UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________________
FORM 10-Q
_________________________________________________________ | | | | | |
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended July 2, 20221, 2023
OR
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☐ | 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 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 every Interactive Data File required to be submitted 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). 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 July 27, 2022,26, 2023, the registrant had 12,072,73414,569,589 shares of common stock outstanding.
DUCOMMUN INCORPORATED AND SUBSIDIARIES | | | | | | | | | | | |
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FORWARD-LOOKING STATEMENTS AND RISK FACTORS
This Quarterly Report on Form 10-Q (“Form 10-Q”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be preceded by, followed by or include words such as “could,” “may,” “believe,” “expect,” “anticipate,” “plan,” “estimate,” “expect,” “would,” or similar expressions. These statements are based on the beliefs and assumptions of our management at the time such statements are made. Generally, forward-looking statements include information concerning our possible or assumed future actions, events or results of operations. Forward-looking statements specifically include, without limitation, the information in this Form 10-Q regarding: future sales, earnings, cash flow, revenue recognition, uses of cash and other measures of financial performance, projections or expectations for future operations, including costs to complete contracts, goodwill impairment evaluations, useful life of intangible assets, unrecognized tax benefits and effective tax rate, environmental remediation costs, insurance recoveries, industry trends and expectations, including ramp up times for build rates, our plans with respect to restructuring activities, capital expenditures, completed acquisitions, future acquisitions and dispositions and expected business opportunities that may be available to us.
Although we believe that the expectations reflected in the forward-looking statements are based on reasonable assumptions, these forward-looking statements are subject to numerous factors, risks and uncertainties that could cause actual outcomes and results to be materially different from those projected. We cannot guarantee future results, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. All written and oral forward-looking statements made in connection with this Form 10-Q that are attributable to us or persons acting on our behalf are expressly qualified in their entirety by the “Risk Factors” contained within Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022 (“Form 10-K”).
There can be no assurance that other factors will not affect the accuracy of these forward-looking statements or that our actual results will not differ materially from the results anticipated in such forward-looking statements. While it is impossible to identify all such factors, some factors that could cause actual results to differ materially from those estimated by us include, but are not limited to, those factors or conditions described under Risk Factors contained within Part I, Item 1A of our Form 10-K and the following:
•our ability to manage and otherwise comply with our covenants with respect to our outstanding indebtedness;
•our ability to service our indebtedness;
•our acquisitions, business combinations, joint ventures, divestitures, or restructuring activities may entail certain operational and financial risks;
•the cyclicality of our end-use markets and the level of new commercial and military aircraft orders;
•industry and customer concentration;
•production rates for various commercial and military aircraft programs;
•the level of U.S. Government defense spending;
•compliance with applicable regulatory requirements and changes in regulatory requirements, including regulatory requirements such as Cybersecurity Maturity Model Certification (“CMMC”), applicable to government contracts and sub-contracts;
•further consolidation of customers and suppliers in our markets;
•product performance and delivery;
•start-up costs, manufacturing inefficiencies and possible overruns on contracts;
•increased design, product development, manufacturing, supply chain and other risks and uncertainties associated with our growth strategy to become a supplier of higher-level assemblies;
•our ability to manage the risks associated with international operations and sales;
•economic and geopolitical developments and conditions, including supply chain issues and rising interest rates;
•environmental, social, and governance (“ESG”) developments and related impact;
•pandemics, such as the COVID-19 pandemic, significantly impacting the global economy and most significantly, the commercial aerospace end-use market;
•disasters, natural or otherwise, damaging or disrupting our operations;
•unfavorable developments in the global credit markets;
•our ability to operate within highly competitive markets;
•technology changes and evolving industry and regulatory standards;
•possible goodwill and other asset impairments;
•the risk of environmental liabilities;
•the risk of cyber security attacks or not being able to detect such attacks; and
•litigation with respect to us.
We caution the reader that undue reliance should not be placed on any forward-looking statements, which speak only as of the date of this Form 10-Q. We do not undertake any duty or responsibility to update any of these forward-looking statements to reflect events or circumstances after the date of this Form 10-Q, except as required by law.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Ducommun Incorporated and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
(Dollars in thousands, except share and per share data) | | | | July 2, 2022 | | December 31, 2021 | | | July 1, 2023 | | December 31, 2022 |
Assets | Assets | | | | | Assets | | | | |
Current Assets | Current Assets | | Current Assets | |
Cash and cash equivalents | Cash and cash equivalents | | $ | 37,519 | | | $ | 76,316 | | Cash and cash equivalents | | $ | 22,806 | | | $ | 46,246 | |
Accounts receivable, net (allowance for credit losses of $649 and $1,098 at July 2, 2022 and December 31, 2021, respectively | | 84,307 | | | 72,261 | | |
Accounts receivable, net of allowance for credit losses of $1,062 and $589 at July 1, 2023 and December 31, 2022, respectively | | Accounts receivable, net of allowance for credit losses of $1,062 and $589 at July 1, 2023 and December 31, 2022, respectively | | 95,382 | | | 103,958 | |
Contract assets | Contract assets | | 182,544 | | | 176,405 | | Contract assets | | 189,836 | | | 191,290 | |
Inventories | Inventories | | 164,191 | | | 150,938 | | Inventories | | 204,465 | | | 171,211 | |
Production cost of contracts | Production cost of contracts | | 5,963 | | | 8,024 | | Production cost of contracts | | 5,536 | | | 5,693 | |
| Other current assets | Other current assets | | 10,302 | | | 8,625 | | Other current assets | | 11,098 | | | 8,938 | |
| Total Current Assets | Total Current Assets | | 484,826 | | | 492,569 | | Total Current Assets | | 529,123 | | | 527,336 | |
Property and Equipment, Net of Accumulated Depreciation of $175,465 and $168,132 at July 2, 2022 and December 31, 2021, respectively | | 105,360 | | | 102,419 | | |
Property and Equipment, Net of Accumulated Depreciation of $179,698 and $171,507 at July 1, 2023 and December 31, 2022, respectively | | Property and Equipment, Net of Accumulated Depreciation of $179,698 and $171,507 at July 1, 2023 and December 31, 2022, respectively | | 111,357 | | | 106,225 | |
Operating Lease Right-of-Use Assets | Operating Lease Right-of-Use Assets | | 38,134 | | | 33,265 | | Operating Lease Right-of-Use Assets | | 36,759 | | | 34,632 | |
Goodwill | Goodwill | | 203,407 | | | 203,694 | | Goodwill | | 244,575 | | | 203,407 | |
Intangibles, Net | Intangibles, Net | | 134,478 | | | 141,764 | | Intangibles, Net | | 174,987 | | | 127,201 | |
| Other Assets | Other Assets | | 12,843 | | | 5,024 | | Other Assets | | 21,953 | | | 22,705 | |
Total Assets | Total Assets | | $ | 979,048 | | | $ | 978,735 | | Total Assets | | $ | 1,118,754 | | | $ | 1,021,506 | |
Liabilities and Shareholders’ Equity | Liabilities and Shareholders’ Equity | | | | | Liabilities and Shareholders’ Equity | | | | |
Current Liabilities | Current Liabilities | | Current Liabilities | |
Accounts payable | Accounts payable | | $ | 83,161 | | | $ | 66,059 | | Accounts payable | | $ | 82,992 | | | $ | 90,143 | |
Contract liabilities | Contract liabilities | | 36,721 | | | 42,077 | | Contract liabilities | | 31,719 | | | 47,068 | |
Accrued and other liabilities | Accrued and other liabilities | | 39,647 | | | 41,291 | | Accrued and other liabilities | | 38,111 | | | 48,820 | |
Operating lease liabilities | Operating lease liabilities | | 7,175 | | | 6,133 | | Operating lease liabilities | | 8,165 | | | 7,155 | |
Current portion of long-term debt | Current portion of long-term debt | | 7,000 | | | 7,000 | | Current portion of long-term debt | | 6,250 | | | 6,250 | |
| Total Current Liabilities | Total Current Liabilities | | 173,704 | | | 162,560 | | Total Current Liabilities | | 167,237 | | | 199,436 | |
Long-Term Debt, Less Current Portion | Long-Term Debt, Less Current Portion | | 246,074 | | | 279,384 | | Long-Term Debt, Less Current Portion | | 271,460 | | | 240,595 | |
Non-Current Operating Lease Liabilities | Non-Current Operating Lease Liabilities | | 32,391 | | | 28,074 | | Non-Current Operating Lease Liabilities | | 30,260 | | | 28,841 | |
Deferred Income Taxes | Deferred Income Taxes | | 16,967 | | | 18,727 | | Deferred Income Taxes | | 12,231 | | | 13,953 | |
Other Long-Term Liabilities | Other Long-Term Liabilities | | 13,367 | | | 15,388 | | Other Long-Term Liabilities | | 15,423 | | | 12,721 | |
Total Liabilities | Total Liabilities | | 482,503 | | | 504,133 | | Total Liabilities | | 496,611 | | | 495,546 | |
Commitments and Contingencies (Notes 8, 10) | | 0 | | 0 | |
Commitments and Contingencies (Notes 9, 11) | | Commitments and Contingencies (Notes 9, 11) | | | | |
Shareholders’ Equity | Shareholders’ Equity | | Shareholders’ Equity | |
Common Stock - $0.01 par value; 35,000,000 shares authorized; 12,067,868 and 11,925,087 shares issued and outstanding at July 2, 2022 and December 31, 2021, respectively | | 121 | | | 119 | | |
Common Stock - $0.01 par value; 35,000,000 shares authorized; 14,569,589 and 12,106,285 shares issued and outstanding at July 1, 2023 and December 31, 2022, respectively | | Common Stock - $0.01 par value; 35,000,000 shares authorized; 14,569,589 and 12,106,285 shares issued and outstanding at July 1, 2023 and December 31, 2022, respectively | | 146 | | | 121 | |
| Additional Paid-In Capital | Additional Paid-In Capital | | 106,301 | | | 104,253 | | Additional Paid-In Capital | | 199,526 | | | 112,042 | |
Retained Earnings | Retained Earnings | | 389,509 | | | 377,263 | | Retained Earnings | | 413,657 | | | 406,052 | |
Accumulated Other Comprehensive Income (Loss) | | 614 | | | (7,033) | | |
Accumulated Other Comprehensive Income | | Accumulated Other Comprehensive Income | | 8,814 | | | 7,745 | |
Total Shareholders’ Equity | Total Shareholders’ Equity | | 496,545 | | | 474,602 | | Total Shareholders’ Equity | | 622,143 | | | 525,960 | |
Total Liabilities and Shareholders’ Equity | Total Liabilities and Shareholders’ Equity | | $ | 979,048 | | | $ | 978,735 | | Total Liabilities and Shareholders’ Equity | | $ | 1,118,754 | | | $ | 1,021,506 | |
See accompanying notes to Condensed Consolidated Financial Statements.
Ducommun Incorporated and Subsidiaries
Condensed Consolidated Statements of Income
(Unaudited)
(Dollars in thousands, except per share amounts)
| | | | Three Months Ended | | Six Months Ended | | | Three Months Ended | | Six Months Ended |
| | | July 2, 2022 | | July 3, 2021 | | July 2, 2022 | | July 3, 2021 | | | July 1, 2023 | | July 2, 2022 | | July 1, 2023 | | July 2, 2022 |
Net Revenues | Net Revenues | | $ | 174,198 | | | $ | 160,192 | | | $ | 337,679 | | | $ | 317,343 | | Net Revenues | | $ | 187,320 | | | $ | 174,198 | | | $ | 368,511 | | | $ | 337,679 | |
Cost of Sales | Cost of Sales | | 139,556 | | | 123,410 | | | 270,562 | | | 247,461 | | Cost of Sales | | 147,198 | | | 139,556 | | | 291,622 | | | 270,562 | |
Gross Profit | Gross Profit | | 34,642 | | | 36,782 | | | 67,117 | | | 69,882 | | Gross Profit | | 40,122 | | | 34,642 | | | 76,889 | | | 67,117 | |
Selling, General and Administrative Expenses | Selling, General and Administrative Expenses | | 24,185 | | | 23,690 | | | 47,537 | | | 46,180 | | Selling, General and Administrative Expenses | | 30,348 | | | 24,185 | | | 56,573 | | | 47,537 | |
Restructuring Charges | Restructuring Charges | | 2,703 | | | — | | | 2,703 | | | — | | Restructuring Charges | | 4,769 | | | 2,703 | | | 8,939 | | | 2,703 | |
Operating Income | Operating Income | | 7,754 | | | 13,092 | | | 16,877 | | | 23,702 | | Operating Income | | 5,005 | | | 7,754 | | | 11,377 | | | 16,877 | |
Interest Expense | Interest Expense | | (2,656) | | | (2,857) | | | (5,058) | | | (5,663) | | Interest Expense | | (5,735) | | | (2,656) | | | (9,954) | | | (5,058) | |
| Other Income | Other Income | | — | | | — | | | 3,000 | | | — | | Other Income | | 4,059 | | | — | | | 7,945 | | | 3,000 | |
Income Before Taxes | Income Before Taxes | | 5,098 | | | 10,235 | | | 14,819 | | | 18,039 | | Income Before Taxes | | 3,329 | | | 5,098 | | | 9,368 | | | 14,819 | |
Income Tax Expense | Income Tax Expense | | 951 | | | 1,812 | | | 2,573 | | | 2,921 | | Income Tax Expense | | 955 | | | 951 | | | 1,763 | | | 2,573 | |
Net Income | Net Income | | $ | 4,147 | | | $ | 8,423 | | | $ | 12,246 | | | $ | 15,118 | | Net Income | | $ | 2,374 | | | $ | 4,147 | | | $ | 7,605 | | | $ | 12,246 | |
Earnings Per Share | Earnings Per Share | | | | | | | | | Earnings Per Share | | | | | | | | |
Basic earnings per share | Basic earnings per share | | $ | 0.34 | | | $ | 0.71 | | | $ | 1.02 | | | $ | 1.28 | | Basic earnings per share | | $ | 0.18 | | | $ | 0.34 | | | $ | 0.59 | | | $ | 1.02 | |
Diluted earnings per share | Diluted earnings per share | | $ | 0.34 | | | $ | 0.69 | | | $ | 0.99 | | | $ | 1.23 | | Diluted earnings per share | | $ | 0.17 | | | $ | 0.34 | | | $ | 0.58 | | | $ | 0.99 | |
Weighted-Average Number of Common Shares Outstanding | Weighted-Average Number of Common Shares Outstanding | | Weighted-Average Number of Common Shares Outstanding | |
Basic | Basic | | 12,070 | | | 11,878 | | | 12,029 | | | 11,834 | | Basic | | 13,403 | | | 12,070 | | | 12,799 | | | 12,029 | |
Diluted | Diluted | | 12,333 | | | 12,248 | | | 12,337 | | | 12,248 | | Diluted | | 13,599 | | | 12,333 | | | 13,075 | | | 12,337 | |
See accompanying notes to Condensed Consolidated Financial Statements.
Ducommun Incorporated and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
(Dollars in thousands)
| | | Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended |
| | July 2, 2022 | | July 3, 2021 | | July 2, 2022 | | July 3, 2021 | | July 1, 2023 | | July 2, 2022 | | July 1, 2023 | | July 2, 2022 |
Net Income | Net Income | | $ | 4,147 | | | $ | 8,423 | | | $ | 12,246 | | | $ | 15,118 | | Net Income | | $ | 2,374 | | | $ | 4,147 | | | $ | 7,605 | | | $ | 12,246 | |
Other Comprehensive Income, Net of Tax: | Other Comprehensive Income, Net of Tax: | | Other Comprehensive Income, Net of Tax: | |
Amortization of actuarial loss and prior service costs, net of tax of $35 and $77 for the three months ended July 2, 2022 and July 3, 2021, respectively and $71 and $153 for the six months ended July 2, 2022 and July 3, 2021, respectively | | 111 | | | 245 | | | 221 | | | 490 | | |
Amortization of actuarial losses and prior service costs, net of tax of $14 and $35 for the three months ended July 1, 2023 and July 2, 2022, respectively and $27 and $71 for the six months ended July 1, 2023 and July 2, 2022, respectively | | Amortization of actuarial losses and prior service costs, net of tax of $14 and $35 for the three months ended July 1, 2023 and July 2, 2022, respectively and $27 and $71 for the six months ended July 1, 2023 and July 2, 2022, respectively | | 41 | | | 111 | | | 83 | | | 221 | |
| Change in unrealized gains on cash flow hedges, net of tax of $777 and zero for the three months ended July 2, 2022 and July 3, 2021, respectively and $2,286 and zero for the six months ended July 2, 2022 and July 3, 2021, respectively | | 2,523 | | | — | | | 7,426 | | | — | | |
Change in net unrealized gains on cash flow hedges, net of tax of $968 and $777 for the three months ended July 1, 2023 and July 2, 2022, respectively and $306 and $2,286 for the six months ended July 1, 2023 and July 2, 2022, respectively | | Change in net unrealized gains on cash flow hedges, net of tax of $968 and $777 for the three months ended July 1, 2023 and July 2, 2022, respectively and $306 and $2,286 for the six months ended July 1, 2023 and July 2, 2022, respectively | | 3,116 | | | 2,523 | | | 986 | | | 7,426 | |
Other Comprehensive Income, Net of Tax | Other Comprehensive Income, Net of Tax | | 2,634 | | | 245 | | | 7,647 | | | 490 | | Other Comprehensive Income, Net of Tax | | 3,157 | | | 2,634 | | | 1,069 | | | 7,647 | |
Comprehensive Income | Comprehensive Income | | $ | 6,781 | | | $ | 8,668 | | | $ | 19,893 | | | $ | 15,608 | | Comprehensive Income | | $ | 5,531 | | | $ | 6,781 | | | $ | 8,674 | | | $ | 19,893 | |
See accompanying notes to Condensed Consolidated Financial Statements.
