UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_________________________________________________________

FORM 10-Q



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September 29, 2018~~March 30, 2019



¨	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~~001-08174

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.)

200 Sandpointe Avenue, Suite 700, Santa Ana, California		92707-5759
(Address of principal executive offices)		(Zip code)

Registrant’s telephone number, including area code: (657) 335-3665

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $.01 par value per share	DCO	New York Stock Exchange

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 a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	¨	Accelerated filer	x

Non-accelerated filer	¨	Smaller reporting company	¨

		Emerging growth company	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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 ~~October 25, 2018,~~April 24, 2019, the registrant had ~~11,410,277~~11,497,942 shares of common stock outstanding.

DUCOMMUN INCORPORATED AND SUBSIDIARIES



			Page
PART I. FINANCIAL INFORMATION

	Item 1.	Financial Statements (unaudited)	3

		Condensed Consolidated Balance Sheets as of ~~September 29, 2018~~March 30, 2019 and December 31, ~~2017~~2018	3

		Condensed Consolidated Statements of Income for the Three ~~and Nine~~ Months Ended ~~September 29,~~March 30, 2019 and March 31, 2018 ~~and September 30, 2017~~	4

		Condensed Consolidated Statements of Comprehensive Income for the Three ~~and Nine~~ Months Ended ~~September 29,~~March 30, 2019 and March 31, 2018 ~~and September 30, 2017~~	5

		Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 30, 2019 and March 31, 2018	6

		Condensed Consolidated Statements of Cash Flows for the ~~Nine~~Three Months Ended ~~September 29,~~March 30, 2019 and March 31, 2018 ~~and September 30, 2017~~	67

		Notes to Condensed Consolidated Financial Statements	78

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2623

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3631

	Item 4.	Controls and Procedures	3731

PART II. OTHER INFORMATION

	Item 1.	Legal Proceedings	3731

	Item 1A.	Risk Factors	3732

	Item 4.	Mine Safety Disclosures	37

	~~Item 5.~~	~~Other Information~~	3732

	Item 6.	Exhibits	3833

Signatures			4136

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)


	September 29, 2018			December 31, 2017			March 30, 2019			December 31, 2018
Assets
Current Assets
Cash and cash equivalents	$	3,573		$	2,150		$	3,727		$	10,263
Accounts receivable, net of allowance for doubtful accounts of $1,212 and $868 at September 29, 2018 and December 31, 2017, respectively	64,466			74,064
Accounts receivable, net of allowance for doubtful accounts of $1,239 and $1,135 at March 30, 2019 and December 31, 2018, respectively							63,134			67,819
Contract assets	88,066			—			93,306			86,665
Inventories	101,752			122,161			103,994			101,125
Production cost of contracts	12,021			11,204			11,008			11,679
Other current assets	12,124			11,435			7,003			6,531
Total Current Assets	282,002			221,014			282,172			284,082
Property and equipment, net of accumulated depreciation of $159,010 and $143,216 at September 29, 2018 and December 31, 2017, respectively	106,583			110,252
Property and equipment, net of accumulated depreciation of $158,308 and $154,840 at March 30, 2019 and December 31, 2018, respectively							108,839			107,045
Operating lease right-of-use assets							18,398			—
Goodwill	135,769			117,435			136,057			136,057
Intangibles, net	114,746			114,693			109,387			112,092
Non-current deferred income taxes	131			261			313			308
Other assets	3,334			3,098			5,543			5,155
Total Assets	$	642,565		$	566,753		$	660,709		$	644,739
Liabilities and Shareholders’ Equity
Current Liabilities
Accounts payable	$	73,534		$	51,907		$	68,785		$	69,274
Contract liabilities	15,108			—			15,030			17,145
Accrued liabilities	31,929			28,329
Accrued and other liabilities							28,986			37,786
Operating lease liabilities							2,536			—
Current portion of long-term debt							2,330			2,330
Total Current Liabilities	120,571			80,236			117,667			126,535
Long-term debt	229,402			216,055			229,125			228,868
Non-current operating lease liabilities							17,499			—
Non-current deferred income taxes	19,427			15,981			18,211			18,070
Other long-term liabilities	17,608			18,898			14,429			14,441
Total Liabilities	387,008			331,170			396,931			387,914
Commitments and contingencies (Notes 11, 13)
Commitments and contingencies (Notes 10, 12)
Shareholders’ Equity
Common stock - $0.01 par value; 35,000,000 shares authorized; 11,409,623 and 11,332,841 shares issued and outstanding at September 29, 2018 and December 31, 2017, respectively	114			113
Common stock - $0.01 par value; 35,000,000 shares authorized; 11,477,771 and 11,417,863 shares issued and outstanding at March 30, 2019 and December 31, 2018, respectively							115			114
Additional paid-in capital	82,447			80,223			83,370			83,712
Retained earnings	179,412			161,364			187,564			180,356
Accumulated other comprehensive loss	(6,416		)	(6,117		)	(7,271		)	(7,357		)
Total Shareholders’ Equity	255,557			235,583			263,778			256,825
Total Liabilities and Shareholders’ Equity	$	642,565		$	566,753		$	660,709		$	644,739

See accompanying notes to Condensed Consolidated Financial Statements.

Ducommun Incorporated and Subsidiaries

Condensed Consolidated Statements of Income

(Unaudited)

(In thousands, except per share amounts)


	Three Months Ended						Nine Months Ended						Three Months Ended
	September 29, 2018			September 30, 2017			September 29, 2018			September 30, 2017			March 30, 2019			March 31, 2018
Net Revenues	$	159,842		$	138,690		$	465,124		$	415,925		$	172,566		$	150,455
Cost of Sales	128,726			112,603			375,225			338,563			136,872			123,700
Gross Profit	31,116			26,087			89,899			77,362			35,694			26,755
Selling, General and Administrative Expenses	20,956			18,676			61,476			59,075			22,846			19,326
Restructuring Charges	3,373			64			10,784			64			—			2,173
Operating Income	6,787			7,347			17,639			18,223			12,848			5,256
Interest Expense	(2,524		)	(2,240		)	(9,186		)	(6,045		)	(4,351		)	(2,899		)
Other Income	27			488			27			488
Income Before Taxes	4,290			5,595			8,480			12,666			8,497			2,357
Income Tax Expense	119			940			118			2,073
Income Tax Expense (Benefit)													1,025			(243		)
Net Income	$	4,171		$	4,655		$	8,362		$	10,593		$	7,472		$	2,600
Earnings Per Share
Basic earnings per share	$	0.37		$	0.41		$	0.73		$	0.94		$	0.65		$	0.23
Diluted earnings per share	$	0.36		$	0.41		$	0.72		$	0.92		$	0.64		$	0.22
Weighted-Average Number of Common Shares Outstanding
Basic	11,404			11,241			11,382			11,276			11,434			11,346
Diluted	11,683			11,486			11,639			11,556			11,755			11,613

See accompanying notes to Condensed Consolidated Financial Statements.

Ducommun Incorporated and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

(In thousands)


	Three Months Ended					Nine Months Ended					Three Months Ended
	September 29, 2018		September 30, 2017			September 29, 2018		September 30, 2017			March 30, 2019			March 31, 2018
Net Income	$	4,171	$	4,655		$	8,362	$	10,593		$	7,472		$	2,600
Other Comprehensive Income (Loss), Net of Tax:
Amortization of actuarial losses and prior service costs, net of tax benefit of $45 and $74 for the three months ended September 29, 2018 and September 30, 2017, respectively, and $134 and $225 for the nine months ended September 29, 2018 and September 30, 2017, respectively	140		128			423		382
Change in unrealized gains and losses on cash flow hedges, net of tax of $16 and $17 for the three months ended September 29, 2018 and September 30, 2017, respectively, and $104 and $161 for the nine months ended September 29, 2018 and September 30, 2017, respectively	49		(28		)	330		(271		)
Amortization of actuarial losses and prior service costs, net of tax benefit of $51 and $45 for the three months ended March 30, 2019 and March 31, 2018, respectively											170			141
Change in unrealized gains and losses on cash flow hedges, net of tax of $54 and $61 for the three months ended March 30, 2019 and March 31, 2018, respectively											(84		)	194
Other Comprehensive Income (Loss), Net of Tax	189		100			753		111			86			335
Comprehensive Income	$	4,360	$	4,755		$	9,115	$	10,704		$	7,558		$	2,935

See accompanying notes to Condensed Consolidated Financial Statements.

Ducommun Incorporated and Subsidiaries

Condensed Consolidated Statements of Changes in Shareholders’ Equity

(Unaudited)

(In thousands)



	Three Months Ended
	March 30, 2019			March 31, 2018
Common Stock and Paid-in-Capital
Balance, Beginning of Period	$	83,826		$	80,336
Stock Options Exercised	97			121
Stock Awards Vested	4,296			2,307
Stock Repurchased Related to Stock Options Exercised and Stock Awards Vested	(6,198		)	(3,376		)
Stock-Based Compensation	1,464			1,247
Balance, End of Period	83,485			80,635
Retained Earnings
Balance, Beginning of Period	180,356			161,364
Net Income	7,472			2,600
Adoption of ASC 842 Adjustment	(264		)	—
Adoption of ASC 606 Adjustment	—			8,665
Adoption of ASU 2018-02 Adjustment	—			1,292
Balance, End of Period	187,564			173,921
Accumulated Other Comprehensive Loss
Balance, Beginning of Period	(7,357		)	(6,117		)
Other Comprehensive Income, Net of Tax	86			453
Adoption of ASU 2018-02 Adjustment	—			(1,318		)
Balance, End of Period	(7,271		)	(6,982		)
Total Stockholders’ Equity	$	263,778		$	247,574

See accompanying notes to Condensed Consolidated Financial Statements.

Ducommun Incorporated and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)


	Nine Months Ended						Three Months Ended
	September 29, 2018			September 30, 2017			March 30, 2019			March 31, 2018
Cash Flows from Operating Activities
Net Income	$	8,362		$	10,593		$	7,472		$	2,600
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and amortization	18,635			17,149			6,755			5,981
Amortization of right-of-use assets							633			—
Property and equipment impairment due to restructuring	5,784			—			—			1,077
Stock-based compensation expense	3,414			4,264			1,464			1,090
Deferred income taxes	3,446			(164		)	217			(206		)
Provision for doubtful accounts	344			125
Provision for (recovery of) doubtful accounts							104			(143		)
Other	9,275			(2,217		)	(19		)	8,810
Changes in Assets and Liabilities:
Accounts receivable	10,771			(1,427		)	4,581			9,292
Contract assets	(88,066		)	—			(6,641		)	(78,163		)
Inventories	22,909			(15,529		)	(2,869		)	36,229
Production cost of contracts	(1,447		)	(599		)	105			(55		)
Other assets	3,709			458			(450		)	412
Accounts payable	22,610			13,801			(1,789		)	12,213
Contract liabilities	15,108			—			(2,115		)	15,723
Accrued and other liabilities	(1,452		)	903			(9,154		)	(4,524		)
Net Cash Provided by Operating Activities	33,402			27,357
Net Cash (Used in) Provided by Operating Activities							(1,706		)	10,336
Cash Flows from Investing Activities
Purchases of property and equipment	(12,796		)	(24,599		)	(3,225		)	(3,341		)
Proceeds from sale of assets	117			3			—			41
Insurance recoveries related to property and equipment	—			288
Payments for acquisition of Lightning Diversion Systems, LLC, net of cash acquired	—			(59,178		)
Payments for acquisition of Certified Thermoplastics Co., LLC, net of cash acquired	(30,711		)	—
Net Cash Used in Investing Activities	(43,390		)	(83,486		)	(3,225		)	(3,300		)
Cash Flows from Financing Activities
Borrowings from senior secured revolving credit facility	239,700			320,500			61,900			76,700
Repayments of senior secured revolving credit facility	(227,100		)	(255,800		)	(58,700		)	(83,300		)
Repayments of term loan	—			(10,000		)	(3,000		)	—
Repayments of other debt	—			(3		)
Net cash paid upon issuance of common stock under stock plans	(1,189		)	(2,311		)	(1,805		)	(789		)
Net Cash Provided by Financing Activities	11,411			52,386
Net Cash Used in Financing Activities							(1,605		)	(7,389		)
Net Increase (Decrease) in Cash and Cash Equivalents	1,423			(3,743		)	(6,536		)	(353		)
Cash and Cash Equivalents at Beginning of Period	2,150			7,432			10,263			2,150
Cash and Cash Equivalents at End of Period	$	3,573		$	3,689		$	3,727		$	1,797

See accompanying notes to Condensed Consolidated Financial Statements.

Ducommun Incorporated and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 1. Summary of Significant Accounting Policies

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 and defense (“A&D”), industrial, medical and other industries (collectively, “Industrial”). Our operations are organized into two primary businesses: Electronic Systems segment and Structural Systems segment, each of which is a reportable operating segment. Electronic Systems designs, engineers and manufactures high-reliability electronic and electromechanical products used in worldwide technology-driven markets including A&D and Industrial end-use markets. Electronic Systems’ product offerings primarily range from prototype development to complex assemblies. Structural Systems designs, engineers and manufactures large, complex contoured aerostructure components and assemblies and supplies composite and metal bonded structures and assemblies. Structural Systems’ products are primarily used on commercial aircraft, military fixed-wing aircraft, and military and commercial rotary-wing aircraft. All reportable operating segments follow the same accounting principles.

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, ~~2017~~2018 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, ~~2017.~~2018. We followed the same accounting policies for interim reporting except for the change in our ~~revenue recognition~~lease accounting practices described below. 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, ~~2017.~~2018.

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 nine~~ months ended ~~September 29, 2018~~March 30, 2019 are not necessarily indicative of the results to be expected for the full year ending December 31, ~~2018.~~2019.

Our fiscal quarters typically 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. As a result of using fiscal quarters for the first three quarters combined with leap years, our first and fourth fiscal quarters can range between 12 1/2 weeks to 13 1/2 weeks while the second and third fiscal quarters remain at a constant 13 weeks per fiscal quarter.

Certain reclassifications have been made to prior period amounts to conform to the current year’s presentation.

Changes in Accounting Policies

We adopted ~~ASC 606, “Revenue from Contracts with Customers”~~Accounting Standards Codification (“ASC”) 842, “Leases” (“ASC ~~606”~~842”), on January 1, ~~2018.~~2019. As a result, we changed our accounting policy for ~~revenue recognition~~lease accounting as ~~detailed below and~~discussed in Note ~~2, as well as other accounting policies as noted below.~~2.

We applied ASC ~~606~~842 using the ~~modified retrospective~~additional transition method ~~(also known as the cumulative effect method)~~ and therefore, recognized the cumulative effect of initially applying ASC ~~606~~842 as an adjustment to the opening condensed consolidated balance sheet at January 1, ~~2018.~~2019. Therefore, the comparative information has not been adjusted and continues to be reported under the previous ~~revenue recognition~~lease accounting standard, ASC ~~605, “Revenue Recognition”~~840, “Leases” (“ASC ~~605”~~840”). The details of the significant changes and quantitative impact of the changes are described ~~below and~~in Note 2.

Use of Estimates

Certain amounts and disclosures included in the unaudited condensed consolidated financial statements require 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.

Supplemental Cash Flow Information


	(In thousands)				(In thousands)
	Nine Months Ended				Three Months Ended
	September 29, 2018		September 30, 2017		March 30, 2019		March 31, 2018
Interest paid	$	8,073	$	4,867	$	3,984	$	2,405
Taxes paid	$	195	$	1,969	$	5	$	—
Non-cash activities:
Purchases of property and equipment not paid	$	970	$	890	$	2,124	$	3,026

Earnings Per Share

Basic earnings per share are computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding in each period. Diluted earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding, plus any potentially dilutive shares that could be issued if exercised or converted into common stock in each period.

The net income and weighted-average common shares outstanding used to compute earnings per share were as follows:


	(In thousands, except per share data)				(In thousands, except per share data)				(In thousands, except per share data)
	Three Months Ended				Nine Months Ended				Three Months Ended
	September 29, 2018		September 30, 2017		September 29, 2018		September 30, 2017		March 30, 2019		March 31, 2018
Net income	$	4,171	$	4,655	$	8,362	$	10,593	$	7,472	$	2,600
Weighted-average number of common shares outstanding
Basic weighted-average common shares outstanding	11,404		11,241		11,382		11,276		11,434		11,346
Dilutive potential common shares	279		245		257		280		321		267
Diluted weighted-average common shares outstanding	11,683		11,486		11,639		11,556		11,755		11,613
Earnings per share
Basic	$	0.37	$	0.41	$	0.73	$	0.94	$	0.65	$	0.23
Diluted	$	0.36	$	0.41	$	0.72	$	0.92	$	0.64	$	0.22

Potentially dilutive stock options and stock ~~units~~awards 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) (In thousands)
Three Months Ended Nine Months Ended
September 29,
2018 September 30,
2017 September 29,
2018 September 30,
2017
Stock options and stock units 171
166
216
142

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 the 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.

