in the fourth quarter for us) or when events or changes in circumstances indicate that the carrying value of our long-lived assets may not be recoverable. An impairment charge is recognized when the carrying value of an asset exceeds the projected undiscounted future cash flows expected from its use and disposal.
Fair Value
Assets and liabilities that are measured, recorded or disclosed at fair value on a recurring basis are categorized using the fair value hierarchy. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. Level 1, the highest level, refers to the values determined based on quoted prices in active markets for identical assets. Level 2 refers to fair values estimated using significant observable inputs. Level 3, the lowest level, includes fair values estimated using significant unobservable inputs.
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss, as reflected in the consolidated balance sheets under the equity section, was comprised of cumulative pension and retirement liability adjustments, net of tax.
Recent Accounting Pronouncements

New Accounting Standards Adopted in 2014

In July 2013, the FASB issued Accounting Standards Update 2013-11, “Income Taxes (Topic 740)” (“ASU 2013-11”), which required the netting of unrecognized tax benefits against a deferred tax asset for a loss or other carryforward that would apply in settlement of the uncertain tax positions. This guidance was effective for fiscal years beginning after December 15, 2013, which is our fiscal year 2014, with early adoption permitted. The adoption of this standard at the beginning of our fiscal year 2014 reduced deferred tax assets by approximately $0.6 million as of June 28,2014.

In February 2013, the FASB issued ASU 2013-04, “Liabilities (Topic 405)” (“ASU 2013-04”), which provided guidance for the recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date, except for obligations addressed within existing guidance in GAAP. The new guidance was effective for us beginning January 1, 2014. Early adoption was permitted. The adoption of this standard at the beginning of our fiscal year 2014 did not have a material impact on our condensed consolidated financial statements.

Recently Issued Accounting Standards

In June 2014, the FASB issued ASU 2014-12, “Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide that a Performance Target Could be Achieved after the Requisite Service Period” (“ASU 2014-12”), which requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. Thus, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. The new guidance is effective for us beginning January 1, 2016. Early adoption is permitted. We currently do not anticipate the adoption of this standard will have a material impact on our condensed consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”), which outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. This new revenue recognition model provides a five-step analysis in determining when and how revenue is recognized. It requires entities to exercise judgment when considering the terms of the contract(s) which include (i) identifying the contract(s) with the customer, (ii) identifying the separate performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction price to the separate performance obligations, and (v) recognizing revenue when each performance obligation is satisfied. Thus, it depicts the transfer of promised goods or services to customers in an amount that reflects the consideration an entity expects to receive in exchange for those goods or services. Companies have the option of applying the provisions of ASU 2014-09 either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially

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applying this guidance recognized at the date of initial application. Early adoption is not permitted. The new guidance is effective for us beginning January 1, 2017. We are currently evaluating the method and impact that adopting this new accounting standard will have on our condensed consolidated financial statements.

 
Note 2. Inventories
Inventories consisted of the following:
 
 
(In thousands)
 
 
June 28,
 
December 31,
 
 
2014
 
2013
Raw materials and supplies
 
$
78,630

 
$
75,985

Work in process
 
67,175

 
62,115

Finished goods
 
10,365

 
11,580

 
 
156,170

 
149,680

Less progress payments
 
13,969

 
9,173

Total
 
$
142,201

 
$
140,507

 
Note 3. Goodwill
The carrying amounts of goodwill, by operating segment, were as follows:
 
 
(In thousands)
 
 
Ducommun
AeroStructures
 
Ducommun
LaBarge
Technologies
 
Consolidated
Ducommun
Gross goodwill
 
$
57,243

 
$
184,970

 
$
242,213

Accumulated goodwill impairment
 
—

 
(80,273
)
 
(80,273
)
Balance at December 31, 2013
 
$
57,243

 
$
104,697

 
$
161,940

Balance at June 28, 2014
 
$
57,243

 
$
104,697

 
$
161,940

 
Note 4. Accrued Liabilities
The components of accrued liabilities were as follows:
 
 
(In thousands)
 
 
June 28,
 
December 31,
 
 
2014
 
2013
Accrued compensation
 
$
23,101

 
$
19,929

Accrued income tax and sales tax
 
1,357

 
1,451

Customer deposits
 
1,719

 
3,236

Interest payable
 
9,103

 
8,965

Provision for forward loss reserves
 
4,680

 
4,825

Other
 
8,013

 
7,047

Total
 
$
47,973

 
$
45,453


Note 5. Long-Term Debt
Long-term debt and the current period interest rates were as follows:

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(In thousands)
 
 
June 28,
 
December 31,
 
 
2014
 
2013
Senior unsecured notes (fixed 9.75%)
 
$
200,000

 
$
200,000

Senior secured term loan (floating 4.75%)
 
117,625

 
132,625

Other debt (fixed 5.41%)
 
65

 
77

Total Debt
 
317,690

 
332,702

Less current portion
 
26

 
25

Total long-term debt
 
$
317,664

 
$
332,677

Weighted-average interest rate
 
7.90
%
 
7.76
%

We made a voluntary principal prepayment on our senior secured term loan of approximately $7.5 million each quarter for an aggregate total of approximately $15.0 million in both the six months ended June 28, 2014 and June 29, 2013.
As of June 28, 2014, we had approximately $58.4 million of unused borrowing capacity under the revolving credit facility, after deducting approximately $1.6 million for standby letters of credit.
As of June 28, 2014, we were in compliance with all covenants required by our amended credit agreement. Also as of June 28, 2014, there were no amounts outstanding that would have triggered the leverage covenant under the Amended Credit Agreement. Under the terms of the credit agreement, if, during a given fiscal quarter, (i) the sum of (a) any amounts outstanding under the revolving credit facility plus (b) the amount drawn under any letters of credit exceeds $1.0 million or (ii) the aggregate amount of outstanding letters of credit exceeds $5.0 million, the revolving credit facility will be subject to a maximum total leverage ratio.
The carrying amount of our long-term debt approximated fair value, except for the senior unsecured notes for which the fair value was approximately $222.0 million. Fair value was estimated using Level 2 inputs, based on the terms of the related debt, recent transactions and estimates using interest rates currently available to us for debt with similar terms and remaining maturities.