Ducommun Incorporated and Subsidiaries
Condensed Consolidated Statements of Changes in Shareholders’ Equity
(Unaudited)
(Dollars in thousands)
| | | Shares Outstanding | | Common Stock | | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total Shareholders’ Equity | | |
Balance at December 31, 2020 | | 11,728,212 | | | $ | 117 | | | | $ | 97,090 | | | $ | 241,727 | | | $ | (9,600) | | | $ | 329,334 | | | |
Net income | | — | | | — | | | | — | | | 6,695 | | | — | | | 6,695 | | | |
Other comprehensive income, net of tax | | — | | | — | | | | — | | | — | | | 245 | | | 245 | | | |
Employee stock purchase plan | | 31,580 | | | — | | | | 1,558 | | | — | | | — | | | 1,558 | | | |
Stock options exercised | | 17,872 | | | — | | | | 610 | | | — | | | — | | | 610 | | | |
Stock awards vested | | 178,827 | | | 2 | | | | (2) | | | — | | | — | | | — | | | |
Stock repurchased related to the exercise of stock options and stock awards vested | | (106,894) | | | (1) | | | | (6,004) | | | — | | | — | | | (6,005) | | | |
Stock-based compensation | | — | | | — | | | | 3,133 | | | — | | | — | | | 3,133 | | | |
Balance at April 3, 2021 | | 11,849,597 | | | 118 | | | | 96,385 | | | 248,422 | | | (9,355) | | | 335,570 | | | |
Net income | | — | | | — | | | | — | | | 8,423 | | | — | | | 8,423 | | | |
Other comprehensive income, net of tax | | — | | | — | | | | — | | | — | | | 245 | | | 245 | | | |
| Stock options exercised | | 13,655 | | | — | | | | 510 | | | — | | | — | | | 510 | | | |
Stock awards vested | | 65,181 | | | 1 | | | | (1) | | | — | | | — | | | — | | | |
Stock repurchased related to the exercise of stock options and stock awards vested | | (33,626) | | | — | | | | (1,887) | | | — | | | — | | | (1,887) | | | |
Stock-based compensation | | — | | | — | | | | 2,609 | | | — | | | — | | | 2,609 | | | |
Balance at July 3, 2021 | | 11,894,807 | | | $ | 119 | | | | $ | 97,616 | | | $ | 256,845 | | | $ | (9,110) | | | $ | 345,470 | | | |
| | | | | | | | | | | | | | | | | Shares Outstanding | | Common Stock | | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total Shareholders’ Equity | |
Balance at December 31, 2021 | Balance at December 31, 2021 | | 11,925,087 | | | $ | 119 | | | | $ | 104,253 | | | $ | 377,263 | | | $ | (7,033) | | | $ | 474,602 | | | Balance at December 31, 2021 | | 11,925,087 | | | $ | 119 | | | | $ | 104,253 | | | $ | 377,263 | | | $ | (7,033) | | | $ | 474,602 | | |
Net income | Net income | | — | | | — | | | | — | | | 8,099 | | | — | | | 8,099 | | | Net income | | — | | | — | | | | — | | | 8,099 | | | — | | | 8,099 | | |
Other comprehensive income, net of tax | Other comprehensive income, net of tax | | — | | | — | | | | — | | | — | | | 5,013 | | | 5,013 | | | Other comprehensive income, net of tax | | — | | | — | | | | — | | | — | | | 5,013 | | | 5,013 | | |
Employee stock purchase plan | Employee stock purchase plan | | 31,686 | | | — | | | | 1,386 | | | — | | | — | | | 1,386 | | | Employee stock purchase plan | | 31,686 | | | — | | | | 1,386 | | | — | | | — | | | 1,386 | | |
Stock options exercised | Stock options exercised | | 48,119 | | | 1 | | | | 1,444 | | | — | | | — | | | 1,445 | | | Stock options exercised | | 48,119 | | | 1 | | | | 1,444 | | | — | | | — | | | 1,445 | | |
Stock awards vested | Stock awards vested | | 117,387 | | | 1 | | | | (1) | | | — | | | — | | | — | | | Stock awards vested | | 117,387 | | | 1 | | | | (1) | | | — | | | — | | | — | | |
Stock repurchased related to the exercise of stock options and stock awards vested | Stock repurchased related to the exercise of stock options and stock awards vested | | (89,334) | | | (1) | | | | (4,428) | | | — | | | — | | | (4,429) | | | Stock repurchased related to the exercise of stock options and stock awards vested | | (89,334) | | | (1) | | | | (4,428) | | | — | | | — | | | (4,429) | | |
Stock-based compensation | Stock-based compensation | | — | | | — | | | | 1,590 | | | — | | | — | | | 1,590 | | | Stock-based compensation | | — | | | — | | | | 1,590 | | | — | | | — | | | 1,590 | | |
Balance at April 2, 2022 | Balance at April 2, 2022 | | 12,032,945 | | | 120 | | | | 104,244 | | | 385,362 | | | (2,020) | | | 487,706 | | | Balance at April 2, 2022 | | 12,032,945 | | | 120 | | | | 104,244 | | | 385,362 | | | (2,020) | | | 487,706 | | |
Net income | Net income | | — | | | — | | | | — | | | 4,147 | | | — | | | 4,147 | | | Net income | | — | | | — | | | | — | | | 4,147 | | | — | | | 4,147 | | |
Other comprehensive income, net of tax | Other comprehensive income, net of tax | | — | | | — | | | | — | | | — | | | 2,634 | | | 2,634 | | | Other comprehensive income, net of tax | | — | | | — | | | | — | | | — | | | 2,634 | | | 2,634 | | |
| Stock options exercised | Stock options exercised | | 33,093 | | | — | | | | 1,029 | | | — | | | — | | | 1,029 | | | Stock options exercised | | 33,093 | | | — | | | | 1,029 | | | — | | | — | | | 1,029 | | |
Stock awards vested | Stock awards vested | | 42,962 | | | 1 | | | | (1) | | | — | | | — | | | — | | | Stock awards vested | | 42,962 | | | 1 | | | | (1) | | | — | | | — | | | — | | |
Stock repurchased related to the exercise of stock options and stock awards vested | Stock repurchased related to the exercise of stock options and stock awards vested | | (41,132) | | | — | | | | (2,025) | | | — | | | — | | | (2,025) | | | Stock repurchased related to the exercise of stock options and stock awards vested | | (41,132) | | | — | | | | (2,025) | | | — | | | — | | | (2,025) | | |
Stock-based compensation | Stock-based compensation | | — | | | — | | | | 3,054 | | | — | | | — | | | 3,054 | | | Stock-based compensation | | — | | | — | | | | 3,054 | | | — | | | — | | | 3,054 | | |
Balance at July 2, 2022 | Balance at July 2, 2022 | | 12,067,868 | | | $ | 121 | | | | $ | 106,301 | | | $ | 389,509 | | | $ | 614 | | | $ | 496,545 | | | Balance at July 2, 2022 | | 12,067,868 | | | $ | 121 | | | | $ | 106,301 | | | $ | 389,509 | | | $ | 614 | | | $ | 496,545 | | |
| Balance at December 31, 2022 | | Balance at December 31, 2022 | | 12,106,285 | | | $ | 121 | | | | $ | 112,042 | | | $ | 406,052 | | | $ | 7,745 | | | $ | 525,960 | | |
Net income | | Net income | | — | | | — | | | | — | | | 5,231 | | | — | | | 5,231 | | |
Other comprehensive income, net of tax | | Other comprehensive income, net of tax | | — | | | — | | | | — | | | — | | | (2,088) | | | (2,088) | | |
Employee stock purchase plan | | Employee stock purchase plan | | 26,833 | | | — | | | | 1,307 | | | — | | | — | | | 1,307 | | |
Stock options exercised | | Stock options exercised | | 25,561 | | | — | | | | 737 | | | — | | | — | | | 737 | | |
Stock awards vested | | Stock awards vested | | 173,249 | | | 2 | | | | (2) | | | — | | | — | | | — | | |
Stock repurchased related to the exercise of stock options and stock awards vested | | Stock repurchased related to the exercise of stock options and stock awards vested | | (100,224) | | | (1) | | | | (5,479) | | | — | | | — | | | (5,480) | | |
Stock-based compensation | | Stock-based compensation | | — | | | — | | | | 2,717 | | | — | | | — | | | 2,717 | | |
Balance at April 1, 2023 | | Balance at April 1, 2023 | | 12,231,704 | | | 122 | | | | 111,322 | | | 411,283 | | | 5,657 | | | 528,384 | | |
Net income | | Net income | | — | | | — | | | | — | | | 2,374 | | | — | | | 2,374 | | |
Other comprehensive income, net of tax | | Other comprehensive income, net of tax | | — | | | — | | | | — | | | — | | | 3,157 | | | 3,157 | | |
Issuance of common stock in public offering, net of issuance costs | | Issuance of common stock in public offering, net of issuance costs | | 2,300,000 | | | 23 | | | | 85,084 | | | — | | | — | | | 85,107 | | |
| Stock options exercised | | Stock options exercised | | 1,771 | | | — | | | | 70 | | | — | | | — | | | 70 | | |
Stock awards vested | | Stock awards vested | | 54,814 | | | 1 | | | | (1) | | | — | | | — | | | — | | |
Stock repurchased related to the exercise of stock options and stock awards vested | | Stock repurchased related to the exercise of stock options and stock awards vested | | (18,700) | | | — | | | | (1,142) | | | — | | | — | | | (1,142) | | |
Stock-based compensation | | Stock-based compensation | | — | | | — | | | | 4,193 | | | — | | | — | | | 4,193 | | |
Balance at July 1, 2023 | | Balance at July 1, 2023 | | 14,569,589 | | | $ | 146 | | | | $ | 199,526 | | | $ | 413,657 | | | $ | 8,814 | | | $ | 622,143 | | |
See accompanying notes to Condensed Consolidated Financial Statements.
Ducommun Incorporated and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
| | | Six Months Ended | | Six Months Ended |
| | July 2, 2022 | | July 3, 2021 | | July 1, 2023 | | July 2, 2022 |
Cash Flows from Operating Activities | Cash Flows from Operating Activities | | | | | Cash Flows from Operating Activities | | | | |
Net Income | Net Income | | $ | 12,246 | | | $ | 15,118 | | Net Income | | $ | 7,605 | | | $ | 12,246 | |
Adjustments to Reconcile Net Income to | Adjustments to Reconcile Net Income to | | Adjustments to Reconcile Net Income to | |
Net Cash Provided by (Used in) Operating Activities: | | |
Net Cash (Used in) Provided by Operating Activities: | | Net Cash (Used in) Provided by Operating Activities: | |
Depreciation and amortization | Depreciation and amortization | | 15,666 | | | 13,908 | | Depreciation and amortization | | 15,943 | | | 15,666 | |
Non-cash operating lease cost | Non-cash operating lease cost | | 3,582 | | | 1,563 | | Non-cash operating lease cost | | 2,953 | | | 3,582 | |
| Inventory write down and property and equipment impairment due to restructuring | Inventory write down and property and equipment impairment due to restructuring | | 832 | | | — | | Inventory write down and property and equipment impairment due to restructuring | | 843 | | | 832 | |
Stock-based compensation expense | Stock-based compensation expense | | 5,190 | | | 5,742 | | Stock-based compensation expense | | 8,117 | | | 5,190 | |
Deferred income taxes | Deferred income taxes | | (4,117) | | | 1,002 | | Deferred income taxes | | (2,056) | | | (4,117) | |
| Recovery of credit losses | | (449) | | | (74) | | |
Provision for (recovery of) credit losses | | Provision for (recovery of) credit losses | | 473 | | | (449) | |
| Recognition of insurance recoveries | | Recognition of insurance recoveries | | (3,886) | | | — | |
| Other | Other | | 382 | | | 357 | | Other | | 444 | | | 382 | |
Changes in Assets and Liabilities: | Changes in Assets and Liabilities: | | Changes in Assets and Liabilities: | |
Accounts receivable | Accounts receivable | | (11,597) | | | (8,646) | | Accounts receivable | | 12,252 | | | (11,597) | |
Contract assets | Contract assets | | (6,139) | | | (18,910) | | Contract assets | | 1,454 | | | (6,139) | |
Inventories | Inventories | | (13,821) | | | (15,381) | | Inventories | | (21,243) | | | (13,821) | |
Production cost of contracts | Production cost of contracts | | 879 | | | (1,558) | | Production cost of contracts | | (401) | | | 879 | |
Other assets | Other assets | | (136) | | | (1,147) | | Other assets | | 343 | | | (136) | |
Accounts payable | Accounts payable | | 15,674 | | | 3,475 | | Accounts payable | | (8,177) | | | 15,674 | |
Contract liabilities | Contract liabilities | | (5,356) | | | (6,394) | | Contract liabilities | | (15,349) | | | (5,356) | |
Operating lease liabilities | Operating lease liabilities | | (2,930) | | | (1,566) | | Operating lease liabilities | | (2,471) | | | (2,930) | |
Accrued and other liabilities | Accrued and other liabilities | | (3,788) | | | (5,307) | | Accrued and other liabilities | | (6,591) | | | (3,788) | |
Net Cash Provided by (Used in) Operating Activities | | 6,118 | | | (17,818) | | |
Net Cash (Used in) Provided by Operating Activities | | Net Cash (Used in) Provided by Operating Activities | | (9,747) | | | 6,118 | |
Cash Flows from Investing Activities | Cash Flows from Investing Activities | | | | | Cash Flows from Investing Activities | | | | |
Purchases of property and equipment | Purchases of property and equipment | | (9,068) | | | (7,367) | | Purchases of property and equipment | | (10,919) | | | (9,068) | |
Proceeds from sale of assets | Proceeds from sale of assets | | 51 | | | 531 | | Proceeds from sale of assets | | — | | | 51 | |
| Payments for acquisition of BLR Aerospace L.L.C., net of cash acquired | | Payments for acquisition of BLR Aerospace L.L.C., net of cash acquired | | (114,353) | | | — | |
Post closing cash received from the acquisition of Magnetic Seal LLC, net | Post closing cash received from the acquisition of Magnetic Seal LLC, net | | 365 | | | — | | Post closing cash received from the acquisition of Magnetic Seal LLC, net | | — | | | 365 | |
Net Cash Used in Investing Activities | Net Cash Used in Investing Activities | | (8,652) | | | (6,836) | | Net Cash Used in Investing Activities | | (125,272) | | | (8,652) | |
Cash Flows from Financing Activities | Cash Flows from Financing Activities | | | | | Cash Flows from Financing Activities | | | | |
| Borrowings from senior secured revolving credit facility | Borrowings from senior secured revolving credit facility | | — | | | 20,000 | | Borrowings from senior secured revolving credit facility | | 133,500 | | | — | |
Repayments of senior secured revolving credit facility | Repayments of senior secured revolving credit facility | | — | | | (30,000) | | Repayments of senior secured revolving credit facility | | (99,700) | | | — | |
| Repayments of term loans | Repayments of term loans | | (33,500) | | | (4,426) | | Repayments of term loans | | (3,125) | | | (33,500) | |
Repayments of other debt | Repayments of other debt | | (168) | | | (170) | | Repayments of other debt | | (165) | | | (168) | |
| Proceeds from issuance of common stock in public offering, net of issuance costs | | Proceeds from issuance of common stock in public offering, net of issuance costs | | 85,107 | | | — | |
| Net cash paid upon issuance of common stock under stock plans | Net cash paid upon issuance of common stock under stock plans | | (2,595) | | | (5,214) | | Net cash paid upon issuance of common stock under stock plans | | (4,038) | | | (2,595) | |
Net Cash Used in Financing Activities | | (36,263) | | | (19,810) | | |
Net Cash Provided by (Used in) Financing Activities | | Net Cash Provided by (Used in) Financing Activities | | 111,579 | | | (36,263) | |
Net Decrease in Cash and Cash Equivalents | Net Decrease in Cash and Cash Equivalents | | (38,797) | | | (44,464) | | Net Decrease in Cash and Cash Equivalents | | (23,440) | | | (38,797) | |
Cash and Cash Equivalents at Beginning of Period | Cash and Cash Equivalents at Beginning of Period | | 76,316 | | | 56,466 | | Cash and Cash Equivalents at Beginning of Period | | 46,246 | | | 76,316 | |
Cash and Cash Equivalents at End of Period | Cash and Cash Equivalents at End of Period | | $ | 37,519 | | | $ | 12,002 | | Cash and Cash Equivalents at End of Period | | $ | 22,806 | | | $ | 37,519 | |
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 innovative, value-added proprietary products and manufacturing solutions 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 2two primary businesses: the Electronic Systems segment (“Electronic Systems”) and the Structural Systems segment (“Structural Systems”), 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. Both 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, 20212022 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, 2021.2022 (“2022 Form 10-K”). The financial information included in this Quarterly Report on Form 10-Q (“Form 10-Q”) should be read in conjunction with our Annual Report onthe 2022 Form 10-K for the year ended December 31, 2021.10-K.
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, changes in shareholders’ equity, and cash flows in accordance with GAAP for the periods covered by this Quarterly Report on Form 10-Q. The results of operations for the three and six months ended July 2, 20221, 2023 are not necessarily indicative of the results to be expected for the full year ending December 31, 2022.2023.
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 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.
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 contract liabilities), revenues and expenses, and related disclosures of contingent assets and liabilities. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
Subsequent Events
Subsequent to our quarter ended July 2, 2022, on July 14, 2022, we completed a refinancing of all our existing debt by entering into a new term loan (“2022 Term Loan”) and a new revolving credit facility (“2022 Revolving Credit Facility”). The 2022 Term Loan is a $250.0 million senior secured loan that matures on July 14, 2027. The 2022 Revolving Credit Facility is a $200.0 million senior secured revolving credit facility that matures on July 14, 2027. The 2022 Term Loan and 2022 Revolving Credit Facility, collectively, are the new credit facilities (“2022 Credit Facilities”). At closing, we utilized the entire amount of the 2022 Term Loan and combined with cash on hand, extinguished the existing 2019 term loan and the existing 2018 term loan. There was no balance outstanding on the 2019 revolving credit facility. At the same leverage ratio, the interest rate spread in our 2022 Credit Facilities is lower then the interest rate spread in our credit facilities that were in effect as of July 2, 2022.
Subsequent to our quarter ended July 2, 2022, on July 14, 2022, as a result of completing a refinancing of our existing debt, we were required to complete an amendment to our derivative contracts with an aggregate notional amount of $150.0 million we had entered into in November 2021. The existing derivative contracts were based on U.S. dollar-one month LIBOR, which was required to be amended to one month Term SOFR, as borrowings using LIBOR are no longer available under the 2022 Credit Facilities. We have elected to apply certain hedge accounting optional expedients under ASC 848 that will allow us to continue the method of assessing hedge effectiveness as documented in the original hedge documentation and allows the reference rate on the hypothetical derivative to match the reference rate on the hedging instrument. These derivative contracts are forward interest rate swaps, all with an effective date of January 1, 2024 and terminating on January 1, 2031.
Supplemental Cash Flow Information | | | (Dollars in thousands) | | (Dollars in thousands) |
| | Six Months Ended | | Six Months Ended |
| | July 2, 2022 | | July 3, 2021 | | July 1, 2023 | | July 2, 2022 |
Interest paid | Interest paid | | $ | 4,540 | | | $ | 5,132 | | Interest paid | | $ | 9,529 | | | $ | 4,540 | |
Taxes paid, net | Taxes paid, net | | $ | 1,790 | | | $ | 1,584 | | Taxes paid, net | | $ | 10,038 | | | $ | 1,790 | |
Non-cash activities: | Non-cash activities: | | Non-cash activities: | |
Purchases of property and equipment not paid | Purchases of property and equipment not paid | | $ | 2,761 | | | $ | 1,567 | | Purchases of property and equipment not paid | | $ | 1,291 | | | $ | 2,761 | |
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: | | | (Dollars in thousands, except per share data) | | (Dollars in thousands, except per share data) | | (Dollars in thousands, except per share data) | | (Dollars in thousands, except per share data) |
| | Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended |
| | | July 2, 2022 | | July 3, 2021 | | July 2, 2022 | | July 3, 2021 | | | July 1, 2023 | | July 2, 2022 | | July 1, 2023 | | July 2, 2022 |
Net income | Net income | | $ | 4,147 | | | $ | 8,423 | | | $ | 12,246 | | | $ | 15,118 | | Net income | | $ | 2,374 | | | $ | 4,147 | | | $ | 7,605 | | | $ | 12,246 | |
Weighted-average number of common shares outstanding | Weighted-average number of common shares outstanding | | | | | | | | | Weighted-average number of common shares outstanding | | | | | | | | |
Basic weighted-average common shares outstanding | Basic weighted-average common shares outstanding | | 12,070 | | | 11,878 | | | 12,029 | | | 11,834 | | Basic weighted-average common shares outstanding | | 13,403 | | | 12,070 | | | 12,799 | | | 12,029 | |
Dilutive potential common shares | Dilutive potential common shares | | 263 | | | 370 | | | 308 | | | 414 | | Dilutive potential common shares | | 196 | | | 263 | | | 276 | | | 308 | |
Diluted weighted-average common shares outstanding | Diluted weighted-average common shares outstanding | | 12,333 | | | 12,248 | | | 12,337 | | | 12,248 | | Diluted weighted-average common shares outstanding | | 13,599 | | | 12,333 | | | 13,075 | | | 12,337 | |
Earnings per share | Earnings per share | | | | | | | | | Earnings per share | | | | | | | | |
Basic | Basic | | $ | 0.34 | | | $ | 0.71 | | | $ | 1.02 | | | $ | 1.28 | | Basic | | $ | 0.18 | | | $ | 0.34 | | | $ | 0.59 | | | $ | 1.02 | |
Diluted | Diluted | | $ | 0.34 | | | $ | 0.69 | | | $ | 0.99 | | | $ | 1.23 | | Diluted | | $ | 0.17 | | | $ | 0.34 | | | $ | 0.58 | | | $ | 0.99 | |
Potentially dilutive stock awards, as shown below, were excluded from the computation of diluted earnings per share because their inclusion would have been anti-dilutive. However, these awards may be potentially dilutive common shares in the future. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | (In thousands) | | (In thousands) |
| | Three Months Ended | | Six Months Ended |
| | July 2, 2022 | | July 3, 2021 | | July 2, 2022 | | July 3, 2021 |
Stock options and stock units | | 99 | | | 7 | | | 42 | | | 67 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | (In thousands) | | (In thousands) |
| | Three Months Ended | | Six Months Ended |
| | July 1, 2023 | | July 2, 2022 | | July 1, 2023 | | July 2, 2022 |
Stock options and stock units | | 111 | | | 99 | | | 56 | | | 42 | |
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 which are included as cash and cash equivalents. We also have forward interest rate swap agreements and the fair value of the forward interest rate swap 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 July 2, 2022.1, 2023.
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, and 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, or a derivative instrument that will not be accounted for using hedge accounting methods. In November 2021, we entered into forward interest rate swap agreements with an aggregate notional amount of $150.0 million, all with an effective date of January 1, 2024 (“Forward Interest Rate Swaps”) to manage our exposure to interest rate movements on a portion of our debt. As such, at the time we have made the following cash flow hedging relationship elections to qualify for hedge accounting treatment related toentered into the Forward Interest Rate Swaps, there was a high probability of forecasted interest payments on our debts occurring and the swaps are highly effective in offsetting those interest payments and therefore, we elected to apply cash flow hedge accounting. In July 2022, as a result of refinancing all our current term loans mature before the expirationexisting debt, which allows borrowing based on a Secured Overnight Financing Rate (“SOFR”), we were required to complete an amendment of the Forward Interest Rate Swaps: 1) ProbabilitySwaps from One Month London Interbank Offered Rate (“LIBOR”) to One Month Term SOFR (“Amended Forward Interest Rate Swaps”), which occurred on the same day. After the transition of forecasted transactions,the Forward Interest Rate Swaps and 2) Assessmentdebt to SOFR was completed, we determined the hedging relationship was still highly effective as of effectiveness.the amendment date. See Note 7. As of July 2, 2022,1, 2023, 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 hedged item. 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. Since the Amended Forward Interest Rate Swaps are not effective until January 1, 2024, in both the three and six months ended July 2, 2022, we only recordedrecord the changes in the fair value of the derivative instruments that were highly effective and that were designated and qualified as cash flow hedges of $3.3 millionhedges. As such, during the three months ended July 1, 2023 and $9.7 million, respectively, in other long term assets, other long term liabilities, and accumulatedJuly 2, 2022, we recorded the unrealized gain (loss) to other comprehensive income (loss). of $3.1 million and $2.5 million, respectively, and the associated change to other current assets, other assets, and deferred income taxes. During the three and six months ended July 3, 2021,1, 2023 and July 2, 2022, we had no derivative instruments.recorded the unrealized gain (loss) to other comprehensive income (loss) of $1.0 million and $7.4 million, respectively, and the associated change to other current assets, other assets, and deferred income taxes.
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. Inventoried costs include raw materials, outside processing, direct labor and allocated overhead, adjusted for any abnormal amounts of idle performance center 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. The majority of our revenues are recognized over time, 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.
Accumulated Other Comprehensive LossIncome
Accumulated other comprehensive loss,income, 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.
Revenue Recognition
Our customers typically engage us to manufacture products based on designs and specifications provided by the end-use customer. This requires 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 agreements and programs that can span several years. We recognize revenue under Accounting Standards CodificationASC 606, “Revenue from Contracts with Customers” (“ASC 606”), which utilizes a five-step model.