We have money market funds and they are included as cash and cash equivalents. We also have interest rate cap hedge agreements and the fair value of the interest rate cap hedge agreements were determined using pricing models that use observable market inputs as of the balance sheet date, a Level 2 measurement. The interest rate cap hedge premium as of March 30, 2019 of $0.1 million is included as other current assets.

There were no transfers between Level 1, Level 2, or Level 3 financial instruments in the three months ended March 30, 2019.

Cash and Cash Equivalents

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 above.

Derivative Instruments

We recognize derivative instruments on our condensed consolidated balance sheets at their fair value. On the date that we enter into a derivative contract, we designate the derivative instrument as a fair value hedge, a cash flow hedge, a hedge of a net investment in a foreign operation, or a derivative instrument that will not be accounted for using hedge accounting methods. As of ~~September 29, 2018,~~March 30, 2019, all of our derivative instruments were designated as cash flow hedges.

We record changes in the fair value of a derivative instrument that is highly effective and that is designated and qualifies as a cash flow hedge in other comprehensive income (loss), net of tax until our earnings are affected by the variability of cash flows of the underlying hedge. We record any hedge ineffectiveness and amounts excluded from effectiveness testing in current period earnings within interest expense. We report changes in the fair values of derivative instruments that are not designated or do not qualify for hedge accounting in current period earnings. We classify cash flows from derivative instruments in the condensed consolidated statements of cash flows in the same category as the item being hedged or on a basis consistent with the nature of the instrument. For the three months ended March 30, 2019, we recorded the changes in the fair value of the derivative instruments that were highly effective and that was designated and qualified as cash flow hedges in other comprehensive income (loss), net of tax, of $(0.1) million. Since a portion of our cash flow hedges mature on a quarterly basis, less than $(0.1) million of realized loss was recorded in the condensed consolidated statements of income for the three months ended March 30, 2019.

When we determine that a derivative instrument is not highly effective as a hedge, we discontinue hedge accounting prospectively. In all situations in which we discontinue hedge accounting and the derivative instrument remains outstanding, we will carry the derivative instrument at its fair value on our condensed consolidated balance sheets and recognize subsequent changes in its fair value in our current period earnings.

Inventories

Inventories are stated at the lower of cost or net realizable value with cost being determined using a moving average cost basis for raw materials and actual cost for work-in-process and finished goods. The majority of our inventory is charged to cost of sales as raw materials are placed into production and the related revenue is recognized. 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. We assess the inventory carrying value and reduce it, if necessary, to its net realizable value based on customer orders on hand, and internal demand forecasts using management’s best estimates given information currently available. ~~As a result of adopting ASC 606 on January 1, 2018, where we utilized the modified retrospective method of adoption and we changed our revenue recognition for the~~The majority of our revenue ~~from point in time to~~are recognized over time, ~~our inventory balance decreased significantly. For~~however, for revenue contracts where revenue is recognized using the point in time method, inventory is not reduced until it is shipped or transfer of control to the customer has occurred. Our ending inventory consists of raw materials, work-in-process, and finished goods. ~~See Note 2.~~

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 sales using the over time revenue recognition model. We review the value of the production cost of contracts on a quarterly basis to ensure when added to the estimated cost to complete, the value is not greater than the estimated realizable value of the related contracts.

Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss, as reflected on the condensed consolidated balance sheets under the equity section, was comprised of cumulative pension and retirement liability adjustments, net of tax, and change in net unrealized gains and losses on cash flow hedges, net of tax.

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 changes in manufacturing efficiency, operating and material costs, and our ability to resolve claims and

assertions with our customers. If any of these or other assumptions and estimates do not materialize in the future, we may be required to adjust the provisions for estimated losses on contracts. ~~As a result of the adoption of ASC 606 on January 1, 2018,~~

the definition of a revenue contract with a customer for us now has changed and is typically defined as a customer purchase order, in certain scenarios, we may be required to recognize anticipated losses on contracts that would not have occurred under ASC 605. In addition,The provision for estimated losses on contracts are ~~now~~ included as part of contract liabilities on the condensed consolidated balance sheets.

Revenue Recognition

Our customers typically engage us to manufacture products based on designs and specifications provided by the end-use customer. This will require the building of tooling and manufacturing first article inspection products (prototypes) before volume manufacturing. Contracts with our customers generally include a termination for convenience clause.

We have a significant number of contracts that are started and completed within the same year, as well as contracts derived from long-term ~~contracts~~agreements and programs that can span several ~~years, as well as contracts that are started and completed within the same year.~~years. We recognize revenue under ASC 606, which utilizes a five-step model. ~~Further, we utilized the modified retrospective method (also known as the cumulative effect method) of adoption of ASC 606. See Note 2.~~

The definition of a contract ~~under ASC 606~~ for us is typically defined as a customer purchase order as this is when we achieve enforceable right to payment. The majority of our contracts are firm fixed-price contracts. The deliverables within a customer purchase order are analyzed to determine the number of performance obligations. In addition, at times, in order to achieve economies of scale and based on our customer’s forecasted demand, we may build in advance of receiving a purchase order from our ~~customers.~~customers and in which case, we would not recognize revenue until we have received the customer purchase order.

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account under ASC 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, control is transferred and the performance obligation is satisfied. The majority of our contracts have a single performance obligation as the promise to transfer the individual goods or services ~~is not separately identifiable from~~are highly interrelated or met the ~~other promises in the contracts and therefore, not distinct.~~series guidance. For contracts with multiple performance obligations, we allocate the contract transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. The primary method used to estimate the standalone selling price is the expected cost plus a margin approach, under which we forecast our expected costs of satisfying a performance obligation and then add an appropriate margin for that distinct good or service.

The majority of our performance obligations are satisfied over time as work progresses. Typically, revenue is recognized over time using an input measure (i.e., costs incurred to date relative to total estimated costs at completion, also known as cost-to-cost plus reasonable profit) to measure progress. Our typical revenue contract is a firm fixed price contract, and the cost of raw materials could make up a significant amount of the total costs incurred. As such, we believe using the total costs incurred input method would be the most appropriate method. While the cost of raw materials could make up a significant amount of the total costs incurred, there is a direct relationship between our inputs and the transfer of control of goods or services to the customer in the event the customer invokes the termination for convenience clause, we would be entitled to costs incurred to date plus a reasonable profit. The majority of our revenues are recognized over time. Contract costs typically include labor, materials, overhead, and ~~overhead.~~when applicable, subcontractor costs.

Contract estimates are based on various assumptions to project the outcome of future events that can span multiple months or years. These assumptions include labor productivity and availability; the complexity of the work to be performed; the cost and availability of materials; and the performance of subcontractors.

As a significant change in one or more of these estimates could affect the profitability of our contracts, we review and update our contract-related estimates on a regular basis. We recognize adjustments in estimated profit on contracts under the cumulative catch-up method. Under this method, the impact of the adjustment on profit recorded to date is recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance is recognized using the adjusted estimate. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, we recognize the total loss in the quarter it is identified.

The impact of adjustments in contract estimates on our operating earnings can be reflected in either operating costs and expenses or revenue. ~~See Note 2~~

Net cumulative catch up adjustments on profit recorded were not material during the three months ended March 30, 2019.

Payments under long-term contracts may be received before or after revenue is recognized. When revenue is recognized before we bill our customer, a contract asset is created for the ~~net impact of these adjustments~~work performed but not yet billed. Similarly, when we receive payment before we ship our products to our ~~unaudited condensed consolidated financial statements~~customer, a contract liability is created for the ~~three-and nine months ended September 29, 2018.~~advance or progress payment.

Contract Assets and Contract Liabilities

Contract assets consist of our right to payment for work performed but not yet billed. Contract assets are transferred to accounts receivable when we ship the products to our customers and meet the shipping terms within the revenue contract. Contract

liabilities consist of advance or progress payments received from our customers prior to the time transfer of control occurs plus the estimated losses on contracts.

Contract assets and contract liabilities from revenue contracts with customers are as follows:


	(In thousands)				(In thousands)
	September 29, 2018		December 31, 2017		March 30, 2019		December 31, 2018
Contract assets	$	88,066	$	—	$	93,306	$	86,665
Contract liabilities	$	15,108	$	—	$	15,030	$	17,145

Remaining performance obligations is defined as customer placed purchase orders (“POs”) with firm fixed price and firm delivery dates. Our remaining performance obligations as of ~~September 29, 2018~~March 30, 2019 totaled ~~$523.7~~$697.5 million. We anticipate recognizing an estimated 70% of our remaining performance obligations as revenue during the next 12 months with the remaining performance obligations being recognized in the remainder of ~~2019~~2020 and beyond.

Revenue by Category

In addition to the revenue categories disclosed above, the following table reflects our revenue disaggregated by major end-use market:


	(In thousands)				(In thousands)				(In thousands)
	Three Months Ended				Nine Months Ended				Three Months Ended
	September 29 2018		September 30, 2017		September 29 2018		September 30, 2017		March 30 2019		March 31, 2018
Consolidated Ducommun
Military and space	$	71,459	$	64,638	$	208,140	$	202,922	$	76,661	$	63,565
Commercial aerospace	76,343		60,010		219,019		173,098		85,496		73,631
Industrial	12,040		14,042		37,965		39,905		10,409		13,259
Total	$	159,842	$	138,690	$	465,124	$	415,925	$	172,566	$	150,455

Electronic Systems
Military and space	$	54,068	$	52,098	$	160,969	$	160,600	$	60,387	$	51,900
Commercial aerospace	19,588		12,865		53,672		39,048		13,401		17,250
Industrial	12,040		14,042		37,965		39,905		10,409		13,259
Total	$	85,696	$	79,005	$	252,606	$	239,553	$	84,197	$	82,409

Structural Systems
Military and space	$	17,391	$	12,540	$	47,171	$	42,322	$	16,274	$	11,665
Commercial aerospace	56,755		47,145		165,347		134,050		72,095		56,381
Total	$	74,146	$	59,685	$	212,518	$	176,372	$	88,369	$	68,046

Recent Accounting Pronouncements

New Accounting Guidance Adopted in ~~2018~~2019

In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging” (“ASU 2017-12”), which intends to improve and simplify accounting rules around hedge accounting. ASU 2017-12 refines and expands hedge accounting for both financial (i.e., interest rate) and commodity risks. In addition, it creates more transparency around how economic results are presented, both on the face of the financial statements and in the footnotes. The new guidance is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods, which is our interim period beginning January 1, 2019. Early adoption is permitted, including adoption in any interim period after the issuance of ASU 2017-12. The adoption of this standard did not have a material impact on our condensed consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”), which simplifies the subsequent measurement of goodwill, the amendments eliminate Step Two from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed

the total amount of goodwill allocated to that reporting unit. In addition, income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step Two of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The new guidance is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this standard did not have a material impact on our condensed consolidated financial statements.

July 2018, the FASB issued ASU ~~2018-15, “Intangibles - Goodwill and Other - Internal-Use Software~~2018-11, “Leases (Topic ~~350-40)~~842): ~~Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract”~~Targeted Improvements” (“ASU ~~2018-15”~~2018-11”); and

July 2018, the FASB issued ASU 2018-10, “Codification Improvements to Topic 842, Leases” (“ASU 2018-10”)

All the new guidance is effective for us beginning January 1, 2019. The cumulative impact to our retained earnings at January 1, 2019 was a net decrease of $0.3 million. See Note 2.

Recently Issued Accounting Standards

In March 2019, the FASB issued ASU 2019-01, “Leases (Topic 842): Codification Improvements” (“ASU 2019-01”), which ~~align the~~addresses various lessor implementation issues and clarifies that lessees and lessors are exempt from certain interim disclosure requirements ~~for capitalizing implementation costs incurred in a hosting arrangement that is a service contract~~associated with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). Accordingly, the amendments require an entity (customer) in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. In addition, the amendments also require the entity (customer) to expense the capitalized implementation costsadoption of ~~a hosting arrangement that is a service contract over the term of the hosting arrangement, which includes reasonably certain renewals.~~ASC 842. The new guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, which will be our interim period beginning January 1, 2020. Early adoption is ~~permitted, including adoption in any interim period, and thus, we have chosen to early adopt ASU 2018-15 beginning July 1, 2018.~~permitted. We ~~utilized~~are evaluating the prospective transition method of adoption which allows us to capitalize software implementation projects currently in process. The adoption of ASU 2018-15 resulted in capitalizing $0.2 million of implementation costs and included as other current assets on our condensed consolidated balance sheets as of September 29, 2018.

~~In February 2018, the FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220):~~

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“AOCI”)” (“ASU 2018-02”), which provides financial statement preparers with an option to reclassify stranded income tax effects within AOCI to retained earnings in each period in which the effect of the change in U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof) is recorded. The new guidance was effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted and we have chosen to early adopt ASU 2018-02 beginning January 1, 2018. Further, in March 2018, the FASB issued ASU 2018-05, “Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 118” (“ASU 2018-05”), which amends certain SEC material in Topic 740 for the income tax accounting implications of the recently issued Tax Cuts and Jobs Act (“Tax Cuts and Jobs Act”). The new guidance was effective upon inclusion in the FASB Codification. The adoption of these standards resulted in reclassifying $1.3 million of income tax effects from AOCI to retained earnings during the nine months ended September 29, 2018 on our condensed consolidated balance sheets. The income tax effects remaining in AOCI will be released into earnings as the related pre-tax AOCI amounts are reclassified to earnings.

In May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting” (“ASU 2017-09”), which provides clarity on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. The new guidance was effective for us beginning January 1, 2018. The adoptionimpact of this ~~standard did not have a significant impact on our condensed consolidated financial statements.~~

In March 2017, the FASB issued ASU 2017-07, “Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Costs” (“ASU 2017-07”), which requires an employer to report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. If a separate line item or items are used to present the other components of net benefit cost, that line item or items must be appropriately described. If a separate line item or items are not used, the line item or items used in the income statement to present the other components of net benefit cost must be disclosed. The amendments also allow only the service cost component to be eligible for capitalization when applicable. The new guidance was effective for us beginning January 1, 2018. The adoption of this standard did not have a material impact on our condensed consolidated financial statements. See Note 10.

In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business” (“ASU 2017-01”), which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of businesses. The new guidance was effective for us beginning January 1, 2018. The adoption of this standard did not have a significant impact on our condensed consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”), which addresses the following eight specific cash flow issues: Debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (“COLIs”) (including bank-owned life insurance policies [“BOLIs”]); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. The new guidance was effective for us beginning January 1, 2018. The adoption of this standard did not have a significant 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 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. Additional guidance was issued subsequently as follows:

~~December 2016, the FASB issued ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers” (“ASU 2016-20”);~~

~~May 2016, the FASB issued ASU 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients” (“ASU 2016-12”);~~

May 2016, the FASB issued ASU 2016-11, “Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-06 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting” (“ASU 2016-11”);

~~April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing” (“ASU 2016-10”); and~~

~~August 2015, the FASB issued ASU 2015-14, “Revenue From Contracts With Customers (Topic 606)” (“ASU 2015-14”).~~

~~All of this new guidance was effective for us beginning January 1, 2018. The cumulative impact to our retained earnings at January 1, 2018 was a net increase of $8.7 million. See Note 2.~~

~~Recently Issued Accounting Standards~~standard.

In August 2018, the FASB issued ASU 2018-14, “Compensation - Retirement Benefits - Defined Benefit Plans - General (Topic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans” (“ASU 2018-14”), which will remove disclosures that no longer are considered cost-beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. The new guidance is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years, which will be our interim period beginning January 1, 2021. Early adoption is permitted. We are evaluating the impact of this standard.

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”), which should improve the effectiveness of fair value measurement disclosures by removing certain requirements, modifying certain requirements, and adding certain new requirements. The new guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, which will be our interim period beginning January 1, 2020. Early adoption is permitted. We are evaluating the impact of this standard.

