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 September 29, 2007
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)
(310) 513-7280
(Registrants telephone number, including area code)
(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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨ Accelerated filer x Nonaccelerated filer ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date. As of September 29, 2007, there were outstanding 10,474,522 shares of common stock.
FORM 10-Q
INDEX
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Item 1. | Financial Statements |
DUCOMMUN INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited) September 29, 2007 |
December 31, 2006 |
|||||||
Assets |
||||||||
Current Assets: |
||||||||
Cash and cash equivalents |
$ | 387 | $ | 378 | ||||
Accounts receivable |
46,273 | 42,658 | ||||||
Unbilled receivables |
4,170 | 3,482 | ||||||
Inventories |
75,277 | 64,587 | ||||||
Deferred income taxes |
5,967 | 6,116 | ||||||
Other current assets |
6,269 | 5,521 | ||||||
Total Current Assets |
138,343 | 122,742 | ||||||
Property and Equipment, Net |
55,475 | 52,987 | ||||||
Goodwill, Net |
106,632 | 106,628 | ||||||
Other Assets |
12,797 | 14,676 | ||||||
$ | 313,247 | $ | 297,033 | |||||
Liabilities and Shareholders' Equity |
||||||||
Current Liabilities: |
||||||||
Current portion of long-term debt |
$ | 1,855 | $ | 1,196 | ||||
Accounts payable |
20,885 | 32,948 | ||||||
Accrued liabilities |
35,482 | 33,243 | ||||||
Total Current Liabilities |
58,222 | 67,387 | ||||||
Long-Term Debt, Less Current Portion |
32,480 | 29,240 | ||||||
Deferred Income Taxes |
5,705 | 6,670 | ||||||
Other Long-Term Liabilities |
9,892 | 6,711 | ||||||
Total Liabilities |
106,299 | 110,008 | ||||||
Commitments and Contingencies |
||||||||
Shareholders' Equity: |
||||||||
Common stock |
105 | 103 | ||||||
Additional paid-in capital |
51,711 | 46,320 | ||||||
Retained earnings |
156,773 | 142,760 | ||||||
Accumulated other comprehensive loss |
(1,641 | ) | (2,158 | ) | ||||
Total Shareholders' Equity |
206,948 | 187,025 | ||||||
$ | 313,247 | $ | 297,033 | |||||
See accompanying notes to consolidated financial statements.
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DUCOMMUN INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
For The Three Months Ended | ||||||||
September 29, 2007 |
September 30, 2006 |
|||||||
Net Sales |
$ | 94,665 | $ | 81,557 | ||||
Operating Costs and Expenses: |
||||||||
Cost of goods sold |
74,135 | 64,612 | ||||||
Selling, general and administrative expenses |
11,831 | 10,374 | ||||||
Total Operating Costs and Expenses |
85,966 | 74,986 | ||||||
Operating Income |
8,699 | 6,571 | ||||||
Interest Expense, Net |
(628 | ) | (704 | ) | ||||
Income Before Taxes |
8,071 | 5,867 | ||||||
Income Tax Expense, Net |
(2,239 | ) | (1,768 | ) | ||||
Net Income |
$ | 5,832 | $ | 4,099 | ||||
Earnings Per Share: |
||||||||
Basic earnings per share |
$ | .56 | $ | .40 | ||||
Diluted earnings per share |
$ | .55 | $ | .40 | ||||
Weighted Average Number of Common Shares Outstanding: |
||||||||
Basic |
10,409 | 10,231 | ||||||
Diluted |
10,560 | 10,292 |
See accompanying notes to consolidated financial statements.
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DUCOMMUN INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
For The Nine Months Ended | ||||||||
September 29, 2007 |
September 30, 2006 |
|||||||
Net Sales |
$ | 273,821 | $ | 231,195 | ||||
Operating Costs and Expenses: |
||||||||
Cost of goods sold |
215,020 | 184,508 | ||||||
Selling, general and administrative expenses |
36,191 | 29,609 | ||||||
Total Operating Costs and Expenses |
251,211 | 214,117 | ||||||
Operating Income |
22,610 | 17,078 | ||||||
Interest Expense, Net |
(2,045 | ) | (1,868 | ) | ||||
Income Before Taxes |
20,565 | 15,210 | ||||||
Income Tax Expense, Net |
(6,362 | ) | (5,181 | ) | ||||
Net Income |
$ | 14,203 | $ | 10,029 | ||||
Earnings Per Share: |
||||||||
Basic earnings per share |
$ | 1.37 | $ | .98 | ||||
Diluted earnings per share |
$ | 1.36 | $ | .97 | ||||
Weighted Average Number of Common Shares Outstanding: |
||||||||
Basic |
10,357 | 10,195 | ||||||
Diluted |
10,440 | 10,287 |
See accompanying notes to consolidated financial statements.
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DUCOMMUN INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For The Nine Months Ended | ||||||||
September 29, 2007 |
September 30, 2006 |
|||||||
Cash Flows from Operating Activities: |
||||||||
Net Income |
$ | 14,203 | $ | 10,029 | ||||
Adjustments to Reconcile Net Income to Net |
||||||||
Cash Provided by Operating Activities: |
||||||||
Depreciation |
5,950 | 6,131 | ||||||
Amortization of other intangible assets |
1,606 | 999 | ||||||
Amortization of discounted notes payable |
52 | | ||||||
Deferred income tax provision/(benefit) |
1,009 | (941 | ) | |||||
Income tax benefit from stock-based compensation, net |
257 | 319 | ||||||
Stock-based compensation expense |
1,521 | 1,067 | ||||||
Expense/(Recovery) of doubtful accounts |
634 | (15 | ) | |||||
Loss/(Gain) on sale of assets |
2 | (36 | ) | |||||
Net recovery of warranty reserves |
| (23 | ) | |||||
Net reduction of contract cost overruns |
(176 | ) | (257 | ) | ||||
Changes in Assets and Liabilities Net of Effects from Acquisitions: |
||||||||
Accounts receivable - (increase) |
(4,249 | ) | (856 | ) | ||||
Unbilled receivables - (increase) |
(688 | ) | (2,052 | ) | ||||
Inventories - (increase) |
(10,690 | ) | (10,784 | ) | ||||
Other assets - (increase) |
(479 | ) | (130 | ) | ||||
Accounts payable - (decrease)/increase |
(12,063 | ) | 7,781 | |||||
Accrued and other liabilities - increase/(decrease) |
4,098 | (408 | ) | |||||
Net Cash Provided by Operating Activities |
987 | 10,824 | ||||||
Cash Flows from Investing Activities: |
||||||||
Purchase of Property and Equipment |
(8,440 | ) | (6,851 | ) | ||||
Proceeds from Sale of Assets |
| 179 | ||||||
Acquisition of Businesses, Net of Cash Acquired |
| (60,495 | ) | |||||
Net Cash Used in Investing Activities |
(8,440 | ) | (67,167 | ) | ||||
Cash Flows from Financing Activities: |
||||||||
Net Borrowings of Long-Term Debt |
3,847 | 38,000 | ||||||
Net Cash Effect of Exercise Related to Stock Options |
2,843 | 1,558 | ||||||
Excess Tax Benefit from Stock-Based Compensation |
772 | 182 | ||||||
Net Cash Provided by Financing Activities |
7,462 | 39,740 | ||||||
Net Increase/(Decrease) in Cash and Cash Equivalents |
9 | (16,603 | ) | |||||
Cash and Cash Equivalents at Beginning of Period |
378 | 19,221 | ||||||
Cash and Cash Equivalents at End of Period |
$ | 387 | $ | 2,618 | ||||
See accompanying notes to consolidated financial statements.
