DCO-Q2 2015 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 July 4, 2015
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number 1-8174
 _________________________________________________________
DUCOMMUN INCORPORATED
(Exact name of registrant as specified in its charter)
 _________________________________________________________
Delaware
 
95-0693330
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
23301 Wilmington Avenue, Carson, California
 
90745-6209
(Address of principal executive offices)
 
(Zip code)
Registrant’s telephone number, including area code: (310) 513-7200

(Former name, former address and former fiscal year, if changed since last report)
 _________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x  No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 
¨
Accelerated filer
 
x
 
 
 
 
Non-accelerated filer
 
¨
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
As of July 22, 2015, the registrant had 11,082,600 shares of common stock outstanding.


Table of Contents

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


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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Ducommun Incorporated and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except share and per share data)

 
 
July 4,
2015
 
December 31,
2014
Assets
 
 
 
 
Current Assets
 
 
 
 
Cash and cash equivalents
 
$
26,842

 
$
45,627

Accounts receivable, net of allowance for doubtful accounts of $223 and $252 at July 4, 2015 and December 31, 2014, respectively
 
91,194

 
91,060

Inventories
 
138,014

 
142,842

Production cost of contracts
 
9,772

 
11,727

Deferred income taxes
 
12,371

 
13,783

Other current assets
 
16,835

 
23,702

Total Current Assets
 
295,028

 
328,741

Property and equipment, net of accumulated depreciation of $133,679 and $128,457 at July 4, 2015 and December 31, 2014, respectively
 
99,347

 
99,068

Goodwill
 
157,569

 
157,569

Intangibles, net
 
150,088

 
155,104

Other assets
 
7,938

 
7,117

Total Assets
 
$
709,970

 
$
747,599

Liabilities and Shareholders’ Equity
 
 
 
 
Current Liabilities
 
 
 
 
Current portion of long-term debt
 
$
27

 
$
26

Accounts payable
 
55,313

 
58,979

Accrued liabilities
 
41,901

 
52,066

Total Current Liabilities
 
97,241

 
111,071

Long-term debt, less current portion
 
265,012

 
290,026

Deferred income taxes
 
69,613

 
69,448

Other long-term liabilities
 
19,583

 
20,484

Total Liabilities
 
451,449

 
491,029

Commitments and contingencies (Notes 9, 11)
 

 

Shareholders’ Equity
 
 
 
 
Common stock - $0.01 par value; 35,000,000 shares authorized; 11,082,460 and 10,952,268 issued at July 4, 2015 and December 31, 2014, respectively
 
111

 
110

Additional paid-in capital
 
74,069

 
72,206

Retained earnings
 
190,714

 
190,905

Accumulated other comprehensive loss
 
(6,373
)
 
(6,651
)
Total Shareholders’ Equity
 
258,521

 
256,570

Total Liabilities and Shareholders’ Equity
 
$
709,970

 
$
747,599

See accompanying notes to condensed consolidated financial statements.

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

 
 
Three Months Ended
 
Six Months Ended
 
 
July 4,
2015
 
June 28,
2014
 
July 4,
2015
 
June 28,
2014
 
 
 
 
As Restated
 
 
 
As Restated
Net Revenues
 
$
174,845

 
$
186,516

 
$
347,765

 
$
366,269

Cost of Sales
 
143,638

 
148,838

 
289,797

 
292,676

Gross Profit
 
31,207

 
37,678

 
57,968

 
73,593

Selling, General and Administrative Expenses
 
20,368

 
20,868

 
43,502

 
41,955

Operating Income
 
10,839

 
16,810

 
14,466

 
31,638

Interest Expense
 
(6,446
)
 
(6,994
)
 
(13,107
)
 
(14,119
)
Loss on Extinguishment of Debt
 
(2,842
)
 

 
(2,842
)
 

Other Income
 
1,510

 

 
1,510

 

Income Before Taxes
 
3,061

 
9,816

 
27

 
17,519

Income Tax Expense
 
1,279

 
3,197

 
218

 
5,741

Net Income (Loss)
 
$
1,782

 
$
6,619

 
$
(191
)
 
$
11,778

Earnings (Loss) Per Share
 
 
 
 
 
 
 
 
Basic earnings (loss) per share
 
$
0.16

 
$
0.61

 
$
(0.02
)
 
$
1.08

Diluted earnings (loss) per share
 
$
0.16

 
$
0.60

 
$
(0.02
)
 
$
1.06

Weighted-Average Number of Common Shares Outstanding
 
 
 
 
 
 
 
 
Basic
 
11,062

 
10,871

 
11,012

 
10,864

Diluted
 
11,276

 
11,045

 
11,012

 
11,122

See accompanying notes to condensed consolidated financial statements.

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Ducommun Incorporated and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
(In thousands)
 
 
 
Three Months Ended
 
Six Months Ended
 
 
July 4,
2015
 
June 28,
2014
 
July 4,
2015
 
June 28,
2014
 
 
 
 
As Restated
 
 
 
As Restated
Net Income (Loss)
 
$
1,782

 
$
6,619

 
$
(191
)
 
$
11,778

Other Comprehensive Loss
 
 
 
 
 
 
 
 
Amortization of actuarial losses and prior service costs, net of tax benefit of approximately $68 and $48 for the three months ended July 4, 2015 and June 28, 2014, respectively, and approximately $165 and $84 for the six months ended July 4, 2015 and June 28, 2014, respectively
 
(153
)
 
(57
)
 
(278
)
 
(126
)
Other Comprehensive Loss
 
(153
)
 
(57
)
 
(278
)
 
(126
)
Comprehensive Income
 
$
1,935

 
$
6,676

 
$
87

 
$
11,904

See accompanying notes to condensed consolidated financial statements.

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Ducommun Incorporated and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
 
 
 
Six Months Ended
 
 
July 4,
2015
 
June 28,
2014
 
 
 
 
As Restated
Cash Flows from Operating Activities
 
 
 
 
Net (Loss) Income
 
$
(191
)
 
$
11,778

Adjustments to Reconcile Net (Loss) Income to
 
 
 
 
Net Cash Provided by Operating Activities:
 
 
 
 
Depreciation and amortization
 
13,428

 
15,125

Stock-based compensation expense
 
2,461

 
1,288

Deferred income taxes
 
1,577

 
998

Excess tax benefits from stock-based compensation
 
(509
)
 
(61
)
Recovery of doubtful accounts
 
(28
)
 
(235
)
Noncash loss on extinguishment of debt
 
2,842

 

Other
 
(1,663
)
 
31

Changes in Assets and Liabilities:
 
 
 
 
Accounts receivable
 
(106
)
 
(13,066
)
Inventories
 
4,828

 
(1,694
)
Production cost of contracts
 
1,348

 
(1,734
)
Other assets
 
7,942

 
6,563

Accounts payable
 
(4,078
)
 
(4,363
)
Accrued and other liabilities
 
(10,295
)
 
835

Net Cash Provided by Operating Activities
 
17,556

 
15,465

Cash Flows from Investing Activities
 
 
 
 
Purchases of property and equipment
 
(7,782
)
 
(5,997
)
Proceeds from sale of assets
 
279

 
51

Insurance recoveries related to property and equipment
 
1,510

 

Net Cash Used in Investing Activities
 
(5,993
)
 
(5,946
)
Cash Flows from Financing Activities
 
 
 
 
Proceeds from senior secured revolving credit facility
 
65,000

 

Repayment of term loan and other debt
 
(90,013
)
 
(15,012
)
Debt issuance costs
 
(4,738
)
 

Excess tax benefits from stock-based compensation
 
509

 
61

Net proceeds from issuance of common stock under stock plans
 
(1,106
)
 
369

Net Cash Used in Financing Activities
 
(30,348
)
 
(14,582
)
Net Decrease in Cash and Cash Equivalents
 
(18,785
)
 
(5,063
)
Cash and Cash Equivalents at Beginning of Period
 
45,627

 
48,814

Cash and Cash Equivalents at End of Period
 
$
26,842

 
$
43,751

Supplemental Disclosures of Cash Flow Information
 
 
 
 
Interest paid
 
$
12,400

 
$
1,440

Taxes paid
 
$
150

 
$
3,249

Non-cash activities:
 
 
 
 
     Purchases of property and equipment not paid
 
$
1,871

 
$
722

See accompanying notes to condensed consolidated financial statements.