Note 6. Shareholders’ Equity
We are authorized to issue five million shares of preferred stock. At June 28, 2014 and December 31, 2013, no preferred shares were issued or outstanding.
 
Note 7. Employee Benefit Plans
The components of net periodic pension expense were as follows:
 
 
(In thousands)
 
(In thousands)
 
 
Three Months Ended
 
Six Months Ended
 
 
June 28,
2014
 
June 29,
2013
 
June 28,
2014
 
June 29,
2013
Service cost
 
$
173

 
$
211

 
$
346

 
$
422

Interest cost
 
319

 
290

 
638

 
580

Expected return on plan assets
 
(351
)
 
(306
)
 
(701
)
 
(612
)
Amortization of actuarial losses
 
105

 
274

 
210

 
548

Net periodic pension cost
 
$
246

 
$
469

 
$
493

 
$
938

The components of the reclassifications of net actuarial losses from accumulated other comprehensive loss to net income for the three and six months ended June 28, 2014 were as follows:

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(In thousands)
 
 
Three Months Ended
 
Six Months Ended
 
 
June 28,
2014
 
June 28,
2014
Amortization of actuarial loss - total before tax (1)
 
$
(105
)
 
$
(210
)
Tax benefit
 
48

 
84

Net of tax
 
$
(57
)
 
$
(126
)

(1)
The amortization expense is included in the computation of periodic pension cost and is a decrease to net income upon reclassification from accumulated other comprehensive loss.

Note 8. Indemnifications
We have made guarantees and indemnities under which we may be required to make payments to a guaranteed or indemnified party, in relation to certain transactions, including revenue transactions in the ordinary course of business. In connection with certain facility leases, we have indemnified our lessors for certain claims arising from the facility or the lease. We indemnify our directors and officers to the maximum extent permitted under the laws of the State of Delaware.
However, we have a directors and officers insurance policy that may reduce our exposure in certain circumstances and may enable us to recover a portion of future amounts that may be payable, if any. The duration of the guarantees and indemnities varies and, in many cases is indefinite but subject to statute of limitations. The majority of guarantees and indemnities do not provide any limitations of the maximum potential future payments we could be obligated to make. Historically, payments related to these guarantees and indemnities have been immaterial. We estimate the fair value of our indemnification obligations as insignificant based on this history and insurance coverage and have, therefore, not recorded any liability for these guarantees and indemnities in the accompanying consolidated balance sheets.
 

Note 9. Income Taxes
We recorded income tax expense of approximately $3.1 million (effective tax rate of 32.5%) in the three months ended June 28, 2014 compared to approximately $2.1 million (effective tax rate of 27.6%) in the three months ended June 29, 2013.
The effective tax rate for for the three months ended June 28, 2014 did not include any benefit from federal research and development (“R&D”) tax credits as it expired on December 31, 2013. The three months ended June 29, 2013 included federal research and development tax credits benefit of approximately $0.5 million.
We recorded income tax expense of approximately $5.3 million (effective tax rate of 32.5%) in the six months ended June 28, 2014 compared to approximately $0.9 million (effective tax rate of 8.6%) in the six months ended June 29, 2013.
The effective tax rate for for the six months ended June 28, 2014 did not include any benefit from federal R&D tax credits as it expired on December 31, 2013. The six months ended June 29, 2013 included federal research and development tax credits benefit of approximately $3.0 million. This amount included approximately $2.0 million of 2012 federal research and development tax credits benefit recognized in the six months ended June 29, 2013 as a result of the American Taxpayer Relief Act of 2012 (the “Act”), passed in January 2013. The Act included an extension of the federal research and development tax credit for amounts paid or incurred after December 31, 2011 and before January 1, 2014.
Our unrecognized tax benefits were approximately $2.7 million and $2.6 million at June 28, 2014 and December 31, 2013, respectively. Most of these amounts, if recognized, would affect the annual income tax rate. It is reasonably possible that the unrecognized tax benefits could be reduced by approximately $0.2 million in the next twelve months.


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Note 10. Contingencies
Ducommun is a defendant in a lawsuit entitled United States of America ex rel Taylor Smith, Jeannine Prewitt and James Ailes v. The Boeing Company and Ducommun Inc., filed in the United States District Court for the District of Kansas (the “District Court”). The lawsuit is a qui tam action brought by three former The Boeing Company (“Boeing”) employees (“Relators”) against Boeing and Ducommun on behalf of the United States of America for violations of the United States False Claims Act. The lawsuit alleges that Ducommun sold unapproved parts to Boeing which were installed by Boeing in aircraft ultimately sold to the United States Government and that Boeing and Ducommun submitted or caused to be submitted false claims for payment relating to 21 aircraft sold by Boeing to the United States Government. The lawsuit seeks damages in an amount equal to three times the amount of damages the United States Government sustained because of the defendants’ actions, plus a civil penalty of $10 thousand for each false claim made on or before September 28, 1999, and $11 thousand for each false claim made on or after September 28, 1999, together with attorneys’ fees and costs. The Relators claim that the United States Government sustained damages of $1.6 billion (the contract purchase price of 21 aircraft) or, alternatively, $851 million (the alleged diminished value and increased maintenance cost of the 21 aircraft). After investigating the allegations, the United States Government has declined to intervene in the lawsuit. Ducommun and Boeing have filed motions for summary judgment to dismiss the lawsuit. The motions for summary judgment are pending before the District Court. Ducommun intends to defend itself vigorously against the lawsuit. Ducommun, at this time, is unable to estimate what, if any, liability it may have in connection with the lawsuit.
DAS has been directed by California environmental agencies to investigate and take corrective action for groundwater contamination at its facilities located in El Mirage and Monrovia, California. Based on currently available information, Ducommun has established a reserve for its estimated liability for such investigation and corrective action of approximately $1.5 million at June 28, 2014, which is reflected in other long-term liabilities on the consolidated balance sheet.
DAS also faces liability as a potentially responsible party for hazardous waste disposed at landfills located in Casmalia and West Covina, California. DAS and other companies and government entities have entered into consent decrees with respect to these landfills with the United States Environmental Protection Agency and/or California environmental agencies under which certain investigation, remediation and maintenance activities are being performed. Based on currently available information, Ducommun preliminarily estimates that the range of its future liabilities in connection with the landfill located in West Covina, California is between approximately $0.4 million and $3.1 million. Ducommun has established a reserve for its estimated liability, in connection with the West Covina landfill of approximately $0.4 million at June 28, 2014, which is reflected in other long-term liabilities on its consolidated balance sheet. Ducommun’s ultimate liability in connection with these matters will depend upon a number of factors, including changes in existing laws and regulations, the design and cost of construction, operation and maintenance activities, and the allocation of liability among potentially responsible parties.
In the normal course of business, Ducommun and its subsidiaries are defendants in certain other litigation, claims and inquiries, including matters relating to environmental laws. In addition, Ducommun makes various commitments and incurs contingent liabilities. While it is not feasible to predict the outcome of these matters, Ducommun does not presently expect that any sum it may be required to pay in connection with these matters would have a material adverse effect on its consolidated financial position, results of operations or cash flows.
 