The definition of a contract for us is typically defined as a customer purchase order as this is when we achieve an 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. AtIn 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 customer. When that occurs, 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 are highly interrelated or meetmet the 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.
We manufacture most products to customer specifications and the product cannot be easily modified to satisfyfor another customer’s order.customer. As such, these products are deemed to have no alternative use once the manufacturing process begins. In the event the customer invokes a termination for convenience clause, we would be entitled to costs incurred to date plus a reasonable profit. Contract costs typically include labor, materials, overhead, and when applicable, subcontractor costs. For most of our products, we are building assets with no alternative use and have enforceable right to payment, and thus, we recognize revenue using the over time method.
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 determinemeasure 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.
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 progress completed (and related profitability) on our contracts, we review and update our contract-related estimates on a regular basis. We recognize such adjustments under the cumulative catch-up method. Under this method, the impact of the adjustment is recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance is recognized using the adjusted estimate.
The impact of adjustments in contract estimates on our operating earnings can be reflected in either operating costs and expenses or revenue.
Net cumulative catch up adjustments on gross profit recorded were not material for both the three and six months ended July 2, 20221, 2023 and July 3, 2021.2, 2022.
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 work performed but not yet billed. Similarly, when we receive payment before we ship our products to our customer and have met the shipping terms, a contract liability is created for the advance or progress payment. When a contract liability and a contract asset exist on the same contract, we report it on a net basis.
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. The provision for estimated losses on contracts is included as part of contract liabilities on the condensed consolidated balance sheets. As of July 2, 20221, 2023 and December 31, 2021,2022, provision for estimated losses on contracts were $3.6$6.8 million and $2.8$3.9 million, respectively.
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. As of July 2, 20221, 2023 and December 31, 2021,2022, production cost of contracts were $6.0$5.5 million and $8.0$5.7 million, respectively.
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 bill our customers. We bill our customers when we ship the products 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. When a contract liability and a contract asset exist on the same contract, we report it on a net basis.
Contract assets and contract liabilities from revenue contracts with customers are as follows: | | | (Dollars in thousands) | | (Dollars in thousands) |
| | July 2, 2022 | | December 31, 2021 | | July 1, 2023 | | December 31, 2022 |
Contract assets | Contract assets | | $ | 182,544 | | | $ | 176,405 | | Contract assets | | $ | 189,836 | | | $ | 191,290 | |
Contract liabilities | Contract liabilities | | $ | 36,721 | | | $ | 42,077 | | Contract liabilities | | $ | 31,719 | | | $ | 47,068 | |
The increasedecrease in our contract assets as of July 2, 20221, 2023 compared to December 31, 20212022 was primarily due to a net increasedecrease of products in work in process in the current period.
The decrease in our contract liabilities as of July 2, 20221, 2023 compared to December 31, 20212022 was primarily due to a net decrease of advance or progress payments received from our customers in the current period. We recognized $16.1$23.0 million of the contract liabilities as of December 31, 20212022 as revenues during the six months ended July 2, 2022.1, 2023.
Performance obligations are defined as customer placed purchase orders (“POs”) with firm fixed price and firm delivery dates. Our remaining performance obligations as of July 2, 20221, 2023 totaled $879.4$916.7 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 20232024 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: | | | (Dollars in thousands) | | (Dollars in thousands) | | (Dollars in thousands) | | (Dollars in thousands) |
| | Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended |
| | July 2 2022 | | July 3, 2021 | | July 2 2022 | | July 3, 2021 | | July 1 2023 | | July 2, 2022 | | July 1 2023 | | July 2, 2022 |
Consolidated Ducommun | Consolidated Ducommun | | | | | | | | | Consolidated Ducommun | | | | | | | | |
Military and space | Military and space | | $ | 106,680 | | | $ | 113,008 | | | $ | 206,014 | | | $ | 227,135 | | Military and space | | $ | 95,887 | | | $ | 106,680 | | | $ | 192,327 | | | $ | 206,014 | |
Commercial aerospace | Commercial aerospace | | 57,067 | | | 37,577 | | | 111,142 | | | 72,954 | | Commercial aerospace | | 78,247 | | | 57,067 | | | 151,297 | | | 111,142 | |
Industrial | Industrial | | 10,451 | | | 9,607 | | | 20,523 | | | 17,254 | | Industrial | | 13,186 | | | 10,451 | | | 24,887 | | | 20,523 | |
Total | Total | | $ | 174,198 | | | $ | 160,192 | | | $ | 337,679 | | | $ | 317,343 | | Total | | $ | 187,320 | | | $ | 174,198 | | | $ | 368,511 | | | $ | 337,679 | |
| Electronic Systems | Electronic Systems | | Electronic Systems | |
Military and space | Military and space | | $ | 80,187 | | | $ | 80,755 | | | $ | 152,007 | | | $ | 162,488 | | Military and space | | $ | 71,772 | | | $ | 80,187 | | | $ | 145,099 | | | $ | 152,007 | |
Commercial aerospace | Commercial aerospace | | 19,094 | | | 12,435 | | | 34,668 | | | 22,159 | | Commercial aerospace | | 22,166 | | | 19,094 | | | 42,764 | | | 34,668 | |
Industrial | Industrial | | 10,451 | | | 9,607 | | | 20,523 | | | 17,254 | | Industrial | | 13,186 | | | 10,451 | | | 24,887 | | | 20,523 | |
Total | Total | | $ | 109,732 | | | $ | 102,797 | | | $ | 207,198 | | | $ | 201,901 | | Total | | $ | 107,124 | | | $ | 109,732 | | | $ | 212,750 | | | $ | 207,198 | |
| Structural Systems | Structural Systems | | Structural Systems | |
Military and space | Military and space | | $ | 26,493 | | | $ | 32,253 | | | $ | 54,007 | | | $ | 64,647 | | Military and space | | $ | 24,115 | | | $ | 26,493 | | | $ | 47,228 | | | $ | 54,007 | |
Commercial aerospace | Commercial aerospace | | 37,973 | | | 25,142 | | | 76,474 | | | 50,795 | | Commercial aerospace | | 56,081 | | | 37,973 | | | 108,533 | | | 76,474 | |
Total | Total | | $ | 64,466 | | | $ | 57,395 | | | $ | 130,481 | | | $ | 115,442 | | Total | | $ | 80,196 | | | $ | 64,466 | | | $ | 155,761 | | | $ | 130,481 | |
Government Grant
In November 2021, we were awarded an Aviation Manufacturing Jobs Protection Program grant from the U.S. Department of Transportation (“AMJPP Grant”) of $4.0 million. As part of the award, we had to meet, and did complete, certain requirements over a six month performance period from November 15, 2021 to May 14, 2022, and as2022. As of our quarter ended July 2,December 31, 2022, we have completed all such requirements. As of July 2, 2022, we havehad received the entire $4.0 million grant balance, $2.0 million of the AMJPP Grant, allwhich was received during 2021 withand the remaining $2.0 million expectedremainder during 2022. We recorded no
reduction to be receivedcost of sales or selling, general and administrative expenses during 2022the three and included as other current assets.six months ended July 1, 2023. We recorded $0.9 million and $2.7 million as a reduction of cost of sales during the three and six months ended July 2, 2022, respectively, and $0.1 million and $0.3 million as a reduction of selling, general, and administrative expenses during the three and six months ended July 2, 2022, respectively. Cumulative through July 2,As of December 31, 2022, the requirements under the AMJPP Grant were completed and the entire $4.0 million awarded were received and thus, we havealso recorded the entire aggregate total of $3.6 million and $0.4 million as a reduction of cost of sales and selling, general and administrative expenses, respectively.
Recent Accounting Pronouncements
NewRecently Issued Accounting Guidance Adopted in 2022Standards
In August 2020,July 2023, the FASB issued ASU 2020-06, “Debt with Conversion2023-03, “Presentation of Financial Statements (Topic 205), Income Statement - Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Other Options (Subtopic 470-20)Compensation - Stock Compensation (Topic 718): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022 EITF Meeting, and Derivatives and HedgingStaff Accounting Bulletin Topic 6.B, Accounting Series Release 280 - Contracts in Entity’s Own Equity (Subtopic 815-40) - Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity”General Revision of Regulation S-X: Income or Loss Applicable to Common Stock” (“ASU 2020-06”2023-03”), which simplifies reportingamends or provides clarification onsupersedes various topics, including clarification that an entity should useSEC paragraphs within the weighted-average share count from each quarter when calculatingAccounting Standards Codification to conform to past SEC announcements and guidance issued by the year-to-date weighted-average share count. TheSEC. ASU 2023-03 does not provide any new guidance so there is no transition or effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years, which was our interim period beginning January 1, 2022. The adoption of this standarddate. ASU 2023-03 did not have a material impact on our condensed consolidated financial statements.
Recently Issued Accounting Standards
In March 2020,December 2022, the FASB issued ASU 2020-04,2022-06, “Reference Rate Reform (Topic 848), FacilitationDeferral of the EffectsSunset Date of Reference Rate Reform on Financial Reporting”Topic 848” (“ASU 2020-04”2022-06”), which provides optional guidance for a limited time for contracts that reference London Interbank Offered Rate (“LIBOR”), to easedefers the potential burden in accounting for, or recognizing the effects,sunset date of reference rate reform on financial reporting as a result of the cessation of LIBOR. The new guidance is effective at any time after March 12, 2020 but no later thanTopic 848 from December 31, 2022. We2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. Since we adopted ASU 2020-04 during 2022, ASU 2022-06 will not have made the following elections related toa material impact on our current cash flow hedging relationships as our current term loans mature before the expiration of the Forward Interest Rate Swaps: 1) Probability of forecasted transactions, and 2) Assessment of effectiveness.condensed consolidated financial statements. See Note 7.
Note 2. Business Combinations
BLR Aerospace, L.L.C. Acquisition
On April 25, 2023, we acquired 100.0% of the outstanding equity interests of BLR Aerospace, L.L.C. (“BLR”), a privately-held leading provider of aerodynamic systems that enhance the productivity, performance, and safety of rotary and fixed-wing aircraft on commercial and military platforms. BLR is located in Everett, Washington. The acquisition of BLR adds to our strategy to diversify and offer more customized, value-driven engineered products with aftermarket opportunities.
The initial purchase price for BLR was $115.0 million, net of cash acquired, all payable in cash, subject to adjustments for working capital. We paid a gross aggregate of $117.0 million in cash upon the closing of the transaction. We allocated the preliminary gross purchase price of $117.0 million to the assets acquired and liabilities assumed at their estimated fair values. The excess of the purchase price over the aggregate fair values of the net assets was recorded as goodwill.
The following table summarizes the preliminary estimated fair value of the assets acquired and liabilities assumed at the date of acquisition (in thousands):
| | | | | | | | |
| | Estimated Fair Value |
Cash | | $ | 2,656 | |
Accounts receivable | | 4,149 | |
Inventories | | 12,011 | |
Other current assets | | 891 | |
Property and equipment | | 2,632 | |
Operating lease right-of-use assets | | 874 | |
Intangible assets | | 55,500 | |
Goodwill | | 41,168 | |
| | |
Total assets acquired | | 119,881 | |
Current liabilities | | (2,145) | |
| | |
Other non-current liabilities | | (727) | |
Total liabilities assumed | | (2,872) | |
Total purchase price allocation | | $ | 117,009 | |
| | | | | | | | | | | | | | |
| | Useful Life (In years) | | Estimated Fair Value (In thousands) |
Intangible assets: | | | | |
Technology | | 23 | | $ | 35,600 | |
Customer relationships | | 10-22 | | 15,000 | |
Trade name | | 18 | | 4,900 | |
| | | | $ | 55,500 | |
The intangible assets acquired of $55.5 million were preliminarily determined based on the estimated fair values using valuation techniques consistent with the income approach to measure fair value, which represented Level 3 fair value measurements. The useful lives were estimated based on the underlying agreements or the future economic benefit expected to be received from the assets. The values for technology and trade name were assessed using the relief from royalty methodology, while the value for customer relationships was estimated based on a multi-period excess earnings approach. Inputs to the income approach models and other aspects of the allocation of the purchase price require judgment. The more significant inputs used in the technology intangible asset valuation include (i) projected revenue, (ii) technology decay rate, and (iii) the discount rate. The more significant inputs used in the customer relationships intangible asset valuation include (i) future revenue growth rates, (ii) projected earnings before interest, taxes, and amortization (“EBITA”), (iii) the customer attrition rates, and (iv) the discount rate.
The goodwill of $41.2 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, and an acquired assembled workforce. All the goodwill was assigned to the Structural Systems segment. The BLR acquisition, for tax purposes, is deemed an asset acquisition and thus, the goodwill recognized is deductible for income tax purposes.
Acquisition related transaction costs were not included as components of consideration transferred but have been expensed as incurred. Total acquisition-related transaction costs incurred by us were $0.5 million and $1.3 million during the three and six months ended July 1, 2023, respectively, and charged to selling, general and administrative expenses.
BLR’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 and were immaterial since the date of acquisition. Pro forma results of operations of the BLR acquisition have not been presented as the effect of the BLR acquisition was not material to our financial results.
Magnetic Seal LLC Acquisition
In December 2021, we acquired 100.0% of the outstanding equity interests of Magnetic Seal LLC (f/k/a Magnetic Seal Corporation, “MagSeal”), a privately-held leading provider of high-impact, military-proven magnetic seals for critical systems in aerospace and defense applications, offering sealing solutions that are engineered to perform in high-speed, high-vibration, and other challenging environments. MagSeal is located in Warren, Rhode Island. The acquisition of MagSeal will continue to advancecontinued the advancement our strategy to diversify and offer more customized, value-driven engineered products with aftermarket opportunities.
The original purchase price for MagSeal was $69.5 million, net of cash acquired, all payable in cash. We paid a gross aggregate of $71.3 million in cash upon the closing of the transaction. Subsequent to the closing of the transaction, during the three months ended July 2, 2022, as part of finalizing the working capital adjustment, we received $0.4 million back from the seller which lowered the purchase price to $69.1 million, net of cash acquired. We allocated the final gross purchase price of $70.9 million to the assets acquired and liabilities assumed at their estimated fair values. The estimated fair value of the assets acquired included $30.1 million of intangible assets, $4.5 million of inventories, $2.1 million of accounts receivable, $1.5 million of operating lease right-of-use assets, $0.5 million of property and equipment, $0.1 million of other current assets, and $2.3 million of liabilities assumed. The excess of the purchase price over the aggregate fair values of the net assets was recorded as goodwill.
The following table summarizes the final estimated fair value of the assets acquired and liabilities assumed at the date of acquisition (in thousands):
| | | | | | | | |
| | Estimated Fair Value |
Cash | | $ | 1,821 | |
Accounts receivable | | 2,093 | |
Inventories | | 4,546 | |
Other current assets | | 98 | |
Property and equipment | | 482 | |
Operating lease right-of-use assets | | 1,533 | |
Intangible assets | | 30,100 | |
Goodwill | | 32,577 | |
| | |
Total assets acquired | | 73,250 | |
Current liabilities | | (907) | |
| | |
Other non-current liabilities | | (1,408) | |
Total liabilities assumed | | (2,315) | |
Total purchase price allocation | | $ | 70,935 | |
| | | | | | | | | | | | | | |
| | Useful Life (In years) | | Estimated Fair Value (In thousands) |
Intangible assets: | | | | |
Customer relationships | | 19 | | $ | 24,800 | |
Backlog | | 2 | | 600 | |
Trade name | | Indefinite | | 4,700 | |
| | | | $ | 30,100 | |
$32.6 million was recorded as goodwill. The intangible assets acquired were comprised of $30.1$24.8 million were determined based on the estimated fair values using valuation techniques consistent with the income approach to measure fair value, which represented Level 3 fair value measurements. The useful lives were estimated based on the underlying agreements or the future economic benefit expected to be received from the assets. The value for customer relationships, $0.6 million for backlog, and backlog were estimated based on a multi-period excess earnings approach, while the value$4.7 million for trade name, was assessed using the relief from royalty methodology. Inputs to the income approach models and other aspectswere assigned an estimated useful life of the allocation of the purchase price require judgment. The more significant inputs used in the customer relationships intangible asset valuation include (i) future revenue growth rates, (ii) projected gross margins, (iii) the customer attrition rate,19 years, two years, and (iv) the discount rate.
The goodwill of $32.6 million arising from the acquisition is 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, and an acquired assembled workforce.indefinite, respectively. All the goodwill was assigned to the Structural Systems segment. The MagSeal acquisition, for tax purposes, iswas deemed an asset acquisition and thus, isthe goodwill recognized was deductible for income tax purposes.
Acquisition related transaction costs were not included as components of consideration transferred but have been expensed as incurred. Total acquisition-related transaction costs incurred by us were $0.9 million during 2021 and charged to selling, general and administrative expenses.
MagSeal’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 and were immaterial since the date of acquisition. Pro forma results of operations of the MagSeal acquisition have not been presented as the effect of the MagSeal acquisition was not material to our financial results.
Note 3. Restructuring Activities
Summary of 2022 Restructuring Plan
In April 2022, management approved and commenced a restructuring plan that will better position us for stronger performance. The restructuring plan will mainly reduce headcount and consolidate facilities. As a result of this restructuring plan, we analyzed the need to write-down inventory and impair long-lived assets, including operating lease right-of-use assets. During the three and six months ended July 2, 2022,1, 2023, we recorded total charges of $3.2 million.$4.8 million and $8.9 million, respectively. Cumulative through the six months ended July 1, 2023, we recorded aggregate total charges of $15.6 million ($0.5 million of which was recorded as cost of sales). As of July 2, 2022,1, 2023, we estimate the remaining amount of charges related to this initiative will be $3.0$5.0 million to $5.0$8.0 million in total pre-tax restructuring charges through 2023. Of these charges, we estimate $2.0$4.0 million to $3.0$6.0 million to be cash payments for employee separation and other facility consolidation related expenses, and $1.0 million to $2.0 million to be non-cash charges for impairment of long-lived assets.
In the Electronics Systems segment, we recorded $1.3charges (reversals) of $2.4 million, zero, and $(0.2) million during the three months ended July 2, 20221, 2023, for severance and benefits that were classified as restructuring charges.charges, accelerated depreciation of property and equipment that was classified as restructuring charges, and other restructuring reversals, respectively. We recorded charges (reversals) of $4.1 million, $0.1 million, and $(0.1) million during the six months ended July 1, 2023, for severance and benefits that were classified as restructuring charges, accelerated depreciation of property and equipment that was classified as restructuring charges, and other restructuring (reversals), respectively. Cumulative through the six months ended July 1, 2023, we recorded total charges for severance and benefits that were classified as restructuring charges, accelerated depreciation of property and equipment that was classified as restructuring charges, and other restructuring reversals of $7.6 million, $0.4 million, and $(0.1) million, respectively.
In the Structural Systems segment, we recorded $0.5$1.6 million, $1.1$0.4 million, and $0.3$0.5 million during the three months ended July 2, 20221, 2023 for severance and benefits that were classified as restructuring charges, accelerated depreciation of property and equipment that was classified as restructuring charges, and other restructuring charges, respectively. We recorded $3.3 million, $0.7 million, and $0.8 million during the six months ended July 1, 2023, for severance and benefits that were classified as restructuring charges, accelerated depreciation of property and equipment that was classified as restructuring charges, and other restructuring charges, respectively. Cumulative through the six months ended July 1, 2023, we recorded total charges for inventory write down that was classified as cost of sales, severance and benefits that were classified as restructuring charges, accelerated depreciation of property and equipment that was classified as restructuring charges, impairment of property and equipment that werewas classified as restructuring charges, and other restructuring charges of $0.5 million, $4.9 million, $1.2 million, $0.3 million, and $0.8 million, respectively.
Our restructuring activities during the six months ended July 2, 20221, 2023 were as follows (in thousands):
| | | December 31, 2021 | | Six Months Ended July 2, 2022 | | July 2, 2022 | | December 31, 2022 | | Six Months Ended July 1, 2023 | | July 1, 2023 |
| | Balance | | Charges | | Cash Payments | | Non-Cash Payments | | Change in Estimates | | Balance | | Balance | | Charges | | Cash Payments | | Non-Cash Payments | | Change in Estimates | | Balance |
Severance and benefits | Severance and benefits | | $ | — | | | $ | 2,399 | | | $ | (948) | | | $ | — | | | $ | — | | | $ | 1,451 | | Severance and benefits | | $ | 2,799 | | | $ | 7,402 | | | $ | (5,184) | | | $ | — | | | $ | — | | | $ | 5,017 | |
| Property and equipment impairment due to restructuring | | — | | | 304 | | | — | | | (304) | | | — | | | — | | |
Inventory write down | | — | | | 528 | | | — | | | (528) | | | — | | | — | | |
Property and equipment accelerated depreciation due to restructuring | | Property and equipment accelerated depreciation due to restructuring | | — | | | 844 | | | — | | | (844) | | | — | | | — | |
| Other | | Other | | — | | | 693 | | | (693) | | | — | | | — | | | — | |
Ending balance | Ending balance | | $ | — | | | $ | 3,231 | | | $ | (948) | | | $ | (832) | | | $ | — | | | $ | 1,451 | | Ending balance | | $ | 2,799 | | | $ | 8,939 | | | $ | (5,877) | | | $ | (844) | | | $ | — | | | $ | 5,017 | |
The restructuring activities accrual for severance and benefits of $1.5$5.0 million as of July 2, 20221, 2023 was included as part of accrued and other liabilities.