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Ducommun Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 1. Summary of Significant Accounting Policies
Basis of Presentation
The unaudited condensed consolidated financial statements include the accounts of Ducommun Incorporated and its subsidiaries (“Ducommun,” the “Company,” “we,” “us” or “our”), after eliminating intercompany balances and transactions. The December 31, 2014 condensed consolidated balance sheet data was derived from audited financial statements, but does not contain all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”).
Our significant accounting policies were described in Part IV, Item 15(a)(1), “Note 1. Summary of Significant Accounting Policies” in our Annual Report on Form 10-K for the year ended December 31, 2014. We followed the same accounting policies for interim reporting. The financial information included in this Quarterly Report on Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2014.
In the opinion of management, all adjustments, consisting of recurring accruals, have been made that are necessary to fairly state our condensed consolidated financial position, statements of income, comprehensive income and cash flows in accordance with GAAP for the periods covered by this Quarterly Report on Form 10-Q. The results of operations for the three and six months ended July 4, 2015 are not necessarily indicative of the results to be expected for the full year ending December 31, 2015.
Our fiscal quarters end on the Saturday closest to the end of March, June and September for the first three fiscal quarters of each year, and ends on December 31 for our fourth fiscal quarter.
Certain reclassifications have been made to prior period amounts to conform to the current year’s presentation.
Use of Estimates
Certain amounts and disclosures included in the unaudited condensed consolidated financial statements required management to make estimates and judgments that affect the amounts of assets, liabilities (including forward loss reserves), 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.
Restatement of Previously Issued Consolidated Financial Statements
As disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014, we have restated our consolidated financial statements as of December 31, 2013, and for the years ended December 31, 2013 and 2012 and our unaudited quarterly financial information for the first three quarters in the year ended December 31, 2014 and for each of the quarters in the year ended December 31, 2013, to correct errors in prior periods primarily related to (i) a long-term contract following the discovery of misconduct by employees in the recording of direct labor costs to the contract from 2009 through the third quarter 2014 which resulted in the identification of a forward loss provision that should have been recorded in 2009 and the impact on subsequent periods of adjustments to the forward loss provision based on information available at the time; and (ii) the year end reconciliation of income taxes payable and deferred tax balances identified errors primarily in 2013, 2012, and 2011. In addition, the restated amounts include previously identified and disclosed immaterial adjustments. We have reflected our restated unaudited quarterly condensed consolidated financial information as of and for the three and six months ended June 28, 2014 herein. See Note 2 for additional information.
Description of Business
We are a leading global provider of engineering and manufacturing services for high-performance products and high-cost-of failure applications used primarily in the aerospace, defense, industrial, natural resources, medical and other industries. Our subsidiaries are organized into two strategic businesses: Ducommun AeroStructures (“DAS”) and Ducommun LaBarge Technologies (“DLT”), each of which is a reportable operating segment. DAS designs, engineers and manufactures large, complex contoured aerospace structural components and assemblies and supplies composite and metal bonded structures and assemblies. DAS products are used on commercial aircraft, military fixed-wing aircraft and military and commercial rotary-wing aircraft. DLT designs, engineers and manufactures high-reliability products used in worldwide technology-driven markets including aerospace and defense, natural resources, industrial and medical and other end-use markets. DLT’s product offerings range from prototype development to complex assemblies. All reportable operating segments follow the same accounting principles.

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Earnings (Loss) Per Share
Basic earnings (loss) per share are computed by dividing income (loss) available to common shareholders by the weighted-average number of common shares outstanding in each period. Diluted earnings per share are computed by dividing income available to common shareholders plus income associated with dilutive securities by the weighted-average number of common shares outstanding, plus any potential dilutive shares that could be issued if exercised or converted into common stock in each period.
The net earnings (loss), weighted-average number of common shares outstanding used to compute earnings (loss) per share were as follows:
 
 
 
(In thousands, except per share data)
Three Months Ended
 
(In thousands, except per share data)
Six Months Ended
 
 
July 4,
2015
 
June 28,
2014
 
July 4,
2015
 
June 28,
2014
 
 
 
 
As Restated
 
 
 
As Restated
Net earnings (loss)
 
$
1,782

 
$
6,619

 
$
(191
)
 
$
11,778

Weighted-average number of common shares outstanding
 
 
 
 
 
 
 
 
Basic weighted-average common shares outstanding
 
11,062

 
10,871

 
11,012

 
10,864

Dilutive potential common shares
 
214

 
174

 

 
258

Diluted weighted-average common shares outstanding
 
11,276

 
11,045

 
11,012

 
11,122

Earnings (loss) per share
 
 
 
 
 
 
 
 
Basic
 
$
0.16

 
$
0.61

 
$
(0.02
)
 
$
1.08

Diluted
 
$
0.16

 
$
0.60

 
$
(0.02
)
 
$
1.06

Potentially dilutive stock options and stock units to purchase common stock, as shown below, were excluded from the computation of diluted earnings per share because their inclusion would have been anti-dilutive. However, these shares may be potentially dilutive common shares in the future.
 
 
(In thousands)
Three Months Ended
 
(In thousands)
Six Months Ended
 
 
July 4,
2015
 
June 28,
2014
 
July 4,
2015
 
June 28,
2014
Stock options and stock units
 
182

 
248

 
911

 
177

Cash and Cash Equivalents
Our cash accounts are not reduced for checks written until the checks are presented for payment and paid by our bank. Cash equivalents consist of highly liquid instruments purchased with original maturities of three months or less. These assets are valued at cost, which approximates fair value, which we classify as Level 1. See Fair Value below.
Provision for Estimated Losses on Contracts
We record provisions for the total anticipated losses on contracts considering total estimated costs to complete the contract compared to total anticipated revenues in the period in which such losses are identified. The provisions for estimated losses on contracts require us to make certain estimates and assumptions, including those with respect to the future revenue under a contract and the future cost to complete the contract. Our estimate of the future cost to complete a contract may include assumptions as to improvements in manufacturing efficiency, reductions in operating and material costs, and our ability to resolve claims and assertions with our customers. If any of these or other assumptions and estimates do not materialize in the future, we maybe required to record additional provisions for estimated losses on contracts.
Inventory Valuation
Inventories are stated at the lower of cost or market, cost being determined on a first-in, first-out basis. Market value for raw materials is based on replacement costs, and is based on net realizable value for other inventory classifications. Inventoried costs include raw materials, outside processing, direct labor and allocated overhead, adjusted for any abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) incurred. Costs under long-term contracts are accumulated into, and removed from, inventory on the same basis as other contracts. We assess the inventory carrying value

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

Recently Issued Accounting Standards

In June 2015, the FASB issued ASU 2015-10, “Technical Corrections and Improvements” (“ASU 2015-10”), which covers a wide range of Topics in the Codification. The amendments in ASU 2015-10 represent changes to make minor corrections or minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost on most entities. The amendments in this new guidance that require transition guidance are effective for annual and interim periods within those annual periods, beginning after December 15, 2015, which was our interim period beginning January 1, 2016. All other amendments are effective upon issuance of ASU 2015-10. Early adoption is permitted. We do not anticipate this standard will have a significant impact on our condensed consolidated financial statements.