Note 11. Business Segment Information
We supply products and services primarily to the aerospace and defense industries. Our subsidiaries are organized into two strategic businesses, DAS and DLT, each of which is a reportable operating segment.

Financial information by reportable operating segment was as follows:

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(In thousands)
Three Months Ended
 
(In thousands)
Six Months Ended
 
 
June 28,
 
June 29,
 
June 28,
 
June 29,
 
 
2014
 
2013
 
2014
 
2013
Net Revenues
 
 
 
 
 
 
 
 
DAS
 
$
78,616

 
$
83,992

 
$
160,270

 
$
156,697

DLT
 
107,900

 
107,480

 
205,999

 
210,690

Total Net Revenues
 
$
186,516

 
$
191,472

 
$
366,269

 
$
367,387

Segment Operating Income
 
 
 
 
 
 
 
 
DAS
 
$
9,833

 
$
8,985

 
$
20,079

 
$
15,616

DLT
 
10,757

 
11,167

 
17,801

 
19,101

 
 
20,590

 
20,152

 
37,880

 
34,717

Corporate General and Administrative Expenses (1)
 
(4,015
)
 
(5,109
)
 
(7,322
)
 
(9,372
)
Operating Income
 
$
16,575

 
$
15,043

 
$
30,558

 
$
25,345

Depreciation and Amortization Expenses
 
 
 
 
 
 
 
 
DAS
 
$
3,554

 
$
2,438

 
$
5,970

 
$
4,765

DLT
 
4,043

 
4,660

 
9,051

 
9,323

Corporate Administration
 
102

 
42

 
104

 
85

Total Depreciation and Amortization Expenses
 
$
7,699

 
$
7,140

 
$
15,125

 
$
14,173

Capital Expenditures
 
 
 
 
 
 
 
 
DAS
 
$
1,435

 
$
1,495

 
$
2,720

 
$
3,049

DLT
 
2,078

 
1,128

 
2,975

 
2,180

Corporate Administration
 
14

 
18

 
24

 
24

Total Capital Expenditures
 
$
3,527

 
$
2,641

 
$
5,719

 
$
5,253


(1)
Includes costs not allocated to either the DLT or DAS operating segments.
Segment assets include assets directly identifiable with each segment. Corporate assets include assets not specifically identified with a business segment, including cash. Our segment assets are as follows:
 
 
(In thousands)
 
 
June 28,
2014
 
December 31,
2013
Total Assets
 
 
 
 
DAS
 
$
243,974

 
$
241,502

DLT
 
443,034

 
444,224

Corporate Administration
 
72,246

 
78,473

Total Assets
 
$
759,254

 
$
764,199

Goodwill and Intangibles
 
 
 
 
DAS
 
$
64,355

 
$
65,213

DLT
 
257,870

 
262,192

Total Goodwill and Intangibles
 
$
322,225

 
$
327,405



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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, defense, industrial, natural resources, medical and other industries. Ducommun differentiates itself 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 units: Ducommun LaBarge Technologies (“DLT”) and Ducommun AeroStructures (“DAS”).
Second quarter 2014 highlights were as follows:
•
Second quarter revenue was $186.5 million
•
We reported net income of $6.5 million, or $0.59 per diluted share
•
EBITDA for the quarter was $24.3 million
•
We made a voluntary principal prepayment of $7.5 million on our term loan during the quarter
•
Firm backlog as of June 28, 2014 was approximately $623.1 million
Earnings before interest, taxes, depreciation and amortization (“EBITDA”) was approximately $24.3 million and $22.2 million for the three months ended June 28, 2014 and June 29, 2013, respectively. See “Non-GAAP Financial Measures” below for certain information regarding EBITDA, including reconciliation of EBITDA to net income.
Non-GAAP Financial Measures
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 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 these measures, explain how they are calculated and provide reconciliations of these measures to the most comparable GAAP measure in the tables below. EBITDA and the related financial ratios, as presented in this 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 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 EBITDA as a non-GAAP operating performance measure internally as complementary financial measures to evaluate the performance and trends of our businesses. We present 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 future debt service, capital expenditures, working capital requirements and overall operating performance.
EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as substitutes for analysis of our results as reported under GAAP. Some of these limitations are:
•
They do not reflect our cash expenditures, future requirements for capital expenditures or contractual commitments;
•
They do not reflect changes in, or cash requirements for, our working capital needs;
•
They do 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 EBITDA does not reflect any cash requirements for such replacements;
•
They are not adjusted for all non-cash income or expense items that are reflected in our statements of cash flows;
•
They do not reflect the impact on earnings of charges resulting from matters unrelated to our ongoing operations; and

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•
Other companies in our industry may calculate EBITDA differently from us, limiting their usefulness as comparative measures.
Because of these limitations, 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 EBITDA as only supplemental information. See our condensed consolidated financial statements contained in this Form 10-Q report.
However, in spite of the above limitations, we believe that EBITDA is useful to an investor in evaluating our results of operations because these measures:
•
Are 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;
•
Help 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
•
Are 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 our net income when calculating EBITDA:
•
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;
•
Depreciation may be useful to investors because it generally represents the wear and tear on our property and equipment used in our operations;
•
Interest expense may be useful to investors for determining current cash flow; and
•
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.
Reconciliations of net income to EBITDA and the presentation of EBITDA as a percentage of net revenues were as follows:
 
