Form 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 October 3, 2009

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

(Registrant’s 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 has submitted electronically and posted on its corporate website, if any, every interactive data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 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  ¨    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 definition of accelerated filer, large accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):

 

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of October 3, 2009, there were outstanding 10,450,426 shares of common stock.

 

 

 


Table of Contents

DUCOMMUN INCORPORATED

FORM 10-Q

INDEX

 

              Page
Part I.    Financial Information   
   Item 1.   Financial Statements   
     Consolidated Balance Sheets at October 3, 2009 and December 31, 2008    3
     Consolidated Statements of Income for the Three Months Ended October 3, 2009 and September 27, 2008    4
     Consolidated Statements of Income for the Nine Months Ended October 3, 2009 and September 27, 2008    5
     Consolidated Statements of Cash Flows for the Nine Months Ended October 3, 2009 and September 27, 2008    6
     Notes to Consolidated Financial Statements    7 - 19
   Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations    20 - 34
   Item 3.   Quantitative and Qualitative Disclosures About Market Risk    35
   Item 4.   Controls and Procedures    35
Part II.    Other Information   
   Item 1A.   Risk Factors    36
   Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds    37
   Item 6.   Exhibits    38
Signatures      39
Exhibits     

 

2


Table of Contents
Item 1. Financial Statements

DUCOMMUN INCORPORATED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands)

 

     (Unaudited)        
     October 3,
2009
    December 31,
2008
 

Assets

    

Current Assets:

    

Cash and cash equivalents

   $ 823      $ 3,508   

Accounts receivable

     60,249        50,090   

Unbilled receivables

     4,250        7,074   

Inventories

     89,966        83,157   

Deferred income taxes

     9,381        9,172   

Other current assets

     6,083        6,172   
                

Total Current Assets

     170,752        159,173   

Property and Equipment, Net

     61,273        61,954   

Goodwill, Net

     113,378        114,002   

Other Assets

     29,423        31,057   
                
   $ 374,826      $ 366,186   
                

Liabilities and Shareholders’ Equity

    

Current Liabilities:

    

Current portion of long-term debt

   $ 4,972      $ 2,420   

Accounts payable

     32,116        35,358   

Accrued liabilities

     34,279        51,723   
                

Total Current Liabilities

     71,367        89,501   

Long-Term Debt, Less Current Portion

     42,400        28,299   

Deferred Income Taxes

     11,014        9,902   

Other Long-Term Liabilities

     13,587        14,038   
                

Total Liabilities

     138,368        141,740   
                

Commitments and Contingencies

    

Shareholders’ Equity:

    

Common stock

     106        106   

Treasury stock

     (1,924     (986

Additional paid-in capital

     57,705        56,040   

Retained earnings

     184,744        173,718   

Accumulated other comprehensive loss

     (4,173     (4,432
                

Total Shareholders’ Equity

     236,458        224,446   
                
   $ 374,826      $ 366,186   
                

See accompanying notes to consolidated financial statements.

 

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Table of Contents

DUCOMMUN INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

(Unaudited)

 

     Three Months Ended  
     October 3,
2009
    September 27,
2008
 

Sales and Service Revenues:

    

Product sales

   $ 95,227      $ 86,299   

Service revenues

     14,676        14,557   
                

Net Sales

     109,903        100,856   
                

Operating Costs and Expenses:

    

Cost of product sales

     76,015        68,462   

Cost of service revenues

     11,350        11,571   

Selling, general and administrative expenses

     12,647        11,484   
                

Total Operating Costs and Expenses

     100,012        91,517   
                

Operating Income

     9,891        9,339   

Interest Expense, Net

     (652     (355
                

Income Before Taxes

     9,239        8,984   

Income Tax Expense, Net

     (3,049     (2,720
                

Net Income

   $ 6,190      $ 6,264   
                

Earnings Per Share:

    

Basic earnings per share

   $ 0.59      $ 0.59   

Diluted earnings per share

   $ 0.59      $ 0.59   

Weighted Average Number of Common Shares Outstanding:

    

Basic

     10,449        10,578   

Diluted

     10,491        10,693   

See accompanying notes to consolidated financial statements.

 

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Table of Contents

DUCOMMUN INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

(Unaudited)

 

     Nine Months Ended  
     October 3,
2009
     September 27,
2008
 

Sales and Service Revenues:

     

Product sales

   $ 277,993       $ 259,200   

Service revenues

     47,090         43,179   
                 

Net Sales

     325,083         302,379   
                 

Operating Costs and Expenses:

     

Cost of product sales

     228,217         204,435   

Cost of service revenues

     37,294         34,537   

Selling, general and administrative expenses

     37,591         35,942   
                 

Total Operating Costs and Expenses

     303,102         274,914   
                 

Operating Income

     21,981         27,465   

Interest Expense, Net

     (2,005      (948
                 

Income Before Taxes

     19,976         26,517   

Income Tax Expense, Net

     (6,592      (9,170
                 

Net Income

   $ 13,384       $ 17,347   
                 

Earnings Per Share:

     

Basic earnings per share

   $ 1.28       $ 1.64   

Diluted earnings per share

   $ 1.27       $ 1.63   

Weighted Average Number of Common Shares Outstanding:

     

Basic

     10,465         10,567   

Diluted

     10,502         10,671   

See accompanying notes to consolidated financial statements.

 

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Table of Contents

DUCOMMUN INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

     Nine Months Ended  
     October 3,
2009
     September 27,
2008
 

Cash Flows from Operating Activities:

     

Net Income

   $ 13,384       $ 17,347   

Adjustments to Reconcile Net Income to Net

     

Cash Provided by Operating Activities:

     

Depreciation

     6,608         6,259   

Amortization of other intangible assets

     1,838         1,150   

Amortization of (premium)/discount on notes payable

     (5      42   

Stock-based compensation expense

     1,611         1,616   

Deferred income tax provision

     841         1,645   

Income tax benefit from stock-based compensation

     115         87   

Other - (increase)/decrease

     (127      1,453   

Changes in Assets and Liabilities:

     

Accounts receivable - (increase)

     (10,257      (10,961

Unbilled receivables - decrease/(increase)

     2,824         (295

Inventories - (increase)

     (6,809      (12,122

Other assets - decrease/(increase)

     1,842         (1,119

Accounts payable - (decrease)

     (3,242      (4,153

Accrued and other liabilities - (decrease)

     (17,269      (696
                 

Net Cash (Used in)/Provided by Operating Activities

     (8,646      253   
                 

Cash Flows from Investing Activities:

     

Purchase of property and equipment

     (5,930      (9,520
                 

Net Cash Used in Investing Activities

     (5,930      (9,520
                 

Cash Flows from Financing Activities:

     

Net borrowings/(repayments) of long-term debt

     16,658         (1,900

Cash dividends paid

     (2,358      (793

Debt issue cost paid

     (1,410      —     

Repurchase of stock

     (938      —     

Net cash effect of exercise related to stock options

     (61      484   

Excess tax benefit from stock-based compensation

     —           75   
                 

Net Cash Provided by/(Used in) Financing Activities

     11,891         (2,134
                 

Net Decrease in Cash and Cash Equivalents

     (2,685      (11,401

Cash and Cash Equivalents at Beginning of Period

     3,508         31,571   
                 

Cash and Cash Equivalents at End of Period

   $ 823       $ 20,170   
                 

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 October 3, 2009, the consolidated statements of income are unaudited for the three months and nine months ended October 3, 2009 and September 27, 2008 and the consolidated statements of cash flows are unaudited for the nine months ended October 3, 2009 and September 27, 2008. 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 Company’s consolidated financial statements and related notes thereto included in the Form 10-K for the year ended December 31, 2008. The results of operations for the three months and nine months ended October 3, 2009 are not necessarily indicative of the results to be expected for the full year ending December 31, 2009.