In April 2015, the FASB issued ASU 2015-05, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement” (“ASU 2015-05”), which provides guidance on fees paid by a customer in a cloud computing arrangement. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The new guidance is effective for annual and interim periods within those annual periods, beginning after December 15, 2015, which will be our interim period beginning January 1, 2016. Early adoption is permitted. We are evaluating the impact of this standard but currently do not anticipate it will have a significant impact on our condensed consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”), which changes the presentation of debt issuance costs in financial statements. Under ASU 2015-03, an entity presents such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of those costs is reported as interest expense. The new guidance is effective for annual and interim periods within those annual periods, beginning after December 15, 2015, which will be our interim period beginning January 1, 2016. Early adoption is permitted. We had approximately $6.9 million of debt issuance costs and approximately $265.0 million of total debt as of July 4, 2015, and thus, we do not believe that adoption of this new guidance will have a significant impact on our condensed consolidated financial statements.

In January 2015, the FASB issued ASU 2015-01, “Income Statement - Extraordinary and Unusual Items (Subtopic 225-20)” (“ASU 2015-01”), which eliminates from U.S. GAAP the concept of extraordinary items. Current guidance requires

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separate classification, presentation, and disclosure of extraordinary events and transactions. In addition, an event or transaction is presumed to be an ordinary and usual activity of the reporting entity unless evidence clearly supports its classification as an extraordinary item. The new guidance is effective for annual and interim periods within those annual periods, beginning after December 15, 2015, which will be our interim period beginning January 1, 2016. Early adoption is permitted provided it is applied from the beginning of the annual period of adoption. We are evaluating the impact of this standard but currently do not anticipate it will have a significant impact on our condensed consolidated financial statements.

In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”), which defines management’s responsibility to evaluate whether there is substantial doubt about a company’s ability to continue as a going concern. ASU 2014-15 also provide principles and definitions that are intended to reduce diversity in the timing and content of disclosures in the financial statement footnotes. The new guidance is effective for annual periods ending after December 15, 2016, which will be our year ending December 31, 2016, and interim periods beginning after December 15, 2016, which will be our interim period beginning January 1, 2017. Early adoption is permitted. We are evaluating the impact of this standard but currently do not anticipate it will have a significant impact on our condensed consolidated financial statements.

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

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”), which outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. This new revenue recognition model provides a five-step analysis in determining when and how revenue is recognized. It requires entities to exercise judgment when considering the terms of the contract(s) which include (i) identifying the contract(s) with the customer, (ii) identifying the separate performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction price to the separate performance obligations, and (v) recognizing revenue when each performance obligation is satisfied. Thus, it depicts the transfer of promised goods or services to customers in an amount that reflects the consideration an entity expects to receive in exchange for those goods or services. Companies have the option of applying the provisions of ASU 2014-09 either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying this guidance recognized at the date of initial application. Early adoption is not permitted. The new guidance is effective for us beginning January 1, 2017. We are currently evaluating the method and impact that adopting this new accounting standard will have on our condensed consolidated financial statements.
 
Note 2. Restatement
As disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014, we restated our consolidated financial statements for the years ended December 31, 2013 and 2012 and our unaudited quarterly financial information for the first three quarters in the year ended December 31, 2014 and for each of the quarters in the year ended December 31, 2013, to correct errors in prior periods primarily related to (i) a long-term contract (“Contract”) following the discovery of misconduct by employees in the recording of direct labor costs to the Contract from 2009 through the third quarter 2014 which resulted in the identification of a forward loss provision that should have been recorded in 2009 and the impact on subsequent periods of adjustments to the forward loss provision based on information available at the time (“Forward Loss Adjustments”); and (ii) the year end reconciliation of income taxes payable and deferred tax balances identified errors primarily in 2013, 2012, and 2011 (“Tax Adjustments”). The misconduct and its related financial impact were concealed from our senior management, internal auditors, and external auditors.
Also as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014, the Forward Loss Adjustments were based on certain assumptions and estimates. To determine the loss on the Contract, we estimated the number of units we would have expected to ship over the life of the Contract at inception of the Contract using external market industry data for fiscal years 2009, 2010, 2011, 2012, and 2013. We used data obtained directly from the customer for 2014 and 2015. The total estimated costs at any given point in time would typically include actual historical costs up to that time plus the estimated cost

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to produce units to be delivered. In addition, the estimated total cost for the life of the Contract includes certain inefficiencies on labor, material, and overhead costs during the initial start-up period. However, as we progress along the learning curve, the direct labor hours and overhead rates are expected to decrease as we gain technical knowhow and efficiency in producing the product. As a result of the misconduct by the employees in the recording of direct labor hours to the Contract, the historical actual direct labor hours charged to the Contract were inaccurate. As a result, we estimated the costs to complete future units at the end of each period based on an estimate of the direct labor hours chargeable to the Contract, including consideration of anticipated learning curve efficiencies that would decrease the direct labor hours over the remaining term of the Contract. Further, we used the actual direct labor hours incurred by the employees assigned to the Contract as a basis for projecting future hours, less an estimate of the time not allocable to the Contract. Using this model, we calculated the Forward Loss Adjustments from the inception of the Contract in 2009 through the expected life of the Contract. As a result of the Forward Loss Adjustments, cost of goods sold increased (decreased) approximately $6.7 million in 2009, $1.3 million in 2010, $(0.3) million in 2011, $(2.2) million in 2012, $(0.9) million in 2013, and $(0.8) million in the nine months ended September 27, 2014.
Further, as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014, the Tax Adjustments were necessary as a result of certain calculation errors. The Tax Adjustments resulted in a net decrease to income tax expense of approximately $0.9 million in 2013 and zero in 2012. The Tax Adjustments in 2011 resulted in a reduction to the carrying value of goodwill totaling approximately $4.0 million due to a calculation error in the original purchase price allocation and subsequent performance of step 2 of our annual goodwill impairment analysis related to deferred income taxes and thus, (i) reduced deferred income taxes by approximately $2.7 million and (ii) generated a pre-tax goodwill impairment charge of approximately $1.4 million. Further, the Tax Adjustments in 2011 reduced deferred tax assets by approximately $1.6 million that were established as a result of shared-based compensation expenses recorded previously and should have been reduced as the tax deductions were utilized. Moreover, the restated amounts include previously identified and disclosed immaterial adjustments.
In evaluating whether our previously issued consolidated financial statements were materially misstated, we evaluated the cumulative impact of these items on prior periods in accordance with the guidance in ASC 250-10, “Accounting Changes and Error Corrections,” relating to SEC Staff Accounting Bulletin No. 99, “Materiality” (“SAB 99”), and SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”), and we concluded these errors were in the aggregate material to the prior reporting periods, and therefore, restatement of previously filed financial statements was necessary to our previously issued 2013, 2012, 2011, and 2010 financial statements.
This Quarterly Report on Form 10-Q for the quarter ended July 4, 2015 includes the impact of the restatement on the comparative unaudited quarterly financial information for the quarter ended June 28, 2014. In addition, our future Quarterly Reports on Form 10-Q for subsequent quarterly periods during 2015 will reflect the impact of the restatement in the 2014 comparative prior quarter and year-to-date periods. Certain reclassifications have been made to prior period amounts to conform to the current year’s presentation.
The account balances labeled “As Reported” in the following tables for the quarter ended June 28, 2014 represent the previously reported unaudited balances in our Quarterly Report on Form 10-Q for the quarter ended June 28, 2014. The effects of these prior period errors on our unaudited condensed consolidated financial statements are as follows (in thousands, except per share data):