Note 4. Inventories
Inventories consisted of the following: | | | (Dollars in thousands) | | (Dollars in thousands) |
| | July 2, 2022 | | December 31, 2021 | | July 1, 2023 | | December 31, 2022 |
Raw materials and supplies | Raw materials and supplies | | $ | 138,637 | | | $ | 125,334 | | Raw materials and supplies | | $ | 178,571 | | | $ | 143,495 | |
Work in process | Work in process | | 21,556 | | | 20,609 | | Work in process | | 22,395 | | | 23,799 | |
Finished goods | Finished goods | | 3,998 | | | 4,995 | | Finished goods | | 3,499 | | | 3,917 | |
| Total | Total | | $ | 164,191 | | | $ | 150,938 | | Total | | $ | 204,465 | | | $ | 171,211 | |
Note 5. Goodwill
We perform our annual goodwill impairment test as of the first day of the fourth quarter. If certain factors occur, including significant underperformance 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 be required to perform an interim impairment test prior to the fourth quarter.
We may use either a qualitative or quantitative approach when testing a reporting unit’s goodwill for impairment. The qualitative approach for potential impairment analysis to determine whether it is more likely than not that the fair value of a reporting unit was less than its carrying amount.
The quantitative approach for potential impairment analysis is performed by comparing the fair value of a reporting unit to its carrying value, including goodwill. Fair value is estimated by management using a combination of the income approach (which is based on a discounted cash flow model) and market approach. Management’s cash flow projections include significant judgments and assumptions, including the amount and timing of expected cash flows, long-term growth rates, and discount rates. The cash flows used in the discounted cash flow model are based on our best estimate of future revenues, gross margins, and adjusted after-tax earnings. If any of these assumptions are incorrect, it will impact the estimated fair value of a reporting unit. The market approach also requires significant management judgment in selecting comparable business acquisitions and the transaction values observed and its related control premiums.
While our business continues to be negatively impacted during the three and six months ended July 2, 2022 as a result of the COVID-19 pandemic, noNo material adverse factors/changes have occurred since the fourth quarter of 20212022 that would require us to perform another qualitative or quantitative assessment. As such, for the second quarter of 2022,2023, it was also not more likely than not that the fair values of the reporting units were less than their carrying amounts and thus, the respective goodwill amounts were not deemed to be impaired.
On April 25, 2023, we completed the acquisition of BLR. The excess of the purchase price over the preliminary aggregate fair values of the net assets was recorded as goodwill. See Note 2 for further information.
The carrying amounts of our goodwill were as follows: | | | | | | | | | | | | | | | | | | | | |
| | (Dollars in thousands) |
| | Electronic Systems | | Structural Systems | | Consolidated Ducommun |
Gross goodwill | | $ | 199,157 | | | $ | 86,259 | | | $ | 285,416 | |
Accumulated goodwill impairment | | (81,722) | | | — | | | (81,722) | |
Balance at December 31, 2021 | | $ | 117,435 | | | $ | 86,259 | | | $ | 203,694 | |
Purchase price allocation refinements | | — | | | (287) | | | (287) | |
Balance at July 2, 2022 | | $ | 117,435 | | | $ | 85,972 | | | $ | 203,407 | |
| | | | | | | | | | | | | | | | | | | | |
| | (Dollars in thousands) |
| | Electronic Systems | | Structural Systems | | Consolidated Ducommun |
Gross goodwill | | $ | 199,157 | | | $ | 85,972 | | | $ | 285,129 | |
Accumulated goodwill impairment | | (81,722) | | | — | | | (81,722) | |
Balance at December 31, 2022 | | $ | 117,435 | | | $ | 85,972 | | | $ | 203,407 | |
Goodwill from acquisition during the period | | — | | | 41,168 | | | 41,168 | |
Balance at July 1, 2023 | | $ | 117,435 | | | $ | 127,140 | | | $ | 244,575 | |
Note 6. Accrued and Other Liabilities
The components of accrued and other liabilities were as follows: | | | (Dollars in thousands) | | (Dollars in thousands) |
| | July 2, 2022 | | December 31, 2021 | | July 1, 2023 | | December 31, 2022 |
Accrued compensation | Accrued compensation | | $ | 21,180 | | | $ | 24,391 | | Accrued compensation | | $ | 28,091 | | | $ | 28,785 | |
Accrued income tax and sales tax | Accrued income tax and sales tax | | 5,901 | | | 926 | | Accrued income tax and sales tax | | 4,361 | | | 10,478 | |
| Other | Other | | 12,566 | | | 15,974 | | Other | | 5,659 | | | 9,557 | |
Total | Total | | $ | 39,647 | | | $ | 41,291 | | Total | | $ | 38,111 | | | $ | 48,820 | |
Note 7. Long-Term Debt
Long-term debt and the current period interest rates were as follows: | | | (Dollars in thousands) | | (Dollars in thousands) |
| | July 2, 2022 | | December 31, 2021 | | July 1, 2023 | | December 31, 2022 |
Term loans | Term loans | | $ | 254,212 | | | $ | 287,712 | | Term loans | | $ | 245,312 | | | $ | 248,438 | |
| Revolving credit facility | | Revolving credit facility | | 33,800 | | | — | |
| Total debt | Total debt | | 254,212 | | | 287,712 | | Total debt | | 279,112 | | | 248,438 | |
Less current portion | Less current portion | | (7,000) | | | (7,000) | | Less current portion | | (6,250) | | | (6,250) | |
Total long-term debt, less current portion | Total long-term debt, less current portion | | 247,212 | | | 280,712 | | Total long-term debt, less current portion | | 272,862 | | | 242,188 | |
Less debt issuance costs - term loans | Less debt issuance costs - term loans | | (1,138) | | | (1,328) | | Less debt issuance costs - term loans | | (1,402) | | | (1,593) | |
Total long-term debt, net of debt issuance costs - term loans | Total long-term debt, net of debt issuance costs - term loans | | $ | 246,074 | | | $ | 279,384 | | Total long-term debt, net of debt issuance costs - term loans | | $ | 271,460 | | | $ | 240,595 | |
Debt issuance costs - revolving credit facility (1) | Debt issuance costs - revolving credit facility (1) | | $ | 947 | | | $ | 1,136 | | Debt issuance costs - revolving credit facility (1) | | $ | 2,013 | | | $ | 2,265 | |
Weighted-average interest rate | Weighted-average interest rate | | 3.80 | % | | 3.27 | % | Weighted-average interest rate | | 7.38 | % | | 4.36 | % |
(1) Included as part of other assets.
Subsequent to our quarter endedIn July 2, 2022, on July 14, 2022, we completed a refinancing of all our existing debt by entering into a new term loan (“2022 Term Loan”) and a new revolving credit facility (“2022 Revolving Credit Facility”). The 2022 Term Loan is a $250.0 million senior secured loan that matures on July 14, 2027. The 2022 Revolving Credit Facility is a $200.0 million senior secured revolving credit facility that matures on July 14, 2027. The 2022 Term Loan and 2022 Revolving Credit Facility, collectively are the new credit facilities (“2022 Credit Facilities”). At
The 2022 Term Loan bears interest, at our option, at a rate equal to either (i) Term Secured Overnight Financing Rate (“Term SOFR”) plus an applicable margin ranging from 1.375% to 2.375% per year or (ii) Base Rate (defined as the samehighest of [a] Federal Funds Rate plus 0.50%, [b] Bank of America’s prime rate, and [c] Term SOFR plus 1.00%, and if the Base Rate is less than zero percent, it will be deemed zero percent) plus an applicable margin ranging from 0.375% to 1.375% per year, in each case based upon the consolidated total net adjusted leverage ratio,ratio. Interest payments are typically paid either on a monthly or quarterly basis, depending on the interest rate spreadselected, on the last business day each month or quarter. In addition, the 2022 Term Loan requires quarterly amortization payments of 0.625% during year one and year two, 1.250% during year three and year four, and 1.875% during year five of the original outstanding principal balance of the 2022 Term Loan amount, on the last business day each quarter. The required quarterly amortization payments began in the fourth quarter of 2022.
The 2022 Revolving Credit Facility bears interest, at our option, at a rate equal to either (i) Term SOFR plus an applicable margin ranging from 1.375% to 2.375% per year or (ii) Base Rate (defined as the highest of [a] Federal Funds Rate plus 0.50%, [b] Bank of America’s prime rate, and [c] Term SOFR plus 1.00%, and if the Base Rate is less than zero percent, it will be deemed zero percent) plus an applicable margin ranging from 0.375% to 1.375% per year, in each case based upon the consolidated total net adjusted leverage ratio. Interest payments are typically paid on a quarterly basis, on the last business day each quarter. The undrawn portion of the commitment of the 2022 Revolving Credit Facility is subject to a commitment fee ranging from 0.175% to 0.275%, based upon the consolidated total net adjusted leverage ratio, typically paid on a quarterly basis, on the last business day each quarter. However, the 2022 Revolving Credit Facility does not require any principal installment payments.
In conjunction with the closing of the 2022 Credit Facilities, is lower thenwe utilized the interest rate spread inentire $250.0 million of proceeds from the 2022 Term Loan plus our existing cash on hand to pay off our entire debt balance outstanding of $254.2 million under our prior credit facilities that were in effect as(described below).
In December 2019, we completed the refinancing of a portion of then our existing debt by entering into a new revolving credit facility (“2019 Revolving Credit Facility”) to replace the then existing revolving credit facility that was entered into in November 2018 (“2018 Revolving Credit Facility”) and entered into a new term loan (“2019 Term Loan”). The 2019 Revolving Credit Facility iswas a $100.0 million senior secured revolving credit facility that matureswould have matured on December 20, 2024 replacingand replaced the $100.0 million 2018 Revolving Credit Facility that would have matured on November 21, 2023. The 2019 Term Loan iswas a $140.0 million senior secured term loan that matureswould have matured on December 20, 2024. We also have anhad a then existing $240.0 million senior secured term loan that was entered into in November 2018 that matureswould have matured on November 21, 2025 (“2018 Term Loan”). The original amounts available under the 2019 Revolving Credit Facility, 2019 Term Loan, and 2018 Term Loan (collectively, the “Credit“Existing Credit Facilities”) in aggregate, totaled $480.0 million.million at that time.
The 2019 Term Loan bearsbore 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 1.50% to 2.50% per year or (ii) the Base Rate (defined as the highest of [a] Federal Funds Rate plus 0.50%, [b] Bank of America’s prime rate, and [c] the Eurodollar Rate plus 1.00%) plus an applicable margin ranging from 0.50% to 1.50% per year, in each case based upon the consolidated total net adjusted leverage ratio, typically payable quarterly. In addition, the 2019 Term Loan requires installmentrequired amortization payments of 1.25% of the original outstanding principal balance of the 2019 Term Loan amount on a quarterly basis, on the last day of the calendar quarter.
For the three and six months ended July 1, 2023 and July 2, 2022, we made the required quarterly amortization payments on the 2022 Term Loan and 2019 Term Loan of $1.6 million and $1.8 million, respectively. For the six months ended July 1, 2023 and July 2, 2022, we made the required quarterly amortization payments on the 2022 Term Loan and 2019 Term Loan of $3.1 million and $3.5 million, respectively.
The 2019 Revolving Credit Facility bearsbore 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% to 2.50% per year or (ii) the Base Rate (defined as the highest of [a] Federal Funds Rate plus 0.50%, [b] Bank of America’s prime rate, and [c] the Eurodollar Rate plus 1.00%) plus an applicable margin ranging from 0.50% to 1.50% per year, in each case based upon the consolidated total net adjusted leverage ratio, typically payable quarterly. The undrawn portion of the commitment of the 2019 Revolving Credit Facility iswas subject to a commitment fee ranging from 0.175% to 0.275%, based upon the consolidated total net adjusted leverage ratio. However, the 2019 Revolving Credit Facility doesdid not require any principal installment payments.
The 2018 Term Loan bearsbore interest, at our option, at a rate equal to either (i) the Eurodollar Rate (defined as 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 2018 Term Loan required installmentamortization payments of 0.25% of the outstanding principal balance of the 2018 Term Loan amount on a quarterly basis.
Further, under the then Existing Credit Facilities, if we exceedexceeded the annual excess cash flow threshold, we arewere required to make an annual additional principal payment based on the consolidated adjusted leverage ratio. The annual mandatory excess cash flow payment iswas based on (i) 50% of the excess cash flow amount if the adjusted leverage ratio iswas greater than 3.25 to 1.0, (ii) 25% of the excess cash flow amount if the adjusted leverage ratio iswas less than or equal to 3.25 to 1.0 but greater than 2.50 to 1.0, and (iii) zero percent of the excess cash flow amount if the consolidated adjusted leverage ratio iswas less than or equal to 2.50 to 1.0. We did not exceed the annual excess cash flow threshold for 2021 and thus, no annual excess cash flow payment was required to be paid during the first quarter of 2022. As of July 2, 2022, we were in compliance with all covenants required under the Credit Facilities.
In conjunction with entering into the 2019 Revolving Credit Facility and the 2019 Term Loan, we drew downused the entire $140.0 million onof proceeds from the 2019 Term Loan and used those proceeds to pay off and close the 2018 Revolving Credit Facility of $58.5 million, paid down a portion of the 2018 Term Loan of $56.0 million, paid the accrued interest associated with the amounts being paid down on the 2018 Revolving Credit Facility and 2018 Term Loan, paid the fees related to this transaction, and used the remainder available for general corporate purposes. The $56.0 million pay down on the 2018 Term Loan paid all the required quarterly installmentamortization payments on the 2018 Term Loan until maturity.
However, since we were paying down on the term loans during the three months ended April 2, 2022, we were required to pay down on the 2019 Term Loan and 2018 Term Loan on a pro-rata basis and thus, we paid down $13.0 million and $17.0 million on the 2019 Term Loan and 2018 Term Loan, respectively, for an aggregate total pay down of $30.0 million. We made no voluntary prepayments on either the 2019 Term Loan or the 2018 Term Loan duringDuring the three months ended July 1, 2023 and July 2, 2022.2022, we made no other voluntary prepayments on our term loans.
As of July 1, 2023, we had $166.0 million of unused borrowing capacity under the 2022 Revolving Credit Facility, after deducting $0.2 million for standby letters of credit.
As of July 1, 2023, we were in compliance with all covenants required under the 2022 Credit Facilities.
The 2022 Term Loan was considered a modification of debt for some lenders and an extinguishment of debt for other lenders, and thus, a loss of $0.2 million was recorded related to the extinguishment. In addition, the new fees incurred of $0.8 million were capitalized and will be amortized over the life of the 2022 Term Loan. Further, the remaining debt issuance costs related to the 2019 Term Loan and 2018 Term Loan were considered a modification of debt and thus, no gain or loss was recorded. Instead, the new fees paid to the lenders of $0.6 million were capitalized and are being amortized over the life of the 2019 Term Loan. The remaining debt issuance costs related to the 2018 Term Loan of $1.5$1.0 million as of the modification date will continue to be amortized over its remaining life.the life of the 2022 Term Loan, using the effective interest method.
The 20192022 Revolving Credit Facility that replaced the 20182019 Revolving Credit Facility was considered an extinguishmenta modification of debt except for the portion related to the creditorscreditor that wereis no longer a part of both the 2019 Revolving Credit Facility and the 20182022 Revolving Credit Facility and in which case, it was considered a modificationan extinguishment of debt. As a result, we expensed the portion of the unamortized debt issuance costs related to the 20182019 Revolving Credit Facility that was considered an extinguishment of debt of $0.5$0.1 million. In addition, the new fees paid to the lendersincurred of $0.5$1.7 million as part of the 20192022 Revolving Credit Facility were capitalized and are beingwill be amortized over its remaining life.the life of the 2022 Revolving Credit Facility. Further, the remaining debt issuance costs related to the 20182019 Revolving Credit Facility of $1.1$0.8 million as of the modification date will also be amortized over its remaining life.
Asthe life of July 2,the 2022 we had $99.8 million of unused borrowing capacity under the 2019 Revolving Credit Facility, after deducting $0.2 million for standby letters of credit.Facility.
The 2022 Credit Facilities were entered into by us (“Parent Company”) and guaranteed by all of our domestic subsidiaries, other than 2two subsidiaries that were considered minor (“Subsidiary Guarantors”). The Subsidiary Guarantors jointly and severally guarantee the 2022 Credit Facilities. The Parent Company has no independent assets or operations and therefore, no consolidating financial information for the Parent Company and its subsidiaries is presented.
On April 25, 2023, we completed the acquisition of BLR. The initial purchase price for BLR was $115.0 million, net of cash acquired, all payable in cash. We paid a gross aggregate of $117.0 million in cash upon the closing of the transaction. We utilized the 2022 Revolving Credit Facility to complete the acquisition. See Note 2 for further information.
On May 18, 2023, we completed a public stock offering of our common stock resulting in net proceeds of $85.1 million. We utilized the net proceeds plus cash on hand to pay down $85.2 million on the 2022 Revolving Credit Facility. See Note 8 for further information.
In November 2021, we entered into derivative contracts, U.S. dollar-one month LIBOR forward interest rate swaps designated as cash flow hedges, all with an effective date of January 1, 2024, for an aggregate total notional amount of $150.0 million, weighted average fixed rate of 1.8%, and all terminating on January 1, 2031 (“Forward Interest Rate Swaps”). The Forward Interest Rate Swaps mature on a monthly basis, with fixed amount payer payment dates on the first day of each calendar month, commencing on February 1, 2024 through January 1, 2031. The Forward Interest Rate Swaps were deemed to be highly effective upon entering into the derivative contracts and thus, hedge accounting treatment was utilized. Since the Amended Forward Interest Rate Swaps (as defined below) are not effective until January 1, 2024, we only recordedrecord the changes in the fair value of the Forward Interest Rate Swapsderivative instruments that were highly effective and that were designated and qualified as cash flow hedges. As such, we recorded the change of $3.3 million in other long term assets, other long term liabilities, and other comprehensive income (loss) forduring the three months ended July 1, 2023 and July 2, 2022.2022, we recorded the unrealized gain (loss) to other comprehensive income (loss) of $3.1 million and $2.5 million, respectively, and the associated change to other current assets, other assets, and deferred income taxes. During the six months ended July 1, 2023 and July 2, 2022, we recorded the unrealized gain (loss) to other comprehensive income (loss) of $1.0 million and $7.4 million, respectively, and the associated change to other current assets, other assets, and deferred income taxes. See Note 1 for further information.
Subsequent to our quarter endedIn July 2, 2022, on July 14, 2022, as a result of completing a refinancing of our existing debt, we were required to complete an amendment of our derivative contracts with an aggregate notional amount of $150.0 million we had entered into in November 2021.the Forward Interest Rate Swaps (“Amended Forward Interest Rate Swaps”). The existing derivative contractsForward Interest Rate Swaps were based on U.S. dollar-one month LIBOR which was requiredand were amended to be amended tobased on one month Term SOFR as borrowings using LIBOR are no longer available under the 2022 Credit Facilities. See Note 1.Since this was an amendment of just the reference rate as a result of the cessation of LIBOR, utilizing the guidance under ASU 2020-04, we determined the Amended Forward Interest Rate Swaps as of the amendment date to continue to be highly effective. The Amended Forward Interest Rate Swaps weighted average fixed rate is 1.7%, as a result of the difference between U.S. dollar-one month LIBOR and one month Term SOFR.
Note 8. Shareholders’ Equity
On May 18, 2023, we completed a public stock offering of 2.3 million shares of our common stock at $40.00 per share, for gross proceeds of $92.0 million. The common stock offering was made under our effective shelf registration statement. We incurred aggregate total out of pocket stock offering related fees of $6.9 million, resulting in net proceeds of $85.1 million. As such, we recorded an increase to common stock at par value of less than $0.1 million with the remaining amount as an increase to additional paid-in capital of $85.1 million. The public stock offering net proceeds along with cash on hand were used to pay down $85.2 million on the 2022 Revolving Credit Facility that was drawn on and utilized to complete the acquisition of BLR. See Note 2 and Note 7 for further information.
Note 8.9. Indemnifications
We have made guarantees and indemnities under which we may be required to make payments to a guaranteed or indemnified party, in relation to certain transactions, including revenue transactions in the ordinary course of business. Additionally, we indemnify our directors and officers to the maximum extent permitted under the laws of the State of Delaware and 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. Moreover, in connection with certain performance center leases, we have indemnified our lessors for certain claims arising from the performance center or the lease.
The duration of the guarantees and indemnities varies and, in many cases is indefinite but subject to applicable statutes of limitations. The majority of guarantees and indemnities do not provide any limitations on the maximum potential future payments we could be obligated to make. Historically, payments related to these guarantees and indemnities have been immaterial. We estimate the fair value of our indemnification obligations as insignificant based on this history and insurance coverage and have, therefore, not recorded any liability for these guarantees and indemnities in the accompanying condensed consolidated balance sheets.
Note 9.10. 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, 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 detriments related to our equity
compensation recognized in the condensed consolidated income statement could result in fluctuations in our effective tax rate period-over-period depending on the volatility of our stock price, number of restricted or performance stock units that vests, and stock options exercised during the period. We recognize deferred tax assets and liabilities, using enacted tax rates, 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.
We recorded income tax expense of $1.0 million for theboth three months ended July 1, 2023 and July 2, 2022 compared to $1.8 million for the three months ended July 3, 2021.2022. The decreaseincrease in income tax expense for the second quarter of 20222023 compared to the second quarter of 20212022 was primarily due to higher discrete income tax expense primarily related to changes in other deferred tax assets and lower net tax windfalls related to stock-based compensation recognized in the second quarter of 2023 compared to the second quarter of 2022. The increase in income tax expense was partially offset by lower pre-tax income for the second quarter of 20222023 compared to the second quarter of 2021.2022.