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DUCOMMUN INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of Ducommun Incorporated and its subsidiaries (Ducommun or the Company), after eliminating intercompany balances and transactions. The consolidated balance sheet is unaudited as of September 29, 2007, the consolidated statements of income are unaudited for the three months and nine months ended September 29, 2007 and September 30, 2006 and the consolidated statements of cash flows are unaudited for the nine months ended September 29, 2007 and September 30, 2006. The interim financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. The financial information included in this Form 10-Q should be read in conjunction with the Companys consolidated financial statements and related notes thereto included in the Form 10-K for the year ended December 31, 2006. The results of operations for the three months and nine months ended September 29, 2007 are not necessarily indicative of the results to be expected for the full year ending December 31, 2007.
Ducommun operates in two business segments. Ducommun AeroStructures, Inc. (DAS), engineers and manufactures aerospace structural components and subassemblies. Ducommun Technologies, Inc. (DTI), designs, engineers and manufactures electromechanical components and subsystems, and provides engineering, technical and program management services (including design, development, integration and test of prototype products) principally for the aerospace and military markets. The significant accounting policies of the Company and its two business segments are the same as described in the Companys Form 10-K for the year ended December 31, 2006, except as noted below.
Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement exists, the price is fixed or determinable, collection is reasonably assured and delivery of products has occurred or services have been rendered. Revenue from products sold under long-term contracts is recognized by the Company on the same basis as other sale transactions. The Company also recognizes revenue on the sale of services (including prototype products) based on the type of contract: time and materials, cost-plus reimbursement and firm-fixed price. Revenue is recognized (i) on time and materials contracts as time is spent at hourly rates, which are negotiated with customers, plus the cost of any allowable materials and out-of-pocket expenses, (ii) on cost plus reimbursement contracts based on direct and indirect costs incurred plus a negotiated profit calculated as a percentage of cost, a fixed amount or a performance-based award fee, and (iii) on fixed-price contracts on the percentage-of-completion method measured by the percentage of costs incurred to estimated total costs.
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Earnings Per Share
The weighted average number of shares outstanding used to compute earnings per share is as follows:
Three Months Ended | Nine Months Ended | |||||||
September 29, 2007 |
September 30, 2006 |
September 29, 2007 |
September 30, 2006 | |||||
Basic weighted average shares outstanding |
10,409,000 | 10,231,000 | 10,357,000 | 10,195,000 | ||||
Dilutive potential common shares |
151,000 | 61,000 | 83,000 | 92,000 | ||||
Diluted weighted average shares outstanding |
10,560,000 | 10,292,000 | 10,440,000 | 10,287,000 | ||||
The numerator used to compute diluted earnings per share is as follows:
Three Months Ended | Nine Months Ended | |||||||||||
September 29, 2007 |
September 30, 2006 |
September 29, 2007 |
September 30, 2006 | |||||||||
Net earnings (total numerator) |
$ | 5,832,000 | $ | 4,099,000 | $ | 14,203,000 | $ | 10,029,000 | ||||
The weighted average number of shares outstanding, included in the table below, is excluded from the computation of diluted earnings per share because the average market price did not exceed the exercise price. However, these shares may be potentially dilutive common shares in the future.
Three Months Ended | Nine Months Ended | |||||||
September 29, 2007 |
September 30, 2006 |
September 29, 2007 |
September 30, 2006 | |||||
Stock options |
252,000 | 632,000 | 440,000 | 523,000 | ||||
Performance stock units |
32,500 | | 32,500 | | ||||
Restricted stock units |
70,000 | | 70,000 | |
Comprehensive Income
Certain items such as unrealized gains and losses on certain investments in debt and equity securities and minimum pension liability adjustments are presented as separate components of shareholders equity. The current period change in these items is included in other comprehensive income and separately reported in the financial statements. Accumulated other comprehensive loss, as reflected in the Consolidated Balance Sheets under the equity section, is comprised of a minimum pension liability adjustment of $1,641,000, net of tax, at September 29, 2007 and $2,158,000, net of tax, at December 31, 2006.
Recent Accounting Pronouncements
On September 15, 2006, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 157, Fair Value Measurements (SFAS No. 157), which addresses how companies
- 8 -
should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under generally accepted accounting principles (GAAP). As a result of SFAS No. 157 there is now a common definition of fair value to be used throughout GAAP. The FASB believes that the new standard will make the measurement of fair value more consistent and comparable and improve disclosures about those measures. The Board has agreed to consider delaying the original effective date of fiscal years beginning after November 15, 2007. Since the delay is not assured, the Company is currently evaluating the effect that the adoption of SFAS No. 157 will have on its results of operations and financial position as of January 1, 2008.
In February 2007, FASB issued FASB Statement No. 159, Fair Value Option for Financial Assets and Financial Liabilities (SFAS No. 159), which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The objective of SFAS No. 159 is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The Company will need to adopt SFAS No. 159 for financial statements issued for fiscal years beginning after November 15, 2007. The Company is currently evaluating the effect that the adoption of SFAS No. 159 will have on its results of operations and financial position.
Use of Estimates
Certain amounts and disclosures included in the 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 under different assumptions or conditions.
Note 2. Acquisitions
On January 6, 2006, the Company acquired Miltec for $46,384,000 (net of cash, including assumed indebtedness and excluding acquisition costs) plus contingent payments not to exceed $3,000,000. The acquisition was funded from internally generated cash, notes to the sellers, and borrowings of approximately $24,000,000 under the Credit Agreement.
On May 10, 2006, the Company acquired WiseWave for $6,827,000 (net of cash, including assumed indebtedness and excluding acquisition costs). The acquisition was funded from notes to the sellers, and borrowings of approximately $5,100,000 under the Credit Agreement.
On September 1, 2006, the Company acquired CMP for $13,804,000 (net of cash acquired and excluding acquisition costs). The acquisition was funded from notes to the sellers, and borrowings of approximately $10,800,000 under the Credit Agreement.
- 9 -
Note 3. Inventories
Inventories consist of the following:
(In thousands) | ||||||
September 29, 2007 |
December 31, 2006 | |||||
Raw materials and supplies |
$ | 22,949 | $ | 23,715 | ||
Work in process |
63,068 | 50,752 | ||||
Finished goods |
1,077 | 1,704 | ||||
87,094 | 76,171 | |||||
Less progress payments |
11,817 | 11,584 | ||||
Total |
$ | 75,277 | $ | 64,587 | ||
Note 4. Long-Term Debt
Long-term debt is summarized as follows:
(In thousands) | ||||||
September 29, 2007 |
December 31, 2006 | |||||
Bank credit agreement |
$ | 28,600 | $ | 23,500 | ||
Notes and other obligations for acquisitions |
5,735 | 6,936 | ||||
Total debt |
34,335 | 30,436 | ||||
Less current portion |
1,855 | 1,196 | ||||
Total long-term debt |
$ | 32,480 | $ | 29,240 | ||
The Company has entered into an Amended and Restated Credit Agreement with Bank of America, N.A., as Administrative Agent, Wachovia Bank, National Association, as Syndication Agent, and the other lenders named therein (the Credit Agreement). The Credit Agreement provides for an unsecured revolving credit line of $75,000,000 maturing on April 7, 2010. Interest is payable monthly on the outstanding borrowings at Bank of Americas prime rate (7.75% at September 29, 2007) plus a spread (0% to 0.50% per annum based on the leverage ratio of the Company) or, at the election of the Company, for terms of up to six months at the LIBOR rate (6.32% for a six month term at September 29, 2007) plus a spread (1.00% to 1.75% per annum depending on the leverage ratio of the Company). The Credit Agreement includes minimum fixed charge coverage, maximum leverage and minimum net worth covenants, an unused commitment fee (0.25% to 0.40% per annum depending on the leverage ratio of the Company), and limitations on future dispositions of property, repurchases of common stock, dividends, outside indebtedness, and acquisitions. At September 29, 2007, the Company had $44,857,000 of unused lines of credit, after deducting $1,543,000 for outstanding standby letters of credit. The Company was in compliance with all covenants at September 29, 2007.