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June 28, 2014
Unaudited Condensed Consolidated Balance Sheet:
 
As Reported
 
Adjustments
 
As Restated
Assets
 
 
 
 
 
 
Current Assets
 
 
 
 
 
 
Cash and cash equivalents
 
$
43,751

 
$

 
$
43,751

Accounts receivable (less allowance for doubtful accounts of $254 at June 28, 2014)
 
105,209

 

 
105,209

Inventories
 
142,201

 

 
142,201

Production cost of contracts
 
11,023

 

 
11,023

Deferred income taxes
 
11,513

 
1,416

 
12,929

Other current assets
 
20,602

 
998

 
21,600

Total Current Assets
 
334,299

 
2,414

 
336,713

Property and Equipment, Net
 
94,070

 

 
94,070

Goodwill
 
161,940

 
(4,371
)
 
157,569

Intangibles, Net
 
160,285

 

 
160,285

Other Assets
 
8,660

 

 
8,660

Total Assets
 
$
759,254

 
$
(1,957
)
 
$
757,297

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

 
$

 
$
26

Accounts payable
 
53,749

 

 
53,749

Accrued liabilities
 
47,973

 
3,589

 
51,562

Total Current Liabilities
 
101,748

 
3,589

 
105,337

Long-Term Debt, Less Current Portion
 
317,664

 

 
317,664

Deferred Income Taxes
 
69,747

 
(500
)
 
69,247

Other Long-Term Liabilities
 
17,456

 
(300
)
 
17,156

Total Liabilities
 
506,615

 
2,789

 
509,404

Commitments and Contingencies
 

 

 

Shareholders’ Equity
 
 
 
 
 
 
Common stock - $0.01 par value; 35,000,000 shares authorized; 10,892,133 shares issued at June 28, 2014
 
109

 

 
109

Additional paid-in capital
 
70,337

 
(1,633
)
 
68,704

Retained earnings
 
185,929

 
(3,113
)
 
182,816

Accumulated other comprehensive loss
 
(3,736
)
 

 
(3,736
)
Total Shareholders’ Equity
 
252,639

 
(4,746
)
 
247,893

Total Liabilities and Shareholders’ Equity
 
$
759,254

 
$
(1,957
)
 
$
757,297



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Three Months Ended June 28, 2014
 
Six Months Ended June 28, 2014
Unaudited Condensed Consolidated Statement of Income:
 
As Reported
 
Adjustments
 
As Restated
 
As Reported
 
Adjustments
 
As Restated
Net Revenues
 
$
186,516

 
$

 
$
186,516

 
$
366,269

 
$

 
$
366,269

Cost of Sales
 
149,073

 
(235
)
 
148,838

 
293,756

 
(1,080
)
 
292,676

Gross Profit
 
37,443

 
235

 
37,678

 
72,513

 
1,080

 
73,593

Selling, General and Administrative Expenses
 
20,868

 

 
20,868

 
41,955

 

 
41,955

Operating Income
 
16,575

 
235

 
16,810

 
30,558

 
1,080

 
31,638

Interest Expense
 
(6,994
)
 

 
(6,994
)
 
(14,119
)
 

 
(14,119
)
Income Before Taxes
 
9,581

 
235

 
9,816

 
16,439

 
1,080

 
17,519

Income Tax Expense
 
3,109

 
88

 
3,197

 
5,338

 
403

 
5,741

Net Income
 
$
6,472

 
$
147

 
$
6,619

 
$
11,101

 
$
677

 
$
11,778

Earnings Per Share
 
 
 
 
 
 
 
 
 
 
 
 
Basic earnings per share
 
$
0.60

 
$
0.01

 
$
0.61

 
$
1.02

 
$
0.06

 
$
1.08

Diluted earnings per share
 
$
0.59

 
$
0.01

 
$
0.60

 
$
1.00

 
$
0.06

 
$
1.06

Weighted-Average Number of Shares Outstanding
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
10,871

 

 
10,871

 
10,864

 

 
10,864

Diluted
 
11,045

 

 
11,045

 
11,122

 

 
11,122


 
 
Three Months Ended June 28, 2014
 
Six Months Ended June 28, 2014
Unaudited Condensed Consolidated Statement of Comprehensive Income:
 
As Reported
 
Adjustments
 
As Restated
 
As Reported
 
Adjustments
 
As Restated
Net Income
 
$
6,472

 
$
147

 
$
6,619

 
$
11,101

 
$
677

 
$
11,778

Pension Adjustments
 
 
 
 
 
 
 
 
 
 
 
 
Amortization of actuarial loss and prior service costs, net of tax benefit of approximately $48 and $84 for the three months and six months ended June 28, 2014
 
(57
)
 

 
(57
)
 
(126
)
 

 
(126
)
Other Comprehensive Loss
 
(57
)
 

 
(57
)
 
(126
)
 

 
(126
)
Comprehensive Income
 
$
6,529

 
$
147

 
$
6,676

 
$
11,227

 
$
677

 
$
11,904



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Six Months Ended June 28, 2014
Unaudited Condensed Consolidated Cash Flow Statement:
 
As Reported
 
Adjustments
 
As Restated
Cash Flows from Operating Activities
 
 
 
 
 
 
Net Income
 
$
11,101

 
$
677

 
$
11,778

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

 

 
15,125

Stock-based compensation expense
 
1,288

 

 
1,288

Deferred income taxes
 
595

 
403

 
998

Excess tax benefits from stock-based compensation
 
(61
)
 

 
(61
)
Recovery of doubtful accounts
 
(235
)
 

 
(235
)
Other
 
1,111

 
(1,080
)
 
31

Changes in Assets and Liabilities:
 
 
 
 
 
 
Accounts receivable
 
(13,066
)
 

 
(13,066
)
Inventories
 
(1,694
)
 

 
(1,694
)
Production cost of contracts
 
(1,734
)
 

 
(1,734
)
Other assets
 
6,563

 

 
6,563

Accounts payable
 
(4,363
)
 

 
(4,363
)
Accrued and other liabilities
 
835

 

 
835

Net Cash Provided by Operating Activities
 
15,465

 

 
15,465

Cash Flows from Investing Activities
 
 
 
 
 
 
Purchases of property and equipment
 
(5,997
)
 

 
(5,997
)
Proceeds from sales of assets
 
51

 

 
51

Net Cash Used in Investing Activities
 
(5,946
)
 

 
(5,946
)
Cash Flows from Financing Activities
 
 
 
 
 
 
Repayment of term loan and other debt
 
(15,012
)
 

 
(15,012
)
Excess tax benefits from stock-based compensation
 
61

 

 
61

Net proceeds from issuance of common stock under stock plans
 
369

 

 
369

Net Cash Used in Financing Activities
 
(14,582
)
 

 
(14,582
)
Net Decrease in Cash and Cash Equivalents
 
(5,063
)
 

 
(5,063
)
Cash and Cash Equivalents at Beginning of Year
 
48,814

 

 
48,814

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

 
$

 
$
43,751


Note 3. Inventories
Inventories consisted of the following:
 
 
(In thousands)
 
 
July 4,
2015
 
December 31,
2014
Raw materials and supplies
 
$
73,309

 
$
77,033

Work in process
 
58,992

 
61,458

Finished goods
 
10,568

 
14,116

 
 
142,869

 
152,607

Less progress payments
 
4,855

 
9,765

Total
 
$
138,014

 
$
142,842


 We net advances from customers related to inventory purchases against inventories in the consolidated balance sheets.