Ducommun operates in two business segments: Ducommun AeroStructures, Inc. (“DAS”), engineers and manufactures aerospace structural components and subassemblies, and Ducommun Technologies, Inc. (“DTI”), designs, engineers and manufactures electromechanical components and subassemblies, 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 as described below.

Earnings Per Share

Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding in each period. Diluted earnings per share is 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.

 

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DUCOMMUN INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

The weighted average number of shares outstanding used to compute earnings per share is as follows:

 

     Three Months Ended    Nine Months Ended
     October 3,    September 27,    October 3,    September 27,
     2009    2008    2009    2008

Basic weighted average shares outstanding

   10,449,000    10,578,000    10,464,000    10,567,000

Dilutive potential common shares

   42,000    115,000    38,000    104,000
                   

Diluted weighted average shares outstanding

   10,491,000    10,693,000    10,502,000    10,671,000
                   

The numerator used to compute diluted earnings per share is as follows:

 

     Three Months Ended    Nine Months Ended
     October 3,    September 27,    October 3,    September 27,
     2009    2008    2009    2008

Net earnings (total numerator)

   $ 6,190,000    $ 6,264,000    $ 13,384,000    $ 17,347,000
                           

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
     October 3,    September 27,    October 3,    September 27,
     2009    2008    2009    2008

Stock options and stock units

   828,950    488,456    811,667    484,564

Comprehensive Income

Certain items such as unrealized gains and losses on certain investments in debt and equity securities and pension liability adjustments are presented as separate components of shareholders’ equity. The current period change in these items is included in other comprehensive loss 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 pension liability adjustment of $3,640,000 net of tax, and an interest rate hedge mark-to-market adjustment of $533,000, net of tax at October 3, 2009, compared to a pension liability adjustment of $3,640,000, net of tax, and an interest rate hedge mark-to-market adjustment of $792,000, net of tax at December 31, 2008.

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (FASB) issued new accounting guidance on fair value measurements. This guidance establishes a common definition for fair value to be applied to U.S. GAAP requiring use of fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. It is effective for financial assets and financial liabilities for fiscal years beginning after November 15, 2007. Issued in February 2008, a FASB staff position removed leasing transactions from the scope of the new fair value guidance. Also in February 2008, the FASB issued

 

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DUCOMMUN INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

authoritative guidance deferring the effective date of the fair value guidance for all nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008. The Company adopted certain provisions of the new accounting guidance for financial assets and liabilities in the first quarter of 2008 which did not have a material effect on the Company’s results of operations and financial position. The Company is currently evaluating the impact of the adoption for nonfinancial assets and liabilities, on its results of operations and financial position

In December 2007, the FASB issued new guidance on business combinations. The new standard provides revised guidance on how acquirers recognize and measure the consideration transferred, identifiable assets acquired, liabilities assumed, noncontrolling interests, and goodwill acquired in a business combination. The new standard also expands required disclosures surrounding the nature and financial effects of business combinations. The standard is effective, on a prospective basis, for fiscal years beginning after December 15, 2008. Upon adoption, this standard did not have a material impact on our consolidated financial position and results of operations. However, if the Company enters into any business combinations after the adoption of the new guidance of business combinations, a transaction may significantly impact the Company’s consolidated financial position and results of operations as compared to the Company’s recent acquisitions, accounted for under prior GAAP requirements, due to the changes described above.

In December 2007, the FASB issued new guidance on noncontrolling interests which establishes requirements for ownership interests in subsidiaries held by parties other than the Company (sometimes called “minority interests”) be clearly identified, presented, and disclosed in the consolidated statement of financial position within equity, but separate from the parent’s equity. All changes in the parent’s ownership interests are required to be accounted for consistently as equity transactions and any noncontrolling equity investments in unconsolidated subsidiaries must be measured initially at fair value. The new guidance is effective, on a prospective basis, for fiscal years beginning after December 15, 2008. However, presentation and disclosure requirements must be retrospectively applied to comparative financial statements. The Company adopted the new standard on January 1, 2009, which did not have a material effect on the Company’s results of operations and financial position.

In March 2008, the FASB issued new guidance on disclosures about derivative instruments and hedging activities. The new guidance expands existing quarterly disclosure requirements about an entity’s derivative instruments and hedging activities. The new guidance is effective for fiscal years beginning after November 15, 2008. All derivatives are recorded on the balance sheet as assets or liabilities and measured at fair value. For derivatives designated as hedges of the fair value of assets or liabilities, the changes in fair values of both the derivatives and the hedged items are recorded in current earnings. For derivatives designated as cash flow hedges, the effective portion of the changes in fair value of the derivatives are recorded in Accumulated Other Comprehensive Income (Loss) and subsequently recognized in earnings when the hedged items impact earnings. Cash flows of such derivative financial instruments are classified consistent with the underlying hedged item. The implementation of this standard did not have a material impact on our consolidated financial position and results of operations. See Note 5 for additional derivative and hedging information and disclosures.

 

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DUCOMMUN INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

In December 2008, the FASB issued a staff position providing guidance on employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. The guidance is effective for fiscal years ending after December 15, 2009. The implementation of this standard will not have a material impact on our consolidated financial position and results of operations. The standard requires an employer to disclose investment policies and strategies, categories, fair value measurements, and significant concentration risk among its postretirement benefit plan assets. The adoption of this statement will have an impact on the Company’s disclosure requirements and the Company is currently evaluating the impact of these disclosures on the financial statements. The disclosure requirements are annual and do not apply to interim financial statements.

In January 2009, the FASB issued new guidance on the determination of the useful life of the intangible assets. The standard amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets. The objective is to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset, and other U.S. GAAP. The standard applies to all intangible assets, whether acquired in a business combination or otherwise. The standard is applied prospectively to financial statements issued for fiscal years and interim periods beginning after December 15, 2008. The adoption of this statement did not have a material impact on the Company’s results of operations or financial condition.

In April 2009, the FASB issued a staff position amending and clarifying the new business combination standard to address application issues associated with recognition and measurement, subsequent and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. The staff position is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The implementation of this standard did not have a material impact on our consolidated financial position and results of operations.

In April 2009, the FASB issued a staff position requiring fair value disclosures in both interim as well as annual financial statements in order to provide more timely information about the effects of current market conditions on financial instruments. The guidance is effective for interim and annual periods ending after June 15, 2009. The implementation of this standard did not have a material impact on our consolidated financial position and results of operations.

In April 2009, the FASB issued a staff position which changes the method for determining whether an other-than-temporary impairment exists for debt securities and the amount of the impairment to be recorded in earnings. The guidance is effective for interim and annual periods ending after June 15, 2009. The implementation of this standard did not have a material impact on our consolidated financial position and results of operations.

In April 2009, the FASB issued a staff position providing additional guidance on factors to consider in estimating fair value when there has been a significant decrease in market activity for a financial asset. The guidance was effective for interim and annual periods ending June 15, 2009. The implementation of this standard did not have a material impact on our consolidated financial position and results of operations.