We recorded income tax expense of $1.8 million for the six months ended July 1, 2023 compared to $2.6 million for the six months ended July 2, 2022. The decrease in income tax expense for the six months ended July 1, 2023 compared to the six months ended July 2, 2022 was primarily due to lower pre-tax income in the six months ended July 1, 2023 compared to the six months ended July 2, 2022. The decrease in income tax expense was partially offset by lowerhigher income tax expense related to non-deductible book compensation expenses and higher discrete income tax benefitsexpense primarily related to changes in other deferred tax assets recognized in the second quarter of 2022 for net tax windfalls relatedsix months ended July 1, 2023 compared to stock-based compensation.
We recorded income tax expense of $2.6 million for the six months ended July 2, 2022 compared to $2.9 million for the six months ended July 3, 2021. The decrease in income tax expense for the first six months of 2022 compared to the first six months of 2021 was primarily due to lower pre-tax income for the first six months of 2022 compared to the first six months of 2021 and higher income tax benefits recognized in the first six months of 2022 related to the U.S. Federal research and development tax credit. The decrease in income tax expense was partially offset by lower discrete income tax benefits recognized in the first six months of 2022 for net tax windfalls related to stock-based compensation.2022.
Our total amount of unrecognized tax benefits was $4.6$5.5 million and $4.4$4.9 million as of July 2, 20221, 2023 and December 31, 2021,2022, respectively. If recognized, $2.8 million would affect the effective tax rate. We record interest and penalty charges, if any, related to uncertain tax positions as a component of tax expense and unrecognized tax benefits. The amounts accrued for interest and penalty charges as of July 2, 20221, 2023 and December 31, 20212022 were not significant. As a result of statute of limitations set to expire in the fourth quarter of 2022,2023, we expect decreases to our unrecognized tax benefits of approximately $0.7 million in the next twelve months.
We file U.S. Federal and state income tax returns. We are subject to examination by the Internal Revenue Service (“IRS”) for tax years after 20172018 and by state taxing authorities for tax years after 2016.2017. While we are no longer subject to examination prior to those periods, carryforwards generated prior to those periods may still be adjusted upon examination by the IRS or state taxing authorities if they either have been or will be used in a subsequent period. We believe we have adequately accrued for tax deficiencies or reductions in tax benefits, if any, that could result from the examination and all open audit years.
The Tax Cuts and Jobs Act of 2017 (“TCJA”), which was signed into U.S. law in December 2017, eliminated the option to immediately deduct research and development expenditures in the year incurred under Section 174 effective January 1, 2022. The amended provision under Section 174 requires us to capitalize and amortize these expenditures over five years (for U.S.-based research). Although there is proposed legislation to temporarily reinstate the current deduction of the expenditures after 2021 through 2025, we must consider the changes under the TCJA. As of July 2, 2022, we recorded an increase to current income taxes payable by approximately $5.3 million and a decrease to net deferred tax liabilities by a similar amount. We are monitoring legislation for any further changes to Section 174 and the impact to the financial statements in 2022.
Note 10.11. Commitments and Contingencies
In December 2020, a representative action under California’s Private Attorneys General Act was filed against us in the Superior Court for the State of California, County of San Bernardino. We received service of process of this complaint onin January 28, 2021. The complaint alleges violations of California’s wage and hour laws relating to our current and former employees and seeks attorney’s fees and penalties. We vigorously refuted and defended these claims, and reached a tentative settlement of $0.8 million during the fourth quarter 2021, which iswas subject to court approval. Thus, we recorded accrued liabilities of $0.8 million as of December 31, 2021. During the three months ended July 2,second quarter of 2022, additional factual information was identified resulting in an increase in the amount of the tentative settlement to $0.9 million. Therefore, we recorded an additional accrued liabilities of $0.1 million for a total accrued liabilities amount of $0.9 million as of July 2, 2022. We arethe end of the second quarter of 2022 which remained unchanged as of December 31, 2022 as we were awaiting final court approval of this settlement. We received final court approval and paid the $0.9 million in January 2023.
Structural Systems has been directed by California environmental agencies to investigate and take corrective action for groundwater contamination at our facilities located in El Mirage and Monrovia, California. Based on currently available information, we have established an accrual for its estimated liability for such investigation and corrective action of $1.5 million at both July 2, 20221, 2023 and December 31, 2021,2022, which is reflected in other long-term liabilities on our 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, we preliminarily estimate that the range of our future liabilities in connection with the landfill located in West Covina, California is between $0.4 million and $3.1 million. We have established an accrual for the estimated liability in connection with the West Covina landfill of $0.4 million as of both July 2, 20221, 2023 and December 31, 2021,2022, which is reflected in other long-term liabilities on our condensed consolidated balance sheets. Our 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 June 2020, a fire severely damaged our performance center in Guaymas, Mexico, which is part of our Structural Systems segment. There were no injuries, however, property and equipment, inventories, and tooling in this leased facility were damaged. Our Guaymas performance center iswas severely damaged and was comprised of 2two buildings with an aggregate total of 62,000 square feet. The loss of production from the Guaymas performance center was being absorbed by our other existing performance centers, however, we have reestablished and are in the process of ramping up our manufacturing capabilities in a different leased facility with 117,000 square feet in Guaymas. A neighboring, non-related manufacturing facility, also suffered fire damage during the same time as the fire that severely damaged our Guaymas performance center. The cause of the fire is still undetermined and as such, there is no amount of loss that is probable and reasonably estimable at this time. If we are ultimately deemed to be responsible or partly responsible, it is possible we could incur a loss in excess of our insurance coverage limits, which could be material to our cash flow, liquidity, or financial results.
Our insurance covers damage, up to a capped amount, to the facility, equipment, unfinished inventory, and other assets at replacement cost, finished goods inventory at selling price, as well as business interruption, third party property damage, and recovery related expenses caused by the fire, less our per claim deductible. The anticipated insurance recoveries related to losses and incremental costs incurred are recognized when receipt is probable. The anticipated insurance recoveries in excess of net book value of the damaged operating assets and business interruption will not be recorded until all contingencies related to our claim have been resolved. During the year ended December 31, 2020, $0.8 million of revenue and $0.5 million of related cost of sales were reversed for revenue previously recognized using the over time method as the revenue recognition process for these items were deemed to be interrupted as a result of these inventory items being damaged. Also during the year ended December 31, 2020, we wrote off property and equipment and tooling with an aggregate total net book value of $7.1 million and inventory on hand of $3.4 million that were damaged by the fire. The related anticipated insurance recoveries were also presented within the same financial statement line item in the condensed consolidated statements of income resulting in no net impact, with the anticipated insurance recoveries receivable included as part of other current assets on the condensed consolidated balance sheets.
The insurance claim for damages to our operating assets and business interruption was deemed final and closed by our insurance company during the three months ended July 1, 2023. During the three and six months ended July 1, 2023 and July 2, 2022, we received insurance recoveries of $3.8 million and zero, respectively, with $2.1 million and $3.0$1.7 million respectively, for business interruption and since the contingencies related to this amount are deemed to be resolved, we recorded this amountproperty and equipment damage, respectively, and recognized as other income. In addition, as ofDuring the six months ended July 1, 2023 and July 2, 2022, we received insurance recoveries of $3.8 million and $3.0 million, respectively. The $3.8 million of insurance recoveries received during the six months ended July 1, 2023 was for business interruption and property and equipment damage of $2.1 million and $1.7 million, respectively, and recognized as other income. The $3.0 million received during the six months ended July 2, 2022 was for business interruption, and was recognized as other income. Cumulatively, as
of July 1, 2023, we have received $13.5 million of general insurance recoveries in aggregate total of $23.7 million, with $7.5 million for business interruption and $16.2 million for damages to property and equipment, inventories, and tooling. Further, all during 2020. The timinginsurance recovery amounts received related to this claim have been recognized up to the amount of net book value loss and presented within the same financial statement line item in the condensed consolidated statements of income resulting in no net impact, with the remaining amounts recognized as other income in our condensed consolidated statements of income when the contingencies were deemed resolved.
On April 29, 2023, a fire damaged a relatively small portion of one of our performance centers in our Structural Systems reporting segment. There were no injuries, however, subsequent to the fire, we determined that some property and equipment in this company owned facility were damaged. Our insurance covers damage, up to a capped amount, to the property and equipment at replacement cost, as well as business interruption and recovery related expenses caused by the fire, less our per claim deductible. There was a loss of production in this damaged portion of the performance center for a short period of time but did not result in significant disruption to customer delivery schedules. Production in this damaged portion has since resumed. The anticipated insurance recoveries including forrelated to losses and incremental costs incurred are recognized when receipt is probable. The anticipated insurance recoveries in excess of net book value of the damaged operating assets and business interruption arewill not known at this time.be recorded until all contingencies related to our claim have been resolved. During the three months ended July 1, 2023, we wrote off property and equipment with an aggregate total net book value of $0.2 million. In addition, during the three months ended July 1, 2023, we received insurance recoveries of $0.3 million (which was net of our deductible of $0.1 million) and thus, such insurance recoveries were also presented within the same financial statement line item in the condensed consolidated statements of income resulting in no net impact. The amount of the insurance recoveries received in excess of the loss on operating assets was deemed a contingent gain and since the gain contingencies were deemed resolved, the $0.1 million was recorded as other income during the three months ended July 1, 2023.
In the normal course of business, Ducommun and its subsidiaries are defendants in certain other litigation, and claims and receive certain demands and inquiries, in both cases, including but not limited to matters relating to environmental laws. In addition, Ducommun makes various commitments grants indemnities, and incurs contingent 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 11.12. Business Segment Information
We supply products and services primarily to the aerospace and defense industries. Our subsidiaries are organized into 2two strategic businesses, Electronic Systems and Structural Systems, each of which is a reportable operating segment.
Financial information by reportable operating segment was as follows: | | | (Dollars in thousands) Three Months Ended | | (Dollars in thousands) Six Months Ended | | (Dollars in thousands) Three Months Ended | | (Dollars in thousands) Six Months Ended |
| | | July 2, 2022 | | July 3, 2021 | | July 2, 2022 | | July 3, 2021 | | | July 1, 2023 | | July 2, 2022 | | July 1, 2023 | | July 2, 2022 |
Net Revenues | Net Revenues | | | | | | | | | Net Revenues | | | | | | | | |
Electronic Systems | Electronic Systems | | $ | 109,732 | | | $ | 102,797 | | | $ | 207,198 | | | $ | 201,901 | | Electronic Systems | | $ | 107,124 | | | $ | 109,732 | | | $ | 212,750 | | | $ | 207,198 | |
Structural Systems | Structural Systems | | 64,466 | | | 57,395 | | | 130,481 | | | 115,442 | | Structural Systems | | 80,196 | | | 64,466 | | | 155,761 | | | 130,481 | |
Total Net Revenues | Total Net Revenues | | $ | 174,198 | | | $ | 160,192 | | | $ | 337,679 | | | $ | 317,343 | | Total Net Revenues | | $ | 187,320 | | | $ | 174,198 | | | $ | 368,511 | | | $ | 337,679 | |
Segment Operating Income(1) | Segment Operating Income(1) | | | | | | | | | Segment Operating Income(1) | | | | | | | | |
Electronic Systems | Electronic Systems | | $ | 13,610 | | | $ | 14,375 | | | $ | 23,021 | | | $ | 26,866 | | Electronic Systems | | $ | 9,528 | | | $ | 13,610 | | | $ | 19,539 | | | $ | 23,021 | |
Structural Systems | Structural Systems | | 1,265 | | | 5,592 | | | 6,152 | | | 10,720 | | Structural Systems | | 5,385 | | | 1,265 | | | 10,130 | | | 6,152 | |
| | 14,875 | | | 19,967 | | | 29,173 | | | 37,586 | | | 14,913 | | | 14,875 | | | 29,669 | | | 29,173 | |
Corporate General and Administrative Expenses (1)(2) | Corporate General and Administrative Expenses (1)(2) | | (7,121) | | | (6,875) | | | (12,296) | | | (13,884) | | Corporate General and Administrative Expenses (1)(2) | | (9,908) | | | (7,121) | | | (18,292) | | | (12,296) | |
Total Operating Income | Total Operating Income | | $ | 7,754 | | | $ | 13,092 | | | $ | 16,877 | | | $ | 23,702 | | Total Operating Income | | $ | 5,005 | | | $ | 7,754 | | | $ | 11,377 | | | $ | 16,877 | |
Depreciation and Amortization Expenses | Depreciation and Amortization Expenses | | | | | | | | | Depreciation and Amortization Expenses | | | | | | | | |
Electronic Systems | Electronic Systems | | $ | 3,484 | | | $ | 3,426 | | | $ | 6,990 | | | $ | 6,849 | | Electronic Systems | | $ | 3,561 | | | $ | 3,484 | | | $ | 7,059 | | | $ | 6,990 | |
Structural Systems | Structural Systems | | 4,356 | | | 3,501 | | | 8,559 | | | 6,941 | | Structural Systems | | 4,335 | | | 4,356 | | | 8,767 | | | 8,559 | |
Corporate Administration | Corporate Administration | | 58 | | | 59 | | | 117 | | | 118 | | Corporate Administration | | 58 | | | 58 | | | 117 | | | 117 | |
Total Depreciation and Amortization Expenses | Total Depreciation and Amortization Expenses | | $ | 7,898 | | | $ | 6,986 | | | $ | 15,666 | | | $ | 13,908 | | Total Depreciation and Amortization Expenses | | $ | 7,954 | | | $ | 7,898 | | | $ | 15,943 | | | $ | 15,666 | |
Capital Expenditures | Capital Expenditures | | | | | | | | | Capital Expenditures | | | | | | | | |
Electronic Systems | Electronic Systems | | $ | 2,943 | | | $ | 1,277 | | | $ | 4,639 | | | $ | 1,901 | | Electronic Systems | | $ | 1,923 | | | $ | 2,943 | | | $ | 3,774 | | | $ | 4,639 | |
Structural Systems | Structural Systems | | 2,486 | | | 2,567 | | | 5,858 | | | 4,556 | | Structural Systems | | 4,111 | | | 2,486 | | | 7,241 | | | 5,858 | |
Corporate Administration | Corporate Administration | | — | | | — | | | — | | | — | | Corporate Administration | | — | | | — | | | — | | | — | |
Total Capital Expenditures | Total Capital Expenditures | | $ | 5,429 | | | $ | 3,844 | | | $ | 10,497 | | | $ | 6,457 | | Total Capital Expenditures | | $ | 6,034 | | | $ | 5,429 | | | $ | 11,015 | | | $ | 10,497 | |
(1)The results for the three and six months ended July 1, 2023 include BLR’s results of operations which have been included in our condensed consolidated statements of income since the date of acquisition as part of the Structural Systems segment. See Note 2.
(2)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: | | | (Dollars in thousands) | | (Dollars in thousands) |
| | | July 2, 2022 | | December 31, 2021 | | | July 1, 2023 | | December 31, 2022 |
Total Assets | Total Assets | | | | | Total Assets | | | | |
Electronic Systems | Electronic Systems | | $ | 518,150 | | | $ | 490,814 | | Electronic Systems | | $ | 532,832 | | | $ | 543,298 | |
Structural Systems(1) | Structural Systems(1) | | 410,255 | | | 408,118 | | Structural Systems(1) | | 541,872 | | | 410,565 | |
Corporate Administration (1)(2) | Corporate Administration (1)(2) | | 50,643 | | | 79,803 | | Corporate Administration (1)(2) | | 44,050 | | | 67,643 | |
Total Assets | Total Assets | | $ | 979,048 | | | $ | 978,735 | | Total Assets | | $ | 1,118,754 | | | $ | 1,021,506 | |
Goodwill and Intangibles | Goodwill and Intangibles | | | | | Goodwill and Intangibles | | | | |
Electronic Systems | Electronic Systems | | $ | 187,146 | | | $ | 191,789 | | Electronic Systems | | $ | 177,858 | | | $ | 182,501 | |
Structural Systems(1) | Structural Systems(1) | | 150,739 | | | 153,669 | | Structural Systems(1) | | 241,704 | | | 148,107 | |
Total Goodwill and Intangibles | Total Goodwill and Intangibles | | $ | 337,885 | | | $ | 345,458 | | Total Goodwill and Intangibles | | $ | 419,562 | | | $ | 330,608 | |
(1)On April 25, 2023, we acquired 100.0% of the outstanding equity interests of BLR for an initial purchase price of $115.0 million, net of cash acquired. We allocated the preliminary gross purchase price of $117.0 million to the assets acquired and liabilities assumed at their estimated fair values. The excess of the purchase price over the aggregate fair values of the net assets was recorded as goodwill. See Note 2.
(2)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.
COVID-19 Pandemic Impact on Our Business
The COVID-19 pandemic has had a significant impact on our overall business during both the prior year three and six months ended July 2, 2022 and July 3, 2021.2022. As a result of the COVID-19 pandemic, precautionary measures were instituted by governments and businesses to mitigate its spread, including the imposition of travel restrictions, quarantines, shelter in place directives, and shutting down of non-essential businesses.
The safety of our employees remains our highest priority. The well-being and safety protocols that were already in place at all of our facilities were further enhanced at the onset of the COVID-19 pandemic. We continue to follow safety protocols consistent with guidelines provided by state and local governmentspandemic and the Centers for Disease Control and Prevention (“CDC”). These measures included social distancing, provision of personal protective equipment, enhanced cleaning, and flexible work arrangements wherever possible. We have also offered enhanced leave and benefits to our employees and provided frequent updates to ensure our workforce is kept apprised of evolving regulations and safety measures.
In March 2020, the U.S. enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) which provides tax relief to individuals and businesses affected by the coronavirus pandemic. We have not requested or accepted any loans or payments that are available under the CARES Act, however, we have utilized the option to defer payment of the employer portion of payroll taxes (Social Security) that would otherwise be required to be made during the period beginning March 27, 2020 to December 31, 2020. One half of the deferred amount was required to be paid and was paid by December 31, 2021, with the remaining 50% to be paid by December 31, 2022. As of July 2, 2022, we have deferred $3.1 million, which is included as part of accruedresulting inflation, rising interest rates, supply chain issues, and other liabilities onevents including the condensed consolidated balance sheets.
The COVID-19 pandemic haswar in Ukraine have contributed and continues to contribute to a general slowdown in the global economy and most significantly, the commercial aerospace end-use market. While both major large aircraft manufacturers, The Boeing Company (“Boeing”) and Airbus SE, have announced increases in build rates for 2022, it2023, the ramp up is wellslower than expected and below pre-pandemic levels. In its 20212022 Annual Report on Form 10-K, Boeing indicated it expectsthat domestic travel continues to recover from the lingering effects of the COVID-19 pandemic and will recover before international travel. However, the pace of the commercial air travelmarket recovery remains impacted by government restrictions related to return to 2019 levels in 2023 to 2024, and a few years beyond that for the industry to return to the long-term trend growth.COVID-19, especially China. While the full extent and impact of the COVID-19 pandemic cannot be reasonably estimated with certainty at this time, in the prior year, COVID-19 has had a significant impact on our business, the businesses of our customers and suppliers, as well as our results of operations and financial condition, and maysuch lingering effects could have a material adverse impact on our business, results of operations and financial condition for 20222023 and beyond.
Second quarter 20222023 recap:
•Net revenues of $174.2$187.3 million
•Net income of $4.1$2.4 million, or $0.34$0.17 per diluted share
•Adjusted EBITDA of $24.1$26.1 million, or 13.8%13.9% of net revenues
Non-GAAP Financial Measures
Adjusted earnings before interest, taxes, depreciation, amortization, stock-based compensation expense, restructuring charges, Guaymas fire related expenses, insurance recoveries related to loss on operating assets, insurance recoveries related to business interruption, and inventory purchase accounting adjustments (“Adjusted EBITDA”) were $24.1$26.1 million and $23.4$24.1 million for the three months ended July 2, 20221, 2023 and July 3, 2021,2, 2022, 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 that clarifies and enhances the understanding of the factors and trends affecting our past performance and future prospects. We define this measure, explain how it is calculated and provide a reconciliation of this measure 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 as a non-GAAP operating performance measure internally as a complementary financial measure 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 a substitute for analysis of our results as reported under GAAP. Some of these limitations include:
•It does not reflect our cash expenditures, future requirements for capital expenditures or contractual commitments;
•It does not reflect changes in, or cash requirements for, our working capital needs;
•It does 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;
•It is not adjusted for all non-cash income or expense items that are reflected in our statements of cash flows;
•It does 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 its usefulness as a comparative measure.
As a result 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.