In ~~July 2018,~~June 2016, the FASB issued ASU ~~2018-11, “Leases~~2016-13, “Financial Instruments - Credit Losses (Topic ~~842)~~326): ~~Targeted Improvements”~~Measurement of Credit Losses on Financial Instruments” (“ASU ~~2018-11”~~2016-13”), which ~~provides entities~~is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. ASU 2016-13 requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional ~~(and optional) transition method to adopt~~information about the new leases standard. Under this new transition method, an entity initially applies the new leases standard at adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity's reporting for the comparative periods presentedamounts recorded in the financial statements in which the entity adopts the new lease requirements would continue to be in accordance with current GAAP (Topic 840). An entity electing this additional (and optional) transition method must provide the required Topic 840 disclosures for all periods that continue to be in accordance with Topic 840. The amendments do not change the existing disclosure requirements in Topic 840.statements. The new guidance is effective for fiscal years beginning after December 15, ~~2018,~~2019, including interim periods within those fiscal years, which will be our interim period beginning January 1, ~~2019.~~2020. We are evaluating the impact of this standard.

In July 2018, the FASB issued ASU 2018-10, “Codification Improvements to Topic 842), Leases” (“ASU 2018-10”), which provides clarification and guidance on multiple issues, some of which include how an entity should perform the lease classification reassessment, clarifying the periods covered by a lessor-only option to terminate the lease is included in the lease term, seller-lessee in a failed sale-and leaseback transaction should adjust the interest rate on its financial liability as necessary to ensure that the interest on the financial liability does not exceed the total payments (rather than the principal payments) on the financial liability. The new guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, which will be our interim period beginning January 1, 2019. We are evaluating the impact of this standard.

In January 2018, the FASB issued ASU 2018-01, “Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842” (“ASU 2018-01”), which clarifies the application of the new leases guidance to land easements and eases adoption efforts for some land easements. The new guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, which will be our interim period beginning January 1, 2019. We are evaluating the impact of this standard.

In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging” (“ASU 2017-12”), which intends to improve and simplify accounting rules around hedge accounting. ASU 2017-12 refines and expands hedge accounting for both financial (i.e., interest rate) and commodity risks. In addition, it creates more transparency around how economic results are presented, both on the face of the financial statements and in the footnotes. The new guidance is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods, which will be our interim period beginning January 1, 2019. Early adoption is permitted, including adoption in any interim period after the issuance of ASU 2017-12. We are evaluating the impact of this standard.

eliminate Step Two from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step Two of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The new guidance is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are evaluating the impact of this standard.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which requires lessees to present right-of-use assets and lease liabilities on the balance sheet. Lessees are required to apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The new guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, which will be our interim period beginning January 1, 2019. We are currently completing the assessment and gap identification phase and have started the implementation of a new lease accounting software package. The assessment and gap identification phase includes gathering and analyzing our leases, and potential gaps in our internal controls as a result of adopting ASU 2016-02. The new accounting standard will be adopted using the additional transition method. Under this method, the cumulative effect of applying the new guidance is recognized as an adjustment to certain captions on the balance sheet, including the opening balance of retained earnings in the first quarter of 2019, and the prior years’ financial information will be presented under the prior accounting standard, ASC 840, “Leases,” (“ASC 840”). In addition, we will be utilizing the various practical expedients available under the new accounting standard. We have periodically briefed our Audit Committee of the Board of Directors on the progress made towards the adoption of this lease accounting standard. Since we have not completed the implementation of the software solution, we currently are unable to determine the exact impact to our condensed consolidated financial statements. We anticipate the majority of our leases will be recorded onto our condensed consolidated balance sheets. As such, various line items on our condensed consolidated balance sheets, income statements, and cash flows will be impacted.

Note 2. Adoption of Accounting Standards Codification ~~606~~842

We adopted ASC ~~606~~842 with an initial application as of January 1, ~~2018.~~2019. We utilized the ~~modified retrospective~~additional transition method, under which the cumulative effect of initially applying the new guidance is recognized as an adjustment to certain captions on the condensed consolidated balance sheet, including the opening balance of retained earnings in the ~~nine~~three months ended ~~September 29, 2018.~~March 30, 2019. As part of the adoption of ASC 842, we have elected to utilize the following practical expedients that are permitted under ASC 842:

Need not reassess whether any expired or existing contracts are or contain leases;

Need not reassess the lease classification for any expired or existing leases;

Need not reassess initial direct costs for any existing leases;

As an accounting policy election by class of underlying asset, choose not to separate nonlease components from lease components and instead to account for each separate lease component and the nonlease components associated with that lease component as a single lease component; and

As an accounting policy election not to apply the recognition requirements in ASC 842 to short term leases (a lease at commencement date has a lease term of 12 months or less and does not contain a purchase option that the lessee is reasonably certain to exercise).

The net impact to the various captions on our January 1, ~~2018~~2019 opening unaudited condensed consolidated balance sheets was as follows:

(In thousands)
December 31, 2017 January 1, 2018
Unaudited Condensed Consolidated Balance Sheets Balances Without Adoption of ASC 606 Effect of Adoption Balances With Adoption of ASC 606
Assets
Contract assets $ —
$ 68,739
$ 68,739
Inventories $ 122,161
$ (39,002 ) $ 83,159
Non-current deferred income taxes $ 261
$ (95 ) $ 166
Liabilities

Contract liabilities $ —
$ 24,460
$ 24,460
Accrued liabilities $ 28,329
$ (6,091 ) $ 22,238
Non-current deferred income taxes $ 15,981
$ 2,608
$ 18,589
Shareholders’ Equity

Retained earnings $ 161,364
$ 8,665
$ 170,029

~~Under ASC 606, we no longer net progress payments from customers related to inventory purchases against inventories but~~

~~instead, they are included in contract liabilities on the condensed consolidated balance sheets. See Note 6.~~



	(In thousands)
	December 31, 2018					January 1, 2019
Unaudited Condensed Consolidated Balance Sheets	Balances Without Adoption of ASC 842		Effect of Adoption			Balances With Adoption of ASC 842
Assets
Other current assets	$	6,531	$	(208	)	$	6,323
Operating lease right-of-use assets	$	—	$	18,985		$	18,985
Non-current deferred income taxes	$	308	$	5		$	313
Other assets	$	5,155	$	254		$	5,409
Liabilities
Operating lease liabilities	$	—	$	2,544		$	2,544
Accrued and other liabilities	$	37,786	$	(329	)	$	37,457
Non-current operating lease liabilities	$	—	$	18,117		$	18,117
Non-current deferred income taxes	$	18,070	$	(76	)	$	17,994
Other long-term liabilities	$	14,441	$	(956	)	$	13,485
Shareholders’ Equity
Retained earnings	$	180,356	$	264		$	180,620

The net impact to retained earnings as a result of adopting ASC ~~606~~842 on the January 1, ~~2018~~2019 opening balance sheet was shown as a change in “other” on the condensed consolidated statements of cash flows.

We have operating and finance leases for manufacturing facilities, corporate offices, and various equipment. Our leases have remaining lease terms of 1 year to 10 years, some of which include options to extend the leases for up to 10 years, and some of which include options to terminate the leases within 1 year.

The ~~following tables summarize the impact~~components of ~~adopting ASC 606 on our unaudited condensed consolidated financial statements~~lease expense for the three ~~and nine~~ months ended ~~September 29, 2018 (in thousands, except per share data):~~March 30, 2019 was as follows:

September 29, 2018
Unaudited Condensed Consolidated Balance Sheets As Reported Effect of Adoption Balances Without Adoption of ASC 606
Assets
Current Assets
Cash and cash equivalents $ 3,573
$ —
$ 3,573
Accounts receivable, net of allowance for doubtful accounts of $1,212 at September 29, 2018 64,466
—
64,466
Contract assets 88,066
(88,066 ) —
Inventories 101,752
59,679
161,431
Production cost of contracts 12,021
—
12,021
Other current assets 12,124
(524 ) 11,600
Total Current Assets 282,002
(28,911 ) 253,091
Property and equipment, net of accumulated depreciation of $159,010 at September 29, 2018 106,583
—
106,583
Goodwill 135,769
—
135,769
Intangibles, net 114,746
—
114,746
Non-current deferred income taxes 131
130
261
Other assets 3,334
—
3,334
Total Assets $ 642,565
$ (28,781 ) $ 613,784
Liabilities and Shareholders’ Equity
Current Liabilities
Accounts payable $ 73,534
$ —
$ 73,534
Contract liabilities 15,108
(15,108 ) —
Accrued liabilities 31,929
4,105
36,034
Total Current Liabilities 120,571
(11,003 ) 109,568
Long-term debt 229,402
—
229,402
Non-current deferred income taxes 19,427
(3,751 ) 15,676
Other long-term liabilities 17,608
—
17,608
Total Liabilities 387,008
(14,754 ) 372,254
Commitments and contingencies (Notes 11, 13)

Shareholders’ Equity
Common stock - $0.01 par value; 35,000,000 shares authorized; 11,409,623 shares issued and outstanding at September 29, 2018 114
—
114
Additional paid-in capital 82,447
—
82,447
Retained earnings 179,412
(14,027 ) 165,385
Accumulated other comprehensive loss (6,416 ) —
(6,416 )
Total Shareholders’ Equity 255,557
(14,027 ) 241,530
Total Liabilities and Shareholders’ Equity $ 642,565
$ (28,781 ) $ 613,784



	(In thousands)
Operating leases expense	$	963

Finance leases expense:
Amortization of right-of-use assets	$	45
Interest on lease liabilities	9
Total finance lease expense	$	54

Short term lease expense for the three months ended March 30, 2019 was not material.

Supplemental cash flow information related to leases for the three months ended March 30, 2019 was as follows:

Three Months Ended September 29, 2018 Nine Months Ended September 29, 2018
Unaudited Condensed Consolidated Statements of Income As Reported Effect of Adoption Balances Without Adoption of ASC 606 As Reported Effect of Adoption Balances Without Adoption of ASC 606
Net Revenues $ 159,842
$ (5,344 ) $ 154,498
$ 465,124
$ (17,296 ) $ 447,828
Cost of Sales 128,726
(4,461 ) 124,265
375,225
(12,067 ) 363,158
Gross Profit 31,116
(883 ) 30,233
89,899
(5,229 ) 84,670
Selling, General and Administrative Expenses 20,956
—
20,956
61,476
—
61,476
Restructuring Charges 3,373
—
3,373
10,784
—
10,784
Operating Income 6,787
(883 ) 5,904
17,639
(5,229 ) 12,410
Interest Expense (2,524 ) (1,059 ) (3,583 ) (9,186 ) (1,059 ) (10,245 )
Other Income 27
—
27
27
—
27
Income Before Taxes 4,290
(1,942 ) 2,348
8,480
(6,288 ) 2,192
Income Tax Expense (Benefit) 119
(726 ) (607 ) 118
(813 ) (695 )
Net Income $ 4,171
$ (1,216 ) $ 2,955
$ 8,362
$ (5,475 ) $ 2,887
Earnings Per Share
Basic earnings per share $ 0.37

$ 0.26
$ 0.73
$ 0.25
Diluted earnings per share $ 0.36

$ 0.25
$ 0.72
$ 0.25
Weighted-Average Number of Common Shares Outstanding
Basic 11,404
11,404
11,382
11,382
Diluted 11,683
11,683
11,639
11,639



	(In thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	923
Operating cash flows from finance leases	$	9
Financing cash flows from finance leases	$	17

Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	—
Finance leases	$	457

The weighted average remaining lease terms as of March 30, 2019 were as follows:

Three Months Ended September 29, 2018 Nine Months Ended September 29, 2018
Unaudited Condensed Consolidated Statements of Comprehensive Income As Reported Effect of Adoption Balances Without Adoption of ASC 606 As Reported Effect of Adoption Balances Without Adoption of ASC 606
Net Income $ 4,171
$ (1,216 ) $ 2,955
$ 8,362
$ (5,475 ) $ 2,887
Other Comprehensive Income (Loss), Net of Tax:
Amortization of actuarial losses and prior service costs, net of tax benefit of $45 and $134 for the three and nine months ended September 29, 2018, respectively 140
—
140
423
—
423
Change in unrealized gains and losses on cash flow hedges, net of tax of $16 and $104 for the three and nine months ended September 29, 2018, respectively 49
—
49
330
—
330
Other Comprehensive Income (Loss), Net of Tax 189

—
189
753
—
753
Comprehensive Income $ 4,360

$ (1,216 ) $ 3,144
$ 9,115
$ (5,475 ) $ 3,640



	(In years)
Operating leases	7
Finance leases	4

When a lease is identified, we recognize a right-of-use asset and a corresponding lease liability based on the present value of the lease payments over the lease term discounted using our incremental borrowing rate, unless an implicit rate is readily determinable. As the discount rate in our leases is usually not readily available and thus, we use our own incremental borrowing rate as the discount rate. Our incremental borrowing rate is based on the interest rate on our term loan, which is a secured rate.

The weighted average discount rate as of March 30, 2019 was as follows:

Nine Months Ended September 29, 2018
Unaudited Condensed Consolidated Statements of Cash Flows As Reported Effect of Adoption Balances Without Adoption of ASC 606
Cash Flows from Operating Activities
Net Income $ 8,362
$ (5,475 ) $ 2,887
Adjustments to Reconcile Net Income to

Net Cash Provided by Operating Activities:

Depreciation and amortization 18,635
—
18,635
Property and equipment impairment due to restructuring 5,784
—
5,784
Stock-based compensation expense 3,414
—
3,414
Deferred income taxes 3,446
(3,751 ) (305 )
Provision for doubtful accounts 344
—
344
Other 9,275
(6,463 ) 2,812
Changes in Assets and Liabilities:

Accounts receivable 10,771
—
10,771
Contract assets (88,066 ) 88,066
—
Inventories 22,909
(59,679 ) (36,770 )
Production cost of contracts (1,447 ) —
(1,447 )
Other assets 3,709
(3,644 ) 65
Accounts payable 22,610
—
22,610
Contract liabilities 15,108
(15,108 ) —
Accrued and other liabilities (1,452 ) 6,054
4,602
Net Cash Provided by Operating Activities 33,402
—
33,402
Cash Flows from Investing Activities
Purchases of property and equipment (12,796 ) —
(12,796 )
Proceeds from sale of assets 117
—
117
Payments for purchase of Certified Thermoplastics Co., LLC, net of cash acquired (30,711 ) —
(30,711 )
Net Cash Used in Investing Activities (43,390 ) —
(43,390 )
Cash Flows from Financing Activities
Borrowings from senior secured revolving credit facility 239,700
—
239,700
Repayments of senior secured revolving credit facility (227,100 ) —
(227,100 )
Net cash paid upon issuance of common stock under stock plans (1,189 ) —
(1,189 )
Net Cash Provided by Financing Activities 11,411
—
11,411
Net Increase in Cash and Cash Equivalents 1,423
—
1,423
Cash and Cash Equivalents at Beginning of Period 2,150
—
2,150
Cash and Cash Equivalents at End of Period $ 3,573
$ —
$ 3,573



Operating leases	6.5	%
Finance leases	6.5	%

Maturity of operating and finance lease liabilities are as follows:



	(In thousands)
	Operating Leases		Finance Leases
2019 (Excluding the three months ended March 30, 2019)	$	3,750	$	236
2020	3,708		233
2021	3,667		203
2022	3,294		61
2023	2,908		45
Thereafter	7,919		60
Total lease payments	25,246		838
Less imputed interest	5,211		102
Total	$	20,035	$	736

Operating lease payments include $12.9 million related to options to extend lease terms that are reasonably certain of being exercised. As of March 30, 2019, it excludes $0.3 million of legally binding minimum lease payments for leases signed but not yet commenced. These operating leases will commence during 2019 with lease terms of 2 years.

Finance lease payments related to options to extend lease terms that are reasonably certain of being exercised are not significant. As of March 30, 2019, it excludes $1.5 million of legally binding minimum lease payments for leases signed but not yet commenced. These finance leases will commence during 2019 with lease terms of 7 years to 10 years.

As previously disclosed in our 2018 Annual Report on Form 10-K and under the previous accounting maturities of lease liabilities were as follows as of December 31, 2018:



	(In thousands)
2019	$	3,680
2020	3,405
2021	2,789
2022	1,404
2023	980
Thereafter	580
Total	$	12,838

Note 3. Business Combination

OnIn April ~~23,~~ 2018, we acquired 100.0% of the outstanding equity interests of Certified Thermoplastics Co., LLC (“CTP”), a privately-held leader in precision profile extrusions and extruded assemblies of engineered thermoplastic resins, compounds, and alloys for a wide range of commercial aerospace, defense, medical, and industrial applications. CTP is located in Santa Clarita, California. The acquisition of CTP was part of our strategy to diversify towards more customized, higher value, engineered products with greater aftermarket potential.