During September 2007 the Company entered into a $20,000,000 Interest Rate Swap with Bank of America, N.A. The $20,000,000 notional amount, receive-variable 1 month LIBOR (5.80% at September 29, 2007) and pay-fixed 4.88% interest rate swap effective September 13, 2007, with monthly settlement dates on the 13th day of each month. The swap expires on September 13, 2010. The Company believes that the credit risk associated with the counterparty is nominal.
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Note 5. Shareholders Equity
The Company is authorized to issue five million shares of preferred stock. At September 29, 2007 and September 30, 2006, no preferred shares were issued or outstanding.
At September 29, 2007, $4,704,000 remained available to repurchase common stock of the Company under stock repurchase programs as previously approved by the Board of Directors. The Company did not repurchase any of its common stock during the nine months ended September 29, 2007 and September 30, 2006, in the open market.
Note 6. Stock Compensation
The Company has three stock option or incentive plans. Stock awards may be made to directors, officers and key employees under the stock plans on terms determined by the Compensation Committee of the Board of Directors or, with respect to directors, on terms determined by the Board of Directors.
Stock options have been and may be granted to directors, officers and key employees under the stock plans at prices not less than 100% of the market value on the date of grant, and expire not more than ten years from the date of grant. The option price and number of shares are subject to adjustment under certain dilutive circumstances.
Effective January 1, 2007, performance stock units were awarded to certain of the Companys officers. The total compensation expense (before tax benefits) to be recognized over the three-year service period of the performance stock units is currently estimated to be approximately $677,000. A total of 32,500 performance stock units were outstanding at September 29, 2007.
On May 2, 2007, restricted stock units were awarded to certain of the Companys officers. The total compensation expense (before tax benefits) to be recognized over the five-year service period of the restricted stock units is currently estimated to be approximately $2,005,000. A total of 70,000 restrictive stock units were outstanding at September 29, 2007.
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Option activity during the three months ended September 29, 2007 and September 30, 2006 was as follows:
September 29, 2007 | September 30, 2006 | |||||||||||
Number of Shares |
Weighted Average Exercise Price |
Number of Shares |
Weighted Average Exercise Price | |||||||||
Outstanding at December 31 |
820,225 | $ | 18.18 | 845,213 | $ | 16.81 | ||||||
Options granted |
187,000 | 26.08 | 218,000 | 20.07 | ||||||||
Options exercised |
(250,625 | ) | 17.26 | (160,988 | ) | 14.45 | ||||||
Options forfeited |
(48,250 | ) | 17.77 | (32,000 | ) | 17.44 | ||||||
Outstanding at September 29 |
708,350 | $ | 20.62 | 870,225 | $ | 18.04 | ||||||
Exercisable at September 29 |
268,550 | $ | 18.22 | 374,000 | $ | 17.03 | ||||||
Available for grant at September 29 |
369,300 | 43,300 | ||||||||||
As of September 29, 2007, total unrecognized compensation cost (before tax benefits) related to stock options of $3,086,000 is expected to be recognized over a weighted-average period of 2.7 years.
Cash received from option exercises for the nine months ended September 29, 2007 and September 30, 2006 was $2,854,000 and $1,558,000, respectively. The tax benefit realized for the tax deductions from option exercises of the share-based payment awards totaled $1,029,000 and $501,000 for the nine months ended September 29, 2007 and September 30, 2006, respectively.
Nonvested stock options at December 31, 2006 and December 31, 2005 and changes through the nine months ended September 29, 2007 and September 30, 2006 were as follows:
September 29, 2007 | September 30, 2006 | |||||||||||
Number of Shares |
Weighted Average Grant Date Fair Value Per Share |
Number of Shares |
Weighted Average Grant Date Fair Value Per Share | |||||||||
Nonvested at Beginning of Period |
495,725 | $ | 8.39 | 493,588 | $ | 8.10 | ||||||
Granted |
187,000 | 14.14 | 218,000 | 8.71 | ||||||||
Vested |
(195,425 | ) | 8.00 | (185,863 | ) | 8.00 | ||||||
Forfeited |
(47,500 | ) | 8.28 | (29,500 | ) | 8.32 | ||||||
Nonvested at End of Period |
439,800 | $ | 10.93 | 496,225 | $ | 8.39 | ||||||
- 12 -
The following table summarizes information concerning outstanding and exercisable stock options at September 29, 2007:
Range of Exercise Prices |
Options Outstanding | Options Exercisable | ||||||||||||||||||
Number of Outstanding Options |
Weighted Average Remaining Contractual Life |
Weighted Average Exercise Price |
Aggregate Intrinsic Value |
Number of Exercisable Options |
Weighted Average Remaining Contractual Life |
Weighted Average Exercise Price |
Aggregate Intrinsic Value | |||||||||||||
(in years) | (in thousands) | (in years) | (in thousands) | |||||||||||||||||
$10.020 - $11.999 |
12,625 | 2.24 | $ | 10.328 | $ | 277,000 | 12,625 | 2.24 | $ | 10.328 | $ | 277,000 | ||||||||
$12.000 - $17.999 |
164,125 | 3.68 | 16.070 | 2,664,000 | 104,875 | 3.08 | 15.596 | 1,752,000 | ||||||||||||
$18.000 - $28.100 |
531,600 | 5.29 | 22.274 | 5,330,000 | 151,050 | 3.83 | 20.693 | 1,753,000 | ||||||||||||
Total |
708,350 | 4.86 | $ | 20.623 | $ | 8,271,000 | 268,550 | 3.46 | $ | 18.215 | $ | 3,782,000 | ||||||||
The aggregate intrinsic value represents the difference between the closing price of the Companys common stock price on the last trading day of the quarter (September 29, 2007) and the exercise prices of outstanding stock options, multiplied by the number of in-the-money stock options as of the same date. This represents the total amount, before tax withholdings, that would have been received by stock option holders if they had all exercised the stock options on September 29, 2007. The aggregate intrinsic value of stock options exercised for the three months ended September 29, 2007 and September 30, 2006 was $1,041,000 and $23,000, respectively; and for the nine months ended September 29, 2007 and September 30, 2006 was $2,573,000 and $1,254,000, respectively. Total fair value of options expensed was $341,000 and $285,000, before tax benefits, for the three months ended September 29, 2007 and September 30, 2006, respectively. Total fair value of options expensed was $1,187,000 and $1,067,000, before tax benefits, for the nine months ended September 29, 2007 and September 30, 2006, respectively.
Note 7. Employee Benefit Plans
The Company has a defined benefit pension plan covering certain hourly employees of a subsidiary. Pension plan benefits are generally determined on the basis of the retirees age and length of service. Assets of the defined benefit pension plan are composed primarily of fixed income and equity securities.
The components of net periodic pension cost for the defined benefit pension plan are as follows:
(In thousands) | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
September 29, 2007 |
September 30, 2006 |
September 29, 2007 |
September 30, 2006 |
|||||||||||||
Service cost |
$ | 137 | $ | 170 | $ | 411 | $ | 510 | ||||||||
Interest cost |
188 | 174 | 564 | 522 | ||||||||||||
Expected return on plan assets |
(225 | ) | (211 | ) | (676 | ) | (633 | ) | ||||||||
Amortization of actuarial loss |
34 | 51 | 102 | 153 | ||||||||||||
Net periodic post retirement benefit cost |
$ | 134 | $ | 184 | $ | 401 | $ | 552 | ||||||||
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Note 8. Indemnifications
The Company has made guarantees and indemnities under which it 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 the Company has indemnified its lessors for certain claims arising from the facility or the lease. The Company indemnifies its directors and officers to the maximum extent permitted under the laws of the State of Delaware. However, the Company has a directors and officers insurance policy that may reduce its exposure in certain circumstances and may enable it 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 the Company could be obligated to make. Historically, payments related to these guarantees and indemnities have been immaterial. The Company estimates the fair value of its indemnification obligations as insignificant based on this history and insurance coverage and has, therefore, not recorded any liability for these guarantees and indemnities in the accompanying consolidated balance sheets. However, there can be no assurances that the Company will not have any future financial exposure under these indemnification obligations.