 
(In thousands)
Three Months Ended
 
(In thousands)
Six Months Ended
 
 
June 28,
 
June 29,
 
June 28,
 
June 29,
 
 
2014
 
2013
 
2014
 
2013
Net income
 
$
6,472

 
$
5,504

 
$
11,101

 
$
9,211

Depreciation and amortization
 
7,699

 
7,140

 
15,125

 
14,173

Interest expense
 
6,994

 
7,442

 
14,119

 
15,265

Income tax expense
 
3,109

 
2,097

 
5,338

 
869

EBITDA
 
$
24,274

 
$
22,183

 
$
45,683

 
$
39,518

% of net revenues
 
13.0
%
 
11.6
%
 
12.5
%
 
10.8
%
 
EBITDA increased in the three months ended June 28, 2014 compared to the three months ended June 29, 2013, primarily due to increased net income combined with an increase in depreciation and amortization expense and income tax expense.






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RESULTS OF OPERATIONS
Second Quarter of 2014 Compared to Second Quarter of 2013
The following table sets forth net revenues, selected financial data, the effective tax rate and diluted earnings per share:

 
 
(in thousands, except per share data)
Three Months Ended
 
(in thousands, except per share data)
Six Months Ended
 
 
June 28,
2014
 
%
of Net  Revenues
 
June 29,
2013
 
%
of Net  Revenues
 
June 28, 2014
 
%
of Net  Revenues
 
June 29, 2013
 
%
of Net  Revenues
Net Revenues
 
$
186,516

 
100.0
%
 
$
191,472

 
100.0
%
 
$
366,269

 
100.0
%
 
$
367,387

 
100.0
%
Cost of Sales
 
149,073

 
79.9
%
 
154,156

 
80.5
%
 
293,756

 
80.2
%
 
297,218

 
80.9
%
Gross Profit
 
37,443

 
20.1
%
 
37,316

 
19.5
%
 
72,513

 
19.8
%
 
70,169

 
19.1
%
Selling, General and Administrative Expenses
 
20,868

 
11.2
%
 
22,273

 
11.6
%
 
41,955

 
11.5
%
 
44,824

 
12.2
%
Interest Expense
 
6,994

 
3.7
%
 
7,442

 
3.9
%
 
14,119

 
3.9
%
 
15,265

 
4.2
%
Income Before Taxes
 
9,581

 
5.1
%
 
7,601

 
4.0
%
 
16,439

 
4.5
%
 
10,080

 
2.7
%
Income Tax Expense
 
3,109

 
nm

 
2,097

 
nm

 
5,338

 
nm

 
869

 
nm

Net Income
 
$
6,472

 
3.5
%
 
$
5,504

 
2.9
%
 
$
11,101

 
3.0
%
 
$
9,211

 
2.5
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Effective Tax Rate
 
32.5
%
 
nm

 
27.6
%
 
nm

 
32.5
%
 
nm

 
8.6
%
 
nm

Diluted Earnings Per Share
 
$
0.59

 
nm

 
$
0.51

 
nm

 
$
1.00

 
nm

 
$
0.86

 
nm

nm = not meaningful
Net Revenues by End-Use Market and Operating Segment
Net revenues by end-use market and operating segment during the three and six months of 2014 and 2013, respectively, were as follows:

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Three Months Ended
 
Six Months Ended
 
 
 
 
(In thousands)
 
% of Net Revenues
 
 
 
(In thousands)
 
% of Net Revenues
 
 
Change
 
June 28,
2014
 
June 29,
2013
 
June 28,
2014
 
June 29,
2013
 
Change
 
June 28,
2014
 
June 29,
2013
 
June 28,
2014
 
June 29,
2013
Consolidated Ducommun
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Military and space
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Defense technologies
 
$
(4,747
)
 
$
62,590

 
$
67,337

 
34
%
 
35
%
 
$
(10,590
)
 
$
119,841

 
$
130,431

 
33
%
 
35
%
Defense structures
 
(3,612
)
 
30,379

 
33,991

 
16
%
 
18
%
 
203

 
64,575

 
64,372

 
18
%
 
18
%
Commercial aerospace
 
258

 
58,509

 
58,251

 
31
%
 
30
%
 
5,466

 
114,950

 
109,484

 
31
%
 
30
%
Natural resources
 
1,909

 
10,791

 
8,882

 
6
%
 
5
%
 
2,513

 
21,566

 
19,053

 
6
%
 
5
%
Industrial
 
1,051

 
12,709

 
11,658

 
7
%
 
6
%
 
277

 
21,819

 
21,542

 
6
%
 
6
%
Medical and other
 
185

 
11,538

 
11,353

 
6
%
 
6
%
 
1,013

 
23,518

 
22,505

 
6
%
 
6
%
Total
 
$
(4,956
)
 
$
186,516

 
$
191,472

 
100
%
 
100
%
 
$
(1,118
)
 
$
366,269

 
$
367,387

 
100
%
 
100
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
DAS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Military and space (defense structures)
 
$
(3,612
)
 
$
30,379

 
$
33,991

 
39
%
 
40
%
 
$
203

 
$
64,575

 
$
64,372

 
40
%
 
41
%
Commercial aerospace
 
(1,764
)
 
48,237

 
50,001

 
61
%
 
60
%
 
3,370

 
95,695

 
92,325

 
60
%
 
59
%
Total
 
$
(5,376
)
 
$
78,616

 
$
83,992

 
100
%
 
100
%
 
$
3,573

 
$
160,270

 
$
156,697

 
100
%
 
100
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
DLT
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Military and space (defense technologies)
 
$
(4,747
)
 
$
62,590

 
$
67,337

 
58
%
 
63
%
 
$
(10,590
)
 