The purchase price for CTP was $30.7 million, net of cash acquired, all payable in cash. We paid an aggregate of $30.8 million in cash related to this transaction. We ~~preliminarily~~ allocated the gross purchase price of $30.8 million to the assets acquired and liabilities assumed at estimated fair values. The estimated fair value of the assets acquired included $8.1 million of intangible assets, $2.2 million of inventories, $1.5 million of accounts receivable, $0.6 million of property and equipment, $0.1 million of cash, less than $0.1 million of other current assets, and $0.4 million of liabilities assumed. The excess of the purchase price over the aggregate fair values of the net assets is recorded as goodwill. The allocation is subject to change as the estimates of fair value of current assets, non-current assets, identifiable intangible assets, and current liabilities are based on preliminary information and are subject to refinement. We are in the process of reviewing third party valuations of certain assets.

~~The following table summarizes the estimated fair value of the~~ assets acquired and liabilities assumed ~~at the date~~ of ~~acquisition (in thousands):~~

Estimated
Fair Value
Cash $ 98
Accounts receivable 1,517
Inventories 2,500
Other current assets 27
Property and equipment 603
Intangible assets 8,000
Goodwill 18,334
Total assets acquired 31,079
Current liabilities (270 )
Total liabilities assumed (270 )
Total preliminary purchase price allocation $ 30,809

Useful Life
(In years)

Estimated
Fair Value
(In thousands)
Intangible assets:
Customer relationships 10 $ 6,600
Trade names and trademarks 10 1,400

$ 8,000

$18.6 million was recorded as goodwill. The intangible assets acquired were comprised of ~~$8.0~~$6.9 million were preliminarily determined based on the estimated fair values using valuation techniques consistent with the income approach to measure fair value. The useful lives were estimated based on the underlying agreements or the future economic benefit expected to be received from the assets. The fair values of the identifiable intangible assets were estimated using several valuation methodologies, which represented Level 3 fair value measurements. The value for customer relationships ~~was estimated based on a multi-period excess earnings approach, while the value~~and $1.2 million for trade names and trademarks, ~~was assessed using the relief from royalty methodology.~~

~~The goodwill~~all of $18.3 million arising from the acquisition is preliminarily attributable to the benefits we expect to derive from expected synergies from the transaction, including complementary products that will enhance our overall product portfolio, opportunities within new markets, andwhich were assigned an ~~acquired assembled workforce.~~estimated useful life of 10 years. All the goodwill was assigned to the Structural Systems segment. Since the CTP acquisition, for tax purposes, was deemed an asset acquisition, the goodwill recognized is deductible for income tax purposes.

Acquisition related transaction costs are not included as components of consideration transferred but have been expensed as incurred. Total acquisition-related transaction costs incurred by us were zero and $0.6 million in the three months and nine months ended September 29, 2018, respectively, and charged to selling, general and administrative expenses.

CTP’s results of operations have been included in our condensed consolidated statements of income since the date of acquisition as part of the Structural Systems segment. Pro forma results of operations of the CTP acquisition during the three and nine months ended September 29, 2018 have not been presented as the effect of the CTP acquisition was not material to our financial results.

In September 2017, we acquired 100.0% of the outstanding equity interests of Lightning Diversion Systems, LLC (“LDS”), a privately-held worldwide leader in lightning protection systems serving the aerospace and defense industries, located in Huntington Beach, California. The acquisition of LDS was part of our strategy to enhance revenue growth by focusing on advanced proprietary technology on various aerospace and defense platforms.

The purchase price for LDS was $60.0 million, net of cash acquired, all payable in cash. We allocated the gross purchase price of $62.0 million to the assets acquired and liabilities assumed at estimated fair values. The excess of the purchase over the aggregate fair values was recorded as goodwill. All the goodwill was assigned to the Electronic Systems segment. Since the LDS acquisition, for tax purposes, was deemed an asset acquisition, the goodwill recognized is deductible for income tax purposes.

~~LDS’ results of operations have been included in our condensed consolidated statements of income since the date of acquisition as part of the Electronic Systems segment.~~

Note 4. Restructuring Activities

~~Summary of 2017 Restructuring Plan~~

In November 2017, management approved and commenced a restructuring plan that was intended to increase operating ~~efficiencies.~~efficiencies (“2017 Restructuring Plan”). We ~~currently estimate this initiative will result in $21.0~~completed the 2017 Restructuring Plan as of December 31, 2018 and have recorded cumulative expenses of $23.6 million, ~~to $23.0~~with $14.8 million ~~in total pre-tax restructuring charges through~~recorded during 2018, ~~with~~and $8.8 million recorded during 2017. We recorded an additional $11.0 million during the nine months ended September 29, 2018, with $0.2 million recorded to cost of sales, and cumulative expenses of $19.8 million. We have finalized our decisions and are executing to the restructuring plan. This will result in additional restructuring charges during the remainder of 2018. We anticipate the additional charges for the other remaining actions will include cash payments for employee separation and non-cash charges for asset impairments.

In the Electronic Systems segment, we recorded ~~$0.7 million during the three months ended September 29, 2018 and~~ cumulative expenses of $2.9 million for severance and benefits which was classified as restructuring charges. We recorded $0.4 million during the three months ended September 29, 2018 for professional service fees which were classified as restructuring charges. We also recorded non-cash expenses of $0.1 million for property and equipment impairment during the three months ended September 29, 2018 which were classified as restructuring charges. Further, we have recorded cumulative non-cash expenses of $0.2 million for inventory write off which was classified as cost of sales.

~~In the Structural Systems segment, we recorded $0.3 million during the three months ended September 29, 2018 and cumulative expenses of $2.8~~$3.8 million for severance and benefits which were classified as restructuring charges. We recorded cumulative $0.9 million for loss on early exit from lease termination which were classified as restructuring charges. We also recorded cumulative expenses of $0.9 million of other expenses which were classified as restructuring charges. In addition, we have recorded cumulative expenses of $0.2 million for professional service fees which were classified as restructuring charges. Further, we also recorded cumulative non-cash expenses of ~~$1.3~~$0.1 million ~~during the three months ended September 29, 2018 and~~for inventory write down which were classified as cost of sales. Finally, we recorded cumulative non-cash expenses of ~~$9.2~~$0.1 million for property and equipment impairment which were classified as restructuring charges. ~~Further,~~

In the Structural Systems segment, we recorded cumulative expenses of $3.0 million for severance and benefits which were classified as restructuring charges. We have recorded cumulative non-cash expenses of $9.8 million for property and equipment impairment which were classified as restructuring charges. We also recorded cumulative non-cash expenses of $0.5 million for

inventory write down which ~~was~~were classified as cost of sales. Further, we recorded cumulative other expenses of $0.4 million which were classified as restructuring charges.

In Corporate, we recorded ~~$0.3 million during the three months ended September 29, 2018 and~~ cumulative expenses of $1.4 million for severance and benefits and cumulative non-cash expenses of ~~$1.5~~$1.4 million for stock-based compensation awards which were modified, all of which were classified as restructuring charges. We also recorded ~~$0.3 million during the three months ended September 29, 2018 and~~ cumulative expenses of ~~$0.7~~$1.0 million for professional service fees which were classified as restructuring charges.

As of ~~September 29, 2018,~~March 30, 2019, we have accrued ~~$1.5~~$0.6 million, ~~$0.5~~$0.3 million, and ~~$0.3~~$0.1 million for severance and benefits and professional service fees in the Electronic Systems segment, Structural Systems segment, and Corporate, respectively.

Our restructuring activities in the ~~nine~~three months ended ~~September 29, 2018~~March 30, 2019 were as follows (in thousands):


	December 31, 2017		Nine Months Ended September 29, 2018											September 29, 2018		December 31, 2018		Three Months Ended March 30, 2019						March 30, 2019
	Balance		Charges		Cash Payments			Non-Cash Payments			Change in Estimates			Balance		Balance		Cash Payments			Adoption of ASU 842 Adjustment			Balance
Severance and benefits	$	2,659	$	3,849	$	(3,994	)	$	—		$	(539	)	$	1,975	$	2,631	$	(1,652	)	$	—		$	979
Modification of stock-based compensation awards	—		105		—			(105		)	—			—
Lease termination	66		3		(69		)	—			—			—		861		(126		)	(735		)	—
Property and equipment impairment due to restructuring	—		5,784		—			(5,784		)	—			—
Professional service fees	—		1,043		(908		)	—			—			135		43		(43		)	—			—
Other																416		(416		)	—			—
Total charged to restructuring charges	2,725		10,784		(4,971		)	(5,889		)	(539		)	2,110		3,951		(2,237		)	(735		)	979
Inventory reserve	—		168		—			—			—			168		50		—			—			50
Total charged to cost of sales	—		168		—			—			—			168		50		—			—			50
Ending balance	$	2,725	$	10,952	$	(4,971	)	$	(5,889	)	$	(539	)	$	2,278	$	4,001	$	(2,237	)	$	(735	)	$	1,029

Note 5. ~~Fair Value Measurements~~

Fair value is defined as the price that would be received for an asset or the price that would be paid to transfer a liability (an exit price) in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. The accounting standard provides a framework for measuring fair value using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. This hierarchy requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Three levels of inputs that may be used to measure fair value are as follows:

~~Level 1~~ ~~- Quoted prices (unadjusted) in active markets for identical assets or liabilities;~~

~~Level 2~~ - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

~~Level 3~~ ~~- Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.~~

Our financial instruments consist primarily of cash and cash equivalents and interest rate cap derivatives designated as cash flow hedging instruments. The fair value of the interest rate cap hedge agreements was determined using pricing models that use observable market inputs as of the balance sheet date, a Level 2 measurement.

~~There were no transfers between Level 1, Level 2, or Level 3 financial instruments in the three months ended September 29, 2018.~~

~~Note 6.~~ Inventories

Inventories consisted of the following:

(In thousands)
September 29,
2018 December 31,
2017
Raw materials and supplies $ 88,882
$ 65,221
Work in process 10,883
62,584
Finished goods 1,987
10,665
101,752
138,470
Less progress payments —
16,309
Total $ 101,752
$ 122,161

The December 31, 2017 balances were prior to the adoption of ASC 606 and as such, we netted progress payments from customers related to inventory purchases against inventories on the condensed consolidated balance sheets. See Note 2.



	(In thousands)
	March 30, 2019		December 31, 2018
Raw materials and supplies	$	91,664	$	89,767
Work in process	9,810		9,199
Finished goods	2,520		2,159
Total	$	103,994	$	101,125

Note 7.6. Goodwill

We perform our annual goodwill impairment test ~~during~~as of the first day of the fourth quarter. If certain factors occur, including significant under performance of our business relative to expected operating results, significant adverse economic and industry trends, significant decline in our market capitalization for an extended period of time relative to net book value, a decision to divest individual businesses within a reporting unit, or a decision to group individual businesses differently, we may perform an impairment test prior to the fourth quarter.

The ~~increase in goodwill in Structural Systems was due to the acquisition of CTP on April 23, 2018. See Note 3.~~

~~The~~ carrying amounts of our goodwill were as follows:

(In thousands)

Structural
Systems

Electronic
Systems

Consolidated
Ducommun
Gross goodwill $ —
$ 199,157
$ 199,157
Accumulated goodwill impairment —
(81,722 ) (81,722 )
Balance at December 31, 2017 —
117,435
117,435
Goodwill from acquisition during the period 18,334
—
18,334
Balance at September 29, 2018 $ 18,334
$ 117,435
$ 135,769




	Electronic Systems			Structural Systems		Consolidated Ducommun
Gross goodwill	$	199,157		$	18,622	$	217,779
Accumulated goodwill impairment	(81,722		)	—		(81,722		)
Balance at December 31, 2018	$	117,435		$	18,622	$	136,057
Balance at March 30, 2019	$	117,435		$	18,622	$	136,057

Note 8.7. Accrued and Other Liabilities

The components of accrued and other liabilities were as follows:

(In thousands)
September 29,
2018 December 31,
2017
Accrued compensation $ 25,530
$ 18,925
Accrued income tax and sales tax 33
71
Customer deposits —
3,970
Provision for forward loss reserves —
1,226
Other 6,366
4,137
Total $ 31,929
$ 28,329

The December 31, 2017 balances of customer deposits and provision for forward losses were prior to the adoption of ASC 606 and as such, classified as accrued liabilities rather than contract liabilities on the condensed consolidated balance sheets. See Note 2.



	(In thousands)
	March 30, 2019		December 31, 2018
Accrued compensation	$	20,686	$	29,616
Accrued income tax and sales tax	1,117		82
Other	7,183		8,088
Total	$	28,986	$	37,786

Note 9.8. Long-Term Debt

Long-term debt and the current period interest rates were as follows:


	(In thousands)						(In thousands)
	September 29, 2018			December 31, 2017			March 30, 2019			December 31, 2018
Term loan	$	160,000		$	160,000		$	230,000		$	233,000
Revolving credit facility	70,700			58,100			3,200			—
Total debt	230,700			218,100			233,200			233,000
Less current portion	—			—			2,330			2,330
Total long-term debt	230,700			218,100
Less debt issuance costs	1,298			2,045
Total long-term debt, less current portion							230,870			230,670
Less debt issuance costs - term loan							1,745			1,802
Total long-term debt, net of debt issuance costs - term loan							229,125			228,868
Less debt issuance costs - revolving credit facility ⁽¹⁾							1,803			1,907
Total long-term debt, net of debt issuance costs	$	229,402		$	216,055		$	227,322		$	226,961
Weighted-average interest rate	4.50		%	3.73		%	6.84		%	4.71		%

(1) Included as part of other assets

The New Term Loan bears interest, at our option, at a rate equal to either (i) the Eurodollar Rate (defined as the London Interbank Offered Rate [“LIBOR”]) plus an applicable margin ranging from 3.75% to 4.00% 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 3.75% to 4.00% per year, in each case based upon the consolidated total net adjusted leverage ratio, typically payable quarterly. In addition, the New Term Loan requires installment payments of 0.25% of the outstanding principal balance of the New Term Loan amount on a quarterly basis. We made an aggregate total of $3.0 million of voluntary and mandatory principal prepayments under the New Term Loan during the three months ended March 30, 2019.

The New Revolving Credit ~~Facilities bear~~Facility bears interest, at our option, at a rate equal to either (i) the Eurodollar Rate (defined as LIBOR) plus an applicable margin ranging from ~~1.50%~~1.75% 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%~~0.75% to 1.75% per year, in each case based upon the consolidated total net adjusted leverage ~~ratio.~~ratio, typically payable quarterly. The undrawn ~~portions~~portion of the ~~commitments~~commitment of the New Revolving Credit ~~Facilities are~~Facility is subject to a commitment fee ranging from ~~0.175%~~0.20% to ~~0.300%~~0.30%, based upon the consolidated total net adjusted leverage ratio.

Further, if we ~~are~~meet the annual excess cash flow threshold, we will be required to make excess cash flow payments. The annual mandatory ~~prepayments of amounts outstanding under the Term Loan. The mandatory prepayments~~excess cash flow payments will be ~~made quarterly,~~based on (i) 50% of the excess cash flow amount if the adjusted leverage ratio is greater than 3.25 to 1.0, (ii) 25% of the excess cash flow amount if the adjusted leverage ratio is less than or equal to ~~5.0% per year~~3.25 to 1.0

but greater than 2.50 to 1.0, and (iii) zero percent of the ~~original aggregate principal~~excess cash flow amount ~~during~~if the ~~first two years and increase~~adjusted leverage ratio is less than or equal to ~~7.5% per year during the third year, and increase~~2.50 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 Revolving Credit Facility are due on June 26, 2020.~~1.0. As of ~~September 29, 2018,~~March 30, 2019, we were in compliance with all covenants required under the New Credit Facilities.

We have been making periodic voluntary principal prepayments on our Existing Credit Facilities and in conjunction with the closing of the New Credit Facilities on November 21, 2018, we drew down $240.0 million on the New Term Loan, $7.9 million on the New Revolving Credit Facility and used those proceeds along with current cash on hand to pay off the Existing Credit Facilities of $247.9 million. The New Term Loan replacing the term loan that was a part of the Existing Credit Facilities (“Existing Term Loan”) was considered an extinguishment of debt except for the portion related to a creditor that was part of the Existing Term Loan and the New Term Loan and in which case, it was considered a modification of debt. As a result, we expensed the portion of the unamortized debt issuance costs related to the Existing Term Loan that was considered an extinguishment of debt of $0.4 million. In addition, the New Revolving Credit Facility replacing the existing revolving credit facility that was part of the Existing Credit Facilities (“Existing Revolving Credit Facility”) was considered an extinguishment of debt except for the portion related to the creditors that were part of the Existing Revolving Credit Facility and the New Revolving Credit Facility and in which case, it was considered a modification of debt. As a result, we expensed the portion of the unamortized debt issuance costs related to the Existing Revolving Credit Facility that was considered an extinguishment of debt of $0.5 million. As such, an aggregate total loss on extinguishment of debt of $0.9 million was recorded in 2018.