 

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DUCOMMUN INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

In May 2009, the FASB issued new guidance on subsequent events. The standard provides guidance on management’s assessment of subsequent events and incorporates this guidance into accounting literature. The standard is effective prospectively for interim and annual periods ending after June 15, 2009. The implementation of this standard did not have a material impact on our consolidated financial position and results of operations. In preparing these financial statements, the Company evaluated the events and transactions that occurred from October 3, 2009 through November 2, 2009, the date these financial statements were issued. The Company has made the required additional disclosures in reporting periods in which subsequent events occur.

In June 2009, the FASB issued an amendment to the accounting and disclosure requirements for the consolidation of variable interest entities. The guidance affects the overall consolidation analysis and requires enhanced disclosures on involvement with variable interest entities. The guidance is effective for fiscal years beginning after November 15, 2009. The Company is currently assessing the impact of the guidance on its consolidated financial position and results of operations.

In June 2009, the FASB Accounting Standards Codification (Codification) was issued. The Codification is the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. The Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The implementation of this standard did not have a material impact on our consolidated financial position and results of operations.

In October 2009, the FASB issued amendments to the accounting and disclosure for revenue recognition. These amendments, effective for fiscal years beginning on or after June 15, 2010 (early adoption is permitted), modify the criteria for recognizing revenue in multiple element arrangements and the scope of what constitutes a non-software deliverable. The Company is currently assessing the impact on its consolidated financial position and results of operations.

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.

 

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DUCOMMUN INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Reclassifications

Certain prior period information has been reclassified to conform to the current period presentation.

Note 2. Acquisitions

On December 23, 2008, the Company acquired DynaBil Industries, Inc., a privately-owned company based in Coxsackie, New York, for $45,386,000 (net of cash acquired and excluding acquisition costs) and subsequently changed its name to Ducommun AeroStructures, New York Inc. (“DAS-New York”). DAS-New York is a leading provider of titanium and aluminum structural components and assemblies for commercial and military aerospace applications. The acquisition was funded from internally generated cash, notes to the sellers, and borrowings of approximately $10,500,000 under the Company’s credit agreement.

The following table presents unaudited pro forma consolidated operating results for the Company for the three months and nine months ended September 27, 2008 as if the DAS-New York acquisition had occurred as of the beginning of the period presented.

 

     (Unaudited)
(In thousands)
     Three Months Ended
September 27,

2008
   Nine Months Ended
September 27,

2008

Net sales

   $ 111,513    $ 335,425

Net income

     5,963      16,965

Basic earnings per share

     0.56      1.61

Diluted earnings per share

     0.56      1.59

The consolidated financial statements reflect estimates of the fair value of the assets acquired and liabilities assumed and the related allocation of the purchase price for DAS-New York. The principal estimates of fair value were determined using expected net present value techniques utilizing a 15% discount rate. Customer relationships were valued assuming an annual attrition rate of 3%.

 

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DUCOMMUN INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

The table below summarizes the purchase price allocation for DAS-New York at the date of acquisition (December 23, 2008).

 

     (In thousands)  

Tangible assets, exclusive of cash

   $ 18,523   

Intangible assets

     19,730   

Goodwill

     19,809   

Liabilities assumed

     (12,360
        

Cost of acquisition, net of cash acquired

   $ 45,702   
        

The tangible assets included in the table above included an inventory step-up of approximately $1,670,000, which reduced margins in the third quarter and nine months of 2009 by $0 and $1,520,000, respectively.

Amortization expense of other intangible assets for the Company was $1,014,000 and $222,000 for the three months ended October 3, 2009 and September 27, 2008, respectively and $1,838,000 and $1,150,000 for the nine months ended October 3, 2009 and September 27, 2008, respectively. Future amortization expense is expected to be as follows:

 

     Ducommun
AeroStructures
   Ducommun
Technologies
   Total
Ducommun

(In thousands)

        

Balance of 2009

   $ 672    $ 340    $ 1,012

2010

     2,629      1,363      3,992

2011

     2,867      900      3,767

2012

     2,828      851      3,679

2013

     2,219      850      3,069

Thereafter

     7,648      3,829      11,477
                    
   $ 18,863    $ 8,133    $ 26,996
                    

Note 3. Inventories

Inventories consist of the following:

 

     (In thousands)
     October 3,
2009
   December 31,
2008

Raw materials and supplies

   $ 18,691    $ 19,918

Work in process

     85,377      75,633

Finished goods

     4,473      4,940
             
     108,541      100,491

Less progress payments

     18,575      17,334
             

Total

   $ 89,966    $ 83,157
             

 

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DUCOMMUN INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 4. Long-Term Debt

Long-term debt is summarized as follows:

 

     (In thousands)
     October 3,
2009
   December 31,
2008

Bank credit agreement

   $ 39,100    $ 20,000

Notes and other obligations for acquisitions

     8,272      10,719
             

Total debt

     47,372      30,719

Less current portion

     4,972      2,420
             

Total long-term debt

   $ 42,400    $ 28,299
             

The Company is a party to a Second Amended and Restated Credit Agreement with Bank of America, N.A., as Administrative Agent, Wells Fargo Bank, National Association, as Syndication Agent, Union Bank, N.A., as Documentation Agent and the other lenders named therein dated June 26, 2009 (the “Credit Agreement”). The Credit Agreement provides for an unsecured revolving credit line of $120,000,000 maturing on June 26, 2014. Interest is payable quarterly on the outstanding borrowings at Bank of America’s prime rate (3.25% at October 3, 2009) plus a spread (1.5% to 2.0% 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 (0.25% at October 3, 2009 for one month LIBOR) plus a spread (2.5% to 3.0% 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 (0.50% to 0.60% 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 October 3, 2009, the Company had $80,044,000 of unused lines of credit, after deducting $856,000 for outstanding standby letters of credit. The Company had outstanding loans of $39,100,000 and was in compliance with all covenants at October 3, 2009.

On September 5, 2007, the Company entered into a $20,000,000 interest rate swap with Banc of America Securities. The interest rate swap is for a $20,000,000 notional amount, under which the Company receives a variable interest rate (one month LIBOR) and pays a fixed 4.88% interest rate, with monthly settlement dates. The interest rate swap expires on September 13, 2010. As of October 3, 2009, the one month LIBOR rate was approximately 0.25%, and the fair value of the interest rate swap was a liability of approximately $889,000.

In connection with the DAS-New York acquisition in December 2008, the Company issued a promissory note in the initial principal amount of $7,000,000 with interest of five percent (5%) per annum payable annually on each anniversary of the closing date (December 23). Principal of the promissory note is payable in the amount of $4,000,000 on June 23, 2010 and $3,000,000 on December 23, 2013.

 

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DUCOMMUN INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

The weighted average interest rate on borrowings outstanding was 4.24% at October 3, 2009, compared to 4.87% at September 27, 2008. The carrying amount of long-term debt approximates fair value based on the terms of the related debt, recent transactions and estimates using interest rates currently available to the Company for debt with similar terms and remaining maturities.

Note 5. Derivative Financial Instruments

SFAS No. 157 (ASC 820) defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS No. 157 (ASC 820) also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Three levels of the fair value hierarchy defined by SFAS No. 157 (ASC 820) are as follows:

Level 1: Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives and listed equities.

Level 2: Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including time value, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.

Level 3: Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value. Level 3 instruments include those that may be more structured or otherwise tailored to customers’ needs.

The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of October 3, 2009. As required by SFAS No. 157 (ASC 820), financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.