Note 4. Goodwill
The carrying amounts of goodwill, by operating segment, were as follows:

14


 
 
(In thousands)
 
 
Ducommun
AeroStructures
 
Ducommun
LaBarge
Technologies
 
Consolidated
Ducommun
Gross goodwill
 
$
57,243

 
$
182,048

 
$
239,291

Accumulated goodwill impairment
 

 
(81,722
)
 
(81,722
)
Balance at December 31, 2014
 
$
57,243

 
$
100,326

 
$
157,569

Balance at July 4, 2015
 
$
57,243

 
$
100,326

 
$
157,569

 
Note 5. Accrued Liabilities
The components of accrued liabilities were as follows:
 
 
(In thousands)
 
 
July 4,
2015
 
December 31,
2014
Accrued compensation
 
$
17,307

 
$
25,352

Accrued income and sales tax
 
1,306

 
1,580

Customer deposits
 
1,015

 
1,139

Interest payable
 
9,032

 
9,439

Provision for forward loss reserves
 
4,762

 
4,734

Other
 
8,479

 
9,822

Total
 
$
41,901

 
$
52,066


Note 6. Long-Term Debt
Long-term debt and the current period interest rates were as follows:
 
 
(In thousands)
 
 
July 4,
2015
 
December 31,
2014
Senior unsecured notes (fixed 9.75%)
 
$
200,000

 
$
200,000

Senior secured term loan (floating 4.75%)
 

 
90,000

New revolving credit facility
 
65,000

 

Other debt (fixed 5.41%)
 
39

 
52

Total debt
 
265,039

 
290,052

Less current portion
 
27

 
26

Total long-term debt
 
$
265,012

 
$
290,026

Weighted-average interest rate
 
8.02
%
 
8.20
%

The failure to file our 2014 Annual Report on Form 10-K by March 31, 2015 resulted in defaults, but not an event of default, under our senior secured term loan and senior secured revolving credit facility (together, the “Existing Credit Facilities”) and our senior unsecured notes (“Existing Notes”). The defaults on our Existing Credit Facilities and our Existing Notes were deemed cured with the filing of our Annual Report on Form 10-K on April 9, 2015.
The carrying amount of our long-term debt approximated fair value, except for the Existing Notes for which the fair value was approximately $210.0 million. Fair value was estimated using Level 2 inputs, based on the terms of the related debt, recent transactions and estimates using interest rates currently available to us for debt with similar terms and remaining maturities.
In June 2015, we completed a new credit facility to replace the Existing Credit Facilities. The new credit facility consists of a $275.0 million senior secured term loan, which matures on June 26, 2020 (“New Term Loan”), and a $200.0 million senior secured revolving credit facility (“New Revolving Credit Facility”), which matures on June 26, 2020 (collectively, the “New Credit Facilities”). The New Credit Facilities bear interest, at our option, at a rate equal to either (i) the Eurodollar Rate

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(defined as LIBOR) plus an applicable margin ranging from 1.50% to 2.75% per year or (ii) the Base Rate (defined as the highest of [a] Federal Funds Rate plus 0.50%, [b] Bank of America’s prime rate, and [c] the Eurodollar Rate plus 1.00%) plus an applicable margin ranging from 0.50% to 1.75% per year, in each case based upon the consolidated total net adjusted leverage ratio. The undrawn portions of the commitments of the New Credit Facilities are subject to a commitment fee ranging from 0.175% to 0.300%, based upon the consolidated total net adjusted leverage ratio.
Further, we are required to make mandatory prepayments of amounts outstanding under the New Term Loan. The mandatory prepayments will be made quarterly, equal to 5.0% per year of the original aggregate principal amount during the first two years and increase to 7.5% per year during the third year, and increase to 10.0% per year during the fourth year and fifth years, with the remaining balance payable on June 26, 2020. The loans under the New Revolving Credit Facility are due on June 26, 2020. As of July 4, 2015, we were in compliance with all covenants required under the New Credit Facilities.
We have been making voluntary principal prepayments on a quarterly basis on our senior secured term loan and in conjunction with the closing of the New Credit Facilities, we drew down approximately $65.0 million on the New Revolving Credit Facility and used those proceeds along with current cash on hand to extinguish the existing senior secured term loan of approximately $80.0 million. We expensed the unamortized debt issuance costs related to the existing senior secured term loan of approximately $2.8 million as part of extinguishing the existing senior secured term loan. We also incurred approximately $4.7 million of debt issuance costs related to the New Credit Facilities and those costs are capitalized and will be amortized over the five year life of the New Credit Facilities.
As of July 4, 2015, we had approximately $132.3 million of unused borrowing capacity under the New Revolving Credit Facility, after deducting approximately $2.7 million for standby letters of credit.
In addition, on June 29, 2015, we initiated a call notice to retire all of the $200.0 million Existing Notes on July 27, 2015. Subsequent to the quarter ended July 4, 2015, we drew down on the New Term Loan and along with paying the call premium of approximately $9.75 million, extinguished the Existing Notes on July 27, 2015. We will expense the call premium of approximately $9.75 million and debt issuance costs related to the Existing Notes of approximately $2.1 million upon extinguishing the Existing Notes.
The Existing Notes were issued by us (“Parent Company”) and guaranteed by all of our subsidiaries, other than one subsidiary (“Subsidiary Guarantors”) that was considered minor. The New Credit Facilities are also guaranteed by the Subsidiary Guarantors. The Parent Company has no independent assets or operations and the Subsidiary Guarantors jointly and severally guarantee, on a senior unsecured basis, the Existing Notes and New Credit Facilities. Therefore, no condensed consolidating financial information for the Parent Company and its subsidiaries are presented.

Note 7. Shareholders’ Equity
We are authorized to issue five million shares of preferred stock. At July 4, 2015 and December 31, 2014, no preferred shares were issued or outstanding.
 
Note 8. Employee Benefit Plans
The components of net periodic pension expense were as follows:
 
 
(In thousands)
 
(In thousands)
 
 
Three Months Ended
 
Six Months Ended
 
 
July 4,
2015
 
June 28,
2014
 
July 4,
2015
 
June 28,
2014
Service cost
 
$
197

 
$
173

 
$
393

 
$
346

Interest cost
 
337

 
319

 
675

 
638

Expected return on plan assets
 
(373
)
 
(351
)
 
(747
)
 
(701
)
Amortization of actuarial losses
 
221

 
105

 
443

 
210

Net periodic pension cost
 
$
382

 
$
246

 
$
764

 
$
493

The components of the reclassifications of net actuarial losses from accumulated other comprehensive loss to net income for the three months ended July 4, 2015 were as follows:

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(In thousands)
 
 
Three Months Ended
 
Six Months Ended
 
 
July 4,
2015
 
July 4,
2015
Amortization of actuarial losses - total before tax (1)
 
$
(221
)
 
$
(443
)
Tax benefit
 
68

 
165

Net of tax
 
$
(153
)
 
$
(278
)

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

Note 9. Indemnifications
We have made guarantees and indemnities under which we may be required to make payments to a guaranteed or indemnified party, in relation to certain transactions, including revenue transactions in the ordinary course of business. In connection with certain facility leases, we have indemnified our lessors for certain claims arising from the facility or the lease. We indemnify our directors and officers to the maximum extent permitted under the laws of the State of Delaware.
However, we have a directors and officers insurance policy that may reduce our exposure in certain circumstances and may enable us to recover a portion of future amounts that may be payable, if any. The duration of the guarantees and indemnities varies and, in many cases is indefinite but subject to statute of limitations. The majority of guarantees and indemnities do not provide any limitations of the maximum potential future payments we could be obligated to make. Historically, payments related to these guarantees and indemnities have been immaterial. We estimate the fair value of our indemnification obligations as insignificant based on this history and insurance coverage and have, therefore, not recorded any liability for these guarantees and indemnities in the accompanying condensed consolidated balance sheets.
 