Further, we incurred ~~$4.8~~$3.5 million of new debt issuance costs that can be capitalized related to the New Credit Facilities, of which $1.7 million were allocated to the New Term Loan and the $1.8 million was allocated to the New Revolving Credit facility. The New Term Loan new debt issuance costs of $1.7 million and remaining unamortized Existing Term Loan debt issuance costs of $0.1 million, for an aggregate total of $1.8 million of debt issuance costs related to the New Term Loan were capitalized and are being amortized over the seven years life of the New Term Loan. The New Revolving Credit ~~Facilities~~Facility new debt issuance costs of $1.8 million and ~~those~~remaining unamortized Existing Revolving Credit Facility debt issuance costs of $0.2 million, for an aggregate total of $2.0 million of debt issuance costs related to the New Revolving Credit Facility were capitalized and are being amortized over the five ~~year~~years life of the New Revolving Credit ~~Facilities.~~Facility.

In July 2017, we entered into a technical amendment to the Credit Facilities (“First Amendment”) which provides more flexibility to close certain qualified acquisitions permitted under the Credit Facilities.

We have made all mandatory prepayments under the Term Loan and thus, no mandatory payments are due until the Term Loan matures in June 2020. We did not make any voluntary principal prepayments under the Term Loan during the three and nine months ended September 29, 2018.

On April ~~23,~~ 2018, we acquired CTP for a purchase price of $30.7 million, net of cash acquired, all payable in cash. We paid an aggregate of $30.8 million in cash related to this transaction by drawing down on the ~~Revolving Credit Facility. See Note 3.~~

In September 2017, we acquired LDS for a purchase price of $60.0 million, net of cash acquired, all payable in cash. Upon the closing of the transaction, we paid $61.4 million in cash by drawing down on the Revolving Credit Facility. The remaining $0.6 million was paid in October 2017 in cash, also by drawing down on theExisting Revolving Credit Facility. See Note 3.

As of ~~September 29, 2018,~~March 30, 2019, we had ~~$129.0~~$96.6 million of unused borrowing capacity under the Revolving Credit Facility, after deducting ~~$70.7~~$3.2 million for draw down on the New Revolving Credit Facility and ~~$0.3~~$0.2 million for standby letters of credit.

The New Credit Facilities were entered into by us (“Parent Company”) and guaranteed by all of our subsidiaries, other than ~~one subsidiary~~two subsidiaries that were considered minor (“Subsidiary Guarantors”) ~~that was considered minor.~~. The Subsidiary Guarantors jointly and severally guarantee the New Credit Facilities. The Parent Company has no independent assets or operations and ~~the Subsidiary Guarantors jointly and severally guarantee, on a senior unsecured basis, the Credit Facilities. Therefore,~~therefore, no ~~condensed~~ consolidating financial information for the Parent Company and its subsidiaries are presented.

In October 2015, we entered into interest rate cap hedges designated as cash flow hedges with a portion of these interest rate cap hedges maturing on a quarterly basis, and a final quarterly maturity ~~dates~~date of June 2020, and in aggregate, totaling $135.0 million of our debt. We paid a total of $1.0 million in connection with entering into the interest rate cap hedges. See Note 51 for further ~~discussion.~~information.

In December 2018, 2017, and 2016, we entered into agreements to purchase $2.2 million, $14.2 million, and $9.9 million of industrial revenue bonds (“IRBs”) issued by the city of Parsons, Kansas (“Parsons”) and concurrently, sold $2.2 million, $14.2 million, and $9.9 million of property and equipment (“Property”) to Parsons as well as entered into lease agreements to lease the Property from Parsons (“Leases”) with lease payments totaling $2.2 million, $14.2 million, and $9.9 million over the lease terms, respectively. The sale of the Property and concurrent lease back of the Property in December 2018, 2017, and 2016 did not meet the sale-leaseback accounting requirements as a result of control not deemed to have transferred to the buyer-lessor under ASC 842 and our continuous involvement with the Property under ASC 840 and thus, the $2.2 million, $14.2 million, and $9.9 million in cash received from Parsons was not recorded as a sale but as a financing ~~obligation.~~obligation, respectively. Further, the Leases included a right of offset so long as we continue to own the IRBs and thus, the financing ~~obligation~~obligations of $2.2 million, $14.2 million, and $9.9 million ~~was~~were offset against the $2.2 million, $14.2 million, and $9.9 million, respectively, of IRBs assets and are presented net on the condensed consolidated balance sheets with no impact to the condensed consolidated statements of income ~~statements~~ or condensed consolidated cash flow statements.

Note ~~10.~~9. Employee Benefit Plans

The components of net periodic pension expense were as follows:


	(In thousands)						(In thousands)						(In thousands)
	Three Months Ended						Nine Months Ended						Three Months Ended
	September 29, 2018			September 30, 2017			September 29, 2018			September 30, 2017			March 30, 2019			March 31, 2018
Service cost	$	150		$	133		$	450		$	398		$	126		$	150
Interest cost	317			332			951			997			347			317
Expected return on plan assets	(446		)	(382		)	(1,338		)	(1,147		)	(411		)	(446		)
Amortization of actuarial losses	185			202			557			607			221			186
Net periodic pension cost	$	206		$	285		$	620		$	855		$	283		$	207

The components of the reclassifications of net actuarial losses from accumulated other comprehensive loss to net income for the three ~~and nine~~ months ended ~~September 29, 2018~~March 30, 2019 were as follows:


	(In thousands)						(In thousands)
	Three Months Ended			Nine Months Ended			Three Months Ended
	September 29, 2018			September 29, 2018			March 30, 2019
Amortization of actuarial losses - total before tax ⁽¹⁾	$	185		$	557		$	221
Tax benefit	(45		)	(134		)	(51		)
Net of tax	$	140		$	423		$	170


(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 ~~11.~~10. 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 our use of the facility under our 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 vary and, in many cases, are subject to statutes 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 amount of our indemnification obligations as insignificant based on this history and insurance coverage and therefore, have not recorded any liability for these guarantees and indemnities on the accompanying condensed consolidated balance sheets. Further, when considered with our insurance coverage, although recorded through different captions on our condensed consolidated balance sheets, the potential impact is further mitigated.

Note ~~12.~~11. Income Taxes

The provision for income taxes is determined using an estimated annual effective tax rate, which is generally less than the U.S. federal statutory rate, primarily due to research and development (“R&D”) tax credits. Our effective tax rate may be subject to fluctuations during the year as new information is obtained, which may affect the assumptions used to estimate the annual effective tax rate, including factors such as expected utilization of R&D tax credits, valuation allowances against deferred tax assets, the recognition or derecognition of tax benefits related to uncertain tax positions, and changes in or the interpretation of tax laws in jurisdictions where we conduct business. Also, excess tax benefits and tax deficiencies related to our equity compensation recognized in the income statement could result in fluctuations in our effective tax rate period-over-period depending on the volatility of our stock price and how many awards vest in the period. We recognize deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities along with net operating loss and tax credit carryovers.

We record a valuation allowance against our deferred tax assets to reduce the net carrying value to an amount that we believe is more likely than not to be realized. When we establish or reduce our valuation allowances against our deferred tax assets, the provision for income taxes will increase or decrease, respectively, in the period when that determination is made.

On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (“2017 Tax Act”) which, among a broad range of tax reform measures, reduced the U.S. corporate tax rate from 35.0% to 21.0% effective January 1, 2018. The reduction in the U.S. corporate tax rate required the federal portion of our deferred tax assets and liabilities at December 31, 2017 to be re-measured at the enacted tax rate expected to apply when the temporary differences are to be realized or settled using 21.0%.

SEC Staff Accounting Bulletin No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act” (“SAB 118”), allows us to record provisional amounts for the tax effects of the 2017 Tax Act when we do not have necessary information available, prepared, or analyzed in reasonable detail to finalize its accounting for the changes in the tax law during a measurement period not to extend beyond one year of the enactment date. During the nine months ended September 29, 2018, we did not recognize any changes to the provisional amounts recorded in our 2017 Annual Report on Form 10-K in connection with the 2017 Tax Act. We expect to finalize our analysis within the measurement period in accordance with SAB 118 after completing our reviews of additional guidance issued by the Internal Revenue Service (“IRS”) and available tax methods and elections related to 2017 tax return positions.

We recorded income tax expense of ~~$0.1~~$1.0 million for the three months ended ~~September 29, 2018~~March 30, 2019 compared to ~~$0.9~~an income tax benefit of $0.2 million for the three months ended ~~September 30, 2017.~~March 31, 2018. The decrease in income tax expense for the third quarter of 2018 compared to the third quarter of 2017 was primarily due to the reduction in the U.S. corporate tax rate from 35.0% to 21.0% and lower pre-tax income in the third quarter of 2018 compared to the third quarter of 2017. The decrease was partially offset by the repeal of the U.S. Domestic Production Activities Deduction in 2018.

higher pre-tax income infor the first ~~nine months~~quarter of ~~2018~~2019 compared to the first ~~nine months~~quarter of 2017. The decrease was partially offset by the repeal of the U.S. Domestic Production Activities Deduction in 2018 and a reduction in tax benefits from deductions of share-based compensation expense in excess of the compensation expense recorded for financial reporting purposes.2018.

Our total amount of unrecognized tax benefits was ~~$5.2~~$5.4 million and $5.3 million as of ~~September 29, 2018~~March 30, 2019 and December 31, ~~2017,~~2018, respectively. If recognized, $3.4 million would affect the effective tax rate. We do not reasonably expect significant increases or decreases to our unrecognized tax benefits in the next twelve months.

Note ~~13.~~12. Contingencies

Structural Systems 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 an accrual for its estimated liability for such investigation and corrective action of $1.5 million at both ~~September 29, 2018~~March 30, 2019 and December 31, ~~2017,~~2018, which is reflected in other long-term liabilities on its condensed consolidated balance sheets.

Structural Systems also faces liability as a potentially responsible party for hazardous waste disposed at landfills located in Casmalia and West Covina, California. Structural Systems 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 $0.4 million and $3.1 million. Ducommun has established an accrual for its estimated liability in connection with the West Covina landfill of $0.4 million at ~~September 29, 2018,~~March 30, 2019, which is reflected in other long-term liabilities on its condensed 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.~~liabilities in the ordinary course of business. 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 ~~14.~~13. Business Segment Information

We supply products and services primarily to the aerospace and defense industries. Our subsidiaries are organized into two strategic businesses, Electronic Systems and Structural Systems, each of which is a reportable operating segment.

Financial information by reportable operating segment was as follows:


	(In thousands) Three Months Ended						(In thousands) Nine Months Ended						(In thousands) Three Months Ended
	September 29, 2018			September 30, 2017			September 29, 2018			September 30, 2017			March 30, 2019			March 31, 2018
Net Revenues
Electronic Systems	$	85,696		$	79,005		$	252,606		$	239,553		$	84,197		$	82,409
Structural Systems	74,146			59,685			212,518			176,372			88,369			68,046
Total Net Revenues	$	159,842		$	138,690		$	465,124		$	415,925		$	172,566		$	150,455
Segment Operating Income
Electronic Systems	$	9,050		$	8,308		$	23,463		$	24,380		$	9,181		$	5,744
Structural Systems	3,963			3,544			13,380			8,382			10,549			4,391
	13,013			11,852			36,843			32,762			19,730			10,135
Corporate General and Administrative Expenses ⁽¹⁾	(6,226		)	(4,505		)	(19,204		)	(14,539		)	(6,882		)	(4,879		)
Operating Income	$	6,787		$	7,347		$	17,639		$	18,223		$	12,848		$	5,256
Depreciation and Amortization Expenses
Electronic Systems	$	3,707		$	3,345		$	11,022		$	10,207		$	3,844		$	3,632
Structural Systems	2,576			2,220			7,510			6,879			3,250			2,316
Corporate Administration	37			54			103			63			294			33
Total Depreciation and Amortization Expenses	$	6,320		$	5,619		$	18,635		$	17,149		$	7,388		$	5,981
Capital Expenditures
Electronic Systems	$	879		$	1,793		$	5,091		$	4,256		$	836		$	2,734
Structural Systems	3,935			4,449			6,565			17,217			3,689			1,529
Corporate Administration	185			127			375			775
Total Capital Expenditures	$	4,999		$	6,369		$	12,031		$	22,248		$	4,525		$	4,263


(1)	Includes costs not allocated to either the Electronic Systems or Structural Systems operating segments.

Segment assets include assets directly identifiable to or allocated to each segment. Our segment assets are as follows:


	(In thousands)				(In thousands)
	September 29, 2018		December 31, 2017		March 30, 2019		December 31, 2018
Total Assets
Electronic Systems	$	408,626	$	362,831	$	414,806	$	405,743
Structural Systems	220,887		193,600		231,685		220,993
Corporate Administration ⁽¹⁾	13,052		10,322		14,218		18,003
Total Assets	$	642,565	$	566,753	$	660,709	$	644,739
Goodwill and Intangibles
Electronic Systems	$	222,228	$	229,292	$	217,518	$	219,872
Structural Systems	28,287		2,836		27,926		28,277
Total Goodwill and Intangibles	$	250,515	$	232,128	$	245,444	$	248,149


(1)	Includes assets not specifically identified to or allocated to either the Electronic Systems or Structural Systems operating segments, including cash and cash equivalents.

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

Overview

Ducommun Incorporated (“Ducommun,” “the Company,” “we,” “us” or “our”) is a leading global provider of engineering and manufacturing services for high-performance products and high-cost-of failure applications used primarily in the aerospace and defense (“A&D”), industrial, medical and other industries (collectively, “Industrial”). We differentiate ourselves 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 segments: Electronic Systems and Structural Systems, each of which is a reportable segment.

We adopted ASC ~~606, “Revenue from Contracts with Customers”~~842, “Leases” (“ASC ~~606”~~842”), as of January 1, ~~2018,~~2019, using the ~~modified retrospective~~additional transition method of adoption. As such, our results for the three ~~and nine~~ months ended ~~September 29, 2018~~March 30, 2019 are reported under ASC ~~606~~842 while our results for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2018 are reported under the prior ~~revenue recognition~~lease accounting standard, ASC ~~605, “Revenue Recognition”~~840, “Leases” (“ASC ~~605”~~840”). However, our discussions are primarily based on a comparison of our results in the three and nine months ended September 29, 2018 under ASC 605 compared to the three and nine months ended September 30, 2017 also under ASC 605. See ~~Note 1 and~~ Note 2 to condensed consolidated financial statements included in Part I, Item I of this Form 10-Q.

~~Third~~First quarter ~~2018~~2019 highlights:

Revenues of ~~$159.8~~$172.6 million

Net income of ~~$4.2~~$7.5 million, or ~~$0.36~~$0.64 per diluted share

Adjusted EBITDA of ~~$18.1 million~~

~~Backlog of $780.1~~$21.7 million

Non-GAAP Financial Measures

Adjusted earnings before interest, taxes, depreciation, amortization, stock-based compensation expense, and restructuring charges ~~and inventory purchase accounting adjustments~~ (“Adjusted EBITDA”) was ~~$18.1~~$21.7 million and ~~$14.6~~$14.5 million for the three months ended ~~September 29,~~March 30, 2019 and March 31, 2018, ~~and September 30, 2017,~~ respectively.

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 Adjusted 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 table below. Adjusted EBITDA and the related financial ratios, as presented in this Quarterly Report on Form 10-Q (“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 Adjusted EBITDA non-GAAP operating performance measures internally as complementary financial measures to evaluate the performance and trends of our businesses. We present Adjusted 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 operating commitments.

Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as ~~substitutes~~a substitute for analysis of our results as reported under GAAP. Some of these limitations include:

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 Adjusted 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 Adjusted EBITDA differently from us, limiting their usefulness as comparative measures.

Because of these limitations, Adjusted 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 Adjusted EBITDA only as supplemental information. See our Condensed Consolidated Financial Statements contained in this Form 10-Q.

However, in spite of the above limitations, we believe that Adjusted EBITDA is useful to an investor in evaluating our results of operations because these measures:

Are widely used by investors to measure a company’s operating performance without regard to items excluded from the calculation of such terms, which can vary substantially from company to company depending upon accounting methods and book value of assets, capital structure and the method by which assets were acquired, among other factors;

Help investors to evaluate and compare the results of our operations from period to period by removing the effect of our capital structure from our operating performance; and

Are used by our management team for various other purposes in presentations to our Board of Directors as a basis for strategic planning and forecasting.