 

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DUCOMMUN INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

     At Fair Value as of October 3, 2009

Recurring Fair Value Measures (In thousands)

   Level 1    Level 2    Level 3    Total

Assets:

           

Interest rate swap

   $ —      $—      $ —      $ —  
                         

Liabilities:

           

Interest rate swap

   $ —      $889    $ —      $ 889
                         

Note 6. Shareholders’ Equity

The Company is authorized to issue five million shares of preferred stock. At October 3, 2009 and September 27, 2008, no preferred shares were issued or outstanding.

At October 3, 2009, $2,773,030 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 three months ended October 3, 2009 and September 27, 2008, in the open market.

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 retiree’s 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  
     October 3,
2009
    September 27,
2008
    October 3,
2009
    September 27,
2008
 

Service cost

   $ 117      $ 137      $ 359      $ 411   

Interest cost

     220        188        648        564   

Expected return on plan assets

     (172     (225     (572     (675

Amortization of actuarial loss

     121        17        335        51   
                                

Net periodic post retirement benefit cost

   $ 286      $ 117      $ 770      $ 351   
                                

 

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DUCOMMUN INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

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

The Company records the interest charge and penalty charge, if any, with respect to uncertain tax positions as a component of tax expense. During the nine months ended October 3, 2009 and September 27, 2008, the Company recognized approximately $92,000 and $197,000, respectively, in interest related to uncertain tax positions. The Company had approximately $388,000 and $335,000 in accrued liabilities, for the payment of interest and penalties, at October 3, 2009 and December 31, 2008, respectively.

The Company’s total amount of unrecognized tax benefits was approximately $2,569,000 and $2,014,000 at October 3, 2009 and December 31, 2008, respectively. These amounts, if recognized, would affect the annual income tax rate.

During 2008, the Company concluded the examination of its federal income tax returns for 2005 and 2006. The Company’s California franchise (income) tax return for 2005 has been selected for examination. Management does not expect the results of this examination to have a material impact on the Company’s financial statements. Federal income tax returns after 2006, California franchise (income) tax returns after 2005 and other state income tax returns after 2004 are subject to examination.

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 “District Court”). The lawsuit is a qui tam action brought against The Boeing Company (“Boeing”) and Ducommun on behalf of the United

 

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DUCOMMUN INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

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 aircraft ultimately sold to the United States government. The number of Boeing aircraft subject to the lawsuit has been reduced to 25 aircraft following the District Court’s granting of partial summary judgment in favor of Boeing and Ducommun. 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. 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.

DAS has been directed by California environmental agencies to investigate and take corrective action for ground water contamination at its facilities located in El Mirage and Monrovia, California. Based on currently available information, the Company has established a reserve for its estimated liability for such investigation and corrective action in the approximate amount of $3,114,000. DAS also faces liability as a potentially responsible party for hazardous waste disposed at two landfills located in Casmalia and West Covina, California. DAS and other companies and government entities have entered into consent decrees with respect to each landfill with the United States Environmental Protection Agency and/or California environmental agencies under which certain investigation, remediation and maintenance activities are being performed. Based upon currently available information, the Company has established a reserve for its estimated liability in connection with the landfills in the approximate amount of $1,588,000. The Company’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, 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. Business Segment Information

The Company supplies products and services to the aerospace industry. The Company’s 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.

 

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DUCOMMUN INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Financial information by operating segment is set forth below:

 

     (In thousands)  
     Three Months Ended     Nine Months Ended  
     October 3,
2009
    September 27,
2008
    October 3,
2009
    September 27,
2008
 

Net Sales:

        

Ducommun AeroStructures

   $ 74,456      $ 62,787      $ 216,362      $ 191,770   

Ducommun Technologies

     35,447        38,069        108,721        110,609   
                                

Total Net Sales

   $ 109,903      $ 100,856      $ 325,083      $ 302,379   
                                

Segment Operating Income

        

Ducommun AeroStructures

   $ 10,107      $ 9,553      $ 21,123      $ 29,675   

Ducommun Technologies

     3,028        2,320        9,294        6,097   
                                
     13,135        11,873        30,417        35,772   

Corporate General and Administrative Expenses

     (3,244     (2,534     (8,436     (8,307
                                

Total Operating Income

   $ 9,891      $ 9,339      $ 21,981      $ 27,465   
                                

Segment assets include assets directly identifiable with each segment. Corporate assets include assets not specifically identified with a business segment, including cash.

 

     (In thousands)
     October 3,
2009
   December 31,
2008

Total Assets:

     

Ducommun AeroStructures

   $ 241,841    $ 229,914

Ducommun Technologies

     118,020      118,401

Corporate Administration

     14,965      17,871
             

Total Assets

   $ 374,826    $ 366,186
             

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Ducommun Incorporated (“Ducommun” or the “Company”), through its subsidiaries 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, helicopter, missile and related programs as well as space programs.

Domestic commercial aircraft programs include the Boeing 737NG, 747, 767, 777 and 787. 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 programs include the Boeing C-17, F-15 and F-18 and Lockheed Martin F-16 and F-22 aircraft, and various aircraft and shipboard electronics upgrade programs. Commercial and military helicopter programs include helicopters manufactured by Boeing (principally the Apache and Chinook helicopters), Sikorsky, Bell, Augusta and Carson. The Company also supports various unmanned space launch vehicle and satellite programs.

Sales, gross profit as a percentage of sales, selling, general and administrative expense as a percentage of sales, the effective tax rate and the diluted earnings per share, for the third quarter and nine months of 2009 and 2008, respectively, were as follows:

 

     Third Quarter Ended     Nine Months Ended  
     2009     2008     2009     2008  

Sales (in $000’s)

   $ 109,903      $ 100,856      $ 325,083      $ 302,379   

Gross Profit % of Sales

     20.5     20.6     18.3     21.0

SG&A Expense % of Sales

     11.5     11.4     11.6     11.9

Effective Tax Rate

     33.0     30.3     33.0     34.6

Diluted Earnings Per Share

   $ 0.59      $ 0.59      $ 1.27      $ 1.63   

The Company manufactures components and assemblies principally for domestic and foreign commercial and military aircraft and space programs. The Company’s Miltec subsidiary provides engineering, technical and program management services almost entirely for United States defense, space and homeland security programs.

 

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The Company’s mix of military, commercial and space business in the third quarter and nine months of 2009 and 2008, respectively, were approximately as follows:

 

     Third Quarter Ended     Nine Months Ended  
     2009     2008     2009     2008  

Military

   65   56   62   58

Commercial

   33      41      36      40   

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 and Blackhawk helicopter programs. Sales to these programs, as a percentage of total sales, for the third quarter and nine months of 2009 and 2008, respectively, were approximately as follows:

 

     Third Quarter Ended     Nine Months Ended  
     2009     2008     2009     2008  

Boeing Commercial Aircraft

   17   17   17   17

Boeing C-17 Aircraft

   10      9      10      9   

Sikorsky Blackhawk Helicopter

   9      2      9      2   

Boeing Apache Helicopter

   8      12      9      14   

All Others

   56      60      55      58   
                        

Total

   100   100   100   100
                        

Sales in the third quarter and nine months of 2009 were higher than the third quarter of 2008 by $9,047,000 and $22,704,000, respectively, due to sales from DAS-New York, which was acquired in December 2008. Sales in the third quarter and nine months of 2009 from DAS-New York were $11,100,000 and $32,300,000, respectively.