Note 10. Income Taxes
We recorded an income tax expense of approximately $1.3 million (effective tax rate of 42%) for the three months ended July 4, 2015 compared to an income tax expense of approximately $3.2 million (effective tax rate of 33%) for the three months ended June 28, 2014. The effective tax rate for the three months ended July 4, 2015 includes a benefit for the Qualified Domestic Production Activities Deduction that was partially offset by permanent tax difference items, state taxes, and certain discrete items. The effective tax rate for the three months ended June 28, 2014 included a benefit for the Qualified Domestic Production Activities Deduction that was partially offset by permanent tax difference items and state taxes.
We recorded an income tax expense of approximately $0.2 million (effective tax rate of 807%) for the six months ended July 4, 2015 compared to an income tax expense of approximately $5.7 million (effective tax rate of 33%) for the six months ended June 28, 2014. The effective tax rate for the six months ended July 4, 2015 includes a benefit for the Qualified Domestic Production Activities Deduction that was partially offset by permanent tax difference items, state taxes, and certain discrete items. The effective tax rate for the six months ended June 28, 2014 included a benefit for the Qualified Domestic Production Activities Deduction that was partially offset by permanent tax difference items and state taxes.
Our unrecognized tax benefits were approximately $2.9 million and $2.8 million as of July 4, 2015 and December 31, 2014, respectively. Approximately $1.9 million, if recognized, would affect the annual income tax rate. We do not reasonably expect significant increases or decreases to our unrecognized tax benefits in the next twelve months.

Note 11. Contingencies
On October 8, 2014, the United States District Court for the District of Kansas (the “District Court”) granted summary judgment in favor of The Boeing Company (“Boeing”) and Ducommun and dismissed the lawsuit entitled United States of America ex rel Taylor Smith, Jeannine Prewitt and James Ailes v. The Boeing Company and Ducommun Inc.. The lawsuit was a qui tam action brought by three former Boeing employees (“Relators”) against Boeing and Ducommun on behalf of the United States of America for violations of the United States False Claims Act. Relators have appealed the dismissal to the Tenth Circuit Court of Appeals. The lawsuit alleged that Ducommun sold unapproved parts to Boeing which were installed by Boeing in aircraft ultimately sold to the United States Government and that Boeing and Ducommun submitted or caused to be submitted false claims for payment relating to 21 aircraft sold by Boeing to the United States Government. The lawsuit sought damages in an amount equal to three times the amount of damages the United States Government sustained because of the defendants’ actions, plus a civil penalty of $10 thousand for each false claim made on or before September 28, 1999, and $11 thousand for each false claim made on or after September 28, 1999, together with attorneys’ fees and costs. The Relators

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claimed that the United States Government sustained damages of $1.6 billion (the contract purchase price of 21 aircraft) or, alternatively, $851 million (the alleged diminished value and increased maintenance cost of the 21 aircraft). After investigating the allegations, the United States Government declined to intervene in the lawsuit.
DAS has been directed by California environmental agencies to investigate and take corrective action for groundwater contamination at its facilities located in El Mirage and Monrovia, California. Based on currently available information, Ducommun has established a reserve for its estimated liability for such investigation and corrective action of approximately $1.5 million at July 4, 2015, which is reflected in other long-term liabilities on its consolidated balance sheet.
DAS also faces liability as a potentially responsible party for hazardous waste disposed at landfills located in Casmalia and West Covina, California. DAS and other companies and government entities have entered into consent decrees with respect to these landfills with the United States Environmental Protection Agency and/or California environmental agencies under which certain investigation, remediation and maintenance activities are being performed. Based on currently available information, Ducommun preliminarily estimates that the range of its future liabilities in connection with the landfill located in West Covina, California is between approximately $0.4 million and $3.1 million. Ducommun has established a reserve for its estimated liability, in connection with the West Covina landfill of approximately $0.4 million at July 4, 2015, which is reflected in other long-term liabilities on its consolidated balance sheet. Ducommun’s ultimate liability in connection with these matters will depend upon a number of factors, including changes in existing laws and regulations, the design and cost of construction, operation and maintenance activities, and the allocation of liability among potentially responsible parties.
In the normal course of business, Ducommun and its subsidiaries are defendants in certain other litigation, claims and inquiries, including matters relating to environmental laws. In addition, Ducommun makes various commitments and incurs contingent liabilities. While it is not feasible to predict the outcome of these matters, Ducommun does not presently expect that any sum it may be required to pay in connection with these matters would have a material adverse effect on its condensed consolidated financial position, results of operations or cash flows.

 
Note 12. Business Segment Information
We supply products and services primarily to the aerospace and defense industries. Our subsidiaries are organized into two strategic businesses, DAS and DLT, each of which is a reportable operating segment.

Financial information by reportable operating segment was as follows:

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Table of Contents

 
 
(In thousands)
Three Months Ended
 
(In thousands)
Six Months Ended
 
 
July 4,
2015
 
June 28,
2014
 
July 4,
2015
 
June 28,
2014
 
 
 
 
As Restated
 
 
 
As Restated
Net Revenues
 
 
 
 
 
 
 
 
DAS
 
$
76,078

 
$
78,616

 
$
148,136

 
$
160,270

DLT
 
98,767

 
107,900

 
199,629

 
205,999

Total Net Revenues
 
$
174,845

 
$
186,516

 
$
347,765

 
$
366,269

Segment Operating Income
 
 
 
 
 
 
 
 
DAS
 
$
6,870

 
$
10,068

 
$
9,008

 
$
21,159

DLT
 
7,692

 
10,757

 
13,977

 
17,801

 
 
14,562

 
20,825

 
22,985

 
38,960

Corporate General and Administrative Expenses (1)
 
(3,723
)
 
(4,015
)
 
(8,519
)
 
(7,322
)
Operating Income
 
$
10,839

 
$
16,810

 
$
14,466

 
$
31,638

Depreciation and Amortization Expenses
 
 
 
 
 
 
 
 
DAS
 
$
2,111

 
$
3,554

 
$
4,624

 
$
5,970

DLT
 
4,361

 
4,043

 
8,720

 
9,051

Corporate Administration
 
42

 
102

 
84

 
104

Total Depreciation and Amortization Expenses
 
$
6,514

 
$
7,699

 
$
13,428

 
$
15,125

Capital Expenditures
 
 
 
 
 
 
 
 
DAS
 
$
2,417

 
$
1,435

 
$
5,751

 
$
2,720

DLT
 
948

 
2,078

 
2,438

 
2,975

Corporate Administration
 
2

 
14

 
6

 
24

Total Capital Expenditures
 
$
3,367

 
$
3,527

 
$
8,195

 
$
5,719


(1)
Includes costs not allocated to either the DLT or DAS operating segments.
Segment assets include assets directly identifiable with each segment. Corporate assets include assets not specifically identified with a business segment, including cash. Our segment assets are as follows:
 