Even with the limitations above, we believe that Adjusted EBITDA is useful to an investor in evaluating our results of operations as this measure:
•Is 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;
•Helps 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
•Is 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;
•Restructuring charges may be useful to our investors in evaluating our core operating performance;
•Guaymas fire related expenses may be useful to our investors in evaluating our core operating performance;
23•Other fire related expenses may be useful to our investors in evaluating our core operating performance;
Insurance recoveries related to loss on operating assets (property and equipment, inventories, and other assets) may be useful to our investors in evaluating our core operating performance; •Insurance recoveries related to business interruption may be useful to our investors in evaluating our core operating performance; and
•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: | | | (Dollars in thousands) | | (Dollars in thousands) | | (Dollars in thousands) | | (Dollars in thousands) |
| | Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended |
| | July 2, 2022 | | July 3, 2021 | | July 2, 2022 | | July 3, 2021 | | July 1, 2023 | | July 2, 2022 | | July 1, 2023 | | July 2, 2022 |
Net income | Net income | $ | 4,147 | | | $ | 8,423 | | | $ | 12,246 | | | $ | 15,118 | | Net income | $ | 2,374 | | | $ | 4,147 | | | $ | 7,605 | | | $ | 12,246 | |
Interest expense | Interest expense | 2,656 | | | 2,857 | | | 5,058 | | | 5,663 | | Interest expense | 5,735 | | | 2,656 | | | 9,954 | | | 5,058 | |
| Income tax expense | Income tax expense | 951 | | | 1,812 | | | 2,573 | | | 2,921 | | Income tax expense | 955 | | | 951 | | | 1,763 | | | 2,573 | |
Depreciation | Depreciation | 3,610 | | | 3,475 | | | 7,197 | | | 6,898 | | Depreciation | 3,932 | | | 3,610 | | | 7,672 | | | 7,197 | |
Amortization | Amortization | 4,288 | | | 3,511 | | | 8,469 | | | 7,010 | | Amortization | 4,022 | | | 4,288 | | | 8,271 | | | 8,469 | |
Stock-based compensation expense (1) | Stock-based compensation expense (1) | 3,600 | | | 2,609 | | | 5,190 | | | 5,742 | | Stock-based compensation expense (1) | 5,036 | | | 3,600 | | | 8,117 | | | 5,190 | |
| Restructuring charges (2) | Restructuring charges (2) | 3,231 | | | — | | | 3,231 | | | — | | Restructuring charges (2) | 4,769 | | | 3,231 | | | 8,939 | | | 3,231 | |
Guaymas fire related expenses | Guaymas fire related expenses | 998 | | | 692 | | | 1,955 | | | 1,167 | | Guaymas fire related expenses | 1,880 | | | 998 | | | 3,348 | | | 1,955 | |
Other fire related expenses | | Other fire related expenses | 477 | | | — | | | 477 | | | — | |
Insurance recoveries related to loss on operating assets | | Insurance recoveries related to loss on operating assets | (1,677) | | | — | | | (5,563) | | | — | |
Insurance recoveries related to business interruption | Insurance recoveries related to business interruption | — | | | — | | | (3,000) | | | — | | Insurance recoveries related to business interruption | (2,160) | | | — | | | (2,160) | | | (3,000) | |
Inventory purchase accounting adjustments | Inventory purchase accounting adjustments | 637 | | | — | | | 1,274 | | | — | | Inventory purchase accounting adjustments | 766 | | | 637 | | | 766 | | | 1,274 | |
| Adjusted EBITDA | Adjusted EBITDA | $ | 24,118 | | | $ | 23,379 | | | $ | 44,193 | | | $ | 44,519 | | Adjusted EBITDA | $ | 26,109 | | | $ | 24,118 | | | $ | 49,189 | | | $ | 44,193 | |
% of net revenues | % of net revenues | 13.8 | % | | 14.6 | % | | 13.1 | % | | 14.0 | % | % of net revenues | 13.9 | % | | 13.8 | % | | 13.3 | % | | 13.1 | % |
(1) BothThe three and six months ended July 1, 2023 included $0.8 million and $1.2 million, respectively, and both the three and six months ended July 2, 2022 included $0.5 million of stock-based compensation expense for awards with both performance and market conditions that will be settled in cash.
(2) Both the three and six months ended July 2, 2022 included $0.5 million of restructuring charges that were recorded as cost of sales.
Results of Operations
Second Quarter of 20222023 Compared to Second Quarter of 20212022
The following table sets forth net revenues, selected financial data, the effective tax rate and diluted earnings per share:
| | | (Dollars in thousands, except per share data) Three Months Ended | | (Dollars in thousands, except per share data) Six Months Ended | | (Dollars in thousands, except per share data) Three Months Ended | | (Dollars in thousands, except per share data) Six Months Ended |
| | July 2, 2022 | | % of Net Revenues | | July 3, 2021 | | % of Net Revenues | | July 2, 2022 | | % of Net Revenues | | July 3, 2021 | | % of Net Revenues | | July 1, 2023 | | % of Net Revenues | | July 2, 2022 | | % of Net Revenues | | July 1, 2023 | | % of Net Revenues | | July 2, 2022 | | % of Net Revenues |
Net Revenues | Net Revenues | | $ | 174,198 | | | 100.0 | % | | $ | 160,192 | | | 100.0 | % | | $ | 337,679 | | | 100.0 | % | | $ | 317,343 | | | 100.0 | % | Net Revenues | | $ | 187,320 | | | 100.0 | % | | $ | 174,198 | | | 100.0 | % | | $ | 368,511 | | | 100.0 | % | | $ | 337,679 | | | 100.0 | % |
Cost of Sales | Cost of Sales | | 139,556 | | | 80.1 | % | | 123,410 | | | 77.0 | % | | 270,562 | | | 80.1 | % | | 247,461 | | | 78.0 | % | Cost of Sales | | 147,198 | | | 78.6 | % | | 139,556 | | | 80.1 | % | | 291,622 | | | 79.1 | % | | 270,562 | | | 80.1 | % |
Gross Profit | Gross Profit | | 34,642 | | | 19.9 | % | | 36,782 | | | 23.0 | % | | 67,117 | | | 19.9 | % | | 69,882 | | | 22.0 | % | Gross Profit | | 40,122 | | | 21.4 | % | | 34,642 | | | 19.9 | % | | 76,889 | | | 20.9 | % | | 67,117 | | | 19.9 | % |
Selling, General and Administrative Expenses | Selling, General and Administrative Expenses | | 24,185 | | | 13.9 | % | | 23,690 | | | 14.8 | % | | 47,537 | | | 14.1 | % | | 46,180 | | | 14.5 | % | Selling, General and Administrative Expenses | | 30,348 | | | 16.2 | % | | 24,185 | | | 13.9 | % | | 56,573 | | | 15.4 | % | | 47,537 | | | 14.1 | % |
Restructuring Charges | Restructuring Charges | | 2,703 | | | 1.5 | % | | — | | | — | % | | 2,703 | | | 0.8 | % | | — | | | — | % | Restructuring Charges | | 4,769 | | | 2.5 | % | | 2,703 | | | 1.5 | % | | 8,939 | | | 2.4 | % | | 2,703 | | | 0.8 | % |
Operating Income | Operating Income | | 7,754 | | | 4.5 | % | | 13,092 | | | 8.2 | % | | 16,877 | | | 5.0 | % | | 23,702 | | | 7.5 | % | Operating Income | | 5,005 | | | 2.7 | % | | 7,754 | | | 4.5 | % | | 11,377 | | | 3.1 | % | | 16,877 | | | 5.0 | % |
Interest Expense | Interest Expense | | (2,656) | | | (1.6) | % | | (2,857) | | | (1.8) | % | | (5,058) | | | (1.5) | % | | (5,663) | | | (1.8) | % | Interest Expense | | (5,735) | | | (3.1) | % | | (2,656) | | | (1.6) | % | | (9,954) | | | (2.7) | % | | (5,058) | | | (1.5) | % |
| Other Income | Other Income | | — | | | — | % | | — | | | — | % | | 3,000 | | | 0.9 | % | | — | | | — | % | Other Income | | 4,059 | | | 2.2 | % | | — | | | — | % | | 7,945 | | | 2.1 | % | | 3,000 | | | 0.9 | % |
| Income Before Taxes | Income Before Taxes | | 5,098 | | | 2.9 | % | | 10,235 | | | 6.4 | % | | 14,819 | | | 4.4 | % | | 18,039 | | | 5.7 | % | Income Before Taxes | | 3,329 | | | 1.8 | % | | 5,098 | | | 2.9 | % | | 9,368 | | | 2.5 | % | | 14,819 | | | 4.4 | % |
Income Tax Expense | Income Tax Expense | | 951 | | | nm | | 1,812 | | | nm | | 2,573 | | | nm | | 2,921 | | | nm | Income Tax Expense | | 955 | | | nm | | 951 | | | nm | | 1,763 | | | nm | | 2,573 | | | nm |
Net Income | Net Income | | $ | 4,147 | | | 2.4 | % | | $ | 8,423 | | | 5.3 | % | | $ | 12,246 | | | 3.6 | % | | $ | 15,118 | | | 4.8 | % | Net Income | | $ | 2,374 | | | 1.3 | % | | $ | 4,147 | | | 2.4 | % | | $ | 7,605 | | | 2.1 | % | | $ | 12,246 | | | 3.6 | % |
| Effective Tax Rate | Effective Tax Rate | | 18.7 | % | | nm | | 17.7 | % | | nm | | 17.4 | % | | nm | | 16.2 | % | | nm | Effective Tax Rate | | 28.7 | % | | nm | | 18.7 | % | | nm | | 18.8 | % | | nm | | 17.4 | % | | nm |
Diluted Earnings Per Share | Diluted Earnings Per Share | | $ | 0.34 | | | nm | | $ | 0.69 | | | nm | | $ | 0.99 | | | nm | | $ | 1.23 | | | nm | Diluted Earnings Per Share | | $ | 0.17 | | | nm | | $ | 0.34 | | | nm | | $ | 0.58 | | | nm | | $ | 0.99 | | | nm |
nm = not meaningful
Net Revenues by End-Use Market and Operating Segment
Net revenues by end-use market and operating segment during the fiscal three and six months ended July 2, 20221, 2023 and July 3, 2021,2, 2022, respectively, were as follows: | | | Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended |
| | | (Dollars in thousands) | | % of Net Revenues | | | (Dollars in thousands) | | % of Net Revenues | | | (Dollars in thousands) | | % of Net Revenues | | | (Dollars in thousands) | | % of Net Revenues |
| | Change | | July 2, 2022 | | July 3, 2021 | | July 2, 2022 | | July 3, 2021 | | Change | | July 2 2022 | | July 3, 2021 | | July 2 2022 | | July 3, 2021 | | Change | | July 1, 2023 | | July 2, 2022 | | July 1, 2023 | | July 2, 2022 | | Change | | July 1 2023 | | July 2, 2022 | | July 1 2023 | | July 2, 2022 |
Consolidated Ducommun | Consolidated Ducommun | | | | | | | | | | | | | | | | | | | | | Consolidated Ducommun | | | | | | | | | | | | | | | | | | | | |
Military and space | Military and space | | $ | (6,328) | | | $ | 106,680 | | | $ | 113,008 | | | 61.2 | % | | 70.5 | % | | $ | (21,121) | | | $ | 206,014 | | | $ | 227,135 | | | 61.0 | % | | 71.6 | % | Military and space | | $ | (10,793) | | | $ | 95,887 | | | $ | 106,680 | | | 51.2 | % | | 61.2 | % | | $ | (13,687) | | | $ | 192,327 | | | $ | 206,014 | | | 52.2 | % | | 61.0 | % |
Commercial aerospace | Commercial aerospace | | 19,490 | | | 57,067 | | | 37,577 | | | 32.8 | % | | 23.5 | % | | 38,188 | | | 111,142 | | | 72,954 | | | 32.9 | % | | 23.0 | % | Commercial aerospace | | 21,180 | | | 78,247 | | | 57,067 | | | 41.8 | % | | 32.8 | % | | 40,155 | | | 151,297 | | | 111,142 | | | 41.1 | % | | 32.9 | % |
Industrial | Industrial | | 844 | | | 10,451 | | | 9,607 | | | 6.0 | % | | 6.0 | % | | 3,269 | | | 20,523 | | | 17,254 | | | 6.1 | % | | 5.4 | % | Industrial | | 2,735 | | | 13,186 | | | 10,451 | | | 7.0 | % | | 6.0 | % | | 4,364 | | | 24,887 | | | 20,523 | | | 6.7 | % | | 6.1 | % |
Total | Total | | $ | 14,006 | | | $ | 174,198 | | | $ | 160,192 | | | 100.0 | % | | 100.0 | % | | $ | 20,336 | | | $ | 337,679 | | | $ | 317,343 | | | 100.0 | % | | 100.0 | % | Total | | $ | 13,122 | | | $ | 187,320 | | | $ | 174,198 | | | 100.0 | % | | 100.0 | % | | $ | 30,832 | | | $ | 368,511 | | | $ | 337,679 | | | 100.0 | % | | 100.0 | % |
| Electronic Systems | Electronic Systems | | Electronic Systems | |
Military and space | Military and space | | $ | (568) | | | $ | 80,187 | | | $ | 80,755 | | | 73.1 | % | | 78.6 | % | | $ | (10,481) | | | $ | 152,007 | | | $ | 162,488 | | | 73.4 | % | | 80.5 | % | Military and space | | $ | (8,415) | | | $ | 71,772 | | | $ | 80,187 | | | 67.0 | % | | 73.1 | % | | $ | (6,908) | | | $ | 145,099 | | | $ | 152,007 | | | 68.2 | % | | 73.4 | % |
Commercial aerospace | Commercial aerospace | | 6,659 | | | 19,094 | | | 12,435 | | | 17.4 | % | | 12.1 | % | | 12,509 | | | 34,668 | | | 22,159 | | | 16.7 | % | | 11.0 | % | Commercial aerospace | | 3,072 | | | 22,166 | | | 19,094 | | | 20.7 | % | | 17.4 | % | | 8,096 | | | 42,764 | | | 34,668 | | | 20.1 | % | | 16.7 | % |
Industrial | Industrial | | 844 | | | 10,451 | | | 9,607 | | | 9.5 | % | | 9.3 | % | | 3,269 | | | 20,523 | | | 17,254 | | | 9.9 | % | | 8.5 | % | Industrial | | 2,735 | | | 13,186 | | | 10,451 | | | 12.3 | % | | 9.5 | % | | 4,364 | | | 24,887 | | | 20,523 | | | 11.7 | % | | 9.9 | % |
Total | Total | | $ | 6,935 | | | $ | 109,732 | | | $ | 102,797 | | | 100.0 | % | | 100.0 | % | | $ | 5,297 | | | $ | 207,198 | | | $ | 201,901 | | | 100.0 | % | | 100.0 | % | Total | | $ | (2,608) | | | $ | 107,124 | | | $ | 109,732 | | | 100.0 | % | | 100.0 | % | | $ | 5,552 | | | $ | 212,750 | | | $ | 207,198 | | | 100.0 | % | | 100.0 | % |
| Structural Systems | Structural Systems | | Structural Systems | |
Military and space | Military and space | | $ | (5,760) | | | $ | 26,493 | | | $ | 32,253 | | | 41.1 | % | | 56.2 | % | | $ | (10,640) | | | $ | 54,007 | | | $ | 64,647 | | | 41.4 | % | | 56.0 | % | Military and space | | $ | (2,378) | | | $ | 24,115 | | | $ | 26,493 | | | 30.1 | % | | 41.1 | % | | $ | (6,779) | | | $ | 47,228 | | | $ | 54,007 | | | 30.3 | % | | 41.4 | % |
Commercial aerospace | Commercial aerospace | | 12,831 | | | 37,973 | | | 25,142 | | | 58.9 | % | | 43.8 | % | | 25,679 | | | 76,474 | | | 50,795 | | | 58.6 | % | | 44.0 | % | Commercial aerospace | | 18,108 | | | 56,081 | | | 37,973 | | | 69.9 | % | | 58.9 | % | | 32,059 | | | 108,533 | | | 76,474 | | | 69.7 | % | | 58.6 | % |
Total | Total | | $ | 7,071 | | | $ | 64,466 | | | $ | 57,395 | | | 100.0 | % | | 100.0 | % | | $ | 15,039 | | | $ | 130,481 | | | $ | 115,442 | | | 100.0 | % | | 100.0 | % | Total | | $ | 15,730 | | | $ | 80,196 | | | $ | 64,466 | | | 100.0 | % | | 100.0 | % | | $ | 25,280 | | | $ | 155,761 | | | $ | 130,481 | | | 100.0 | % | | 100.0 | % |
Net revenues for the three months ended July 2, 20221, 2023 were $174.2$187.3 million, compared to $160.2$174.2 million for the three months ended July 3, 2021.2, 2022. The year-over-year increase was primarily due to the following:
•$19.521.2 million higher revenues in our commercial aerospace end-use markets due to higher build rates on large aircraft platforms and other commercial aerospace platforms, and regional and business aircraft platforms; partially offset by
•$6.310.8 million lower revenues in our military and space end-use markets due to lower build rates on military rotary-wingfixed-wing aircraft platforms and various missile platforms, partially offset by higher build rates on other military and space platforms.
Net revenues for the six months ended July 2, 20221, 2023 were $337.7$368.5 million, compared to $317.3$337.7 million for the six months ended July 3, 2021.2, 2022. The year-over-year increase was primarily due to the following:
•$38.240.2 million higher revenues in our commercial aerospace end-use markets due to higher build rates on large aircraft platforms, other commercial aerospace platforms and regional and businesslarge aircraft platforms, partially offset by lower build rates on rotary-wing aircraft platforms; partially offset by
•$21.113.7 million lower revenues in our military and space end-use markets due to lower build rates on military rotary-wingfixed-wing aircraft platforms, various missile platforms, and military fixed-wingrotary-wing aircraft platforms, partially offset by higher build rates on other military and space platforms.
Net Revenues by Major Customers
A significant portion of our net revenues are from our top ten customers as follows:
| | | Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended |
| | July 2, 2022 | | July 3, 2021 | | July 2, 2022 | | July 3, 2021 | | July 1, 2023 | | July 2, 2022 | | July 1, 2023 | | July 2, 2022 |
Boeing Company | Boeing Company | | 6.4 | % | | 9.0 | % | | 6.8 | % | | 8.2 | % | Boeing Company | | 8.0 | % | | 6.5 | % | | 7.8 | % | | 6.8 | % |
General Dynamics Corporation | General Dynamics Corporation | | 6.0 | % | | 2.7 | % | | 5.6 | % | | 2.7 | % | General Dynamics Corporation | | 3.1 | % | | 6.0 | % | | 4.3 | % | | 5.6 | % |
| Northrop Grumman Corporation | Northrop Grumman Corporation | | 5.7 | % | | 7.4 | % | | 6.2 | % | | 6.7 | % | Northrop Grumman Corporation | | 6.4 | % | | 5.7 | % | | 5.8 | % | | 6.2 | % |
Raytheon Technologies Corporation | Raytheon Technologies Corporation | | 21.9 | % | | 22.2 | % | | 21.3 | % | | 22.4 | % | Raytheon Technologies Corporation | | 14.3 | % | | 21.9 | % | | 15.3 | % | | 21.3 | % |
Spirit AeroSystems Holdings, Inc. | Spirit AeroSystems Holdings, Inc. | | 6.1 | % | | 3.7 | % | | 5.0 | % | | 3.2 | % | Spirit AeroSystems Holdings, Inc. | | 5.7 | % | | 6.1 | % | | 6.4 | % | | 5.0 | % |
Viasat, Inc. | | Viasat, Inc. | | 4.9 | % | | 4.8 | % | | 5.2 | % | | 4.2 | % |
Total top ten customers (1) | Total top ten customers (1) | | 61.4 | % | | 61.3 | % | | 60.2 | % | | 59.7 | % | Total top ten customers (1) | | 56.5 | % | | 61.5 | % | | 57.4 | % | | 60.3 | % |
(1)Includes The Boeing Company (“Boeing”), General Dynamics Corporation (“GD”), Northrop Grumman Corporation (“Northrop”), Raytheon Technologies Corporation (“Raytheon”), and Spirit AeroSystems Holdings, Inc. (“Spirit”), and Viasat, Inc. (“Viasat”) for the three and six months ended July 2, 20221, 2023 and July 3, 2021.2, 2022. Raytheon Technologies Corporation changed its name to RTX Corporation effective July 17, 2023.
Boeing, GD, Northrop, Raytheon, Spirit, and SpiritViasat represented the following percentages of total accounts receivable: | | | | July 2, 2022 | | December 31, 2021 | | | July 1, 2023 | | December 31, 2022 |
Boeing | Boeing | | 5.3 | % | | 3.5 | % | Boeing | | 6.1 | % | | 3.8 | % |
GD | GD | | 5.2 | % | | 4.0 | % | GD | | 3.4 | % | | 3.4 | % |
| Northrop | Northrop | | 10.2 | % | | 10.9 | % | Northrop | | 5.2 | % | | 13.0 | % |
Raytheon | Raytheon | | 13.4 | % | | 17.8 | % | Raytheon | | 11.8 | % | | 16.3 | % |
Spirit | Spirit | | 1.8 | % | | 0.7 | % | Spirit | | 0.7 | % | | 1.0 | % |
Viasat | | Viasat | | 7.8 | % | | 10.3 | % |
The net revenues and accounts receivable from Boeing, GD, Northrop, Raytheon, Spirit, and SpiritViasat 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 as a percentage of net revenues decreasedincreased year-over-year with the three months ended July 1, 2023 of 21.4%, compared to the three months ended July 2, 2022 of 19.9%, compared to the three months ended July 3, 2021 of 23.0% primarily due to unfavorablefavorable product mix partially offset byand favorable manufacturing volume and lower compensation and benefits costs.volume.
Gross profit as a percentage of net revenues decreasedincreased year-over-year with the six months ended July 1, 2023 of 20.9%, compared to the six months ended July 2, 2022 of 19.9%, compared to the six months ended July 3, 2021 of 22.0% primarily due to unfavorable product mix,favorable manufacturing volume, partially offset by lower compensation and benefitsunfavorable other manufacturing costs and favorable manufacturing volume.unfavorable product mix.
Selling, General and Administrative (“SG&A”) Expenses
SG&A expenses increased $0.5$6.2 million year-over-year in the three months ended July 2, 20221, 2023 compared to the three months ended July 3, 20212, 2022 primarily due to higher compensation and benefits costs of $4.1 million, a portion of which was related to the BLR acquisition, and higher other general and administrative expenses of $0.9$1.9 million, partially offset by lower compensation and benefits costsa portion of $0.3 million.which was related to the BLR acquisition.