Net income for the third quarter and nine months of 2009 was lower than the third quarter and nine months of 2008. The decline in net income for the nine months of 2009 was negatively impacted by inventory reserves and valuation adjustments at DAS. In the first quarter of 2009, the Company recorded a pre-tax inventory reserve of $4,359,000 related to inventory on-hand for Eclipse Aviation Corporation (“Eclipse”). In the second quarter of 2009, the Company recorded a pre-tax inventory valuation adjustment of $782,000 related to costs that were capitalized in error in prior periods. Net income for the third quarter of 2009 was also negatively impacted by an increase in interest expense due to higher debt in 2009 and higher income tax expense due to higher income before taxes and the impact of a higher effective tax rate. Net income for the nine months of 2009 was also favorably impacted by a decrease in income tax expense due to lower income before taxes and the benefit of a lower effective tax rate, partially offset by an increase in interest expense due to higher debt in 2009.

 

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Results of Operations

Third Quarter 2009 Compared to Third Quarter 2008

Net sales in the third quarter of 2009 were $109,903,000, compared to net sales in the third quarter 2008 of $100,856,000. Net sales in the third quarter of 2009 increased $9,047,000 from the same period last year due to sales of $11,100,000 from DAS-New York, which was acquired in December 2008. The Company’s mix of business in the third quarter of 2009 was approximately 65% military, 33% commercial, and 2% space, compared to 56% military, 41% commercial, and 3% space in the third quarter of 2008.

The Company had substantial sales, through both of its business segments, to Boeing, the United States government, Sikorsky and Raytheon. During the third quarters of 2009 and 2008, sales to these customers were as follows:

 

     (In thousands)
     Third Quarter Ended
     October 3,
2009
   September 27,
2008

Boeing

   $ 34,035    $ 32,758

Raytheon

     9,082      8,774

Sikorsky

     7,659      2,299

United States government

     5,759      7,500
             

Total

   $ 56,535    $ 51,331
             

At October 3, 2009, trade receivables from Boeing, Raytheon, Sikorsky and the United States government were $11,460,000, $3,781,000, $5,268,000 and $2,845,000, 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 country’s front-line fighters, bombers, helicopters and support aircraft, as well as sea-based applications. Engineering, technical and program management services are provided principally for United States defense, space and homeland security programs. The Company’s defense business is diversified among military manufacturers and programs. Sales related to military programs were approximately $71,329,000, or 65% of total sales, in the third quarter 2009, compared to $56,781,000, or 56% of total sales, in the third quarter of 2008. The increase in military sales in the third quarter of 2009 resulted principally from an increase in sales to the Blackhawk helicopter, primarily at DAS-New York, the X-47B UCAS and the C-17 programs at DAS and an increase in sales to the F-18 aircraft program at DTI, partially offset by a reduction in sales to the Apache helicopter program at DAS and a reduction in sales to the F-15 aircraft program at DTI.

 

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Military sales during the third quarter of 2009 and 2008 included the following programs:

 

     (In thousands)
     Third Quarter Ended
     October 3,
2009
   September 27,
2008

Blackhawk

   $ 10,399    $ 2,140

X-47B UCAS

     5,362      —  

F-18

     8,054      4,596

C-17

     11,363      9,202

Apache

     8,624      12,453

F-15

     1,391      3,038

Other

     26,136      25,352
             

Total

   $ 71,329    $ 56,781
             

The Company’s commercial business is represented on many of today’s major commercial aircraft. Sales related to commercial business were approximately $35,938,000, or 33% of total sales in the third quarter of 2009, compared to $41,580,000, or 41% of total sales, in the third quarter of 2008. The reduction in commercial sales in the third quarter of 2009 compared to 2008 was primarily due to a decline in demand for regional and business aircraft. Sales to the Boeing 737NG program accounted for approximately $11,316,000 in sales in the third quarter of 2009, compared to $10,228,000 in sales in the third quarter of 2008. The Boeing 777 program accounted for approximately $4,007,000 in sales in the third quarter of 2009, compared to $2,849,000 in sales in the third quarter of 2008.

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 $2,636,000, or 2% of total sales, in the third quarter of 2009, compared to $2,495,000, or 3% of total sales, in the third quarter of 2008. The increase in sales for space programs resulted principally from an increase in engineering services at DTI.

Gross profit, as a percent of sales, decreased to 20.5% in the third quarter of 2009 compared to 20.6% in the third quarter of 2008. Gross profit margin was negatively impacted by a decline in operating performance at DAS, which resulted primarily from an unfavorable change in sales mix, partially offset by an improvement in operating performance at DTI.

Selling, general and administrative (“SG&A”) expenses were $12,647,000, or 11.5% of sales in the third quarter of 2009, compared to $11,484,000, or 11.4% of sales, in the third quarter of 2008. The increase in SG&A expenses was due primarily to the expenses of DAS-New York including amortization of intangible assets, partially offset by lower SG&A expenses for the remainder of the Company.

 

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Table of Contents

Interest expense was $652,000 in the third quarter of 2009, compared to $355,000 in the third quarter of 2008. The increase was primarily due to higher debt in 2009, partially offset by lower interest rates in 2009.

Income tax expense increased to $3,049,000 in the third quarter of 2009, compared to $2,720,000 in the third quarter of 2008. The increase in income tax expense was due to an increase in income before taxes and the impact of a higher effective income tax rate. The Company’s effective tax rate for the third quarter of 2009 was 33.0%, compared to 30.3% in the third quarter of 2008. The Company’s effective tax rate in the third quarter of 2008 included benefits related to the expiration of a tax statute of limitation. The Company expects to record, in its fourth quarter of 2009, a tax benefit related to the expiration of a tax statute of limitation. The benefit will effectively lower the Company’s 2009 fourth quarter and full year tax rate. The Company’s effective tax rate for the fourth quarter of 2009 is expected to be between 25% and 28% compared to a tax benefit of 55.3% in the fourth quarter of 2008.

Net income was $6,190,000, or $0.59 diluted earnings per share, in the third quarter of 2009 compared to $6,264,000, or $0.59 diluted earnings per share, in the third quarter of 2008.

Nine Months 2009 Compared to Nine Months 2008

Net sales in the nine months of 2009 were $325,083,000, compared to net sales in the nine months 2008 of $302,379,000. Net sales in the nine months of 2009 increased 8% from the same period last year due to sales of $32,300,000 from DAS-New York, which was acquired in December 2008. The Company’s mix of business in the nine months of 2009 was approximately 62% military, 36% commercial, and 2% space, compared to 58% military, 40% commercial, and 2% space in the nine months of 2008.

 

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The Company had substantial sales, through both of its business segments, to Boeing, the United States government, Sikorsky and Raytheon. During the nine months of 2009 and 2008, sales to these customers were as follows:

 

     (In thousands)
     Nine Months Ended
     October 3,
2009
   September 27,
2008

Boeing

   $ 100,977    $ 101,268

Sikorsky

     23,167      6,262

United States government

     23,148      23,455

Raytheon

     21,889      22,688
             

Total

   $ 169,181    $ 153,673
             

At October 3, 2009, trade receivables from Boeing, Raytheon, Sikorsky and the United States government were $11,460,000, $3,781,000, $5,268,000 and $2,845,000, 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 country’s front-line fighters, bombers, helicopters and support aircraft, as well as sea-based applications. Engineering, technical and program management services are provided principally for United States defense, space and homeland security programs. The Company’s defense business is diversified among military manufacturers and programs. Sales related to military programs were approximately $199,843,000, or 62% of total sales, in the nine months of 2009, compared to $174,094,000, or 58% of total sales, in the nine months of 2008. The increase in military sales in the nine months of 2009 resulted principally from an increase in sales to the Blackhawk program, primarily at the DAS-New York operation, increases in sales to the UCAS and C-17 programs at DAS, an increase in sales of engineering services related to various missiles programs at DTI and an increase in sales to the F-15 program at DTI, partially offset by a reduction in sales to the Apache helicopter program at DAS.