$
119,841

 
$
130,431

 
58
%
 
62
%
Commercial aerospace
 
2,022

 
10,272

 
8,250

 
10
%
 
8
%
 
2,096

 
19,255

 
17,159

 
10
%
 
8
%
Natural resources
 
1,909

 
10,791

 
8,882

 
9
%
 
7
%
 
2,513

 
21,566

 
19,053

 
10
%
 
9
%
Industrial
 
1,051

 
12,709

 
11,658

 
12
%
 
11
%
 
277

 
21,819

 
21,542

 
11
%
 
10
%
Medical and other
 
185

 
11,538

 
11,353

 
11
%
 
11
%
 
1,013

 
23,518

 
22,505

 
11
%
 
11
%
Total
 
$
420

 
$
107,900

 
$
107,480

 
100
%
 
100
%
 
$
(4,691
)
 
$
205,999

 
$
210,690

 
100
%
 
100
%
Net revenues for the three months ended June 28, 2014 were approximately $186.5 million, compared to approximately $191.5 million for the three months ended June 29, 2013. The net revenues decrease primarily reflects an approximate 8% lower revenue in the military and space end-use markets, partially offset by an approximate 10% increase in revenue in the non-aerospace and defense (“non-A&D”) end-use markets.
Net revenues for the six months ended June 28, 2014 were approximately $366.3 million, compared to approximately $367.4 million for the six months ended June 29, 2013. The net revenues decrease primarily reflects an approximate 5% lower revenue in the military and space end-use markets, partially offset by an approximate 5% higher revenue in the commercial aerospace end-use markets and an approximate 6% higher revenue in the non-A&D end-use markets.
Net Revenues by Major Customers
A significant portion of our net revenues are to our top ten customers as follows:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 28,
2014
 
June 29,
2013
 
June 28,
2014
 
June 29,
2013
Boeing
 
20
%
 
16
%
 
20
%
 
17
%
Raytheon
 
9
%
 
10
%
 
9
%
 
10
%
Total top ten customers
 
58
%
 
56
%
 
59
%
 
56
%
Boeing and Raytheon represented the following percentages of total accounts receivable:

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June 28,
2014
 
December 31,
2013
Boeing
 
15
%
 
12
%
Raytheon
 
9
%
 
8
%
The revenues and accounts receivable from Boeing and Raytheon are diversified over a number of commercial, military and space programs and were made by both operating segments.
Gross Profit
Gross profit margins and dollars increased year over year in the three months ended June 28, 2014 compared to the three months ended June 29, 2013 primarily due to improved operating performance and an approximately $0.8 million workers’ compensation audit refund related to prior years.
Gross profit margins and dollars increased year over year in the six months ended June 28, 2014 compared to the six months ended June 29, 2013 primarily due to a favorable product mix, improved operating performance and an approximate $0.8 million workers’ compensation audit refund related to prior years.
Selling, General and Administrative Expenses (“SG&A”)
SG&A expenses decreased year over year in the three months ended June 28, 2014 compared to the three months ended June 29, 2013 primarily due to lower non-recurring professional fees and lower benefit related costs.
SG&A expenses decreased year over year in the six months ended June 28, 2014 compared to the six months ended June 29, 2013 primarily due to lower non-recurring professional fees, lower benefit related costs, combined with the prior year included an approximate $0.5 million charge related to the Company’s debt repricing transaction.
Interest Expense
Interest expense decreased year over year in the three months ended June 28, 2014 compared to the three months ended June 29, 2013 primarily due to lower outstanding debt balances and interest rate reduction as a result of repricing our term loan towards the end of the first quarter of 2013.
Interest expense decreased year over year in the six months ended June 28, 2014 compared to the six months ended June 29, 2013 primarily due to lower outstanding debt balances and interest rate reduction as a result of repricing our term loan towards the end of the first quarter of 2013.
Income Tax Expense
We recorded income tax expense of approximately $3.1 million (effective tax rate of 32.5%) in the three months ended June 28, 2014 compared to approximately $2.1 million (effective tax rate of 27.6%) in the three months ended June 29, 2013.
The effective tax rate for for the three months ended June 28, 2014 did not include any benefit from federal research and development (“R&D”) tax credits as it expired on December 31, 2013. The three months ended June 29, 2013 included federal research and development tax credits benefit of approximately $0.5 million. The federal R&D tax credit has not been extended for 2014, therefore, there was no federal R&D tax credit benefit recognized in the three months ended June 28, 2014.
We recorded income tax expense of approximately $5.3 million (effective tax rate of 32.5%) in the six months ended June 28, 2014 compared to approximately $0.9 million (effective tax rate of 8.6%) in the six months ended June 29, 2013.
The effective tax rate for for the six months ended June 28, 2014 did not include any benefit from federal R&D tax credits as it expired on December 31, 2013. The six months ended June 29, 2013 included federal research and development tax credits benefit of approximately $3.0 million. This amount included approximately $2.0 million of 2012 federal research and development tax credits benefit recognized in the six months ended June 29, 2013 as a result of the American Taxpayer Relief Act of 2012 (the “Act”), passed in January 2013. The Act included an extension of the federal research and development tax credit for amounts paid or incurred after December 31, 2011 and before January 1, 2014. The federal R&D tax credit has not been extended for 2014, therefore, there was no federal R&D tax credit benefit recognized in the six months ended June 28, 2014.

Net Income and Earnings per Diluted Share
Net income and earnings per diluted share for the three months ended June 28, 2014 were approximately $6.5 million, or $0.59 per diluted share, compared to approximately $5.5 million, or $0.51 per diluted share, for the three months ended June 29, 2013. Net

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income for the three months ended June 28, 2014 increased primarily due to improved operating performance, lower selling, general and administrative expenses, and lower interest expense, partially offset by higher income tax expense.

Net income and earnings per diluted share for the six months ended June 28, 2014 were approximately $11.1 million, or $1.00 per diluted share, compared to approximately $9.2 million, or $0.86 per diluted share, for the six months ended June 29, 2013. Net income for the six months ended June 28, 2014 increased primarily due to a favorable product mix, improved operating performance, lower selling, general and administrative expenses, and lower interest expense, partially offset by higher income tax expense.