The following financial items have been added back to or subtracted from our net income when calculating Adjusted EBITDA:

Interest expense may be useful to investors for determining current cash flow;

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;

Depreciation may be useful to investors because it generally represents the wear and tear on our property and equipment used in our operations;

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;

Stock-based compensation may be useful to our investors for determining current cash flow; and

Restructuring charges may be useful to our investors in evaluating our core operating ~~performance;~~

~~Purchase accounting inventory step-ups may be useful to our investors as they do not necessarily reflect the current or on-going cash charges related to our core operating~~ performance.

Reconciliations of net income to Adjusted EBITDA and the presentation of Adjusted EBITDA as a percentage of net revenues were as follows:


	(In thousands) Three Months Ended						(In thousands) Nine Months Ended						(In thousands) Three Months Ended
	September 29, 2018			September 30, 2017			September 29, 2018			September 30, 2017			March 30, 2019			March 31, 2018
Net income	$	4,171		$	4,655		$	8,362		$	10,593		$	7,472		$	2,600
Interest expense	2,524			2,240			9,186			6,045			4,351			2,899
Income tax expense	119			940			118			2,073
Income tax expense (benefit)													1,025			(243		)
Depreciation	3,276			3,243			10,058			9,910			4,117			3,364
Amortization	3,044			2,376			8,577			7,239			3,271			2,617
Stock-based compensation expense	1,299			1,100			3,414			4,264			1,464			1,090
Restructuring charges	3,373			64			10,952			64			—			2,173
Inventory purchase accounting adjustments	293			—			622			—
Adjusted EBITDA	$	18,099		$	14,618		$	51,289		$	40,188		$	21,700		$	14,500
% of net revenues	11.3		%	10.5		%	11.0		%	9.7		%	12.6		%	9.6		%

Results of Operations

~~Third~~First Quarter of ~~2018~~2019 Compared to ~~Third~~First Quarter of ~~2017~~2018

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) Nine Months Ended										(in thousands, except per share data) Three Months Ended
	September 29, 2018			% of Net Revenues		September 30, 2017			% of Net Revenues		September 29, 2018			% of Net Revenues		September 30, 2017			% of Net Revenues		March 30, 2019			% of Net Revenues		March 31, 2018			% of Net Revenues
Net Revenues	$	159,842		100.0	%	$	138,690		100.0	%	$	465,124		100.0	%	$	415,925		100.0	%	$	172,566		100.0	%	$	150,455		100.0	%
Cost of Sales	128,726			80.5	%	112,603			81.2	%	375,225			80.7	%	338,563			81.4	%	136,872			79.3	%	123,700			82.2	%
Gross Profit	31,116			19.5	%	26,087			18.8	%	89,899			19.3	%	77,362			18.6	%	35,694			20.7	%	26,755			17.8	%
Selling, General and Administrative Expenses	20,956			13.1	%	18,676			13.5	%	61,476			13.2	%	59,075			14.2	%	22,846			13.3	%	19,326			12.8	%
Restructuring Charges	3,373			2.1	%	64			—	%	10,784			2.3	%	64			—	%	—			—	%	2,173			1.5	%
Operating Income	6,787			4.3	%	7,347			5.3	%	17,639			3.8	%	18,223			4.4	%	12,848			7.4	%	5,256			3.5	%
Interest Expense	(2,524		)	(1.6	)%	(2,240		)	(1.6	)%	(9,186		)	(2.0	)%	(6,045		)	(1.5	)%	(4,351		)	(2.5	)%	(2,899		)	(1.9	)%
Other Income	27			—	%	488			0.4	%	27			—	%	488			0.1	%
Income Before Taxes	4,290			2.7	%	5,595			4.1	%	8,480			1.8	%	12,666			3.0	%	8,497			4.9	%	2,357			1.6	%
Income Tax Expense	119			nm		940			nm		118			nm		2,073			nm
Income Tax Expense (Benefit)																					1,025			nm		(243		)	nm
Net Income	$	4,171		2.6	%	$	4,655		3.4	%	$	8,362		1.8	%	$	10,593		2.5	%	$	7,472		4.3	%	$	2,600		1.7	%

Effective Tax Rate	2.8		%	nm		16.8		%	nm		1.4		%	nm		16.4		%	nm
Effective Tax (Benefit) Rate																					12.1		%	nm		(10.3		)%	nm
Diluted Earnings Per Share	$	0.36		nm		$	0.41		nm		$	0.72		nm		$	0.92		nm		$	0.64		nm		$	0.22		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 nine~~ months of ~~2018~~2019 and ~~2017,~~2018, respectively, were as follows:


	Three Months Ended											Nine Months Ended											Three Months Ended
				(In thousands)				% of Net Revenues							(In thousands)				% of Net Revenues							(In thousands)				% of Net Revenues
	Change			September 29 2018		September 30, 2017		September 29 2018		September 30, 2017		Change			September 29 2018		September 30, 2017		September 29 2018		September 30, 2017		Change			March 30, 2019		March 31, 2018		March 30, 2019		March 31, 2018
Consolidated Ducommun
Military and space	$	6,821		$	71,459	$	64,638	44.7	%	46.6	%	$	5,218		$	208,140	$	202,922	44.7	%	48.8	%	$	13,096		$	76,661	$	63,565	44.4	%	42.3	%
Commercial aerospace	16,333			76,343		60,010		47.8	%	43.3	%	45,921			219,019		173,098		47.1	%	41.6	%	11,865			85,496		73,631		49.6	%	48.9	%
Industrial	(2,002		)	12,040		14,042		7.5	%	10.1	%	(1,940		)	37,965		39,905		8.2	%	9.6	%	(2,850		)	10,409		13,259		6.0	%	8.8	%
Total	$	21,152		$	159,842	$	138,690	100.0	%	100.0	%	$	49,199		$	465,124	$	415,925	100.0	%	100.0	%	$	22,111		$	172,566	$	150,455	100.0	%	100.0	%

Electronic Systems
Military and space (defense electronics)	$	1,970		$	54,068	$	52,098	63.1	%	65.9	%	$	369		$	160,969	$	160,600	63.7	%	67.0	%
Military and space																							$	8,487		$	60,387	$	51,900	71.7	%	63.0	%
Commercial aerospace	6,723			19,588		12,865		22.9	%	16.3	%	14,624			53,672		39,048		21.3	%	16.3	%	(3,849		)	13,401		17,250		15.9	%	20.9	%
Industrial	(2,002		)	12,040		14,042		14.0	%	17.8	%	(1,940		)	37,965		39,905		15.0	%	16.7	%	(2,850		)	10,409		13,259		12.4	%	16.1	%
Total	$	6,691		$	85,696	$	79,005	100.0	%	100.0	%	$	13,053		$	252,606	$	239,553	100.0	%	100.0	%	$	1,788		$	84,197	$	82,409	100.0	%	100.0	%

Structural Systems
Military and space (defense structures)	$	4,851		$	17,391	$	12,540	23.5	%	21.0	%	$	4,849		$	47,171	$	42,322	22.2	%	24.0	%
Military and space																							$	4,609		$	16,274	$	11,665	18.4	%	17.1	%
Commercial aerospace	9,610			56,755		47,145		76.5	%	79.0	%	31,297			165,347		134,050		77.8	%	76.0	%	15,714			72,095		56,381		81.6	%	82.9	%
Total	$	14,461		$	74,146	$	59,685	100.0	%	100.0	%	$	36,146		$	212,518	$	176,372	100.0	%	100.0	%	$	20,323		$	88,369	$	68,046	100.0	%	100.0	%

Net revenues for the three months ended ~~September 29, 2018~~March 30, 2019 were ~~$159.8~~$172.6 million, compared to ~~$138.7~~$150.5 million for the three months ended ~~September 30, 2017.~~March 31, 2018. The year-over-year increase was due to the following:

$~~16.3 million higher revenues in our commercial aerospace end-use markets due to higher build rates on large aircraft platforms; and~~

~~$6.8~~13.1 million higher revenues in our military and space end-use markets due to increased shipments on ~~military fixed-wing aircraft~~various missile platforms; ~~partially offset by~~and

$~~2.0 million lower revenues in our industrial end-use markets.~~

Net revenues for the nine months ended September 29, 2018 were $465.1 million, compared to $415.9 million for the nine months ended September 30, 2017. The year-over-year increase was due to the following:

~~$45.9~~11.9 million higher revenues in our commercial aerospace end-use markets due to additional content and higher build rates on large aircraft platforms; ~~and~~

~~$5.2 million higher revenues in our military and space end-use markets due to increased shipments on military fixed-wing aircraft platforms;~~ partially offset by

$~~1.9~~2.9 million lower revenues in our industrial end-use markets.

Net Revenues by Major Customers

A significant portion of our net revenues are from our top ten customers as follows:


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 29, 2018		September 30, 2017		September 29, 2018		September 30, 2017		March 30, 2019		March 31, 2018
Boeing Company	17.0	%	17.1	%	17.1	%	16.5	%	19.9	%	17.7	%
Lockheed Martin Corporation	4.0	%	5.7	%	4.5	%	5.7	%
Northrop Grumman Corporation									4.3	%	5.9	%
Raytheon Company	11.5	%	14.5	%	11.8	%	14.1	%	10.5	%	11.0	%
Spirit Aerosystems Holdings, Inc.	10.2	%	8.0	%	9.3	%	7.6	%	11.9	%	9.0	%
United Technologies Corporation	3.9	%	4.5	%	4.8	%	5.0	%
Total top ten customers ⁽¹⁾	62.0	%	64.5	%	62.9	%	62.7	%	67.1	%	64.2	%


(1)	Includes the Boeing Company (“Boeing”), ~~Lockheed Martin~~Northrop Grumman Corporation (“~~Lockheed Martin”~~Northrop”), Raytheon Company (“Raytheon”), and Spirit Aerosystems Holdings, Inc. (“Spirit”)~~, and United Technologies Corporation (“United Technologies”)~~.

Boeing, ~~Lockheed Martin,~~Northrop, Raytheon, ~~Spirit,~~ and ~~United Technologies~~Spirit represented the following percentages of total accounts receivable:


	September 29, 2018		December 31, 2017		March 30, 2019		December 31, 2018
Boeing	8.3	%	7.8	%	9.4	%	7.9	%
Lockheed Martin	1.9	%	5.9	%
Northrop					1.5	%	3.7	%
Raytheon	2.8	%	1.4	%	4.7	%	3.1	%
Spirit	2.1	%	13.5	%	2.6	%	0.2	%
United Technologies	3.0	%	2.3	%

The net revenues and accounts receivable from Boeing, ~~Lockheed Martin,~~Northrop, Raytheon, ~~Spirit,~~ and ~~United Technologies~~Spirit are diversified over a number of commercial, military and space programs and were generated by both operating segments.

Gross Profit

Gross profit consists of net revenues less cost of sales. Cost of sales includes the cost of production of finished products and other expenses related to inventory management, manufacturing quality, and order fulfillment. Gross profit margin as a percentage of net revenues increased year-over-year in the three months ended ~~September 29, 2018~~March 30, 2019 to ~~19.5%~~20.7%, compared to the three months ended ~~September 30, 2017~~March 31, 2018 of ~~18.8%~~17.8% due to favorable product mix, manufacturing efficiencies, and ~~favorable~~higher manufacturing volume, partially offset by higher ~~compensation and benefits costs and higher~~ other manufacturing costs.

Gross profit margin as a percentage of net revenues increased year-over-year in the nine months ended September 29, 2018 to 19.3%, compared to the nine months ended September 30, 2017 of 18.6% due to favorable product mix and favorable manufacturing volume, partially offset by higher compensation and benefit costs, higher other manufacturing costs, and lack of forward loss reserve release in the current year.

Selling, General and Administrative (“SG&A”) Expenses

SG&A expenses increased ~~$2.3~~$3.5 million year-over-year in the three months ended ~~September 29, 2018~~March 30, 2019 compared to the three months ended ~~September 30, 2017~~March 31, 2018 due to higher compensation and benefit costs of ~~$1.2 million and higher professional services fees of $0.6 million.~~

~~SG&A expenses increased~~ $2.4 million year-over-year in the nine months ended September 29, 2018 compared to the nine months ended September 30, 2017 due to higher professional services fees of $2.3 million, which includes acquisition related costs of $0.6 million, and amortization of intangibles of $1.2 million, partially offset by lower compensation and benefit costs of $1.1 million.

Restructuring Charges

Restructuring charges ~~increased $3.3 million and $10.7~~decreased $2.2 million year-over-year in the three ~~and nine~~ months ended ~~September 29, 2018~~March 30, 2019 compared to the three ~~and nine~~ months ended ~~September 30, 2017, respectively,~~March 31, 2018 due to the restructuring plan implemented in November 2017 that is expected to increase operating ~~efficiencies.~~efficiencies was completed by December 31, 2018. See Note 4 to our condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q.

Interest Expense

Interest expense increased year-over-year in the three months ended ~~September 29, 2018~~March 30, 2019 compared to the three months ended ~~September 30, 2017~~March 31, 2018 due to a higher outstanding balance on the Revolving Credit Facility, reflecting the ~~acquisitions~~acquisition of Certified Thermoplastics Co., LLC (“CTP”) in April 2018 ~~and Lightning Diversion Systems, LLC (“LDS”) during September 2017, and higher interest rates.~~

Interest expense increased year-over-year in the nine months ended September 29, 2018 compared to the nine months ended September 30, 2017 due to a higher outstanding balance on the Revolving Credit Facility, reflecting the acquisitions of CTP and LDS, and higher interest rates.

Income Tax Expense

~~We recorded income tax expense of $0.1 million for the nine months ended September 29, 2018 compared to $2.1 million for the nine months ended September 30, 2017. The decrease~~increase in income tax expense for the first ~~nine months~~quarter of ~~2018~~2019 compared to the first ~~nine months~~quarter of ~~2017~~2018 was primarily due to ~~the reduction in the U.S. corporate tax rate from 35.0% to 21.0% and lower~~higher pre-tax income infor the first ~~nine months~~quarter of ~~2018~~2019 compared to the first ~~nine months~~quarter of 2017. The decrease was partially offset by the repeal of the U.S. Domestic Production Activities Deduction in 2018 and a reduction in tax benefits from deductions of share-based compensation expense in excess of the compensation expense recorded for financial reporting purposes.2018.

Net Income and Earnings per Share

Net income and earnings per share for the three months ended ~~September 29, 2018~~March 30, 2019 were ~~$4.2~~$7.5 million, or ~~$0.36~~$0.64 per diluted share, compared to ~~$4.7~~$2.6 million, or ~~$0.41~~$0.22 per diluted share, for the three months ended ~~September 30, 2017.~~March 31, 2018. The ~~decrease~~increase in net income for the three months ended ~~September 29, 2018~~March 30, 2019 compared to the three months ended ~~September 30, 2017~~March 31, 2018 was due to ~~$3.4~~$8.9 million of ~~restructuring charges. The $5.0 million increase in~~higher gross profit ~~was due to~~as a result of higher revenues and improved operating ~~performance~~performance. Restructuring charges were lower by $2.2 million that was ~~partially~~ offset by ~~$2.3~~$3.5 million of higher selling, general and administrative expenses, ~~and $0.3 million of higher interest expense.~~

Net income and earnings per share for the nine months ended September 29, 2018 were $8.4 million, or $0.72 per diluted share, compared to $10.6 million, or $0.92 per diluted share, for the nine months ended September 30, 2017. The decrease in net income for the nine months ended September 29, 2018 compared to the nine months ended September 30, 2017 was due to $11.0 million of restructuring charges, $0.2 million of which was included in cost of sales. The $12.5 million increase in gross profit was due to higher revenues and improved operating performance that was partially offset by $3.1$1.5 million of higher interest expense, and ~~$2.4 million~~higher income taxes of ~~higher selling, general and administrative expenses.~~$1.3 million.