 

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Military sales during the nine months of 2009 and 2008 included the following programs:

 

     (In thousands)
     Nine Months Ended
     October 3,
2009
   September 27,
2008

Blackhawk

   $ 28,876    $ 7,090

X-47B UCAS

     5,362      —  

Engineering Services - Missiles

     42,288      38,007

F-18

     13,680      13,443

C-17

     31,701      28,230

F-15

     8,739      7,080

Apache

     29,201      40,985

Other

     39,996      39,259
             

Total

   $ 199,843    $ 174,094
             

The Company’s commercial business is represented on many of today’s major commercial aircraft. Sales related to commercial business were approximately $117,292,000, or 36% of total sales, in the nine months of 2009, compared to $121,437,000, or 40% of total sales, in the nine months of 2008. DAS-New York, which was acquired in December 2008, accounted for $10,613,000 of sales related to commercial business in the nine months of 2009. The reduction in commercial sales in the nine months 2009 compared to 2008 was primarily due to a decline in demand for regional and business aircraft. During the nine months of 2009, sales to commercial business were lower than 2008 in the majority of the Company’s commercial sales programs. Sales to the Boeing 737NG program accounted for approximately $32,030,000 in sales in the nine months of 2009, compared to $32,162,000 in sales in the nine months of 2008. The Boeing 777 program accounted for approximately $12,292,000 in the nine months of 2009, compared to $8,845,000 in sales in the nine months of 2008.

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 $7,948,000, or 2% of total sales, in the nine months of 2009, compared to $6,848,000, or 2% of total sales, in the nine months of 2008. The increase in sales for space programs resulted principally from an increase in engineering services at DTI.

Backlog is subject to delivery delays or program cancellations, which are beyond the Company’s control. As of October 3, 2009, backlog believed to be firm was approximately $386,340,000 compared to $475,800,000 at December 31, 2008. Approximately $92,000,000 of total backlog is expected to be delivered during the remainder of 2009. The backlog at October 3, 2009 included the following programs:

 

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     Backlog
(In thousands)

737NG

   $ 50,754

C-17

     37,247

F-18

     32,467

Apache Helicopter

     30,778

Sikorsky Blackhawk Helicopter

     29,381

Carson Helicopter

     21,512

F-15

     19,911

Winglet Programs

     15,579

Chinook Helicopter

     14,481

777

     14,241

Other

     119,989
      
   $ 386,340
      

Trends in the Company’s overall level of backlog, however, may not be indicative of trends in future sales because the Company’s backlog is affected by timing differences in the placement of customer orders and because the Company’s backlog tends to be concentrated in several programs to a greater extent than the Company’s sales. Current program backlog will be shipped over an extended delivery schedule. Beginning in 2010, the production rate and the Company’s sales for the Apache helicopter program are expected to be reduced by approximately 31% from the rate in 2009.

Gross profit, as a percent of sales, decreased to 18.3% in the nine months of 2009 compared to 21.0% in the nine months of 2008. Gross profit margin was negatively impacted by inventory reserves and valuation adjustments of $5,141,000, and an unfavorable change in sales mix at DAS, partially offset by and improvement in operating performance at DTI.

Selling, general and administrative (“SG&A”) expenses increased to $37,591,000, or 11.6% of sales, in the nine months of 2009, compared to $35,942,000, or 11.9% of sales, in the nine months of 2008. The increase in SG&A expenses was due primarily to expenses at DAS-New York including the amortization of intangible assets, partially offset by lower SG&A expenses for the remainder of the Company.

Interest expense was $2,005,000, in the nine months of 2009, compared to $948,000 in the nine months of 2008. The increase was primarily due to higher debt in 2009, partially offset by lower interest rates in 2009.

Income tax expense decreased to $6,592,000 in the nine months of 2009, compared to $9,170,000 in the nine months of 2008. The decrease in income tax expense was due to a decrease in income before taxes and a lower effective income tax rate. The Company’s effective tax rate for the nine months of 2009 was 33.0%, compared to 34.6% in the nine months of 2008. The Company’s effective tax rate in the nine months of 2009 included the benefit of research and development tax credits. The Company’s effective tax rate in the nine months of 2008 did not include the benefit of research and development tax credits. The

 

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federal tax law providing for research and development tax credits had not been extended by the end of September 27, 2008. The Company expects to record, in its fourth quarter of 2009, a tax benefit related to the expiration of a tax statute of limitation. The benefit will effectively lower the Company’s 2009 fourth quarter and full year tax rate. The Company’s effective tax rate for the full year 2009 is expected to be between 30% and 32% compared to 23.1% for 2008. The Company’s effective tax rate for 2008 was lower than 2009 due to reduction of income tax reserves in 2008.

Net income was $13,384,000, or $1.27 diluted earnings per share, in the nine months of 2009, compared to $17,347,000, or $1.63 diluted earnings per share, in the nine months of 2008. Net income for the nine months of 2009 included an after-tax charge of $3,444,000, or $0.33 per diluted share for the Eclipse inventory reserve and inventory valuation adjustment discussed above.

Financial Condition

Cash Flow Summary

Net cash used in operating activities for the nine months of 2009 was $8,646,000, compared to net cash provided by operating activities of $253,000 in 2008. Net cash used in operating activities for the nine months of 2009 resulted principally from a decrease in accrued and other liabilities of $17,269,000 (consisting primarily of a $9,887,000 decrease in customer deposits, a $5,307,000 decrease in accrued bonuses and incentives, a $1,162,000 decrease in deferred compensation and a $913,000 decrease in other accrued liabilities), an increase in accounts and unbilled receivables of $7,433,000 primarily related to the timing of billings to customers and extension of payments by the customers, and an increase in inventory of $6,809,000 primarily related to work-in-process for production jobs scheduled to be shipped in 2009 and 2010.

Net cash used in investing activities for the nine months of 2009 consisted primarily of $5,930,000 of capital expenditures.

Net cash provided by financing activities for the nine months of 2009 of $11,891,000 included approximately $16,658,000 of net borrowings of debt, partially offset by $2,358,000 of cash dividends paid, $1,410,000 of debt issue cost paid, $938,000 paid for repurchase of stock and $61,000 paid relating to the exercise of stock options.

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 Company’s obligations during the next twelve months.

 

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Liquidity and Capital Resources

The Company is a party to a Second Amended and Restated Credit Agreement with Bank of America, N.A., as Administrative Agent, Wells Fargo Bank, National Association, as Syndication Agent, Union Bank, N.A., as Documentation Agent and the other lenders named therein dated June 26, 2009 (the “Credit Agreement”). The Credit Agreement provides for an unsecured revolving credit line of $120,000,000 maturing on June 30, 2014. Interest is payable quarterly on the outstanding borrowings at Bank of America’s prime rate (3.25% at October 3, 2009) plus a spread (1.5% to 2.0% 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 (0.25% at October 3, 2009 for one month LIBOR) plus a spread (2.5% to 3.0% 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 (0.50% to 0.60% 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 October 3, 2009, the Company had $80,044,000 of unused lines of credit, after deducting $856,000 for outstanding standby letters of credit. The Company had outstanding loans of $39,100,000 and was in compliance with all covenants at October 3, 2009.