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Table of Contents

Business Segment Performance
We report our financial performance based upon the two reportable operating segments: DAS and DLT. The results of operations differ between our reportable operating segments due to differences in competitors, customers, extent of proprietary deliverables and performance. The following table summarizes our business segment performance for the three and six months ended June 28, 2014 and June 29, 2013:
 
 
Three Months Ended
 
Six Months Ended
 
 
%
 
(In thousands)
 
% of Net Revenues
 
%
 
(In thousands)
 
% of Net Revenues
 
 
Change
 
June 28,
2014
 
June 29,
2013
 
June 28,
2014
 
June 29,
2013
 
Change
 
June 28,
2014
 
June 29,
2013
 
June 28,
2014
 
June 29,
2013
Net Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
DAS
 
(6.4
)%
 
$
78,616

 
$
83,992

 
42.1
 %
 
43.9
 %
 
2.3
 %
 
$
160,270

 
$
156,697

 
43.8
 %
 
42.7
 %
DLT
 
0.4
 %
 
107,900

 
107,480

 
57.9
 %
 
56.1
 %
 
(2.2
)%
 
205,999

 
210,690

 
56.2
 %
 
57.3
 %
Total Net Revenues
 
(2.6
)%
 
$
186,516

 
$
191,472

 
100.0
 %
 
100.0
 %
 
(0.3
)%
 
$
366,269

 
$
367,387

 
100.0
 %
 
100.0
 %
Segment Operating Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
DAS
 
 
 
$
9,833

 
$
8,985

 
12.5
 %
 
10.7
 %
 
 
 
$
20,079

 
$
15,616

 
12.5
 %
 
10.0
 %
DLT
 
 
 
10,757

 
11,167

 
10.0
 %
 
10.4
 %
 
 
 
17,801

 
19,101

 
8.6
 %
 
9.1
 %
 
 
 
 
20,590

 
20,152

 
 
 
 
 
 
 
37,880

 
34,717

 
 
 
 
Corporate General and Administrative Expenses (1)
 
 
 
(4,015
)
 
(5,109
)
 
(2.2
)%
 
(2.7
)%
 
 
 
(7,322
)
 
(9,372
)
 
(2.0
)%
 
(2.6
)%
Total Operating Income
 
 
 
$
16,575

 
$
15,043

 
8.9
 %
 
7.9
 %
 
 
 
$
30,558

 
$
25,345

 
8.3
 %
 
6.9
 %
EBITDA
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
DAS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Income
 
 
 
$
9,833

 
$
8,985

 
 
 
 
 
 
 
$
20,079

 
$
15,616

 
 
 
 
Depreciation and Amortization
 
 
 
3,554

 
2,438

 
 
 
 
 
 
 
5,970

 
4,765

 
 
 
 
 
 
 
 
13,387

 
11,423

 
17.0
 %
 
13.6
 %
 
 
 
26,049

 
20,381

 
16.3
 %
 
13.0
 %
DLT
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Income
 
 
 
10,757

 
11,167

 
 
 
 
 
 
 
17,801

 
19,101

 

 
 
Depreciation and Amortization
 
 
 
4,043

 
4,660

 
 
 
 
 
 
 
9,051

 
9,323

 
 
 
 
 
 
 
 
14,800

 
15,827

 
13.7
 %
 
14.7
 %
 
 
 
26,852

 
28,424

 
13.0
 %
 
13.5
 %
Corporate General and Administrative Expenses (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Loss
 
 
 
(4,015
)
 
(5,109
)
 
 
 
 
 
 
 
(7,322
)
 
(9,372
)
 
 
 
 
Depreciation and Amortization
 
 
 
102

 
42

 
 
 
 
 
 
 
104

 
85

 
 
 
 
 
 
 
 
(3,913
)
 
(5,067
)
 
 
 
 
 
 
 
(7,218
)
 
(9,287
)
 
 
 
 
EBITDA
 
 
 
$
24,274

 
$
22,183

 
13.0
 %
 
11.6
 %
 
 
 
$
45,683

 
$
39,518

 
12.5
 %
 
10.8
 %

(1)
Includes costs not allocated to either the DLT or DAS operating segments.
Ducommun AeroStructures
DAS’s net revenues in the three months ended June 28, 2014 compared to the three months ended June 29, 2013 decreased approximately 6% reflecting an approximate 4% decrease in commercial aerospace revenue and an approximate 11% decrease in military aircraft revenue. DAS’s net revenues for the six-months ended June 28, 2014 compared to the six months ended June 29, 2013 increased approximately 2% as a result of an approximate 4% increase in commercial aerospace revenue.
The DAS segment operating income and EBITDA increased in the three- and six-month periods ending June 28, 2014, respectively, as a result of improved operating performance and a $0.8 million workers’ compensation audit refund related to prior years.
Ducommun LaBarge Technologies
DLT’s net revenues in the three months ended June 28, 2014 compared to the three months ended June 29, 2013 were essentially flat reflecting an approximate 10% increase in non-aerospace and defense revenue, approximate 25% increase in commercial aerospace revenue, partially offset by an approximate 7% decrease in defense technologies revenue. DLT’s net revenues for the six-months ended June 28, 2014 compared to the six months ended June 29, 2013 decreased approximately 2% reflecting an approximate 8%

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decrease in defense technologies revenue which was partially off-set by an approximate 6% increase in non-aerospace and defense revenue and an approximate 12% increase in commercial aerospace revenue.
DLT’s segment operating income and EBITDA decreased in the three month period ending June 28, 2014 compared to the three months ended June 29, 2013 as a result of a decrease in defense technologies revenue. DLT’s segment operating income and EBITDA decreased in the six month period ending June 28, 2014 compared to the six months ended June 29, 2013 as result of a decrease in defense technologies revenue.
Corporate General and Administrative (“CG&A”)
CG&A expenses decreased approximately $1.1 million in the three months ending June 28, 2014 compared to the three months ended June 29, 2013 primarily due to lower non-recurring professional fees and lower benefit costs.
CG&A expenses decreased approximately $2.1 million in the six month period ending June 28, 2014 compared to the six months ended June 29, primarily due to lower non-recurring professional fees and lower benefit costs, combined with the the first quarter of 2013 that included an approximate $0.5 million charge related to our debt repricing transaction.
Backlog
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 non-aerospace and defense markets tends to be of a shorter duration and is generally fulfilled within a 3-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. Approximately $498.5 million of total backlog is expected to be delivered over the next 12 months. The following table summarizes our backlog as of June 28, 2014 and December 31, 2013:
 