Business Segment Performance

We report our financial performance based upon the two reportable operating segments: Electronic Systems and Structural Systems. The results of operations differ between our reportable operating segments due to differences in competitors, customers, extent of proprietary deliverables and performance. The following table summarizes our business segment performance for the three ~~and nine~~ months ended ~~September 29, 2018~~March 30, 2019 and ~~September 30, 2017:~~

March 31, 2018:


	Three Months Ended												Nine Months Ended												Three Months Ended
	%		(In thousands)						% of Net Revenues				%		(In thousands)						% of Net Revenues				%		(In thousands)						% of Net Revenues
	Change		September 29, 2018			September 30, 2017			September 29, 2018		September 30, 2017		Change		September 29, 2018			September 30, 2017			September 29, 2018		September 30, 2017		Change		March 30, 2019			March 31, 2018			March 30, 2019		March 31, 2018
Net Revenues
Electronic Systems	8.5	%	$	85,696		$	79,005		53.6	%	57.0	%	5.4	%	$	252,606		$	239,553		54.3	%	57.6	%	2.2	%	$	84,197		$	82,409		48.8	%	54.8	%
Structural Systems	24.2	%	74,146			59,685			46.4	%	43.0	%	20.5	%	212,518			176,372			45.7	%	42.4	%	29.9	%	88,369			68,046			51.2	%	45.2	%
Total Net Revenues	15.3	%	$	159,842		$	138,690		100.0	%	100.0	%	11.8	%	$	465,124		$	415,925		100.0	%	100.0	%	14.7	%	$	172,566		$	150,455		100.0	%	100.0	%
Segment Operating Income
Electronic Systems			$	9,050		$	8,308		10.6	%	10.5	%			$	23,463		$	24,380		9.3	%	10.2	%			$	9,181		$	5,744		10.9	%	7.0	%
Structural Systems			3,963			3,544			5.3	%	5.9	%			13,380			8,382			6.3	%	4.8	%			10,549			4,391			11.9	%	6.5	%
			13,013			11,852									36,843			32,762									19,730			10,135
Corporate General and Administrative Expenses ⁽¹⁾			(6,226		)	(4,505		)	(3.9	)%	(3.2	)%			(19,204		)	(14,539		)	(4.1	)%	(3.5	)%			(6,882		)	(4,879		)	(4.0	)%	(3.2	)%
Total Operating Income			$	6,787		$	7,347		4.3	%	5.3	%			$	17,639		$	18,223		3.8	%	4.4	%			$	12,848		$	5,256		7.4	%	3.5	%
Adjusted EBITDA
Electronic Systems
Operating Income			$	9,050		$	8,308								$	23,463		$	24,380								$	9,181		$	5,744
Other Income			27			288									27			288
Depreciation and Amortization			3,707			3,345									11,022			10,207									3,844			3,632
Restructuring Charges			1,150			—									2,406			—									—			520
			13,934			11,941			16.3	%	15.1	%			36,918			34,875			14.6	%	14.6	%			13,025			9,896			15.5	%	12.0	%
Structural Systems
Operating Income			3,963			3,544									13,380			8,382									10,549			4,391
Other Income			—			200									—			200
Depreciation and Amortization			2,576			2,220									7,510			6,879									3,250			2,316
Restructuring Charges			1,612			64									6,748			64									—			1,526
Inventory Purchase Accounting Adjustments			293			—									622			—
			8,444			6,028			11.4	%	10.1	%			28,260			15,525			13.3	%	8.8	%			13,799			8,233			15.6	%	12.1	%
Corporate General and Administrative Expenses ⁽¹⁾
Operating Loss			(6,226		)	(4,505		)							(19,204		)	(14,539		)							(6,882		)	(4,879		)
Depreciation and Amortization			37			54									103			63									294			33
Stock-Based Compensation Expense			1,299			1,100									3,414			4,264									1,464			1,090
Restructuring Charges			611			—									1,798			—									—			127
			(4,279		)	(3,351		)							(13,889		)	(10,212		)							(5,124		)	(3,629		)
Adjusted EBITDA			$	18,099		$	14,618		11.3	%	10.5	%			$	51,289		$	40,188		11.0	%	9.7	%			$	21,700		$	14,500		12.6	%	9.6	%
Capital Expenditures
Electronic Systems			$	879		$	1,793								$	5,091		$	4,256								$	836		$	2,734
Structural Systems			3,935			4,449									6,565			17,217									3,689			1,529
Corporate Administration			185			127									375			775
Total Capital Expenditures			$	4,999		$	6,369								$	12,031		$	22,248								$	4,525		$	4,263


(1)	Includes costs not allocated to either the Electronic Systems or Structural Systems operating segments.

Electronic Systems

Electronic ~~Systems’~~Systems net revenues in the three months ended ~~September 29, 2018~~March 30, 2019 compared to the three months ended ~~September 30, 2017~~March 31, 2018 increased ~~$6.7~~$1.8 million due to the following:

$~~6.7 million higher revenues in our commercial aerospace end-use markets due to increased build rates on large aircraft platforms; and~~

~~$2.0~~8.5 million higher revenues in our military and space end-use markets due to increased shipments on ~~military fixed-wing~~various missile platforms; partially offset by

$~~2.0~~3.8 million lower revenues in our commercial aerospace end-use markets due to timing of shipments which unfavorably impacted our large aircraft platforms; and

$2.9 million lower revenues in our industrial end-use markets.

Electronic ~~Systems’~~Systems segment operating income in the three months ended March 30, 2019 compared to the three months ended March 31, 2018 increased $3.4 million due to favorable product mix and improved manufacturing efficiencies.

Structural Systems

Structural Systems net revenues in the ~~nine~~three months ended ~~September 29, 2018~~March 30, 2019 compared to the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2018 increased ~~$13.1~~$20.3 million due to the following:

$~~14.6~~15.7 million higher revenues in our commercial aerospace end-use markets due to ~~increased build rates on large aircraft platforms;~~additional content and

~~$0.4 million higher revenues in our military and space end-use markets; partially offset by~~

~~$1.9 million lower revenues in our industrial end-use markets.~~

Electronic Systems’ segment operating income in the three months ended September 29, 2018 compared to the three months ended September 30, 2017 increased $0.7 million due to favorable manufacturing volume, partially offset by unfavorable product mix and restructuring charges.

Electronic Systems’ segment operating income in the nine months ended September 29, 2018 compared to the nine months ended September 30, 2017 decreased $0.9 million due to unfavorable product mix, restructuring charges, and higher compensation and benefits costs, partially offset by favorable manufacturing volume.

~~Structural Systems~~

~~Structural Systems’ net revenues in the three months ended September 29, 2018 compared to the three months ended September 30, 2017 increased $14.5 million due to the following:~~

~~$9.6 million higher revenues in our commercial aerospace end-use markets due to~~ higher build rates on large aircraft platforms; and

$~~4.9 million higher revenues in our military and space end-use markets due to increased shipments on rotary-wing aircraft platforms.~~

~~Structural Systems’ net revenues in the nine months ended September 29, 2018 compared to the nine months ended September 30, 2017 increased $36.1 million due to the following:~~

~~$31.3 million higher revenues in our commercial aerospace end-use markets due to higher build rates on large aircraft platforms; and~~

~~$4.8~~4.6 million higher revenues in our military and space end-use markets due to increased shipments on military rotary-wing aircraft platforms.

The Structural Systems segment operating income in the three ~~and nine~~ months ended ~~September 29, 2018~~March 30, 2019 compared to the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2018 increased ~~$0.4~~$6.2 million ~~and $5.0 million, respectively~~ due to favorable manufacturing volume, favorable product mix, ~~favorable~~improved manufacturing ~~volume, improved operating performance, partially offset by higher restructuring charges, higher compensation and benefits costs,~~efficiencies, and lack of ~~forward loss reserve release~~restructuring charges in the current year.

Corporate General and Administrative (“CG&A”) Expenses

CG&A expenses increased ~~$1.7~~$2.0 million in the three months ended ~~September 29, 2018~~March 30, 2019 compared to the three months ended ~~September 30, 2017~~March 31, 2018 due to higher compensation and benefit costs of ~~$0.8 million, restructuring charges of $0.6 million, and higher professional services fees of $0.6 million.~~

CG&A expenses increased $4.7 million in the nine months ended September 29, 2018 compared to the nine months ended September 30, 2017 due to higher professional services fees of $2.0 million, which includes acquisition related costs of $0.6 million, restructuring charges of $1.8 million, and higher compensation and benefit costs of $0.8$1.6 million.

Backlog

We define backlog as ~~potential revenue that is based on~~ customer placed purchase orders (“POs”) and long-term agreements (“LTAs”) with firm fixed price and ~~firm~~expected delivery dates of 24 months or less. The majority of the LTAs do not meet the definition of a contract under ASC 606 and thus, the backlog amount disclosed below is greater than the ~~backlog~~remaining performance obligations amount disclosed in Note 1 to our condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q. Backlog is subject to delivery delays or program cancellations, which are beyond our control. Backlog is affected by timing differences in the placement of customer orders and tends to

be concentrated in several programs to a greater extent than our net revenues. Backlog in industrial markets tends to be of a shorter duration and is generally fulfilled within a three month period. As a result of these factors, trends in our overall level of backlog may not be indicative of trends in our future net revenues.

The increase in backlog was primarily in the commercial aerospace end-use markets and defense technologies end-use markets. ~~$552.0~~$625.0 million of total backlog is expected to be delivered over the next 12 months. The following table summarizes our backlog as of ~~September 29, 2018~~March 30, 2019 and December 31, ~~2017:~~2018:


	(In thousands)							(In thousands)
	Change			September 29, 2018		December 31, 2017		Change			March 30, 2019		December 31, 2018
Consolidated Ducommun
Military and space	$	23,004		$	298,663	$	275,659	$	7,516		$	346,959	$	339,443
Commercial aerospace	23,822			441,895		418,073		12,241			499,473		487,232
Industrial	6,769			39,515		32,746		(441		)	37,333		37,774
Total	$	53,595		$	780,073	$	726,478	$	19,316		$	883,765	$	864,449
Electronic Systems
Military and space	$	(3,994	)	$	210,581	$	214,575	$	8,106		$	249,302	$	241,196
Commercial aerospace	(81		)	56,569		56,650		16,990			65,022		48,032
Industrial	6,769			39,515		32,746		(441		)	37,333		37,774
Total	$	2,694		$	306,665	$	303,971	$	24,655		$	351,657	$	327,002
Structural Systems
Military and space	$	26,998		$	88,082	$	61,084	$	(590	)	$	97,657	$	98,247
Commercial aerospace	23,903			385,326		361,423		(4,749		)	434,451		439,200
Total	$	50,901		$	473,408	$	422,507	$	(5,339	)	$	532,108	$	537,447

Liquidity and Capital Resources

Available Liquidity

Total debt, the weighted-average interest rate, cash and cash equivalents and available credit facilities were as follows:


	(In millions)						(In millions)
	September 29,			December 31,			March 30,			December 31,
	2018			2017			2019			2018
Total debt, including long-term portion	$	230.7		$	218.1		$	233.2		$	233.0
Weighted-average interest rate on debt	4.50		%	3.73		%	6.84		%	4.71		%
Term Loan interest rate	4.58		%	3.74		%	6.53		%	4.15		%
Cash and cash equivalents	$	3.6		$	2.2		$	3.7		$	10.3
Unused Revolving Credit Facility	$	129.0		$	141.6		$	96.6		$	99.7

~~Our~~In November 2018, we completed new credit ~~facility consists~~facilities to replace the Existing Credit Facilities. The new credit facilities consist of a ~~$275.0~~$240.0 million senior secured term loan, which matures on ~~June 26, 2020~~November 21, 2025 (“New Term Loan”), and a ~~$200.0~~$100.0 million senior secured revolving credit facility (“New Revolving Credit Facility”), which matures on ~~June 26, 2020~~November 21, 2023 (collectively, the ~~“Credit~~“New Credit Facilities”). We are required to make ~~mandatory prepayments~~installment payments of ~~amounts~~0.25% of the outstanding ~~under~~principal balance of the New Term ~~Loan.~~Loan amount on a quarterly basis. In addition, if we meet the annual excess cash flow threshold, we will be required to make excess flow payments on an annual basis. Further, the undrawn portion of the commitment of the New Revolving Credit Facility is subject to a commitment fee ranging from 0.20% to 0.30%, based upon the consolidated total net adjusted leverage ratio. As of ~~September 29, 2018,~~March 30, 2019, we were in compliance with all covenants required under the Credit Facilities. See Note 98 to our condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q for further information. In July 2017, we entered into a technical amendment to the Credit Facilities (“First Amendment”) which provides more flexibility to close certain qualified acquisitions permitted under the Credit Facilities. We ~~have~~ made ~~all~~an aggregate total of $3.0 million of voluntary and mandatory principal prepayments under the Term Loan ~~and thus, no mandatory payments are due until~~during the ~~Term Loan matures in June 2020.~~three months ended March 30, 2019.

In October 2015, we entered into interest rate cap hedges designated as cash flow hedges with maturity dates of June 2020, and in aggregate, totaling $135.0 million of our debt. We paid a total of $1.0 million in connection with entering into the interest rate cap hedges.

OnIn April ~~23,~~ 2018, we acquired Certified Thermoplastics Co., LLC (“CTP”) for a purchase price of $30.7 million, net of cash acquired, all payable in cash. We paid an aggregate of $30.8 million in cash by drawing down on the Revolving Credit Facility. See Note 3 to our condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q.

We expect to spend a total of $15.0 million to $17.0 million for capital expenditures in ~~2018~~2019 financed by cash generated from operations, principally to support new contract awards in ~~Structural~~Electronic Systems and ~~Electronic~~Structural Systems. As part of our strategic plan to become a ~~Tier 2~~ supplier of higher-level assemblies and win new contract awards, additional up-front investment in tooling will be required for newer programs which have higher engineering content and higher levels of complexity in assemblies.

We believe the ongoing aerospace and defense subcontractor consolidation makes acquisitions an increasingly important component of our future growth. We will continue to make prudent acquisitions and capital expenditures for manufacturing equipment and facilities to support long-term contracts for commercial and military aircraft and defense programs.

We continue to depend on operating cash flow and the availability of our New Credit Facilities to provide short-term liquidity. Cash generated from operations and bank borrowing capacity are expected to provide sufficient liquidity to meet our obligations during the next twelve months.

In November 2017, management approved and commenced a restructuring plan that was intended to increase operating efficiencies. We have finalized our decisions and are executing to the restructuring plan. This will result in additional restructuring charges during the remainder of 2018. On an annualized basis, beginning in 2019, we anticipate these restructuring actions will result in estimated total savings of $14.0 million.

Cash Flow Summary

Net cash ~~provided by~~used in operating activities for the ~~nine~~three months ended ~~September 29, 2018 increased to $33.4~~March 30, 2019 was $1.7 million, compared to ~~$27.4~~cash provided by of $10.3 million for the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2018. The ~~higher~~lower net cash generated during the first ~~nine~~three months of ~~2018~~2019 was due to ~~improved working capital management,~~the decrease in accrued and other liabilities, partially offset by ~~lower~~higher net income.

Net cash used in investing activities was ~~$43.4~~$3.2 million for the ~~nine~~three months ended ~~September 29, 2018~~March 30, 2019 compared to ~~$83.5~~$3.3 million in the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2018. The lower net cash used in the first ~~nine~~three months of ~~2018~~2019 compared to the prior year period was due to lower ~~payments for business combination and lower~~ purchases of property and equipment.

Net cash ~~provided by~~used in financing activities for the ~~nine~~three months ended ~~September 29, 2018~~March 30, 2019 of ~~$11.4~~$1.6 million was lower than the prior year

period due to lower net ~~borrowings~~repayments on the Revolving Credit Facility.

Off-Balance Sheet Arrangements

Our off-balance sheet arrangements consist of operating and finance leases not recorded as a result of the practical expedients utilized as a part of the adoption of ASC 842 as of January 1, 2019 and indemnities.

Critical Accounting Policies

The preparation of our condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States requires estimation and judgment that affect the reported amounts of net revenues, expenses, assets and liabilities. For a description of our critical accounting policies, please refer to “Critical Accounting Policies” in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our ~~2017~~2018 Annual Report on Form 10-K. As a result of adopting ASC ~~606~~842 as of January 1, ~~2018,~~2019, there have been material changes into our ~~critical~~lease accounting policies during the ~~nine~~three months ended ~~September 29, 2018,~~March 30, 2019, and are described in ~~Note 1 and~~ Note 2 to our condensed consolidated financial statements included in Part I, Item I of this Form 10-Q.

Recent Accounting Pronouncements

See “Part I, Item 1. Ducommun Incorporated and Subsidiaries—Notes to Condensed Consolidated Financial Statements—Note 1. Summary of Significant Accounting Policies—Recent Accounting Pronouncements” for further information.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our main market risk exposure relates to changes in U.S. interest rates on our outstanding long-term debt. At ~~September 29, 2018,~~March 30, 2019, we had total borrowings of ~~$230.7~~$233.2 million under our New Credit ~~Facilities which bear~~Facilities.