Note 9. Income Taxes
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes an Interpretation of FASB Statement No. 109 (FIN 48), which became effective for the Company on January 1, 2007. The Interpretation prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. The adoption of FIN 48 has resulted in a transition adjustment reducing beginning retained earnings by approximately $190,000; all of which is interest on unrecognized tax positions. The Company records the interest charge with respect to uncertain tax positions as a component of tax expense.
As of January 1, 2007, the Companys total amount of unrecognized tax benefits was $2,561,000. Of this amount, $2,468,000, if recognized, would affect the annual income tax rate. As of the date of adoption, the Company had accrued interest of $316,000 relating to unrecognized tax benefits.
As of September 29, 2007, the Company had recognized $284,000 of previously unrecognized tax benefit as a result of the expiration of various statutes of limitation. During the remainder of 2007, $328,000 of unrecognized tax benefit is subject to recognition due to the expiration of various statues of limitation.
The Companys federal income tax return for 2005 and California franchise (income) tax returns for 2004 and 2005 have been selected for examination. Management does not expect the results of these examinations to have a material impact on the Companys financial statements. Other federal and various state returns for the years after 2002 are subject to examination.
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Note 10. Contingencies
The Company 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 lawsuit is a qui tam action brought against The Boeing Company (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 the Boeing Commercial Airplanes-Wichita Division which were installed by Boeing in 32 aircraft ultimately sold to the United States government. The lawsuit seeks damages, civil penalties and other relief from the defendants for presenting or causing to be presented false claims for payment to the United States government. Although the amount of alleged damages are not specified, 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 $10,000 for each false claim made on or before September 28, 1999, and $11,000 for each false claim made on or after September 28, 1999, together with attorneys fees and costs. On June 5, 2007, the United States District Court denied the Companys motion to dismiss the lawsuit. The Company intends to defend itself vigorously against the lawsuit. The Company, at this time, is unable to estimate what, if any, liability it may have in connection with the lawsuit.
The DAS facility located in El Mirage, California has been directed by California environmental agencies to investigate and take corrective action for groundwater contamination. Based upon currently available information, the Company has established a provision for the cost of such investigation and corrective action. DAS expects to spend approximately $1.5 million for future investigation and corrective action for groundwater contamination and post-closure maintenance of the closed hazardous waste facility at its El Mirage location. However, the Companys ultimate liability in connection with the contamination will depend upon a number of factors, including changes in existing laws and regulations, and the design and cost of the construction, operation and maintenance of the corrective action.
The Companys subsidiary, Composite Structures, LLC (Composite), and several other companies have been ordered by a California environmental agency to investigate and clean up soil and groundwater contamination at its Monrovia, California facility. Composite has filed a petition for review of the order.
DAS and other companies and government entities have entered into an amended consent decree (the Consent Decree) with the California Department of Toxic Substances Control (DTSC), which has been entered in the United States District Court for the Central District of California, relating to the alleged release of hazardous waste at a landfill in West Covina, California. The Consent Decree resolves the liability of DAS and the other settling defendants for certain past response costs, future interim response costs and future DTSC oversight costs in connection with the landfill. The Consent Decree provides for the performance of certain operation, maintenance and monitoring activities at the landfill by DAS and the other settling defendants until the later of March 15, 2008 or two years after essential activities commence at the landfill. The Company, at this time, is unable to estimate reliably its liability in connection with the landfill. Based on currently available information, the Company preliminarily estimates that the range of its future liability in connection with the landfill is between approximately $557,000 and $3.0 million. The Companys accrued liabilities at September 29, 2007 included the minimum amount of the range of approximately $557,000.
The Orange County Water District (OCWD) had filed a lawsuit against American Electronics, Inc. (AEI), a subsidiary of the Company, and other companies, to recover damages, relating to contamination of groundwater within the District. In the third quarter of 2007 AEI and the OCWD have entered into a settlement agreement which resolved the lawsuit.
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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, the Company makes various commitments and incurs contingent liabilities. While it is not feasible to predict the outcome of these matters, the Company 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. Subsequent Events
In January 2006, the Company received a termination notice on the Space Shuttle program which affected virtually all of the Companys work on the program. In October 2007, the Company reached an agreement with Lockheed Martin to settle claims related to the termination notice. This agreement is subject to NASA approval. The settlement agreement is expected to increase the Companys fourth quarter 2007 pre-tax profit by approximately $1,000,000 and reduce inventory by approximately $1,000,000.
Note 12. Business Segment Information
The Company supplies products and services to the aerospace industry. The Companys subsidiaries are organized into two strategic businesses, each of which is a reportable operating segment. The accounting policies of the segments are the same as those of the Company. Ducommun AeroStructures, Inc. (DAS), engineers and manufactures aerospace structural components and subassemblies. Ducommun Technologies, Inc. (DTI), designs, engineers and manufactures electromechanical components and subsystems, and provides engineering, technical and program management services (including design, development, integration and test of prototype products) principally for the aerospace and military markets.
Financial information by reporting segment is set forth below:
(In thousands) | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
September 29, 2007 |
September 30, 2006 |
September 29, 2007 |
September 30, 2006 |
|||||||||||||
Net Sales: |
||||||||||||||||
Ducommun AeroStructures |
$ | 57,636 | $ | 47,665 | $ | 162,726 | $ | 140,707 | ||||||||
Ducommun Technologies |
37,029 | 33,892 | 111,095 | 90,488 | ||||||||||||
Total Net Sales |
$ | 94,665 | $ | 81,557 | $ | 273,821 | $ | 231,195 | ||||||||
Segment Operating Income |
||||||||||||||||
Ducommun AeroStructures |
$ | 8,737 | $ | 6,118 | $ | 22,021 | $ | 18,192 | ||||||||
Ducommun Technologies |
2,316 | 2,235 | 8,065 | 4,054 | ||||||||||||
11,053 | 8,353 | 30,086 | 22,246 | |||||||||||||
Corporate General and Administrative Expenses |
(2,354 | ) | (1,782 | ) | (7,476 | ) | (5,168 | ) | ||||||||
Total Operating Income |
$ | 8,699 | $ | 6,571 | $ | 22,610 | $ | 17,078 | ||||||||
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Segment assets include assets directly identifiable with each segment. Corporate assets include assets not specifically identified with a business segment, including cash.
(In thousands) | ||||||
September 29, 2007 |
December 31, 2006 | |||||
Total Assets: |
||||||
Ducommun AeroStructures |
$ | 166,346 | $ | 152,466 | ||
Ducommun Technologies |
133,966 | 133,171 | ||||
Corporate Administration |
12,935 | 11,396 | ||||
Total Assets |
$ | 313,247 | $ | 297,033 | ||
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Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Overview
Ducommun designs, engineers and manufactures aerostructure and electromechanical components and subassemblies, and provides engineering, technical and program management services principally for the aerospace industry. These components, assemblies and services are provided principally for domestic and foreign commercial and military aircraft as well as space programs.