 
(In thousands)
 
 
Change
 
June 28,
2014
 
December 31,
2013
Consolidated Ducommun
 
 
 
 
 
 
Military and space
 
 
 
 
 
 
Defense technologies
 
$
(20,279
)
 
$
197,174

 
$
217,453

Defense structures
 
(5,413
)
 
112,320

 
117,733

Commercial aerospace
 
20,118

 
251,321

 
231,203

Natural resources
 
(788
)
 
22,017

 
22,805

Industrial
 
6,487

 
20,103

 
13,616

Medical and other
 
3,026

 
20,209

 
17,183

Total
 
$
3,151

 
$
623,144

 
$
619,993

DAS
 
 
 
 
 
 
Military and space (defense structures)
 
$
(5,413
)
 
$
112,320

 
$
117,733

Commercial aerospace
 
8,665

 
214,195

 
205,530

Total
 
$
3,252

 
$
326,515

 
$
323,263

DLT
 
 
 
 
 
 
Military and space (defense technologies)
 
$
(20,279
)
 
$
197,174

 
$
217,453

Commercial aerospace
 
11,453

 
37,126

 
25,673

Natural resources
 
(788
)
 
22,017

 
22,805

Industrial
 
6,487

 
20,103

 
13,616

Medical and other
 
3,026

 
20,209

 
17,183

Total
 
$
(101
)
 
$
296,629

 
$
296,730


LIQUIDITY AND CAPITAL RESOURCES
Available Liquidity
Total debt, the weighted-average interest rate, cash and cash equivalents and available credit facilities were as follows:

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(In millions)
 
 
June 28,
 
December 31,
 
 
2014
 
2013
Total debt, including long-term portion
 
$
317.7

 
$
332.7

Weighted-average interest rate on debt
 
7.90
%
 
7.76
%
Term Loan interest rate
 
4.75
%
 
4.75
%
Cash and cash equivalents
 
$
43.8

 
$
48.8

Unused Revolving Credit Facility
 
$
58.4

 
$
58.4

We made a voluntary principal prepayment of approximately $7.5 million in each of the first two quarters of 2014 for a total aggregate voluntary principal prepayment of approximately $15.0 million on our term loan. We expect to pay down a total of $25.0 million to $30.0 million on the term loan in 2014.
The Revolving Credit Facility and Term Loan covenants require EBITDA of more than $50.0 million and a maximum leverage ratio under certain circumstances, as well as annual limitations on capital expenditures and limitations on future disposition of property, investments, acquisitions, repurchase of stock, dividends, and outside indebtedness. At June 28, 2014, we were in compliance with all covenants. At June 28, 2014, there were no amounts outstanding that would have triggered the leverage ratio covenant. However, we would have been in compliance with such coverage ratio.
We expect to spend a total of approximately $16.0 million for capital expenditures in 2014 financed by cash generated from operations, which would be higher than 2013, principally to support new contract awards at DAS and DLT. As part of our strategic plan to become a Tier 2 supplier, additional up-front investment in tooling will be required for newer programs which have higher engineering content and higher levels of complexity in assemblies.
We continue to depend on operating cash flow and the availability of our Revolving Credit Facility 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.

Cash Flow Summary
Net cash generated from operating activities for the six months ended June 28, 2014 increased to approximately $15.5 million, compared to net cash generated of approximately $6.9 million in the six months ended June 29, 2013. The higher cash generated during the first six months of 2014 related primarily to higher net income and improved working capital management.
Net cash used in investing activities of approximately $5.9 million for the six months ended June 28, 2014 included capital expenditures, principally to support new contract awards at DAS and DLT. The increase from the prior year was primarily due to timing of capital expenditures.
Net cash used in financing activities for the six months ended June 28, 2014 of approximately $14.6 million was related to a voluntary principal prepayment on our term loan.

Off-Balance Sheet Arrangements
Our off-balance sheet arrangements consist of operating leases and indemnities.
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 2013 Annual Report on Form 10-K. There have been no material changes in any of our critical accounting policies during the three and six months ended June 28, 2014.
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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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Table of Contents

Our main market risk exposure relates to changes in U.S. interest rates on our outstanding long-term debt. At June 28, 2014, we had borrowings of approximately $117.6 million under our Term Loan which bears interest, at our option, at a rate equal to either an alternate base rate or an adjusted LIBOR rate for a one-, two-, three-, or six-month interest period chosen by us, plus an applicable margin percentage. This LIBOR rate has a floor of 1.00%, and a margin of 3.75%. A hypothetical 10% increase or decrease in the interest rate would have an immaterial impact on our financial condition and results of operations.
 
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company’s chief executive officer and chief financial officer have concluded, based on an evaluation of the Company’s disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)), that such disclosure controls and procedures were effective as of the end of the period covered by this report.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the three months ended June 28, 2014 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
Part II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS
See Note 10, “Contingencies,” in the accompanying notes to condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q for a description of our legal proceedings.

ITEM 1A. RISK FACTORS
See Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the year ended December 31, 2013 for discussion of risk factors. There have been no material changes in the six months ended June 28, 2014 to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013.

ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.