On September 5, 2007, the Company entered into a $20,000,000 interest rate swap with Banc of America Securities. The interest rate swap is for a $20,000,000 notional amount, under which the Company receives a variable interest rate (one month LIBOR) and pays a fixed 4.88% interest rate, with monthly settlement dates. The interest rate swap expires on September 13, 2010. As of October 3, 2009, the one month LIBOR rate was approximately 0.25%, and the fair value of the interest rate swap was a liability of approximately $889,000.

In connection with the DAS-New York acquisition in December 2008, the Company issued a promissory note in the initial principal amount of $7,000,000 with interest of five percent (5%) per annum payable annually on each anniversary of the closing date (December 23). Principal of the promissory note is payable in the amount of $4,000,000 on June 23, 2010 and $3,000,000 on December 23, 2013.

The weighted average interest rate on borrowings outstanding was 4.24% at October 3, 2009, compared to 4.87% at September 27, 2008. The carrying amount of long-term debt approximates fair value based on the terms of the related debt, recent transactions and estimates using interest rates currently available to the Company for debt with similar terms and remaining maturities.

The Company expects to spend less than $9,000,000 for capital expenditures in 2009. The capital expenditures in 2009 are 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 Company’s 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.

Dividends are subject to the approval of the Board of Directors, and will depend upon the Company’s results of operations, cash flows and financial position.

 

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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.

As of October 3, 2009, the Company expects to make the following payments on its contractual obligations (in thousands):

 

       Total      Payments Due by Period

Contractual Obligations

          Remainder
of 2009
     2010-
2012
     2013-
2015
     After
2015

Long-term debt

     $ 47,372      $ 9      $ 5,200      $ 42,163      $ —  

Operating leases

       17,996        1,298        11,153        4,422        1,123

Future interest on notes payable and long-term debt

       7,242        678        4,659        1,905        —  

Pension liability

       5,844        —          2,410        3,434        —  

Liabilities related to uncertain tax positions

       2,957        381        1,839        737        —  

Interest rate swap

       889        —          889        —          —  
                                            

Total

     $ 82,300      $ 2,366      $ 26,150      $ 52,661      $ 1,123
                                            

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 “District Court”). 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 aircraft ultimately sold to the United States government. The number of Boeing aircraft subject to the lawsuit has been reduced to 25 aircraft following the District Court’s granting of partial summary judgment in favor of Boeing and Ducommun. 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

 

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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. 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.

DAS has been directed by California environmental agencies to investigate and take corrective action for ground water contamination at its facilities located in El Mirage and Monrovia, California. Based on currently available information, the Company has established a reserve for its estimated liability for such investigation and corrective action in the approximate amount of $3,114,000. DAS also faces liability as a potentially responsible party for hazardous waste disposed at two landfills located in Casmalia and West Covina, California. DAS and other companies and government entities have entered into consent decrees with respect to each landfill with the United States Environmental Protection Agency and/or California environmental agencies under which certain investigation, remediation and maintenance activities are being performed. Based upon currently available information, the Company has established a reserve for its estimated liability in connection with the landfills in the approximate amount of $1,588,000. The Company’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, 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.

Off-Balance Sheet Arrangements

The Company’s off-balance sheet arrangements consist of operating leases.

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (FASB) issued new accounting guidance on fair value measurements. This guidance establishes a common definition for fair value to be applied to U.S. GAAP requiring use of fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. It is effective for financial assets and financial liabilities for fiscal years beginning after November 15, 2007. Issued in February 2008, a FASB staff position removed leasing transactions from the scope of the new fair value guidance. Also in February 2008, the FASB issued authoritative guidance deferring the effective date of the fair value guidance for all nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008. The Company adopted certain provisions of the new accounting guidance for

 

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financial assets and liabilities in the first quarter of 2008 which did not have a material effect on the Company’s results of operations and financial position. The Company is currently evaluating the impact of the adoption for nonfinancial assets and liabilities, on its results of operations and financial position

In December 2007, the FASB issued new guidance on business combinations. The new standard provides revised guidance on how acquirers recognize and measure the consideration transferred, identifiable assets acquired, liabilities assumed, noncontrolling interests, and goodwill acquired in a business combination. The new standard also expands required disclosures surrounding the nature and financial effects of business combinations. The standard is effective, on a prospective basis, for fiscal years beginning after December 15, 2008. Upon adoption, this standard did not have a material impact on our consolidated financial position and results of operations. However, if the Company enters into any business combinations after the adoption of the new guidance of business combinations, a transaction may significantly impact the Company’s consolidated financial position and results of operations as compared to the Company’s recent acquisitions, accounted for under prior GAAP requirements, due to the changes described above.

In December 2007, the FASB issued new guidance on noncontrolling interests which establishes requirements for ownership interests in subsidiaries held by parties other than the Company (sometimes called “minority interests”) be clearly identified, presented, and disclosed in the consolidated statement of financial position within equity, but separate from the parent’s equity. All changes in the parent’s ownership interests are required to be accounted for consistently as equity transactions and any noncontrolling equity investments in unconsolidated subsidiaries must be measured initially at fair value. The new guidance is effective, on a prospective basis, for fiscal years beginning after December 15, 2008. However, presentation and disclosure requirements must be retrospectively applied to comparative financial statements. The Company adopted the new standard on January 1, 2009, which did not have a material effect on the Company’s results of operations and financial position.

In March 2008, the FASB issued new guidance on disclosures about derivative instruments and hedging activities. The new guidance expands existing quarterly disclosure requirements about an entity’s derivative instruments and hedging activities. The new guidance is effective for fiscal years beginning after November 15, 2008. All derivatives are recorded on the balance sheet as assets or liabilities and measured at fair value. For derivatives designated as hedges of the fair value of assets or liabilities, the changes in fair values of both the derivatives and the hedged items are recorded in current earnings. For derivatives designated as cash flow hedges, the effective portion of the changes in fair value of the derivatives are recorded in Accumulated Other Comprehensive Income (Loss) and subsequently recognized in earnings when the hedged items impact earnings. Cash flows of such derivative financial instruments are classified consistent with the underlying hedged item. The implementation of this standard did not have a material impact on our consolidated financial position and results of operations. See Note 5 for additional derivative and hedging information and disclosures.

In December 2008, the FASB issued a staff position providing guidance on employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. The guidance is effective for fiscal years ending after December 15, 2009. The implementation of this standard will not have a material impact on our consolidated financial position and results of operations. The

 

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standard requires an employer to disclose investment policies and strategies, categories, fair value measurements, and significant concentration risk among its postretirement benefit plan assets. The adoption of this statement will have an impact on the Company’s disclosure requirements and the Company is currently evaluating the impact of these disclosures on the financial statements. The disclosure requirements are annual and do not apply to interim financial statements.

In January 2009, the FASB issued new guidance on the determination of the useful life of the intangible assets. The standard amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets. The objective is to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset, and other U.S. GAAP. The standard applies to all intangible assets, whether acquired in a business combination or otherwise. The standard is applied prospectively to financial statements issued for fiscal years and interim periods beginning after December 15, 2008. The adoption of this statement did not have a material impact on the Company’s results of operations or financial condition.

In April 2009, the FASB issued a staff position amending and clarifying the new business combination standard to address application issues associated with recognition and measurement, subsequent and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. The staff position is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The implementation of this standard did not have a material impact on our consolidated financial position and results of operations.

In April 2009, the FASB issued a staff position requiring fair value disclosures in both interim as well as annual financial statements in order to provide more timely information about the effects of current market conditions on financial instruments. The guidance is effective for interim and annual periods ending after June 15, 2009. The implementation of this standard did not have a material impact on our consolidated financial position and results of operations.