Domestic commercial aircraft programs include the Boeing 737NG, 747, 767, 777 and 787 and the Eclipse very light jet. Foreign commercial aircraft programs include the Airbus Industrie A330 and A340 aircraft, Bombardier business and regional jets, and the Embraer 145 and 170/190. Major military production programs include the Boeing C-17, F-15 and F-18 and Lockheed Martin F-16 aircraft, and various aircraft and shipboard electronics upgrade programs. Commercial and military helicopter programs include helicopters manufactured by Boeing (principally the Apache helicopter), Sikorsky, Bell, Augusta and Carson. The Company continues to support various unmanned launch vehicle and satellite programs, but the Companys contract for the Space Shuttle external fuel tank was terminated in January 2006.
On January 6, 2006, the Company completed the acquisition of Miltec Corporation (Miltec). As a result of the Miltec acquisition, the Company also provides engineering, technical and program management services, including the design, development, integration and test of prototype products. Engineering, technical and program management services are provided principally for advanced weapons systems and missile defense. On May 10, 2006, the Company acquired WiseWave Technologies, Inc. (WiseWave). WiseWave manufactures microwave and millimeterwave products for both aerospace and non-aerospace applications. On September 1, 2006, the Company acquired CMP Display Systems, Inc. (CMP). CMP manufactures incandescent, electroluminescent and LED edge lit panels and assemblies for the aerospace and defense industries.
Sales, diluted earnings per share, gross profit as a percentage of sales, selling, general and administrative expense as a percentage of sales, and the effective tax rate in the third quarter and the first nine months of 2007 and 2006, respectively, were as follows:
Third Quarter | Nine Months | |||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Sales (in $000's) |
$ | 94,665 | $ | 81,557 | $ | 273,821 | $ | 231,195 | ||||||||
Diluted Earnings Per Share |
$ | 0.54 | $ | 0.40 | $ | 1.34 | $ | 0.97 | ||||||||
Gross Profit % of Sales |
21.7 | % | 20.8 | % | 21.5 | % | 20.2 | % | ||||||||
SG&A Expense % of Sales |
12.5 | % | 12.7 | % | 13.2 | % | 12.8 | % | ||||||||
Effective Tax Rate |
27.7 | % | 30.1 | % | 30.9 | % | 34.1 | % |
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The Company manufactures components and assemblies principally for domestic and foreign commercial and military aircraft and space programs. The Companys Miltec subsidiary provides engineering, technical and program management services almost entirely for United States defense, space and homeland security programs. The Companys mix of military, commercial and space business in the third quarter and the first nine months of 2007 and 2006, respectively, were approximately as follows:
Third Quarter | Nine Months | |||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||
Military |
60 | % | 66 | % | 61 | % | 67 | % | ||||
Commercial |
38 | 31 | 37 | 31 | ||||||||
Space |
2 | 3 | 2 | 2 | ||||||||
Total |
100 | % | 100 | % | 100 | % | 100 | % | ||||
The Company is dependent on Boeing commercial aircraft, the C-17 aircraft and the Apache helicopter programs. Sales to these programs, as a percentage of total sales, for the third quarter and the first nine months of 2007 and 2006, respectively, were approximately as follows:
Third Quarter | Nine Months | |||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||
Boeing Commercial Aircraft |
18 | % | 14 | % | 18 | % | 14 | % | ||||
Boeing C-17 Aircraft |
9 | 11 | 9 | 10 | ||||||||
Boeing Apache Helicopter |
15 | 17 | 14 | 19 | ||||||||
All Others |
58 | 58 | 59 | 57 | ||||||||
Total |
100 | % | 100 | % | 100 | % | 100 | % | ||||
Net income for the third quarter and the first nine months of 2007 was higher than the third quarter and the first nine months of 2006. The reasons for the increase in net income in 2007 include (1) a favorable change in sales mix, (2) an improvement in operating performance at both DAS and DTI, and (3) a lower effective tax rate in 2007 compared to 2006.
Results of Operations
Third Quarter of 2007 Compared to Third Quarter of 2006
Net sales in the third quarter of 2007 were $94,665,000, compared to net sales of $81,557,000 for 2006. Net sales in the third quarter of 2007 increased 16% from the same period last year primarily due to a strong increase in commercial sales. The Companys mix of business in the third quarter of 2007 was approximately 60% military, 38% commercial, and 2% space, compared to 66% military, 31% commercial, and 3% space in the third quarter of 2006.
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The Company had substantial sales, through both of its business segments, to Boeing, the United States government and Raytheon. During the third quarter of 2007 and 2006, sales to these customers were as follows:
(In thousands) | ||||||
Third Quarter Ended | ||||||
September 29, 2007 |
September 30, 2006 | |||||
Boeing |
$ | 33,693 | $ | 31,284 | ||
United States Government |
9,484 | 8,713 | ||||
Raytheon |
7,893 | 6,314 | ||||
Total |
$ | 51,070 | $ | 46,311 | ||
At September 29, 2007, trade receivables from Boeing, the United States government and Raytheon were $8,580,000, $1,934,000 and $4,621,000, respectively. The sales and receivables relating to these customers are diversified over a number of different commercial, space and military programs.
Military components manufactured by the Company are employed in many of the countrys front-line fighters, bombers, helicopters and support aircraft, as well as many sea-based vehicles. Engineering, technical and program management services are provided principally for United States defense and homeland security programs. The Companys defense business is diversified among military manufacturers and programs. Sales related to military programs were approximately $57,046,000, or 60% of total sales in the third quarter of 2007, compared to $53,748,000, or 66% of total sales in the third quarter of 2006. The increase in military sales in the third quarter of 2007 resulted principally from an increase in military sales at both Ducommun AeroStructures and Ducommun Technologies. The Apache helicopter program accounted for approximately $14,471,000 in sales in the third quarter of 2007, compared to $13,540,000 in sales in third quarter of 2006. The C-17 program accounted for approximately $8,837,000 in sales in the third quarter of 2007, compared to $8,644,000 in sales in the third quarter of 2006.
The Companys commercial business is represented on many of todays major commercial aircraft. Sales related to commercial business were approximately $35,432,000, or 38% of total sales in the third quarter of 2007, compared to $24,956,000, or 31% of total sales in the third quarter of 2006. The increase in commercial sales in the third quarter of 2007 resulted principally from an increase in sales to the Boeing commercial aircraft programs and an increase in sales to commercial helicopter programs. The Boeing 737NG program accounted for approximately $10,210,000 in sales in the third quarter of 2007, compared to $7,619,000 in sales in the third quarter of 2006. The Boeing 777 program accounted for approximately $3,130,000 in sales in the third quarter of 2007, compared to $2,204,000 in sales in the third quarter of 2006.
In the space sector, the Company produces components for a variety of unmanned launch vehicles and satellite programs and provides engineering services. Sales related to space programs were approximately $2,187,000, or 2% of total sales in the third quarter of 2007, compared to $2,853,000, or 3% of total sales in the third quarter of 2006.
Gross profit, as a percent of sales, increased to 21.7% in the third quarter of 2007 from 20.8% in the third quarter of 2006. The gross profit margin increase was primarily attributable to improvement in operating performance at DAS and a favorable change in sales mix.
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Selling, general and administrative (SG&A) expenses increased to $11,831,000, or 12.5% of sales in the third quarter of 2007, compared to $10,374,000, or 12.7% of sales in the third quarter of 2006. The increase in SG&A expense was primarily due to higher bonus accruals in 2007 and expenses of the CMP business, which was acquired in the third quarter of 2006.
Interest expense was $628,000 in the third quarter of 2007, compared to interest expense of $704,000 in the third quarter of 2006, resulting principally from a decrease in debt in the third quarter of 2007, compared to the third quarter of 2006.
Income tax expense increased to $2,239,000 in the third quarter of 2007, compared to $1,768,000 in third quarter of 2006. The increase in income tax expense was due to the increase in income before taxes, partially offset by a lower effective income tax rate. The Companys effective tax rate for the third quarter of 2007 was 27.7%, compared to 30.1% in the third quarter of 2006.