 
(In thousands)
 
 
July 4,
2015
 
December 31,
2014
Total Assets
 
 
 
 
DAS
 
$
243,840

 
$
245,925

DLT
 
412,489

 
427,719

Corporate Administration
 
53,641

 
73,955

Total Assets
 
$
709,970

 
$
747,599

Goodwill and Intangibles
 
 
 
 
DAS
 
$
62,803

 
$
63,497

DLT
 
244,854

 
249,176

Total Goodwill and Intangibles
 
$
307,657

 
$
312,673


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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Restatement of Previously Issued Financial Statements
As disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014, we restated our consolidated financial statements for the years ended December 31, 2013 and 2012 and our unaudited quarterly financial information for the first three quarters in the year ended December 31, 2014 and for each of the quarters in the year ended December 31, 2013, to correct errors in prior periods primarily related to (i) a long-term contract (“Contract”) following the discovery of misconduct by employees in the recording of direct labor costs to the Contract from 2009 through the third quarter 2014 which resulted in the identification of a forward loss provision that should have been recorded in 2009 and the impact on subsequent periods of adjustments to the forward loss provision based on information available at the time (“Forward Loss Adjustments”); and (ii) the year end reconciliation of income taxes payable and deferred tax balances identified errors primarily in 2013, 2012, and 2011 (“Tax Adjustments”). The misconduct and its related financial impact were concealed from our senior management, internal auditors, and external auditors.
Also as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014, the Forward Loss Adjustments were based on certain assumptions and estimates. To determine the loss on the Contract, we estimated the number of units we would have expected to ship over the life of the Contract at inception of the Contract using external market industry data for fiscal years 2009, 2010, 2011, 2012, and 2013. We used data obtained directly from the customer for 2014 and 2015. The total estimated costs at any given point in time would typically include actual historical costs up to that time plus the estimated cost to produce units to be delivered. In addition, the estimated total cost for the life of the Contract includes certain inefficiencies on labor, material, and overhead costs during the initial start-up period. However, as we progress along the learning curve, the direct labor hours and overhead rates are expected to decrease as we gain technical knowhow and efficiency in producing the product. As a result of the misconduct by the employees in the recording of direct labor hours to the Contract, the historical actual direct labor hours charged to the Contract were inaccurate. As a result, we estimated the costs to complete future units at the end of each period based on an estimate of the direct labor hours chargeable to the Contract, including consideration of anticipated learning curve efficiencies that would decrease the direct labor hours over the remaining term of the Contract. Further, we used the actual direct labor hours incurred by the employees assigned to the Contract as a basis for projecting future hours, less an estimate of the time not allocable to the Contract. Using this model, we calculated the Forward Loss Adjustments from the inception of the Contract in 2009 through the expected life of the Contract. As a result of the Forward Loss Adjustments, cost of goods sold increased (decreased) approximately $6.7 million in 2009, $1.3 million in 2010, $(0.3) million in 2011, $(2.2) million in 2012, $(0.9) million in 2013, and $(0.8) million in the nine months ended September 27, 2014.
Further, as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014, the Tax Adjustments were necessary as a result of certain calculation errors. The Tax Adjustments resulted in a net decrease to income tax expense of approximately $0.9 million in 2013 and zero in 2012. The Tax Adjustments in 2011 resulted in a reduction to the carrying value of goodwill totaling approximately $4.0 million due to a calculation error in the original purchase price allocation and subsequent performance of step 2 of our annual goodwill impairment analysis related to deferred income taxes and thus, (i) reduced deferred income taxes by approximately $2.7 million and (ii) generated a pre-tax goodwill impairment charge of approximately $1.4 million. Further, the Tax Adjustments in 2011 reduced deferred tax assets by approximately $1.6 million that were established as a result of shared-based compensation expenses recorded previously and should have been reduced as the tax deductions were utilized. Moreover, the restated amounts include previously identified and disclosed immaterial adjustments.
See Part I, Item 4 of this Form 10-Q for information regarding our controls and procedures.
Overview
Ducommun Incorporated (“Ducommun,” the “Company,” “we,” “us” or “our”) is a leading global provider of engineering and manufacturing services for high-performance products and high-cost-of failure applications used primarily in the aerospace, defense, industrial, natural resources, medical and other industries. Ducommun differentiates itself as a full-service solution-based provider, offering a wide range of value-added products and services in our primary businesses of electronics, structures and integrated solutions. We operate through two primary business units: Ducommun LaBarge Technologies (“DLT”) and Ducommun AeroStructures (“DAS”).
Second quarter 2015 recap:
Second quarter revenue was approximately $174.8 million

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Table of Contents

Net income of approximately $1.8 million, or $0.16 per diluted share
EBITDA for the quarter was approximately $18.9 million
New $475.0 million credit facility completed and, on July 27, redeemed all $200.0 million of our senior unsecured notes
Earnings before interest, taxes, depreciation and amortization (“EBITDA”) was approximately $18.9 million and $24.5 million for the three months ended July 4, 2015 and June 28, 2014, respectively. See “Non-GAAP Financial Measures” below for certain information regarding EBITDA, including reconciliation of EBITDA to net income.
Non-GAAP Financial Measures
When viewed with our financial results prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and accompanying reconciliations, we believe EBITDA provides additional useful information to clarify and enhance the understanding of the factors and trends affecting our past performance and future prospects. We define these measures, explain how they are calculated and provide reconciliations of these measures to the most comparable GAAP measure in the tables below. EBITDA and the related financial ratios, as presented in this Form 10-Q, are supplemental measures of our performance that are not required by, or presented in accordance with, GAAP. They are not a measurement of our financial performance under GAAP and should not be considered as alternatives to net income or any other performance measures derived in accordance with GAAP, or as an alternative to net cash provided by operating activities as measures of our liquidity. The presentation of these measures should not be interpreted to mean that our future results will be unaffected by unusual or nonrecurring items.
We use EBITDA as a non-GAAP operating performance measure internally as complementary financial measures to evaluate the performance and trends of our businesses. We present EBITDA and the related financial ratios, as applicable, because we believe that measures such as these provide useful information with respect to our ability to meet our future debt service, capital expenditures, working capital requirements and overall operating performance.
EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as substitutes for analysis of our results as reported under GAAP. Some of these limitations are:
They do not reflect our cash expenditures, future requirements for capital expenditures or contractual commitments;
They do not reflect changes in, or cash requirements for, our working capital needs;
They do not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on our debt;
Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA does not reflect any cash requirements for such replacements;
They are not adjusted for all non-cash income or expense items that are reflected in our statements of cash flows;
They do not reflect the impact on earnings of charges resulting from matters unrelated to our ongoing operations; and
Other companies in our industry may calculate EBITDA differently from us, limiting their usefulness as comparative measures.
Because of these limitations, EBITDA and the related financial ratios should not be considered as measures of discretionary cash available to us to invest in the growth of our business or as a measure of cash that will be available to us to meet our obligations. You should compensate for these limitations by relying primarily on our GAAP results and using EBITDA as only supplemental information. See our condensed consolidated financial statements contained in this Form 10-Q report.
However, in spite of the above limitations, we believe that EBITDA is useful to an investor in evaluating our results of operations because these measures:
Are widely used by investors to measure a company’s operating performance without regard to items excluded from the calculation of such terms, which can vary substantially from company to company depending upon accounting methods and book value of assets, capital structure and the method by which assets were acquired, among other factors;