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Table of Contents

Item 6. Exhibits
2.1
Agreement and Plan of Merger, dated as of April 3, 2011, among Ducommun Incorporated, DLBMS, Inc. and LaBarge, Inc. Incorporated by reference to Exhibit 2.1 to Form 8-K filed on April 5, 2011.
3.1
Restated Certificate of Incorporation filed with the Delaware Secretary of State on May 29, 1990. Incorporated by reference to Exhibit 3.1 to Form 10-K for the year ended December 31, 1990.
3.2
Certificate of Amendment of Certificate of Incorporation filed with the Delaware Secretary of State on May 27, 1998. Incorporated by reference to Exhibit 3.2 to Form 10-K for the year ended December 31, 1998.
3.3
Bylaws as amended and restated on March 19, 2013. Incorporated by reference to Exhibit 99.1 to Form 8-K dated March 22, 2013.
3.4
Amendment No. 2 to Bylaws dated August 1, 2013. Incorporated by reference to Exhibit 99.2 to Form 8-K dated August 5, 2013.
4.1
Indenture, dated June 28, 2011, between Ducommun Incorporated, certain of its subsidiaries and Wilmington Trust FSB, as trustee. Incorporated by reference to Exhibit 4.1 to Form 8-K filed on July 1, 2011.
4.2
Registration Rights Agreement, dated June 28, 2011, between Ducommun Incorporated, certain of its subsidiaries, UBS Securities LLC and Credit Suisse Securities (USA) LLC. Incorporated by reference to Exhibit 4.2 to Form 8-K filed on July 1, 2011.
10.1
Commitment Letter to Ducommun Incorporated, dated April 3, 2011 from UBS Loan Finance LLC and UBS Securities LLC, Credit Suisse Securities (USA) LLC and Credit Suisse AG. Incorporated by reference to Exhibit 10.1 to Form 8-K filed on April 5, 2011.
10.2
Credit Agreement, dated as of June 28, 2011, among Ducommun Incorporated, certain of its subsidiaries, UBS Securities LLC and Credit Suisse Securities (USA) LLC as joint lead arrangers, UBS AG, Stamford Branch as issuing bank, administrative agent and collateral agent, and other lenders party thereto. Incorporated by reference to Exhibit 10.1 to Form 8-K filed on July 1, 2011.
10.3
Amendment No. 1 to Credit Agreement, dated as of March 28, 2013, by and among Ducommun Incorporated, certain of its subsidiaries, UBS AG, Stamford Branch as administrative agent, collateral agent, swingline bank and issuing bank and other lenders party thereto. Incorporated by reference to Exhibit 10.1 to Form 8-K dated March 28, 2013.
10.4
Amendment No. 2 to Credit Agreement, dated as of October 18, 2013 by and among Ducommun Incorporated, certain of its subsidiaries, and UBS AG, Stamford Branch, as administrative agent, collateral agent, swingline bank and issuing bank, and other lenders party thereto. Incorporated by reference to Exhibit 10.1 to Form 8-K dated October 23, 2013.
*10.13
Form of Key Executive Severance Agreement entered with seven current executive officers of Ducommun. Incorporated by reference to Exhibit 99.1 to Form 8-K dated January 9, 2008. Incorporated by reference to Exhibit 99.1 to Form 8-K dated January 9, 2008. All of the Key Executive Severance Agreements are identical except for the name of the executive officer, the address for notice, and the date of the Agreement:
 
Executive Officer
 
Date of Agreement
 
 
Kathryn M. Andrus
 
February 18, 2014
 
 
Joseph P. Bellino
 
November 5, 2009
 
 
Joel H. Benkie
 
December 13, 2013
 
 
Douglas L. Groves
 
February 18, 2014
 
 
James S. Heiser
 
December 31, 2007
 
 
Anthony J. Reardon
 
December 31, 2007
 
 
Rose F. Rogers
 
November 5, 2009
 


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Table of Contents

*10.14
Form of Indemnity Agreement entered with all directors and officers of Ducommun. Incorporated by reference to Exhibit 10.8 to Form 10-K for the year ended December 31, 1990. All of the Indemnity Agreements are identical except for the name of the director or officer and the date of the Agreement:
 
Director/Officer
 
Date of Agreement
 
 
Kathryn M. Andrus
 
January 30, 2008
 
 
Richard A. Baldridge
 
March 19, 2013
 
 
Joseph C. Berenato
 
November 4, 1991
 
 
Joseph P. Bellino
 
September 15, 2008
 
 
Joel H. Benkie
 
February 12, 2013
 
 
Gregory S. Churchill
 
March 19, 2013
 
 
Robert C. Ducommun
 
December 31, 1985
 
 
Dean W. Flatt
 
November 5, 2009
 
 
Douglas L. Groves
 
February 12, 2013
 
 
Jay L. Haberland
 
February 2, 2009
 
 
James S. Heiser
 
May 6, 1987
 
 
Robert D. Paulson
 
March 25, 2003
 
 
Anthony J. Reardon
 
January 8, 2008
 
 
Rosalie F. Rogers
 
July 24, 2008
 
*10.17
Employment Letter Agreement dated September 5, 2008 between Ducommun Incorporated and Joseph P. Bellino. Incorporated by reference to Exhibit 99.1 to Form 8-K dated September 18, 2008.
*10.18
Employment Letter Agreement dated May 3, 2012 between Ducommun Incorporated and Joel H. Benkie. Incorporated by reference to Exhibit 99.1 to Form 8-K dated June 4, 2012.
*10.19
Form of Performance Stock Unit Agreement for 2014 and after.
31.1
Certification of Principal Executive Officer.
31.2
Certification of Principal Financial Officer.
32
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema
101.CAL    XBRL Taxonomy Extension Calculation Linkbase
101.DEF    XBRL Taxonomy Extension Definition Linkbase
101.LAB    XBRL Taxonomy Extension Label Linkbase
101.PRE        XBRL Taxonomy Extension Presentation Linkbase
___________________
* Indicates an executive compensation plan or arrangement.


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Table of Contents

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
Date: July 28, 2014
By:
 
/s/ Anthony J. Reardon
 
 
 
Anthony J. Reardon
 
 
 
Chairman and Chief Executive Officer
 
 
 
(Principal Executive Officer)
 
 
 
Date: July 28, 2014
By:
 
/s/ Joseph P. Bellino
 
 
 
Joseph P. Bellino
 
 
 
Vice President, Treasurer and Chief Financial Officer
 
 
 
(Principal Financial Officer)
 
 
 
Date: July 28, 2014
By:
 
/s/ Douglas L. Groves
 
 
 
Douglas L. Groves
 
 
 
Vice President, Controller and Chief Accounting Officer
 
 
 
(Principal Accounting Officer)



27