The New Term Loan bears interest, at our option, at a rate equal to

either ~~an alternate base rate or an adjusted LIBOR rate for a one-, two-, three-, or six-month interest period chosen by us,~~(i) the Eurodollar Rate (defined as the London Interbank Offered Rate [“LIBOR”]) plus an applicable margin ~~percentage. This LIBOR~~ranging from 3.75% to 4.00% 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, ~~has a~~and [c] the Eurodollar Rate plus 1.00%) plus an applicable margin ranging from ~~1.50%~~3.75% to 4.00% per year, in each case based upon the consolidated total net adjusted leverage ratio.

The New Revolving Credit Facility bears interest, at our option, at a rate equal to either (i) the Eurodollar Rate (defined as LIBOR) plus an applicable margin ranging from 1.75% 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 0.75% to 1.75% per year, in each case based upon the consolidated total net adjusted leverage ratio.

A hypothetical 10% increase or decrease in the interest rate would have an immaterial impact on our financial condition and results of operations.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

The Company’s chief executive officer (“CEO”) and chief financial officer (“CFO”) have conducted 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 were effective as of the end of the period covered by this report.

Changes in Internal Control over Financial Reporting

~~There were no changes in~~We adopted ASC 842, “Leases” (“ASC 842”), as of January 1, 2019, and as a result, there was a material impact to our internal ~~controls~~control over financial ~~reporting~~reporting. We implemented changes to our process and controls related to identifying and accounting for lease arrangements during the three months ended ~~September 29, 2018 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.~~March 30, 2019. These changes included the development of new and revised policies based on the guidance provided in ASC 842, new training for employees, and the implementation of new and revised processes, including the implementation of a new lease accounting software package, and gathering of disclosure information.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

See Note 1312 to our condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q for a description of our legal proceedings.

Item 1A. Risk Factors

See Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, ~~2017~~2018 for a discussion of our risk factors. There have been no material changes in the ~~nine~~three months ended ~~September 29, 2018~~March 30, 2019 to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018.

Item 4. Mine Safety Disclosures

Not applicable.

~~Item 5. Other Information~~

Subsequent to our quarter ended September 29, 2018, on October 18, 2018, we appointed Shirley G. Drazba as a Class III Director, effectively immediately, to serve for a term expiring at the annual meeting of stockholders in 2021 and until her successor is elected and qualified.

Item 6. Exhibits

2.1 Agreement and Plan of Merger, dated as of April 3, 2011, among Ducommun Incorporated, DLBMS, Inc. and LaBarge, Inc. Incorporated by reference to Exhibit 2.1 to Form 8-K filed on April 5, 2011.

2.2 Agreement and Plan of Merger, dated as of September 11, 2017, among Ducommun LaBarge Technologies, Inc., LS Holdings Company LLC, and DLS Company LLC. Incorporated by reference to Exhibit 2.1 to Form 8-K filed on September 11, 2017.

2.3 Stock Purchase Agreement dated January 22, 2016, by and among Ducommun Incorporated, Ducommun LaBarge Technologies, Inc., as Seller, LaBarge Electronics, Inc., and Intervala, LLC, as Buyer. Incorporated by reference to Exhibit 2.1 to Form 8-K dated January 25, 2016.

2.4 Stock Purchase Agreement dated February 24, 2016, by and between Ducommun LaBarge Technologies, Inc., as Seller, and General Atomics, as Buyer. Incorporated by reference to Exhibit 2.1 to Form 8-K dated February 24, 2016.


3.1	Restated Certificate of Incorporation filed with the Delaware Secretary of State on May 29, 1990. Incorporated by reference to Exhibit 3.1 to Form 10-K for the year ended December 31, 1990.

3.2 Certificate of Amendment of Certificate of Incorporation filed with the Delaware Secretary of State on May 27, 1998. Incorporated by reference to Exhibit 3.2 to Form 10-K for the year ended December 31, 1998.

3.3 Bylaws as amended and restated on March 19, 2013. Incorporated by reference to Exhibit 99.1 to Form 8-K dated March 22, 2013.

3.4 Amendment to Bylaws dated January 5, 2017. Incorporated by reference to Exhibit 99.2 to Form 8-K dated January 9, 2017.

3.5 Amendment to Bylaws dated February 21, 2018. Incorporated by reference to Exhibit 3.1 to Form 8-K dated February 26, 2018.

10.1 Credit Agreement, dated as of ~~June 26, 2015,~~November 21, 2018, among Ducommun Incorporated, certain of its subsidiaries, Bank of America, N.A., as administrative agent, swingline lender and issuing bank, and other lenders party thereto. Incorporated by reference to Exhibit 10.1 to Form 8-K ~~dated June~~filed on November 26, ~~2015.~~

10.2 First Amendment to Credit Agreement, dated as of July 14, 2017, among Ducommun Incorporated, certain of its subsidiaries, Bank of America, N.A., as administrative agent, swingline lender and issuing bank, and other lenders party thereto. Incorporated by reference to Exhibit 10.2 to Form 10-Q for the period ended July 1, 2017.2018.

*~~10.3~~10.2 2007 Stock Incentive Plan. Incorporated by reference to Appendix B of Definitive Proxy Statement on Schedule 14a, filed on March 29, 2010.

*~~10.4~~10.3 2013 Stock Incentive Plan (Amended and Restated March 18, 2015). Incorporated by reference to Appendix B of Definitive Proxy Statement on Schedule 14a, filed on April 22, 2015.

*~~10.5~~10.4 2013 Stock Incentive Plan (Amended and Restated May 2, 2018). Incorporated by reference to Appendix A of Definitive Proxy Statement on Schedule 14a, filed on March 23, 2018.

*~~10.6~~10.5 2018 Employee Stock Purchase Plan. Incorporated by reference to Appendix B of Definitive Proxy Statement on Schedule 14a, filed on March 23, 2018.

*~~10.7~~10.6 Form of Stock Option Agreement for 2016 and earlier. Incorporated by reference to Exhibit 10.8 to Form 10-K for the year ended December 31, 2003.

*~~10.8~~10.7 Form of Stock Option Agreement for 2017. Incorporated by reference to Exhibit 10.5 to Form 10-K for the year ended December 31, 2016.

*~~10.9~~10.8 Form of Stock Option Agreement for 2018 and after. Incorporated by reference to Exhibit 4.7 to Form S-8, filed on May 10, 2018.

*~~10.10~~10.9 Form of Performance Stock Unit Agreement for 2014 and 2015. Incorporated by reference to Exhibit 10.19 to Form 10-Q ~~dated April 28,~~for the period ended March 29, 2014.

*~~10.11~~10.10 Form of Performance Stock Unit Agreement for 2016. Incorporated by reference to Exhibit 10.6 to Form 10-Q for the period ended April 2, 2016.

*~~10.12~~10.11 Form of Performance Stock Unit Agreement for 2017. Incorporated by reference to Exhibit 10.21 to Form 10-Q for the period ended April 1, 2017.

*~~10.13~~10.12 Form of Restricted Stock Unit Agreement for 2016 and earlier. Incorporated by reference to Exhibit 99.1 to Form 8-K dated May 8, 2007.

*~~10.14~~10.13 Form of Restricted Stock Unit Agreement for 2017 and after. Incorporated by reference to Exhibit 10.9 to Form 10-K for the year ended December 31, 2016.

*~~10.15~~10.14 Form of Directors’ Restricted Stock Unit Agreement. Incorporated by reference to Exhibit 99.1 to Form 8-K dated May 10, 2010.

*~~10.16~~10.15 Performance Restricted Stock Unit Agreement dated January 23, 2017 between Ducommun Incorporated and Stephen G. Oswald. Incorporated by reference to Exhibit 10.11 to Form 10-K for the year ended December 31, 2016.


*~~10.17~~10.16	Form of Indemnity Agreement entered with all directors and officers of Ducommun. Incorporated by reference to Exhibit 10.8 to Form 10-K for the year ended December 31, 1990. All of the Indemnity Agreements are identical except for the name of the director or officer and the date of the Agreement:



	Director/Officer		Date of Agreement
	Richard A. Baldridge		March 19, 2013
	Gregory S. Churchill		March 19, 2013
	Shirley G. Drazba		October 18, 2018
	Robert C. Ducommun		December 31, 1985
	Dean M. Flatt		November 5, 2009
	Douglas L. Groves		February 12, 2013
	Jay L. Haberland		February 2, 2009
	Stephen G. Oswald		January 23, 2017
	Robert D. Paulson		March 25, 2003
	Jerry L. Redondo		October 1, 2015
	Rosalie F. Rogers		July 24, 2008
	Christopher D. Wampler		January 1, 2016

*~~10.18~~10.17 Ducommun Incorporated 2016 Bonus Plan. Incorporated by reference to Exhibit 99.3 to Form 8-K dated March 1, 2016.

*~~10.19~~10.18 Ducommun Incorporated 2017 Bonus Plan. Incorporated by reference to Exhibit 99.1 to Form 8-K dated February 27, 2017.

*~~10.20~~10.19 Directors’ Deferred Compensation and Retirement Plan, as amended and restated February 2, 2010. Incorporated by reference to Exhibit 10.15 to Form 10-K for the year ended December 31, 2009.

*~~10.21~~10.20 Key Executive Severance Agreement between Ducommun Incorporated and Stephen G. Oswald dated January 23, 2017. Incorporated by reference to Exhibit 99.1 to Form 8-K dated January 27, 2017.

*~~10.22~~10.21 Form of Key Executive Severance Agreement between Ducommun Incorporated and each of the individuals listed below. Incorporated by reference to Exhibit 99.2 to Form 8-K dated January 27, 2017. All of the Key Executive Severance Agreements are identical except for the name of the person and the address for notice:



	Person		Date of Agreement
	Douglas L. Groves		January 23, 2017
	Jerry L. Redondo		January 23, 2017
	Rosalie F. Rogers		January 23, 2017
	Christopher D. Wampler		January 23, 2017

*~~10.23~~10.22 Employment Letter Agreement dated January 3, 2017 between Ducommun Incorporated and Stephen G. Oswald. Incorporated by reference to Exhibit 99.1 to Form 8-K dated January 9, 2017.

*~~10.24~~10.23 Employment Letter Agreement dated December 19, 2016 between Ducommun Incorporated and Amy M. Paul. Incorporated by reference to Exhibit 10.19 to Form 10-K for the year ended December 31, 2016.

*~~10.25~~10.24 Transition Services Letter Agreement dated January 10, 2017 between Ducommun Incorporated and James S. Heiser. Incorporated by reference to Exhibit 99.1 to Form 8-K ~~dated~~filed on January ~~16,~~17, 2017.

*~~10.26~~10.25 Separation and Release Agreement dated May ~~16,~~14, 2018 between Ducommun Incorporated and Amy M. Paul. Incorporated by reference to Exhibit 10.1 to Form 8-K ~~dated~~filed on May 23, 2018.

31.1 Certification of Principal Executive Officer.

31.2 Certification of Principal Financial Officer.

32 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS XBRL Instance Document

101.SCH XBRL Taxonomy Extension Schema

101.CAL XBRL Taxonomy Extension Calculation Linkbase

101.DEF XBRL Taxonomy Extension Definition Linkbase

101.LAB XBRL Taxonomy Extension Label Linkbase

101.PRE XBRL Taxonomy Extension Presentation Linkbase

___________________

* Indicates an executive compensation plan or arrangement.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



Date: ~~November 5, 2018~~May 6, 2019	By:	/s/ Stephen G. Oswald
		Stephen G. Oswald
		Chairman, President and Chief Executive Officer
		(Principal Executive Officer)

Date: ~~November 5, 2018~~May 6, 2019	By:	/s/ Douglas L. Groves
		Douglas L. Groves
		Vice President, Chief Financial Officer and Treasurer
		(Principal Financial Officer)

Date: ~~November 5, 2018~~May 6, 2019	By:	/s/ Christopher D. Wampler
		Christopher D. Wampler
		Vice President, Controller and Chief Accounting Officer
		(Principal Accounting Officer)

4136



	(In thousands)
	December 31, 2017					January 1, 2018
Unaudited Condensed Consolidated Balance Sheets	Balances Without Adoption of ASC 606		Effect of Adoption			Balances With Adoption of ASC 606
Assets
Contract assets	$	—	$	68,739		$	68,739
Inventories	$	122,161	$	(39,002	)	$	83,159
Non-current deferred income taxes	$	261	$	(95	)	$	166
Liabilities
Contract liabilities	$	—	$	24,460		$	24,460
Accrued liabilities	$	28,329	$	(6,091	)	$	22,238
Non-current deferred income taxes	$	15,981	$	2,608		$	18,589
Shareholders’ Equity
Retained earnings	$	161,364	$	8,665		$	170,029



	September 29, 2018
Unaudited Condensed Consolidated Balance Sheets	As Reported			Effect of Adoption			Balances Without Adoption of ASC 606
Assets
Current Assets
Cash and cash equivalents	$	3,573		$	—		$	3,573
Accounts receivable, net of allowance for doubtful accounts of $1,212 at September 29, 2018	64,466			—			64,466
Contract assets	88,066			(88,066		)	—
Inventories	101,752			59,679			161,431
Production cost of contracts	12,021			—			12,021
Other current assets	12,124			(524		)	11,600
Total Current Assets	282,002			(28,911		)	253,091
Property and equipment, net of accumulated depreciation of $159,010 at September 29, 2018	106,583			—			106,583
Goodwill	135,769			—			135,769
Intangibles, net	114,746			—			114,746
Non-current deferred income taxes	131			130			261
Other assets	3,334			—			3,334
Total Assets	$	642,565		$	(28,781	)	$	613,784
Liabilities and Shareholders’ Equity
Current Liabilities
Accounts payable	$	73,534		$	—		$	73,534
Contract liabilities	15,108			(15,108		)	—
Accrued liabilities	31,929			4,105			36,034
Total Current Liabilities	120,571			(11,003		)	109,568
Long-term debt	229,402			—			229,402
Non-current deferred income taxes	19,427			(3,751		)	15,676
Other long-term liabilities	17,608			—			17,608
Total Liabilities	387,008			(14,754		)	372,254
Commitments and contingencies (Notes 11, 13)
Shareholders’ Equity
Common stock - $0.01 par value; 35,000,000 shares authorized; 11,409,623 shares issued and outstanding at September 29, 2018	114			—			114
Additional paid-in capital	82,447			—			82,447
Retained earnings	179,412			(14,027		)	165,385
Accumulated other comprehensive loss	(6,416		)	—			(6,416		)
Total Shareholders’ Equity	255,557			(14,027		)	241,530
Total Liabilities and Shareholders’ Equity	$	642,565		$	(28,781	)	$	613,784



	Three Months Ended September 29, 2018									Nine Months Ended September 29, 2018
Unaudited Condensed Consolidated Statements of Income	As Reported			Effect of Adoption			Balances Without Adoption of ASC 606			As Reported			Effect of Adoption			Balances Without Adoption of ASC 606
Net Revenues	$	159,842		$	(5,344	)	$	154,498		$	465,124		$	(17,296	)	$	447,828
Cost of Sales	128,726			(4,461		)	124,265			375,225			(12,067		)	363,158
Gross Profit	31,116			(883		)	30,233			89,899			(5,229		)	84,670
Selling, General and Administrative Expenses	20,956			—			20,956			61,476			—			61,476
Restructuring Charges	3,373			—			3,373			10,784			—			10,784
Operating Income	6,787			(883		)	5,904			17,639			(5,229		)	12,410
Interest Expense	(2,524		)	(1,059		)	(3,583		)	(9,186		)	(1,059		)	(10,245		)
Other Income	27			—			27			27			—			27
Income Before Taxes	4,290			(1,942		)	2,348			8,480			(6,288		)	2,192
Income Tax Expense (Benefit)	119			(726		)	(607		)	118			(813		)	(695		)
Net Income	$	4,171		$	(1,216	)	$	2,955		$	8,362		$	(5,475	)	$	2,887
Earnings Per Share
Basic earnings per share	$	0.37					$	0.26		$	0.73					$	0.25
Diluted earnings per share	$	0.36					$	0.25		$	0.72					$	0.25
Weighted-Average Number of Common Shares Outstanding
Basic	11,404						11,404			11,382						11,382
Diluted	11,683						11,683			11,639						11,639



	Estimated Fair Value
Cash	$	98
Accounts receivable	1,517
Inventories	2,500
Other current assets	27
Property and equipment	603
Intangible assets	8,000
Goodwill	18,334
Total assets acquired	31,079
Current liabilities	(270		)
Total liabilities assumed	(270		)
Total preliminary purchase price allocation	$	30,809



	Useful Life (In years)	Estimated Fair Value (In thousands)
Intangible assets:
Customer relationships	10	$	6,600
Trade names and trademarks	10	1,400
		$	8,000

(In thousands)

Three Months Ended

March 30,
2019

March 31,
2018

Stock options and stock units