Net income for the third quarter of 2007 was $5,832,000, or $0.55 diluted earnings per share, compared to $4,099,000, or $0.40 diluted earnings per share, in the third quarter of 2006.
Nine Months 2007 Compared to Nine Months 2006
Net sales in the first nine months of 2007 were $273,821,000, compared to net sales of $231,195,000 for the first nine months of 2006. Net sales in the first nine months of 2007 increased 18% from the same period last year primarily due to increases in both military and commercial sales. The Companys mix of business in the first nine months of 2007 was approximately 61% military, 37% commercial, and 2% space, compared to 67% military, 31% commercial, and 2% space in the first nine months of 2006.
The Company had substantial sales, through both of its business segments, to Boeing, the United States government and Raytheon. During the first nine months of 2007 and 2006, sales to these customers were as follows:
(In thousands) | ||||||
Nine Months Ended | ||||||
September 29, 2007 |
September 30, 2006 | |||||
Boeing |
$ | 95,506 | $ | 93,247 | ||
United States Government |
25,103 | 21,124 | ||||
Raytheon |
21,985 | 18,500 | ||||
Total |
$ | 142,594 | $ | 132,871 | ||
At September 29, 2007, trade receivables from Boeing, the United States government and Raytheon were $8,580,000, $1,934,000 and $4,621,000, respectively. The sales and receivables relating to these customers are diversified over a number of different commercial, space and military programs.
Military components manufactured by the Company are employed in many of the countrys front-line fighters, bombers, helicopters and support aircraft, as well as many sea-based vehicles. Engineering, technical and program management services are provided principally for United States defense and homeland security programs. The Companys defense business is diversified among military
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manufacturers and programs. Sales related to military programs were approximately $165,311,000, or 61% of total sales in the first nine months of 2007, compared to $154,107,000, or 67% of total sales in the first nine months of 2006. The increase in military sales in the first nine months of 2007 resulted principally from an increase in military sales from the acquisition of CMP, an increase in sales to the C-17 program, an increase in sales to the F-18 program and an increase in government engineering and technical services sales, partially offset by a decrease in sales to the Apache helicopter program. The Apache helicopter program accounted for approximately $39,329,000 in sales in the first nine months of 2007, compared to $43,081,000 in sales in the first nine months of 2006. The C-17 program accounted for approximately $25,135,000 in sales in the first nine months of 2007, compared to $23,671,000 in sales in the first nine months of 2006.
The Companys commercial business is represented on many of todays major commercial aircraft. Sales related to commercial business were approximately $101,998,000, or 37% of total sales in the first nine months of 2007, compared to $72,616,000, or 31% of total sales in the first nine months of 2006. The increase in commercial sales in the first nine months of 2007 resulted principally from an increase in sales to the Boeing 737NG and Boeing 777 programs, an increase in commercial after market sales and sales from the acquisition of CMP. The Boeing 737NG program accounted for approximately $29,341,000 in sales in the first nine months of 2007, compared to $21,505,000 in sales in the first nine months of 2006. The Boeing 777 program accounted for approximately $9,282,000 in sales in the first nine months of 2007, compared to $5,600,000 in sales in the first nine months of 2006.
In the space sector, the Company produced components for a variety of unmanned launch vehicles and satellite programs and provides engineering services. Sales related to space programs were approximately $6,512,000, or 2% of total sales in the first nine months of 2007, compared to $4,472,000, or 2% of total sales in the first nine months of 2006.
As of September 29, 2007, backlog believed to be firm was approximately $333,366,000, compared to $320,580,000 at December 31, 2006. Approximately $84,000,000 of total backlog is expected to be delivered during the remainder of 2007. The backlog at September 29, 2007 included the following programs:
Backlog (In thousands) | |||
Apache Helicopter |
$ | 62,974 | |
737NG |
61,048 | ||
F-18 |
25,697 | ||
C-17 |
23,059 | ||
Chinook Helicopter |
18,582 | ||
Eclipse 500 |
18,135 | ||
$ | 209,495 | ||
Trends in the Companys overall level of backlog may not be indicative of trends in future sales because the Companys backlog is affected by timing differences in the placement of customer orders and because the Companys backlog tends to be concentrated in several programs to a greater extent than the Companys sales. Backlog is also subject to delivery delays or program cancellations, which are beyond the Companys control.
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Gross profit, as a percent of sales, increased to 21.5% in the first nine months of 2007 from 20.2% in the first nine months of 2006. The gross profit margin increase was primarily attributable to improvement in operating performance at both DAS and DTI and a favorable change in sales mix. Gross profit in the first nine months of 2006 was negatively impacted by an $860,000 increase in inventory reserves related to a canceled contract at Ducommun Technologies.
Selling, general and administrative (SG&A) expenses increased to $36,191,000, or 13.2% of sales in the first nine months of 2007, compared to $29,609,000, or 12.8% of sales in the first nine months of 2006. The increase in SG&A expense was primarily due to higher bonus accruals in 2007 and expenses of the WiseWave and CMP businesses, which were acquired in the second and third quarters of 2006, respectively.
Interest expense was $2,045,000 in the first nine months of 2007, compared to interest expense of $1,868,000 in the first nine months of 2006, resulting principally from the use of cash in the first nine months of 2007, compared to the first nine months of 2006.
Income tax expense increased to $6,362,000 in the first nine months of 2007, compared to $5,181,000 in the first nine months of 2006. The increase in income tax expense was due to the increase in income before taxes, partially offset by a lower effective income tax rate. The Companys effective tax rate for the first nine months of 2007 was 30.9%, compared to 34.1% in the first nine months of 2006, because of the applicability of the R&D tax credit in the first nine months of 2007.
Net income for the first nine months of 2007 was $14,203,000, or $1.36 diluted earnings per share, compared to $10,029,000, or $0.97 diluted earnings per share, in the first nine months of 2006.
Financial Condition
Cash Flow Summary
Net cash provided by operating activities for the first nine months of 2007 was $987,000 compared to net cash provided by operating activities of $10,824,000 in 2006. Net cash provided by operating activities for the first nine months of 2007 was impacted by an increase in inventory of $10,690,000 primarily related to work-in-process inventory for production jobs scheduled to be shipped in 2007 and 2008; and an increase in accounts and unbilled receivables of $4,937,000 primarily related to higher sales and the timing of shipments and billings to customers. Net cash provided by operating activities for the first nine months of 2007 also was impacted by a decrease in accounts payable of $12,063,000 due to timing of payments of vendor invoices.
Net cash used in investing activities for the first nine months of 2007 consisted primarily of capital expenditures of $8,440,000.
Net cash provided by financing activities in the first nine months of 2007 of $7,462,000 included approximately $3,847,000 of net borrowings related to working capital increases and $2,843,000 of net cash received from the exercise of stock options.
During the first nine months of 2006, the Company acquired Miltec, WiseWave and CMP for $67,015,000 (net of cash, including assumed indebtedness and excluding acquisition costs) plus contingent payments not to exceed $3,500,000. The acquisitions were funded from internally generated cash, notes to the sellers and borrowings of approximately $39,900,000 under the Credit Agreement.
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The Company continues to depend on operating cash flow and the availability of its bank line of credit to provide short-term liquidity. Cash from operations and bank borrowing capacity are expected to provide sufficient liquidity to meet the Companys obligations during the next twelve months.