SG&A expenses increased $1.4$9.0 million year-over-year in the six months ended July 2, 20221, 2023 compared to the six months ended July 3, 20212, 2022 primarily due to higher compensation and benefits costs of $4.7 million, a portion of which was related to the BLR acquisition, higher other general and administrative expenses of $1.6 million.$2.4 million, a portion of which was related to the BLR acquisition, and higher professional services fees of $2.0 million, mainly due to the BLR acquisition.
Restructuring Charges
Restructuring charges increased $3.2$2.1 million (of which $0.5and $6.2 million was included in cost of sales) year-over-year in boththe three and six months ended July 1, 2023, compared to the three and six months ended July 2, 2022, compared to both the three and six months ended July 3, 2021respectively, primarily due to the restructuring plan that was approved and commenced in April 2022 that is expected to better position us for stronger performance. See Note 3 for further information.
Interest Expense
Interest expense decreased $0.2increased $3.1 million and $0.6$4.9 million year-over-year in the three and six months ended July 2, 20221, 2023 compared to the three and six months ended July 3, 2021,2, 2022, respectively, primarily due to higher interest rates and a lowerhigher outstanding debt balance, partially offset by higher interest rates.balance.
Income Tax Expense
We recorded income tax expense of $1.0 million for theboth three months ended July 1, 2023 and July 2, 2022, compared to $1.8 million for the three months ended July 3, 2021.2022. The decreaseincrease in income tax expense for the second quarter of 20222023 compared to the second quarter of 20212022 was primarily due to higher discrete income tax expense primarily related to changes in other deferred tax assets and lower net tax windfalls related to stock-based compensation recognized in the second quarter of 2023 compared to the second quarter of 2022. The increase in income tax expense was partially offset by lower pre-tax income for the second quarter of 20222023 compared to the second quarter of 2021. 2022.
We recorded income tax expense of $1.8 million for the six months ended July 1, 2023 compared to $2.6 million for the six months ended July 2, 2022. The decrease in income tax expense for the six months ended July 1, 2023 compared to the six months ended July 2, 2022 was primarily due to lower pre-tax income in the six months ended July 1, 2023 compared to the six months ended July 2, 2022.
The decrease in income tax expense was partially offset by lowerhigher income tax expense related to non-deductible book compensation expenses and higher discrete income tax benefitsexpense primarily related to changes in other deferred tax assets recognized in the second quarter of 2022 for net tax windfalls relatedsix months ended July 1, 2023 compared to stock-based compensation.
We recorded income tax expense of $2.6 million for the six months ended July 2, 2022, compared to $2.9 million for the six months ended July 3, 2021. The decrease in income tax expense for the first six months of 2022 compared to the first six months of 2021 was primarily due to lower pre-tax income for the first six months of 2022 compared to the first six months of 2021 and higher income tax benefits recognized in the first six months of 2022 related to the U.S. Federal research and development tax credit. The decrease in
income tax expense was partially offset by lower discrete income tax benefits recognized in the first six months of 2022 for net tax windfalls related to stock-based compensation.2022.
Our total amount of unrecognized tax benefits was $4.6$5.5 million and $4.4$4.9 million as of July 2, 20221, 2023 and December 31, 2021,2022, respectively. If recognized, $2.8 million would affect the effective tax rate. We record interest and penalty charges, if any, related to uncertain tax positions as a component of tax expense and unrecognized tax benefits. The amounts accrued for interest and penalty charges as of July 2, 20221, 2023 and December 31, 20212022 were not significant. As a result of statute of limitations set to expire in the fourth quarter of 2022,2023, we expect decreases to our unrecognized tax benefits of approximately $0.7 million in the next twelve months.
We file U.S. Federal and state income tax returns. We are subject to examination by the Internal Revenue Service (“IRS”) for tax years after 20172018 and by state taxing authorities for tax years after 2016.2017. While we are no longer subject to examination prior to those periods, carryforwards generated prior to those periods may still be adjusted upon examination by the IRS or state taxing authorities if they either have been or will be used in a subsequent period. We believe we have adequately accrued for tax deficiencies or reductions in tax benefits, if any, that could result from the examination and all open audit years.
The Tax Cuts and Jobs Act of 2017 (“TCJA”), which was signed into U.S. law in December 2017, eliminated the option to immediately deduct research and development expenditures in the year incurred under Section 174 effective January 1, 2022. The amended provision under Section 174 requires us to capitalize and amortize these expenditures over five years (for U.S.-based research). Although there is proposed legislation to temporarily reinstate the current deduction of the expenditures after 2021 through 2025, we must consider the changes under the TCJA. As of July 2, 2022, we recorded an increase to current income taxes payable by approximately $5.3 million and a decrease to net deferred tax liabilities by a similar amount. We are monitoring legislation for any further changes to Section 174 and the impact to the financial statements in 2022.
Net Income and Earnings per Share
Net income and earnings per share for the three months ended July 2, 20221, 2023 were $4.1$2.4 million, or $0.34$0.17 per diluted share, compared to $8.4$4.1 million, or $0.69$0.34 per diluted share, for the three months ended July 3, 2021.2, 2022. The decrease in net income for the three months ended July 2, 20221, 2023 compared to the three months ended July 3, 20212, 2022 was primarily due to lower gross profithigher SG&A expenses of $2.1$6.2 million, higher interest expense of $3.1 million, and higher restructuring charges of $3.2$2.1 million, partially offset by higher gross profit of $5.5 million and higher other income of $4.1 million.
Net income and earnings per share for the six months ended July 2, 20221, 2023 were $12.2$7.6 million, or $0.99$0.58 per diluted share, compared to $15.1$12.2 million, or $1.23$0.99 per diluted share, for the six months ended July 3, 2021.2, 2022. The decrease in net income for the six months ended July 2, 20221, 2023 compared to the six months ended July 3, 20212, 2022 was primarily due to lower gross profithigher SG&A expenses of $2.8$9.0 million, and higher restructuring charges of $3.2$6.2 million, and higher interest expense of $4.9 million, partially offset by higher gross profit of $9.8 million and higher other income of $3.0$4.9 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 six months ended July 2, 20221, 2023 and July 3, 2021:2, 2022: | | | Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended |
| | % | | (Dollars in thousands) | | % of Net Revenues | | % | | (Dollars in thousands) | | % of Net Revenues | | % | | (Dollars in thousands) | | % of Net Revenues | | % | | (Dollars in thousands) | | % of Net Revenues |
| | Change | | July 2, 2022 | | July 3, 2021 | | July 2, 2022 | | July 3, 2021 | | Change | | July 2, 2022 | | July 3, 2021 | | July 2, 2022 | | July 3, 2021 | | Change | | July 1, 2023 | | July 2, 2022 | | July 1, 2023 | | July 2, 2022 | | Change | | July 1, 2023 | | July 2, 2022 | | July 1, 2023 | | July 2, 2022 |
Net Revenues | Net Revenues | | | | | | | | | | | | | | | | | | | | | Net Revenues | | | | | | | | | | | | | | | | | | | | |
Electronic Systems | Electronic Systems | | 6.7 | % | | $ | 109,732 | | | $ | 102,797 | | | 63.0 | % | | 64.2 | % | | 2.6 | % | | $ | 207,198 | | | $ | 201,901 | | | 61.4 | % | | 63.6 | % | Electronic Systems | | (2.4) | % | | $ | 107,124 | | | $ | 109,732 | | | 57.2 | % | | 63.0 | % | | 2.7 | % | | $ | 212,750 | | | $ | 207,198 | | | 57.7 | % | | 61.4 | % |
Structural Systems | Structural Systems | | 12.3 | % | | 64,466 | | | 57,395 | | | 37.0 | % | | 35.8 | % | | 13.0 | % | | 130,481 | | | 115,442 | | | 38.6 | % | | 36.4 | % | Structural Systems | | 24.4 | % | | 80,196 | | | 64,466 | | | 42.8 | % | | 37.0 | % | | 19.4 | % | | 155,761 | | | 130,481 | | | 42.3 | % | | 38.6 | % |
Total Net Revenues | Total Net Revenues | | 8.7 | % | | $ | 174,198 | | | $ | 160,192 | | | 100.0 | % | | 100.0 | % | | 6.4 | % | | $ | 337,679 | | | $ | 317,343 | | | 100.0 | % | | 100.0 | % | Total Net Revenues | | 7.5 | % | | $ | 187,320 | | | $ | 174,198 | | | 100.0 | % | | 100.0 | % | | 9.1 | % | | $ | 368,511 | | | $ | 337,679 | | | 100.0 | % | | 100.0 | % |
Segment Operating Income | Segment Operating Income | | | | | | | | | | | | | | | | | Segment Operating Income | | | | | | | | | | | | | | | | |
Electronic Systems | Electronic Systems | | $ | 13,610 | | | $ | 14,375 | | | 12.4 | % | | 14.0 | % | | $ | 23,021 | | | $ | 26,866 | | | 11.1 | % | | 13.3 | % | Electronic Systems | | $ | 9,528 | | | $ | 13,610 | | | 8.9 | % | | 12.4 | % | | $ | 19,539 | | | $ | 23,021 | | | 9.2 | % | | 11.1 | % |
Structural Systems | Structural Systems | | 1,265 | | | 5,592 | | | 2.0 | % | | 9.7 | % | | 6,152 | | | 10,720 | | | 4.7 | % | | 9.3 | % | Structural Systems | | 5,385 | | | 1,265 | | | 6.7 | % | | 2.0 | % | | 10,130 | | | 6,152 | | | 6.5 | % | | 4.7 | % |
| | 14,875 | | | 19,967 | | | 29,173 | | | 37,586 | | | | 14,913 | | | 14,875 | | | 29,669 | | | 29,173 | | |
Corporate General and Administrative Expenses (1) | Corporate General and Administrative Expenses (1) | | (7,121) | | | (6,875) | | | (4.1) | % | | (4.3) | % | | (12,296) | | | (13,884) | | | (3.6) | % | | (4.4) | % | Corporate General and Administrative Expenses (1) | | (9,908) | | | (7,121) | | | (5.3) | % | | (4.1) | % | | (18,292) | | | (12,296) | | | (5.0) | % | | (3.6) | % |
Total Operating Income | Total Operating Income | | $ | 7,754 | | | $ | 13,092 | | | 4.5 | % | | 8.2 | % | | $ | 16,877 | | | $ | 23,702 | | | 5.0 | % | | 7.5 | % | Total Operating Income | | $ | 5,005 | | | $ | 7,754 | | | 2.7 | % | | 4.5 | % | | $ | 11,377 | | | $ | 16,877 | | | 3.1 | % | | 5.0 | % |
Adjusted EBITDA | Adjusted EBITDA | | | | | | | | | | Adjusted EBITDA | | | | | | | | | |
Electronic Systems | Electronic Systems | | Electronic Systems | |
Operating Income | Operating Income | | $ | 13,610 | | | $ | 14,375 | | | $ | 23,021 | | | $ | 26,866 | | | Operating Income | | $ | 9,528 | | | $ | 13,610 | | | $ | 19,539 | | | $ | 23,021 | | |
| Other Income | | Other Income | | 222 | | | — | | | 222 | | | — | | |
Depreciation and Amortization | Depreciation and Amortization | | 3,484 | | | 3,426 | | | 6,990 | | | 6,849 | | | Depreciation and Amortization | | 3,561 | | | 3,484 | | | 7,059 | | | 6,990 | | |
Restructuring Charges | Restructuring Charges | | 1,284 | | | — | | | 1,284 | | | — | | | Restructuring Charges | | 2,071 | | | 1,284 | | | 3,945 | | | 1,284 | | |
| | 18,378 | | | 17,801 | | | 16.7 | % | | 17.3 | % | | 31,295 | | | 33,715 | | | 15.1 | % | | 16.7 | % | | 15,382 | | | 18,378 | | | 14.4 | % | | 16.7 | % | | 30,765 | | | 31,295 | | | 14.5 | % | | 15.1 | % |
Structural Systems | Structural Systems | | Structural Systems | |
Operating Income | Operating Income | | 1,265 | | | 5,592 | | | 6,152 | | | 10,720 | | | Operating Income | | 5,385 | | | 1,265 | | | 10,130 | | | 6,152 | | |
| Depreciation and Amortization | Depreciation and Amortization | | 4,356 | | | 3,501 | | | 8,559 | | | 6,941 | | | Depreciation and Amortization | | 4,335 | | | 4,356 | | | 8,767 | | | 8,559 | | |
Restructuring Charges | Restructuring Charges | | 1,947 | | | — | | | 1,947 | | | — | | | Restructuring Charges | | 2,612 | | | 1,947 | | | 4,908 | | | 1,947 | | |
Guaymas fire related expenses | Guaymas fire related expenses | | 998 | | | 692 | | | 1,955 | | | 1,167 | | | Guaymas fire related expenses | | 1,880 | | | 998 | | | 3,348 | | | 1,955 | | |
Other fire related expenses | | Other fire related expenses | | 477 | | | — | | | 477 | | | — | | |
Inventory Purchase Accounting Adjustments | Inventory Purchase Accounting Adjustments | | 637 | | | — | | | 1,274 | | | — | | | Inventory Purchase Accounting Adjustments | | 766 | | | 637 | | | 766 | | | 1,274 | | |
| | 9,203 | | | 9,785 | | | 14.3 | % | | 17.0 | % | | 19,887 | | | 18,828 | | | 15.2 | % | | 16.3 | % | | 15,455 | | | 9,203 | | | 19.3 | % | | 14.3 | % | | 28,396 | | | 19,887 | | | 18.2 | % | | 15.2 | % |
Corporate General and Administrative Expenses (1) | Corporate General and Administrative Expenses (1) | | Corporate General and Administrative Expenses (1) | |
Operating Loss | Operating Loss | | (7,121) | | | (6,875) | | | (12,296) | | | (13,884) | | | Operating Loss | | (9,908) | | | (7,121) | | | (18,292) | | | (12,296) | | |
| Depreciation and Amortization | Depreciation and Amortization | | 58 | | | 59 | | | 117 | | | 118 | | | Depreciation and Amortization | | 58 | | | 58 | | | 117 | | | 117 | | |
Stock-Based Compensation Expense | | 3,600 | | | 2,609 | | | 5,190 | | | 5,742 | | | |
Stock-Based Compensation Expense (2) | | Stock-Based Compensation Expense (2) | | 5,036 | | | 3,600 | | | 8,117 | | | 5,190 | | |
Restructuring Charges | | Restructuring Charges | | 86 | | | — | | | 86 | | | — | | |
| | | (3,463) | | | (4,207) | | | (6,989) | | | (8,024) | | | | (4,728) | | | (3,463) | | | (9,972) | | | (6,989) | | |
Adjusted EBITDA | Adjusted EBITDA | | $ | 24,118 | | | $ | 23,379 | | | 13.8 | % | | 14.6 | % | | $ | 44,193 | | | $ | 44,519 | | | 13.1 | % | | 14.0 | % | Adjusted EBITDA | | $ | 26,109 | | | $ | 24,118 | | | 13.9 | % | | 13.8 | % | | $ | 49,189 | | | $ | 44,193 | | | 13.3 | % | | 13.1 | % |
| Capital Expenditures | Capital Expenditures | | | | | | | | | | Capital Expenditures | | | | | | | | | |
Electronic Systems | Electronic Systems | | $ | 2,943 | | | $ | 1,277 | | | $ | 4,639 | | | $ | 1,901 | | | Electronic Systems | | $ | 1,923 | | | $ | 2,943 | | | $ | 3,774 | | | $ | 4,639 | | |
Structural Systems | Structural Systems | | 2,486 | | | 2,567 | | | 5,858 | | | 4,556 | | | Structural Systems | | 4,111 | | | 2,486 | | | 7,241 | | | 5,858 | | |
Corporate Administration | Corporate Administration | | — | | | — | | | — | | | — | | | Corporate Administration | | — | | | — | | | — | | | — | | |
Total Capital Expenditures | Total Capital Expenditures | | $ | 5,429 | | | $ | 3,844 | | | $ | 10,497 | | | $ | 6,457 | | | Total Capital Expenditures | | $ | 6,034 | | | $ | 5,429 | | | $ | 11,015 | | | $ | 10,497 | | |
(1)Includes costs not allocated to either the Electronic Systems or Structural Systems operating segments.
(2)The three and six months ended July 1, 2023 included $0.8 million and $1.2 million, respectively, and both the three and six months ended July 2, 2022 included $0.5 million of stock-based compensation expense for awards with both performance and market conditions that will be settled in cash.
Electronic Systems
Electronic Systems net revenues in the three months ended July 2, 20221, 2023 compared to the three months ended July 3, 2021 increased $6.92, 2022 decreased $2.6 million primarily due to the following:
•$6.7 million higher revenues in our commercial aerospace end-use markets due to higher build rates on other commercial aerospace platforms and large aircraft platforms; partially offset by
•$0.68.4 million lower revenues in our military and space end-use markets due to lower build rates on military fixed-wing aircraft platforms and various missile platforms,platforms; partially offset by higher build rates on other military and space platforms.
Electronic Systems net revenues in the six months ended July 2, 2022 compared to the six months ended July 3, 2021 increased $5.3 million primarily due to the following:
•$12.53.1 million higher revenues in our commercial aerospace end-use markets due to higher build rates on other commercial aerospace platforms, large aircraft platforms, and regional and business aircraft platforms; partially offset by
•$10.5 million lower revenues in our military and space end-use markets due to lower build rates on other military and space platforms, military fixed-wing aircraft platforms, and various missile platforms.
Electronic Systems segment operating incomenet revenues in the threesix months ended July 2, 20221, 2023 compared to the three months ended July 3, 2021 decreased $0.8 million primarily due to unfavorable product mix, partially offset by favorable manufacturing volume.
Electronic Systems segment operating income in the six months ended July 2, 2022 compared to the six months ended July 3, 2021 decreased $3.8 million primarily due to unfavorable product mix.
Structural Systems
Structural Systems net revenues in the three months ended July 2, 2022 compared to the three months ended July 3, 2021 increased $7.1$5.6 million primarily due to the following:
•$12.88.1 million higher revenues in our commercial aerospace end-use markets due to higher build rates on large aircraftother commercial aerospace platforms; partially offset by
•$5.86.9 million lower revenues in our military and space end-use markets due to lower build rates on military fixed-wing aircraft platforms and military rotary-wing aircraft platforms, partially offset by higher build rates on other military and various missilespace platforms.
Electronic Systems segment operating income in the three months ended July 1, 2023 compared to the three months ended July 2, 2022 decreased $4.1 million primarily due to unfavorable product mix and unfavorable manufacturing volume.
Electronic Systems segment operating income in the six months ended July 1, 2023 compared to the six months ended July 2, 2022 decreased $3.5 million primarily due to unfavorable product mix and higher restructuring charges, partially offset by favorable manufacturing volume.
Structural Systems
Structural Systems net revenues in the sixthree months ended July 1, 2023 compared to the three months ended July 2, 2022 compared to the six months ended July 3, 2021 increased $15.0$15.7 million primarily due to the following:
•$25.718.1 million higher revenues in our commercial aerospace end-use markets due to higher build rates on large aircraft platforms and regional and business aircraftother commercial aerospace platforms; partially offset by
•$10.62.4 million lower revenues in our military and space end-use markets due to lower build rates on various missile platforms and military fixed-wing aircraft platforms, partially offset by higher build rates on military rotary-wing platforms.
Structural Systems net revenues in the six months ended July 1, 2023 compared to the six months ended July 2, 2022 increased $25.3 million primarily due to the following:
•$32.1 million higher revenues in our commercial aerospace end-use markets due to higher build rates on large aircraft platforms and other commercial aerospace platforms; partially offset by
•$6.8 million lower revenues in our military and space end-use markets due to lower build rates on various missile platforms, military fixed-wing aircraft platforms, and military rotary-wing aircraft platforms.
The Structural Systems segment operating income in the three months ended July 2, 20221, 2023 compared to the three months ended July 3, 2021 decreased $4.32, 2022 increased $4.1 million primarily due to favorable product mix and favorable manufacturing volume, partially offset by unfavorable product mix.other manufacturing costs.
The Structural Systems segment operating income in the six months ended July 2, 20221, 2023 compared to the six months ended July 3, 2021 decreased $4.62, 2022 increased $4.0 million primarily due to unfavorablefavorable manufacturing volume and favorable product mix, partially offset by lower compensation and benefitsunfavorable other manufacturing costs and favorable manufacturing volume.higher restructure charges.
On April 25, 2023, we acquired 100.0% of BLR Aerospace L.L.C. (“BLR”). The initial purchase price for BLR was $115.0 million, net of cash acquired, all payable in cash. We paid a gross aggregate of $117.0 million in cash upon the closing of the transaction. BLR’s results of operations have been included in our condensed consolidated statements of income since the date of acquisition and is a part of the Structural Systems segment. See Note 2 to our condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q for further information.
In June 2020, a fire severely damaged our performance center in Guaymas, Mexico. We have insurance coverage and up to a capped amount, expect these items will be covered, less our deductible. The full financial impact cannot be estimated at this time as we are currently working with our insurance carriers to determine the cause of the fire. The loss of production from the Guaymas performance center was being absorbed by our other existing performance centers, however, we have reestablished and are in the process of ramping up our manufacturing capabilities in a different leased facility in Guaymas. A neighboring, non-related manufacturing facility, also suffered fire damage during the same time as the fire that severely damaged our Guaymas performance center. The cause of the fire is still undetermined and as such, there is no amount of loss that is probable and reasonably estimable at this time. If we are ultimately
deemed to be responsible or partly responsible, it is possible we could incur a loss in excess of our insurance coverage limits, which could be material to our cash flow, liquidity, or financial results. See Note 89 and Note 1011 to our condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q.