In April 2009, the FASB issued a staff position which changes the method for determining whether an other-than-temporary impairment exists for debt securities and the amount of the impairment to be recorded in earnings. The guidance is effective for interim and annual periods ending after June 15, 2009. The implementation of this standard did not have a material impact on our consolidated financial position and results of operations.

In April 2009, the FASB issued a staff position providing additional guidance on factors to consider in estimating fair value when there has been a significant decrease in market activity for a financial asset. The guidance was effective for interim and annual periods ending June 15, 2009. The implementation of this standard did not have a material impact on our consolidated financial position and results of operations.

 

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In May 2009, the FASB issued new guidance on subsequent events. The standard provides guidance on management’s assessment of subsequent events and incorporates this guidance into accounting literature. The standard is effective prospectively for interim and annual periods ending after June 15, 2009. The implementation of this standard did not have a material impact on our consolidated financial position and results of operations. In preparing these financial statements, the Company evaluated the events and transactions that occurred from October 3, 2009 through November 2, 2009, the date these financial statements were issued. The Company has made the required additional disclosures in reporting periods in which subsequent events occur.

In June 2009, the FASB issued an amendment to the accounting and disclosure requirements for the consolidation of variable interest entities. The guidance affects the overall consolidation analysis and requires enhanced disclosures on involvement with variable interest entities. The guidance is effective for fiscal years beginning after November 15, 2009. The Company is currently assessing the impact of the guidance on its consolidated financial position and results of operations.

In June 2009, the FASB Accounting Standards Codification (Codification) was issued. The Codification is the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. The Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The implementation of this standard did not have a material impact on our consolidated financial position and results of operations.

In October 2009, the FASB issued amendments to the accounting and disclosure for revenue recognition. These amendments, effective for fiscal years beginning on or after June 15, 2010 (early adoption is permitted), modify the criteria for recognizing revenue in multiple element arrangements and the scope of what constitutes a non-software deliverable. The Company is currently assessing the impact on its consolidated financial position and results of operations.

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Company uses an interest rate swap for certain debt obligations to manage exposure to interest rate changes. On September 5, 2007, the Company entered into a $20,000,000 interest rate swap with Banc of America Securities. The interest rate swap is for a $20,000,000 notional amount, under which the Company receives a variable interest rate (one month LIBOR) and pays a fixed 4.88% interest rate, with monthly settlement dates. The interest rate swap expires on September 13, 2010. As of October 3, 2009, the one month LIBOR rate was approximately 0.25% and the fair value of the interest rate swap was a liability of approximately $889,000. An increase or decrease of 50 basis-points in the LIBOR interest rate of the swap at October 3, 2009 would result in a change of approximately $101,000 in the fair value of the swap.

 

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 has been no change in the Company’s internal control over financial reporting during the three months ended October 3, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

Item 1A. Risk Factors

See Item 1A of the Company’s Form 10-K for the year ended December 31, 2008 for a discussion of risk factors.

 

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Table of Contents
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

  (c) Issuer Purchases of Equity Securities for the Three Months Ended October 3, 2009

 

Period

   Total
Number of
Shares (or
Units)
Purchase
   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 (1)

Period beginning July 5, 2009 and ending August 1, 2009

   0    $ 0.00    0    $ 2,773,030

Period beginning August 2, 2009 and ending August 29, 2009

   0    $ 0.00    0    $ 2,773,030

Period beginning August 30, 2009 and ending October 3, 2009

   0    $ 0.00    0    $ 2,773,030
               

Total

   0    $ 0.00    0    $ 2,773,030
               

 

(1) At October 3, 2009, $2,773,030 remained available to repurchase common stock of the Company under stock repurchase programs previously approved by the Board of Directors.

 

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Table of Contents
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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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.

 

DUCOMMUN INCORPORATED
(Registrant)
By:  

/s/    JOSEPH P. BELLINO        

  Joseph P. Bellino
  Vice President and Chief Financial Officer
  (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: November 2, 2009

 

39

Reconciliation

Exhibit 11

DUCOMMUN INCORPORATED AND SUBSIDIARIES

RECONCILIATION OF THE NUMERATORS AND DENOMINATORS OF

THE BASIC AND DILUTED EARNINGS PER SHARE COMPUTATIONS

 

     Quarter Ended October 3, 2009
     Income
(Numerator)
   Shares
(Denominator)
   Per-Share
Amount

Basic EPS

        

Income Available to Common Stockholders

   $ 6,190,000    10,449,000    $ 0.59
            

Effect of Dilutive Securities

        

Stock Options

     —      42,000   
              

Diluted EPS

        

Income Available to Common Stockholders + Assumed Conversions

   $ 6,190,000    10,491,000    $ 0.59
                  
     Quarter Ended September 27, 2008
     Income
(Numerator)
   Shares
(Denominator)
   Per-Share
Amount

Basic EPS

        

Income Available to Common Stockholders

   $ 6,264,000    10,578,000    $ 0.59
            

Effect of Dilutive Securities

        

Stock Options

     —      115,000   
              

Diluted EPS

        

Income Available to Common Stockholders + Assumed Conversions

   $ 6,264,000    10,693,000    $ 0.59
                  


DUCOMMUN INCORPORATED AND SUBSIDIARIES

RECONCILIATION OF THE NUMERATORS AND DENOMINATORS OF

THE BASIC AND DILUTED EARNINGS PER SHARE COMPUTATIONS

 

     Nine Months Ended October 3, 2009
     Income
(Numerator)
   Shares
(Denominator)
   Per-Share
Amount

Basic EPS

        

Income Available to Common Stockholders

   $ 13,384,000    10,465,000    $ 1.28
            

Effect of Dilutive Securities

        

Stock Options

     —      37,000   
              

Diluted EPS

        

Income Available to Common Stockholders + Assumed Conversions

   $ 13,384,000    10,502,000    $ 1.27
                  
     Nine Months Ended September 27, 2008
     Income
(Numerator)
   Shares
(Denominator)
   Per-Share
Amount

Basic EPS

        

Income Available to Common Stockholders

   $ 17,347,000    10,567,000    $ 1.64
            

Effect of Dilutive Securities

        

Stock Options

     —      104,000   
              

Diluted EPS

        

Income Available to Common Stockholders + Assumed Conversions

   $ 17,347,000    10,671,000    $ 1.63
                  
Section 302 CEO Certification

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 October 3, 2009;

 

  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 registrant’s 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 registrant’s 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 registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s 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 registrant’s 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 registrant’s internal control over financial reporting.

 

Date: November 2, 2009

/s/    Joseph C. Berenato

Joseph C. Berenato
Chairman and Chief Executive Officer
Section 302 CFO Certification

Exhibit 31.2

Certification of Principal Financial Officer

Pursuant to Section 302 of the

Sarbanes-Oxley Act of 2002

I, Joseph P. Bellino, certify that:

 

  1. I have reviewed this Quarterly Report of Ducommun Incorporated (the “registrant”) on Form 10-Q for the period ended October 3, 2009;

 

  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 registrant’s 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 registrant’s 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 registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s 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 registrant’s 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 registrant’s internal control over financial reporting.

Date: November 2, 2009

 

/s/    Joseph P. Bellino

Joseph P. Bellino
Vice President and Chief Financial Officer
Section 906 CEO and CFO Certification

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 October 3, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, Joseph C. Berenato, Chairman and Chief Executive Officer of the Company, and Joseph P. Bellino, 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 and Chief Executive Officer
By:  

/s/    Joseph P. Bellino

  Joseph P. Bellino
  Vice President and Chief Financial Officer

Date: November 2, 2009

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.