Liquidity and Capital Resources
The Company has entered into an Amended and Restated Credit Agreement with Bank of America, N.A., as Administrative Agent, Wachovia Bank, National Association, as Syndication Agent, and the other lenders named therein (the Credit Agreement). The Credit Agreement provides for an unsecured revolving credit line of $75,000,000 maturing on April 7, 2010. Interest is payable monthly on the outstanding borrowings at Bank of Americas prime rate (7.75% at September 29, 2007) plus a spread (0% to 0.50% per annum based on the leverage ratio of the Company) or, at the election of the Company, for terms of up to six months at the LIBOR rate (6.32% for a six month term at September 29, 2007) plus a spread (1.00% to 1.75% per annum depending on the leverage ratio of the Company). The Credit Agreement includes minimum fixed charge coverage, maximum leverage and minimum net worth covenants, an unused commitment fee (0.25% to 0.40% per annum depending on the leverage ratio of the Company), and limitations on future dispositions of property, repurchases of common stock, dividends, outside indebtedness, and acquisitions. At September 29, 2007, the Company had $44,857,000 of unused lines of credit, after deducting $1,543,000 for outstanding standby letters of credit. The Company was in compliance with all covenants at September 29, 2007.
During September 2007 the Company entered into a $20,000,000 Interest Rate Swap with Bank of America, N.A. The $20,000,000 notional amount, receive-variable (1 month LIBOR) and pay-fixed 4.88% interest rate swap effective September 13, 2007, with monthly settlement dates on the 13th day of each month. The swap expires on September 13, 2010. The Company believes that the credit risk associated with the counterparty is nominal.
The Company expects to spend no more than $11,000,000 for capital expenditures in 2007. The increase in capital expenditures in 2007 from 2006 is principally to support new contract awards at DAS and DTI and offshore manufacturing expansion. The Company believes the ongoing subcontractor consolidation makes acquisitions an increasingly important component of the Companys future growth. The Company plans to continue to seek attractive acquisition opportunities and to make substantial capital expenditures for manufacturing equipment and facilities to support long-term contracts for both commercial and military aircraft programs.
The Company has made guarantees and indemnities under which it 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 the Company has indemnified its lessors for certain claims arising from the facility or the lease. The Company indemnifies its directors and officers to the maximum extent permitted under the laws of the State of Delaware. However, the Company has a directors and officers insurance policy that may reduce its exposure in certain circumstances and may enable it 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 limitation of the maximum potential future payments the Company could be obligated to make. Historically, payments related to these guarantees and indemnities have been immaterial. The Company estimates the fair value of its indemnification obligations as insignificant based on this history and insurance coverage and has, therefore, not recorded any liability for these guarantees and indemnities in the accompanying consolidated balance sheets. However, there can be no assurances that the Company will not have any future financial exposure under these indemnification obligations.
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As of September 29, 2007, the Company expects to make the following payments on its contractual obligations (in thousands):
Contractual Obligations |
Total | Payments Due by Period | |||||||||||||
Remainder of 2007 |
2008- 2010 |
2011- 2012 |
2013 and after | ||||||||||||
Long-term debt |
$ | 34,335 | $ | | $ | 34,190 | $ | 145 | $ | | |||||
Operating leases |
5,015 | 794 | 3,337 | 822 | 62 | ||||||||||
Contractual obligations |
5,768 | 231 | 1,543 | 1,258 | 2,736 | ||||||||||
Minimum pension liabilities |
2,738 | | 1,400 | 1,338 | | ||||||||||
Uncertain tax positions |
3,064 | 328 | 2,134 | 602 | | ||||||||||
Total |
$ | 50,920 | $ | 1,353 | $ | 42,604 | $ | 4,165 | $ | 2,798 | |||||
The Company 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 lawsuit is a qui tam action brought against The Boeing Company (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 the Boeing Commercial Airplanes-Wichita Division which were installed by Boeing in 32 aircraft ultimately sold to the United States government. The lawsuit seeks damages, civil penalties and other relief from the defendants for presenting or causing to be presented false claims for payment to the United States government. Although the amount of alleged damages is not specified, 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 $10,000 for each false claim made on or before September 28, 1999, and $11,000 for each false claim made on or after September 28, 1999, together with attorneys fees and costs. On June 5, 2007, the United States District Court denied the Companys motion to dismiss the lawsuit. The Company intends to defend itself vigorously against the lawsuit. The Company, at this time, is unable to estimate what, if any, liability it may have in connection with the lawsuit.
The DAS facility located in El Mirage, California has been directed by California environmental agencies to investigate and take corrective action for groundwater contamination. Based upon currently available information, the Company has established a provision for the cost of such investigation and corrective action. DAS expects to spend approximately $1.5 million for future investigation and corrective action for groundwater contamination and post-closure maintenance of the closed hazardous waste facility at its El Mirage location. However, the Companys ultimate liability in connection with the contamination will depend upon a number of factors, including changes in existing laws and regulations, and the design and cost of the construction, operation and maintenance of the corrective action.
The Companys subsidiary, Composite Structures, LLC (Composite), and several other companies have been ordered by a California environmental agency to investigate and clean up soil and groundwater contamination at its Monrovia, California facility. Composite has filed a petition for review of the order.
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DAS and other companies and government entities have entered into an amended consent decree (the Consent Decree) with the California Department of Toxic Substances Control (DTSC), which has been entered in the United States District Court for the Central District of California, relating to the alleged release of hazardous waste at a landfill in West Covina, California. The Consent Decree resolves the liability of DAS and the other settling defendants for certain past response costs, future interim response costs and future DTSC oversight costs in connection with the landfill. The Consent Decree provides for the performance of certain operation, maintenance and monitoring activities at the landfill by DAS and the other settling defendants until the later of March 15, 2008 or two years after essential activities commence at the landfill. The Company, at this time, is unable to estimate reliably its liability in connection with the landfill. Based on currently available information, the Company preliminarily estimates that the range of its future liability in connection with the landfill is between approximately $557,000 and $3.0 million. The Companys accrued liabilities at September 29, 2007 included approximately $557,000.
The Orange County Water District (OCWD) had filed a lawsuit against American Electronics, Inc. (AEI), a subsidiary of the Company, and other companies, to recover damages, relating to contamination of groundwater within the District. In the third quarter of 2007, AEI and the OCWD entered into a settlement agreement which resolved the lawsuit.
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, the Company makes various commitments and incurs contingent liabilities. While it is not feasible to predict the outcome of these other matters, the Company 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.
Off-Balance Sheet Arrangements
The Companys off-balance sheet arrangements consist solely of operating leases.
Critical Accounting Policies
Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement exists, the price is fixed or determinable, collection is reasonably assured and delivery of products has occurred or services have been rendered. Revenue from products sold under long-term contracts is recognized by the Company on the same basis as other sale transactions. The Company also recognizes revenue on the sale of services (including prototype products) based on the type of contract: time and materials, cost-plus reimbursement and firm-fixed price. Revenue is recognized (i) on time and materials contracts as time is spent at hourly rates, which are negotiated with customers, plus the cost of any allowable materials and out-of-pocket expenses, (ii) on cost plus reimbursement contracts based on direct and indirect costs incurred plus a negotiated profit calculated as a percentage of cost, a fixed amount or a performance-based award fee, and (iii) on fixed-price contracts on the percentage-of-completion method measured by the percentage of costs incurred to estimated total costs.
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Recent Accounting Pronouncements
On September 15, 2006, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 157, Fair Value Measurements (SFAS No. 157), which addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under generally accepted accounting principles (GAAP). As a result of SFAS No. 157 there is now a common definition of fair value to be used throughout GAAP. The FASB believes that the new standard will make the measurement of fair value more consistent and comparable and improve disclosures about those measures. The Board has agreed to consider delaying the original effective date of fiscal years beginning after November 15, 2007. Since the delay is not assured, the Company is currently evaluating the effect that the adoption of SFAS No. 157 will have on its results of operations and financial position as of January 1, 2008.