On April 29, 2023, a fire damaged a relatively small portion of one of our performance centers in our Structural Systems reporting segment. Our insurance covers damage, up to a capped amount, to the property and equipment at replacement cost, as well as business interruption and recovery related expenses caused by the fire, less our per claim deductible. There was a loss of production in this damaged portion of the performance center for a short period of time but did not result in significant disruption to customer delivery schedules. Production in this damaged portion has since resumed. See Note 11 to our condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q.
Corporate General and Administrative (“CG&A”) Expenses
CG&A expenses increased $0.2$2.8 million for the three months ended July 2, 20221, 2023 compared to the three months ended July 3, 2021.2, 2022 primarily due to higher compensation and benefits costs of $2.7 million, a portion of which was related to the acquisition of BLR.
CG&A expenses decreased $1.6increased $6.0 million for the six months ended July 2, 20221, 2023 compared to the six months ended July 3, 20212, 2022 primarily due to lowerhigher compensation and benefits costs of $1.6 million.$4.4 million, a portion of which was related to the acquisition of BLR, and higher professional services fees of $1.3 million, mainly due to the BLR acquisition.
Backlog
We define backlog as customer placed purchase orders (“POs”) and long-term agreements (“LTAs”) with firm fixed price and 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 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 market, partially offset by a decrease in the military and space end-use market. $686.0markets and commercial aerospace end-use markets. $677.0 million of total backlog is expected to be delivered over the next 12 months. The following table summarizes our backlog as of July 2, 20221, 2023 and December 31, 2021:2022:
| | | (Dollars in thousands) | | (Dollars in thousands) |
| | Change | | July 2, 2022 | | December 31, 2021 | | Change | | July 1, 2023 | | December 31, 2022 |
Consolidated Ducommun | Consolidated Ducommun | | | | | | | Consolidated Ducommun | | | | | | |
Military and space | Military and space | | $ | (26,358) | | | $ | 493,920 | | | $ | 520,278 | | Military and space | | $ | 37,013 | | | $ | 494,367 | | | $ | 457,354 | |
Commercial aerospace | Commercial aerospace | | 86,076 | | | 419,183 | | | 333,107 | | Commercial aerospace | | 14,618 | | | 464,710 | | | 450,092 | |
Industrial | Industrial | | 11,557 | | | 63,359 | | | 51,802 | | Industrial | | (2,279) | | | 51,095 | | | 53,374 | |
Total | Total | | $ | 71,275 | | | $ | 976,462 | | | $ | 905,187 | | Total | | $ | 49,352 | | | $ | 1,010,172 | | | $ | 960,820 | |
Electronic Systems | Electronic Systems | | | | | | | Electronic Systems | | | | | | |
Military and space | Military and space | | $ | (12,718) | | | $ | 387,284 | | | $ | 400,002 | | Military and space | | $ | 7,918 | | | $ | 369,500 | | | $ | 361,582 | |
Commercial aerospace | Commercial aerospace | | 32,822 | | | 89,632 | | | 56,810 | | Commercial aerospace | | (25,193) | | | 100,397 | | | 125,590 | |
Industrial | Industrial | | 11,557 | | | 63,359 | | | 51,802 | | Industrial | | (2,279) | | | 51,095 | | | 53,374 | |
Total | Total | | $ | 31,661 | | | $ | 540,275 | | | $ | 508,614 | | Total | | $ | (19,554) | | | $ | 520,992 | | | $ | 540,546 | |
Structural Systems | Structural Systems | | | | | | | Structural Systems | | | | | | |
Military and space | Military and space | | $ | (13,640) | | | $ | 106,636 | | | $ | 120,276 | | Military and space | | $ | 29,095 | | | $ | 124,867 | | | $ | 95,772 | |
Commercial aerospace | Commercial aerospace | | 53,254 | | | 329,551 | | | 276,297 | | Commercial aerospace | | 39,811 | | | 364,313 | | | 324,502 | |
Total | Total | | $ | 39,614 | | | $ | 436,187 | | | $ | 396,573 | | Total | | $ | 68,906 | | | $ | 489,180 | | | $ | 420,274 | |
Liquidity and Capital Resources
Available Liquidity
Total debt, the weighted-average interest rate, cash and cash equivalents and available credit facilities were as follows: | | | (Dollars in millions) | | (Dollars in millions) |
| | July 2, | | December 31, | | July 1, | | December 31, |
| | 2022 | | 2021 | | 2023 | | 2022 |
Total debt, including long-term portion | Total debt, including long-term portion | | $ | 254.2 | | | $ | 287.7 | | Total debt, including long-term portion | | $ | 279.1 | | | $ | 248.4 | |
Weighted-average interest rate on debt | Weighted-average interest rate on debt | | 3.80 | % | | 3.27 | % | Weighted-average interest rate on debt | | 7.38 | % | | 4.36 | % |
Term Loans interest rate | Term Loans interest rate | | 3.50 | % | | 3.22 | % | Term Loans interest rate | | 6.69 | % | | 4.24 | % |
| Cash and cash equivalents | Cash and cash equivalents | | $ | 37.5 | | | $ | 76.3 | | Cash and cash equivalents | | $ | 22.8 | | | $ | 46.2 | |
Unused Revolving Credit Facility | Unused Revolving Credit Facility | | $ | 99.8 | | | $ | 99.8 | | Unused Revolving Credit Facility | | $ | 166.0 | | | $ | 199.8 | |
Subsequent to our quarter endedIn July 2, 2022, on July 14, 2022, we completed a refinancing of all our existing debt by entering into a new term loan (“2022 Term Loan”) and a new revolving credit facility.facility (“2022 Revolving Credit Facility”). The 2022 Term Loan is a $250.0 million senior secured loan that matures on July 14, 2027. The 2022 Revolving Credit Facility is a $200.0 million senior secured revolving credit facility that matures on July 14, 2027. The 2022 Term Loan and 2022 Revolving Credit Facility, collectively are the new credit facilities (“2022 Credit Facilities”). In conjunction with the closing of the 2022 Credit Facilities, we utilized the entire $250.0 million of proceeds from the 2022 Term Loan plus our existing cash on hand to pay off our entire debt balance outstanding of $254.2 million under our prior credit facilities. At the same leverage ratio, the interest rate spread in our new credit facilitiesthe 2022 Credit Facilities is lower thenthan the interest rate spread inunder our prior credit facilities that were in effect as of July 2, 2022. See Note 1 to our condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q for further information.
facilities. Interest payments are typically paid either on a monthly or quarterly basis, depending on the interest rate selected, on the last business day each month or quarter. In December 2019, we completedaddition, the refinancing of a portion of our existing debt by entering into a new revolving credit facility (“2019 Revolving Credit Facility”) to replace the then existing revolving credit facility that was entered into in November 2018 (“2018 Revolving Credit Facility”) and entered into a new term loan (“2019 Term Loan”). The 2019 Revolving Credit Facility is a $100.0 million senior secured revolving credit facility that will mature on December 20, 2024, replacing the $100.0 million 2018 Revolving Credit Facility that would have matured on November 21, 2023. The 20192022 Term Loan is a $140.0 million senior secured term loan that will mature on December 20, 2024. We also have an existing $240.0 million senior secured term loan that was entered into in November 2018 that will mature on November 21, 2025 (“2018 Term Loan”). The original amounts available under the 2019 Revolving Credit Facility, 2019 Term Loan, and 2018 Term Loan (collectively, the “Credit Facilities”) in aggregate, totaled $480.0 million. We are required to make installmentrequires quarterly amortization payments of 1.25%0.625% during year one and year two, 1.250% during year three and year four, and 1.875% during year five of the original outstanding principal balance of the 20192022 Term Loan amount, on a quarterly basis, on the last business day of the calendareach quarter. We made the mandatory quarterly principal prepayment under the 2019 Term Loan during the three and six months ended July 2, 2022 of $1.8 million and $3.5 million, respectively. In addition, if we meet the annual excess cash flow threshold, we are required to make an annual additional principal payment on the 2018 Term Loan based on the consolidated adjusted leverage ratio. We did not exceed the annual excess cash flow threshold for 2021 and thus, no annual excess cash flow payment was required to be paid during the first quarter of 2022. Further, the undrawn portion of the commitment of the 20192022 Revolving Credit Facility is subject to a commitment fee ranging from 0.175% to 0.275%, based upon the consolidated total net adjusted leverage ratio.ratio, typically paid on a quarterly basis, on the last business day each quarter. However, the 2022 Revolving Credit Facility does not require any principal installment payments. As of July 2, 2022,1, 2023, we were in compliance with all covenants required under the 2022 Credit Facilities. See Note 7 to our condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q for further information.
In November 2018, we completed credit facilities to replaceWe made the thenmandatory quarterly amortization payments under our existing credit facilities. The November 2018 credit facilities consisted of the 2018 Term Loan and the 2018 Revolving Credit Facility (collectively, the “2018 Credit Facilities”). We were required to make installment payments of 0.25% of the outstanding principal balance of the 2018 Term Loan amount on a quarterly basis, however, in conjunction with the 2019 refinancing where we paid down $56.0 million on the 2018 Term Loan, it paid all the required quarterly installment payments on the 2018 Term Loan until maturity.
However, since we were paying down on the term loans during the three months ended AprilJuly 1, 2023 and July 2, 2022 we were required to pay down on the 2019 Term Loan and 2018 Term Loan on a pro-rata basis and thus, we paid down $13.0of $1.6 million and $17.0$1.8 million, on the 2019 Term Loan and 2018 Term Loan, respectively, for an aggregate total pay down of $30.0 million.respectively. We made no voluntary prepayments on either the 2019 Term Loan or the 2018 Term Loanour term loans during theboth three months ended July 1, 2023 and July 2, 2022.
During the three months ended July 2, 2022, inIn April 2022, management approved and commenced a restructuring plan that will position us for stronger performance. The restructuring plan will mainly reduce headcount and consolidate facilities. As a result of this restructuring plan, we analyzed the need to write-down inventory and impair long-lived assets, including operating lease right-of-use assets. As of July 2, 2022,1, 2023, we estimate the remaining amount of charges related to this initiative to be $3.0$5.0 million to $5.0$8.0 million in total pre-tax restructuring charges through 2023. Of these charges, we estimate $2.0$4.0 million to $3.0$6.0 million to be cash payments for employee separation and other facility consolidation related expenses, and $1.0 million to $2.0 million to be non-cash charges for impairment of long-lived assets. On an annualized basis, we anticipate these restructuring actions will result in total cost savings of $3.0$11.0 million to $4.0$13.0 million. See Note 3 to our condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q for further information.
In November 2021, we entered into derivative contracts, U.S. dollar-one month LIBOR forward interest rate swaps designated as cash flow hedges, all with an effective date of January 1, 2024, for an aggregate total notional amount of $150.0 million,
weighted average fixed rate of 1.8%, and all terminating on January 1, 2031 (“Forward Interest Rate Swaps”). The Forward Interest Rate Swaps mature on a monthly basis, with fixed amount payer payment dates on the first day of each calendar month, commencing on February 1, 2024 through January 1, 2031. See Note 1 and Note 7 to our condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q for further information.
Subsequent to our quarter endedIn July 2, 2022, on July 14, 2022, as a result of completing a refinancing of the Credit Facilities,our existing debt, we were required to complete an amendment of our derivative contracts with an aggregate notional amount of $150.0 million we had entered into in November 2021.the Forward Interest Rate Swaps (“Amended Forward Interest Rate Swaps”). The existing derivative contractsForward Interest Rate Swaps were based on U.S. dollar-one month LIBOR which was requiredand were amended to be amended tobased on one month Term SOFR as borrowings using LIBOR are no longer available under the New2022 Credit Facilities. The Amended Forward Interest Rate Swaps weighted average fixed rate is 1.7%, as a result of the difference between U.S. dollar-one month LIBOR and one month Term SOFR. See Note 1 and Note 7 to our condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q for further information.
In December 2021,On April 25, 2023, we acquired MagSeal for acompleted the acquisition of BLR. The initial purchase price of $69.5for BLR was $115.0 million, net of cash
acquired, all payable in cash. UponWe paid a gross aggregate of $117.0 million in cash upon the closing of the transaction, we paid a gross total aggregate of $71.3 million in cash, a portion of which was by drawing down ontransaction. We utilized the 2019 Revolving Credit Facility. This draw down on the 20192022 Revolving Credit Facility was paid off by December 31, 2021.to complete the acquisition. See Note 2 to our condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q for further information.
In December 2021,On May 18, 2023, we entered intocompleted a sale-leaseback transactionpublic stock offering of our common stock resulting in net proceeds of $85.1 million. The stock offering net proceeds along with cash on hand were used to pay down $85.2 million on the 2022 Revolving Credit Facility that was drawn on and utilized to complete the acquisition of BLR. See Note 2, Note 7, and Note 8 to our condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q for the building and related land for our Gardena performance center located in Carson, California (“Sale-Leaseback Agreement”). The building and related land was sold for $141.3 million and we recognized a gain of $132.5 million. As part of the Sale-Leaseback Agreement, we entered into an initial five year lease for the usage of the just sold building and related land. The future minimum base monthly lease payments during the initial five year period in aggregate total $19.6 million.further information.
We expect to spend a total of $17.0$18.0 million to $19.0$20.0 million for capital expenditures in 2022 (excluding capital expenditures we will spend to restore the manufacturing capabilities related to our Guaymas performance center that was severely damaged by fire in June 2020),2023 financed by cash generated from operations, principally to support new contract awards in the Electronic Systems and Structural Systems segments.Systems. As part of our strategic plan to become a supplier of a wider range 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 monitor our asset base, including the market dynamics of the properties we own, and we may sell such properties and/or enter into sale-leaseback transactions. Such transactions would provide cash for various capital deployment options.
We continue to depend on operating cash flow and the availability of our 2022 Credit Facilities to provide short-term liquidity. Cash generated from operations and bank borrowing capacity is expected to provide sufficient liquidity to meet our obligations during the next twelve months from the date of issuance of these financial statements.
Cash Flow Summary
Net cash provided byused in operating activities for the six months ended July 2, 20221, 2023 was $6.1$9.7 million, compared to net cash used inprovided by operating activities of $17.8$6.1 million for the six months ended July 3, 2021.2, 2022. The higher net cash provided byused in operating activities during the first six months of 20222023 was mainly due to higher inventories, lower contract liabilities, lower accounts payable, lower accrued and other liabilities, and lower net income, partially offset by higher contract assets, higherlower accounts receivable, and lower net income.receivable.
Net cash used in investing activities was $8.7$125.3 million for the six months ended July 2, 2022,1, 2023, compared to $6.8$8.7 million in the six months ended July 3, 2021.2, 2022. The higher net cash used in investing activities during the first six months of 20222023 compared to the prior year period was mainly due to payments for the acquisition of BLR and higher purchases of property and equipment.
Net cash provided by financing activities was $111.6 million for the six months ended July 1, 2023, compared to a net cash used in financing activities wasof $36.3 million for the six months ended July 2, 2022, compared to $19.8 million for the six months ended July 3, 2021.2022. The higher net cash used inprovided by financing activities during the first six months of 20222023 was mainly due to $85.1 million net proceeds from the issuance of common stock in a public offering and $33.8 million net borrowings under the revolving credit facility, partially offset by the voluntary $30.0 million pay down on term loans duringin the prior year six months ended July 2, 2022.
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, right of offset of industrial revenue bonds and associated failed sales-leasebacks on property and equipment, and indemnities, none of which we believe may have a material current or future effect on our financial condition, liquidity, capital resources, or results of operations.
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 20212022 Annual Report on Form 10-K. There have been no material changes in any of our critical accounting policies during the three months ended July 2, 2022.1, 2023.
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. and U.K. interest rates on our outstanding long-term debt. At July 2, 2022,1, 2023, we had total borrowings of $254.2$279.1 million under our 2022 Credit Facilities.
The 20192022 Term Loan bears interest, at our option, at a rate equal to either (i) the EurodollarTerm Secured Overnight Financing Rate (defined as the London Interbank Offered Rate [“LIBOR”](“Term SOFR”) plus an applicable margin ranging from 1.50%1.375% to 2.50%2.375% 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 RateTerm SOFR plus 1.00%), and if the Base Rate is less than zero percent, it will be deemed zero percent) plus an applicable margin ranging from 0.50%0.375% to 1.50%1.375% per year, in each case based upon the consolidated total net adjusted leverage ratio.
The 20192022 Revolving Credit Facility bears interest, at our option, at a rate equal to either (i) the Eurodollar Rate (defined as LIBOR)Term SOFR plus an applicable margin ranging from 1.50%1.375% to 2.50%2.375% 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 RateTerm SOFR plus 1.00%), and if the Base Rate is less than zero percent, it will be deemed zero percent) plus an applicable margin ranging from 0.50%0.375% to 1.50% per year, in each case based upon the consolidated total net adjusted leverage ratio.
The 2018 Term Loan bears interest, at our option, at a rate equal to either (i) the Eurodollar Rate (defined as 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%1.375% 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.
Subsequent to our quarter ended July 2, 2022, on July 14, 2022, we completed a refinancing of all our existing debt by entering into a new term loan and a new revolving credit facility. See Note 1 to our condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q for further information.
Subsequent to our quarter ended July 2, 2022, on July 14, 2022, as a result of completing a refinancing of all our existing debt, we were required to complete an amendment of our derivative contracts with an aggregate notional amount of $150.0 million we had entered into in November 2021. The existing derivative contracts were based on U.S. dollar-one month LIBOR, which was required to be amended to one month Term SOFR, as borrowings using LIBOR are no longer available under the New Credit Facilities. See Note 1 to our condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q for further information.
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 Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934), and concluded that such disclosure controls and procedures were effective as of the end of the period covered by this report.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the three months ended July 2, 20221, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note 1011 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 (“Form 10-K”) for the year ended December 31, 20212022 for a discussion of our risk factors. There have been no material changes during the three months ended July 2, 20221, 2023 to the risk factors disclosed in our Form 10-K for the year ended December 31, 2021.2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
Exhibit
No. Description
2.4 Securities Purchase Agreement dated March 20, 2023, by and among BLR Aerospace, L.L.C., the Undersigned Equityholders of the Company, Crescent Capital Aerospace, L.L.C., as the Seller Representative, Ducommun LaBarge Technologies, Inc., and Ducommun Incorporated. Incorporated by reference to Exhibit 2.1 to Form 8-K filed on March 21, 2023. 2.6 Securities Purchase Agreement dated March 20, 2023, by and between Ducommun LaBarge Technologies, Inc., Ducommun Incorporated, solely for the purposes of Section 7.07, BLR, L.L.C., Crescent Capital Aerospace, L.L.C. and Michael Carpenter. Incorporated by reference to Exhibit 2.1 to Form 8-K filed on March 21, 2023. 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.
10.1 Credit Agreement, dated as of July 14, 2022, by and among Ducommun Incorporated, as Borrower, the subsidiaries of the Borrower party thereto as Guarantors, Bank of America, N.A., as Administrative Agent, Swingline Lender and an L/C Issuer, and the lender party thereto. Incorporated by reference to Exhibit 10.1 to Form 8-K filed on July 18, 2022. 10.4 Incremental Term Loan Lender Joinder Agreement and Additional Credit Extension Amendment, dated as of December 20, 2019, by and among Ducommun Incorporated, as Borrower, the subsidiaries of the Borrower party thereto, as Guarantors, Bank of America, N.A., as Administrative Agent, Swingline Lender and an L.C. Issuer, and the lender party thereto. Incorporated by reference to Exhibit 10.1 to Form 8-K filed on December 20, 2019.10.5 Amended and Restated Credit Agreement, dated as of 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 filed on November 26, 2018.
Exhibit
No. Description
Exhibit
No. Description
| | | | | | | | | | | | | | |
| Executive Officer | | Date of Agreement | |
| Laureen S. Gonzalez | | September 20, 2022 | |
| Suman B. Mookerji | | May 2, 2018 | |
| Jerry L. Redondo | | January 23, 2017 | |
| Rajiv A. Tata | | January 24, 2020 | |
| Christopher D. Wampler | | January 23, 2017 | |
Exhibit
No. Description
10.2810.27 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 | |
| Shirley G. Drazba | | October 18, 2018 | |
| Robert C. Ducommun | | December 31, 1985 | |
| Dean M. Flatt | | November 5, 2009 | |
| Laureen S. Gonzalez | | September 20, 2022 | |
| Jay L. Haberland | | February 2, 2009 | |
| Sheila G. Kramer | | June 1, 2021 | |
| Suman B. Mookerji | | April 27, 2023 | |
| Stephen G. Oswald | | January 23, 2017 | |
| Jerry L. Redondo | | October 1, 2015 | |
| Samara A. Strycker | | December 30, 2021 | |
| Rajiv A. Tata | | January 24, 2020 | |
| Christopher D. Wampler | | January 1, 2016 | |
101.INS Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL
101.SCH Inline XBRL Taxonomy Extension Schema
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase
101.LAB Inline XBRL Taxonomy Extension Label Linkbase
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase
104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
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* 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.
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| | | DUCOMMUN INCORPORATED |
| | | (Registrant) |
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Date: August 4, 20223, 2023 | By: | | /s/ Stephen G. Oswald |
| | | Stephen G. Oswald |
| | | Chairman, President and Chief Executive Officer |
| | | (Principal Executive Officer) |
| | |
Date: August 4, 20223, 2023 | By: | | /s/ Christopher D. WamplerSuman B. Mookerji |
| | | Christopher D. WamplerSuman B. Mookerji |
| | | Senior Vice President, Chief Financial Officer, Controller and Treasurer |
| | | (Principal Financial and Principal Accounting Officer) |
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