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Help investors to evaluate and compare the results of our operations from period to period by removing the effect of our capital structure from our operating performance; and
Are used by our management team for various other purposes in presentations to our Board of Directors as a basis for strategic planning and forecasting.
The following financial items have been added back to our net (loss) income when calculating EBITDA:
Amortization expense may be useful to investors because it represents the estimated attrition of our acquired customer base and the diminishing value of product rights;
Depreciation may be useful to investors because it generally represents the wear and tear on our property and equipment used in our operations;
Interest expense may be useful to investors for determining current cash flow; and
Income tax expense may be useful to investors because it represents the taxes which may be payable for the period and the change in deferred taxes during the period, and may reduce cash flow available for use in our business.
Reconciliations of net income (loss) to EBITDA and the presentation of EBITDA as a percentage of net revenues were as follows:
 
(In thousands)
Three Months Ended
 
(In thousands)
Six Months Ended
 
July 4,
2015
 
June 28,
2014
 
July 4,
2015
 
June 28,
2014
 
 
 
As Restated
 
 
 
As Restated
Net income (loss)
$
1,782

 
$
6,619

 
$
(191
)
 
$
11,778

Depreciation and amortization
6,514

 
7,699

 
13,428

 
15,125

Interest expense
6,446

 
6,994

 
13,107

 
14,119

Loss on extinguishment of debt
2,842

 

 
2,842

 

Income tax expense
1,279

 
3,197

 
218

 
5,741

EBITDA
$
18,863

 
$
24,509

 
$
29,404

 
$
46,763

% of net revenues
10.8
%
 
13.1
%
 
8.5
%
 
12.8
%
 
EBITDA decreased in both the three and six months ended July 4, 2015 compared to the three and six months ended June 28, 2014, primarily due to lower net revenues, primarily in the military and space end-use markets, and lower income tax expense primarily due to lower pre-tax income, partially offset by the loss on extinguishment of debt as a result of writing off the unamortized debt issuance costs when the existing senior secured term loan was extinguished.


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Table of Contents

Results of Operations
Second Quarter of 2015 Compared to Second Quarter of 2014
The following table sets forth net revenues, selected financial data, the effective tax rate and diluted earnings per share:

 
 
(in thousands, except per share data)
Three Months Ended
 
(in thousands, except per share data)
Six Months Ended
 
 
July 4,
2015
 
%
of Net  Revenues
 
June 28,
2014
 
%
of Net  Revenues
 
July 4,
2015
 
%
of Net  Revenues
 
June 28,
2014
 
%
of Net  Revenues
 
 
 
 
 
 
As Restated
 
As Restated
 
 
 
 
 
As Restated
 
As Restated
Net Revenues
 
$
174,845

 
100.0
 %
 
$
186,516

 
100.0
 %
 
$
347,765

 
100.0
 %
 
$
366,269

 
100.0
 %
Cost of Sales
 
143,638

 
82.2
 %
 
148,838

 
79.8
 %
 
289,797

 
83.3
 %
 
292,676

 
79.9
 %
Gross Profit
 
31,207

 
17.8
 %
 
37,678

 
20.2
 %
 
57,968

 
16.7
 %
 
73,593

 
20.1
 %
Selling, General and Administrative Expenses
 
20,368

 
11.6
 %
 
20,868

 
11.2
 %
 
43,502

 
12.5
 %
 
41,955

 
11.5
 %
Operating Income
 
10,839

 
6.2
 %
 
16,810

 
9.0
 %
 
14,466

 
4.2
 %
 
31,638

 
8.6
 %
Interest Expense
 
(6,446
)
 
(3.7
)%
 
(6,994
)
 
(3.7
)%
 
(13,107
)
 
(3.8
)%
 
(14,119
)
 
(3.8
)%
Loss on Extinguishment of Debt
 
(2,842
)
 
(1.6
)%
 

 
 %
 
(2,842
)
 
(0.8
)%
 

 
 %
Other Income
 
1,510

 
0.9
 %
 

 
 %
 
1,510

 
0.4
 %
 

 
 %
Income Before Taxes
 
3,061

 
1.8
 %
 
9,816

 
5.3
 %
 
27

 
 %
 
17,519

 
4.8
 %
Income Tax Expense
 
1,279

 
nm

 
3,197

 
nm

 
218

 
nm

 
5,741

 
nm

Net Income (Loss)
 
$
1,782

 
1.0
 %
 
$
6,619

 
3.5
 %
 
$
(191
)
 
(0.1
)%
 
$
11,778

 
3.2
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Effective Tax Rate
 
41.8
%
 
nm

 
32.6
%
 
nm

 
807.4
%
 
nm

 
32.8
%
 
nm

Diluted Earnings (Loss) Per Share
 
$
0.16

 
nm

 
$
0.60

 
nm

 
$
(0.02
)
 
nm

 
$
1.06

 
nm

nm = not meaningful
Net Revenues by End-Use Market and Operating Segment
Net revenues by end-use market and operating segment during the first fiscal three and six months of 2015 and 2014, respectively, were as follows:

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Table of Contents


 
 
Three Months Ended
 
Six Months Ended
 
 
 
 
(In thousands)
 
% of Net Revenues
 
 
 
(In thousands)
 
% of Net Revenues
 
 
Change
 
July 4
2015
 
June 28,
2014
 
July 4
2015
 
June 28,
2014
 
Change
 
July 4
2015
 
June 28,
2014
 
July 4
2015
 
June 28,
2014
Consolidated Ducommun
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Military and space
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Defense technologies
 
$
(7,987
)
 
$
54,639

 
$
62,626

 
32%
 
34%
 
$
(13,822
)
 
$
106,162

 
$
119,984

 
31%
 
32%
Defense structures
 
(7,755
)
 
22,624

 
30,379

 
13%
 
16%
 
(22,513
)
 
42,062

 
64,575

 
12%
 
18%
Commercial aerospace
 
5,547

 
64,537

 
58,990

 
37%
 
32%
 
14,469

 
130,926

 
116,457

 
38%
 
32%
Natural resources
 
(3,253
)
 
7,538

 
10,791

 
4%
 
6%
 
(2,712
)
 
18,854

 
21,566

 
5%
 
6%
Industrial
 
(1,738
)
 
10,971

 
12,709

 
6%
 
7%
 
2,242

 
24,061

 
21,819

 
7%
 
6%
Medical and other
 
3,515

 
14,536

 
11,021

 
8%
 
5%
 
3,832

 
25,700

 
21,868

 
7%
 
6%
Total
 
$
(11,671
)
 
$
174,845

 
$
186,516

 
100%
 
100%
 
$
(18,504
)
 
$
347,765

 
$
366,269

 
100%
 
100%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
DAS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Military and space (defense structures)
 
$
(7,755
)
 
$
22,624

 
$
30,379

 
30%
 
39%
 
$
(22,513
)
 
$
42,062

 
$
64,575

 
28%
 
40%
Commercial aerospace
 
5,217

 
53,454

 
48,237

 
70%
 
61%
 
10,379

 
106,074

 
95,695

 
72%
 
60%
Total
 
$
(2,538
)
 
$
76,078

 
$
78,616

 
100%
 
100%
 
$
(12,134
)
 
$
148,136

 
$
160,270

 
100%
 
100%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
DLT
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Military and space (defense technologies)
 
$
(7,987
)
 
$
54,639

 
$
62,626

 
55%
 
58%