In February 2007, FASB issued FASB Statement No. 159, Fair Value Option for Financial Assets and Financial Liabilities (SFAS No. 159), which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The objective of SFAS No. 159 is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The Company will need to adopt SFAS No. 159 for financial statements issued for fiscal years beginning after November 15, 2007. The Company is currently evaluating the effect that the adoption of SFAS No. 159 will have on its results of operations and financial position.
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Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
During September 2007 the Company entered into a $20,000,000 Interest Rate Swap with Bank of America, N.A. The $20,000,000 notional amount, receive-variable (1 month LIBOR) and pay-fixed 4.88% interest rate swap effective September 13, 2007, with monthly settlement dates on the 13th day of each month. The swap expires on September 13, 2010. The Company believes that the credit risk associated with the counterparty is nominal.
Item 4. | Controls and Procedures |
The Companys chief executive officer and chief financial officer have concluded, based on an evaluation of the Companys 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. No change in the Companys internal control over financial reporting occurred during the period covered by this report that has materially affected or is reasonably likely to materially affect, the Companys internal control over financial reporting.
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Item 1. | Legal Proceedings |
See Item 1 of the Companys Form 10-K for the year ended December 31, 2006 and Form 10-Q for the quarter ended June 30, 2007 for a discussion of the lawsuit entitled United States of America ex rel Taylor Smith, Jeannine Prewitt and James Ailes v. The Boeing Company and Ducommun Inc.
Item 1A. | Risk Factors |
See Item 1A of the Companys Form 10-K for the year ended December 31, 2006 for a discussion of risk factors.
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
(c)
Issuer Purchases of Equity Securities For the Three Months Ended September 29, 2007
Period |
Total Number of Shares (or Units) |
Average Price Paid per Share (or Unit) |
Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs |
Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs (2) | ||||||
Period beginning July 1, 2007 and ending July 28, 2007 |
0 | $ | 0.00 | 0 | $ | 4,704,000 | ||||
Period beginning July 29, 2007 and ending August 25, 2007 |
0 | $ | 0.00 | 0 | $ | 4,704,000 | ||||
Period beginning August 26, 2007 and ending September 29, 2007 |
1,406 | $ | 29.80 | 0 | $ | 4,704,000 | ||||
Total |
1,406 | $ | 29.80 | 0 | $ | 4,704,000 | ||||
(1) |
The shares of common stock repurchased represent previously issued shares used by employees to pay the exercise price in connection with the exercise of stock options. |
(2) |
The Company did not repurchase any of its common stock during the third quarter of 2007 or the year ended December 31, 2006 in the open market. At September 29, 2007, $4,704,000 remained available to repurchase common stock of the Company under stock repurchase programs previously approved by the Board of Directors. |
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Item 6. | Exhibits. |
11 | Reconciliation of Numerators and Denominators of the Basic and Diluted Earnings Per Share Computations | |
31.1 | Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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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.
DUCOMMUN INCORPORATED | ||
(Registrant) | ||
By: | /s/Gregory A. Hann | |
Gregory A. Hann | ||
Vice President, Chief Financial Officer | ||
and Treasurer | ||
(Duly Authorized Officer of the Registrant) | ||
By: | /s/Samuel D. Williams | |
Samuel D. Williams | ||
Vice President and Controller | ||
(Chief Accounting Officer of the Registrant) |
Date: October 29, 2007
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EXHIBIT 11
DUCOMMUN INCORPORATED AND SUBSIDIARIES
RECONCILIATION OF THE NUMERATORS AND DENOMINATORS OF
THE BASIC AND DILUTED EARNINGS PER SHARE COMPUTATIONS
For the Quarter Ended September 29, 2007 | ||||||||
Income (Numerator) |
Shares (Denominator) |
Per-Share Amount | ||||||
Basic EPS |
||||||||
Income Available to Common Stockholders |
$ | 5,832,000 | 10,409,000 | $ | 0.56 | |||
Effect of Dilutive Securities |
||||||||
Stock Options |
| 151,000 | ||||||
Diluted EPS |
||||||||
Income Available to Common Stockholders + Assumed Conversions |
$ | 5,832,000 | 10,560,000 | $ | 0.55 | |||
For the Quarter Ended September 30, 2006 | ||||||||
Income (Numerator) |
Shares (Denominator) |
Per-Share Amount | ||||||
Basic EPS |
||||||||
Income Available to Common Stockholders |
$ | 4,099,000 | 10,231,000 | $ | 0.40 | |||
Effect of Dilutive Securities |
||||||||
Stock Options |
| 61,000 | ||||||
Diluted EPS |
||||||||
Income Available to Common Stockholders + Assumed Conversions |
$ | 4,099,000 | 10,292,000 | $ | 0.40 | |||
DUCOMMUN INCORPORATED AND SUBSIDIARIES
RECONCILIATION OF THE NUMERATORS AND DENOMINATORS OF
THE BASIC AND DILUTED EARNINGS PER SHARE COMPUTATIONS
For the Nine Months Ended September 29, 2007 | ||||||||
Income (Numerator) |
Shares (Denominator) |
Per-Share Amount | ||||||
Basic EPS |
||||||||
Income Available to Common Stockholders |
$ | 14,203,000 | 10,357,000 | $ | 1.37 | |||
Effect of Dilutive Securities |
||||||||
Stock Options |
| 83,000 | ||||||
Diluted EPS |
||||||||
Income Available to Common Stockholders + Assumed Conversions |
$ | 14,203,000 | 10,440,000 | $ | 1.36 | |||
For the Nine Months Ended September 30, 2006 | ||||||||
Income (Numerator) |
Shares (Denominator) |
Per-Share Amount | ||||||
Basic EPS |
||||||||
Income Available to Common Stockholders |
$ | 10,029,000 | 10,195,000 | $ | 0.98 | |||
Effect of Dilutive Securities |
||||||||
Stock Options |
| 92,000 | ||||||
Diluted EPS |
||||||||
Income Available to Common Stockholders + Assumed Conversions |
$ | 10,029,000 | 10,287,000 | $ | 0.97 | |||
Exhibit 31.1
Certification of Principal Executive Officer
Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
I, Joseph C. Berenato, certify that:
1. | I have reviewed this Quarterly Report of Ducommun Incorporated (the registrant) on Form 10-Q for the period ended September 29, 2007; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a - 15(f) and 15d - 15(f)), for the registrant and have: |
a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c. | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d. | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: October 29, 2007
/s/ Joseph C. Berenato |
Joseph C. Berenato |
Chairman, President and Chief Executive Officer |
Exhibit 31.2
Certification of Principal Financial Officer
Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
I, Gregory A. Hann, certify that:
1. | I have reviewed this Quarterly Report of Ducommun Incorporated (the registrant) on Form 10-Q for the period ended September 29, 2007; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a - 15(f) and 15d - 15(f)), for the registrant and have: |
a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c. | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d. | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: October 29, 2007
/s/ Gregory A. Hann |
Gregory A. Hann |
Vice President and Chief Financial Officer |
Exhibit 32
Certification Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of Ducommun Incorporated (the Company) on Form 10-Q for the period ending September 29, 2007 as filed with the Securities and Exchange Commission on the date hereof (the Report), we, Joseph C. Berenato, Chairman, President and Chief Executive Officer of the Company, and Gregory A. Hann, Vice President and Chief Financial Officer of the Company, certify pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to the best of our knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
By: | /s/ Joseph C. Berenato | |
Joseph C. Berenato | ||
Chairman, President and Chief Executive Officer | ||
By: | /s/ Gregory A. Hann | |
Gregory A. Hann | ||
Vice President and Chief Financial Officer |
Date: October 29, 2007
The foregoing certification is accompanying the Form 10-Q solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and is not being filed as part of the Form 10-Q or as a separate disclosure document.