DUCOMMUN INC DE

Previous wording

In its 2023 Annual Report on Form 10-K, The Boeing Company (“Boeing”) indicated that in 2023, global air traffic largely recovered to 2019 levels with domestic travel continuing to be the most robust and international travel has mostly recovered. For 2024, while both major large aircraft manufacturers, Boeing and Airbus SE, have announced either similar or increases in build rates compared to 2023, the ramp up is slower than expected and below pre-pandemic levels. In addition, Boeing, one of our largest customers, was notified by the Federal Aviation Administration (“FAA”) in early January 2024 that the FAA has initiated an investigation into Boeing’s quality control system. This notification was followed by the FAA announcing actions to increase its oversight of Boeing as well as not approving production rate increases or additional production lines for the 737 MAX until it is satisfied that Boeing is in full compliance with required quality control procedures. Since Boeing is one of our largest customers, if Boeing is unable to meet the full compliance of the FAA’s required quality control procedures, it could have a material adverse impact on our business, results of operations and financial condition.

Current wording

In its 2023 Annual Report on Form 10-K, The Boeing Company (“Boeing”) indicated that in 2023, global air traffic largely recovered to 2019 levels with domestic travel continuing to be the most robust and international travel has mostly recovered. For 2024, while both major large aircraft manufacturers, Boeing and Airbus SE, have announced either similar or increases in build rates compared to 2023, the ramp up to date has been slower than initially expected and below pre-pandemic levels. In addition, Boeing, one of our largest customers, was notified by the Federal Aviation Administration (“FAA”) in early January 2024 that the FAA had initiated an investigation into Boeing’s quality control system. This notification was followed by the FAA announcing actions to increase its oversight of Boeing as well as not approving production rate increases or additional production lines for the 737 MAX until it is satisfied that Boeing is in full compliance with required quality control procedures. In July 2024, Boeing also pleaded guilty to conspiracy fraud charges, which may result in additional external oversight on its manufacturing and quality control process. Since Boeing is one of our largest customers, if Boeing is unable to meet the full compliance of the FAA’s required quality control procedures, it could have a material adverse impact on our business, results of operations and financial condition.

Previous wording

•Net income of $6.8 million, or 3.6% of net revenues, or $0.46 per diluted share

Current wording

•Net income of $7.7 million, or 3.9% of net revenues, or $0.52 per diluted share

Previous wording

Net revenues by end-use market and operating segment during the fiscal three months ended March 30, 2024 and April 1, 2023, respectively, were as follows:

Current wording

Net revenues by end-use market and operating segment during the fiscal three and six months ended June 29, 2024 and July 1, 2023, respectively, were as follows:

Previous wording

Net revenues for the three months ended March 30, 2024 were $190.8 million, compared to $181.2 million for the three months ended April 1, 2023. The year-over-year increase was primarily due to the following:

Current wording

Net revenues for the three months ended June 29, 2024 were $197.0 million, compared to $187.3 million for the three months ended July 1, 2023. The year-over-year increase in our key end-use markets were primarily due to the following:

Previous wording

•$5.7 million higher revenues in our commercial aerospace end-use markets due to higher rates on rotary-wing and large aircraft platforms, partially offset by lower rates on other commercial platforms; and

Current wording

•$3.2 million higher revenues in our military and space end-use markets due to higher rates on rotary-wing aircraft and naval platforms, partially offset by lower rates on fixed-wing aircraft platforms.

Previous wording

(1)Includes The Boeing Company (“Boeing”), General Dynamics Corporation (“GD”), Northrop Grumman Corporation (“Northrop”), RTX Corporation (“RTX”), Spirit AeroSystems Holdings, Inc. (“Spirit”), and Viasat, Inc. (“Viasat”) for the three months ended March 30, 2024 and April 1, 2023.

Current wording

(1)Includes The Boeing Company (“Boeing”), Lockheed Martin Corporation (“Lockheed”), Northrop Grumman Corporation (“Northrop”), RTX Corporation (“RTX”), Spirit AeroSystems Holdings, Inc. (“Spirit”), and Viasat, Inc. (“Viasat”) for the three and six months ended June 29, 2024 and July 1, 2023.

Previous wording

Boeing, GD, Northrop, RTX, Spirit, and Viasat represented the following percentages of total accounts receivable:

Current wording

Boeing, Lockheed, Northrop, RTX, Spirit, and Viasat represented the following percentages of total accounts receivable:

Previous wording

The net revenues and accounts receivable from Boeing, GD, Northrop, RTX, Spirit, and Viasat are diversified over a number of commercial, military and space programs and were generated by both operating segments.

Current wording

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

Previous wording

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 increased year-over-year with the three months ended March 30, 2024 of 24.6%, compared to the three months ended April 1, 2023 of 20.3% primarily due to favorable product mix and higher manufacturing volume.

Current wording

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 increased year-over-year with the three months ended June 29, 2024 of 26.0%, compared to the three months ended July 1, 2023 of 21.4% primarily due to higher manufacturing volume and favorable product mix, partially offset by higher other manufacturing costs.

Previous wording

Restructuring charges decreased $2.8 million year-over-year in the three months ended March 30, 2024, compared to the three months ended April 1, 2023, primarily due to the winding down of the previously disclosed restructuring plan that was approved and commenced in April 2022. See Note 3 for further information.

Current wording

Restructuring charges decreased $2.7 million and $5.5 million (including $0.9 million recorded as cost of sales in both periods) year-over-year in the three and six months ended June 29, 2024, compared to the three and six months ended July 1, 2023, respectively, primarily due to the winding down of the previously disclosed restructuring plan that was approved and commenced in April 2022. See Note 3 for further information.

Previous wording

Interest expense decreased $0.3 million year-over-year in the three months ended March 30, 2024 compared to the three months ended April 1, 2023, primarily due to the interest rate swaps became effective as of January 1, 2024, partially offset by a higher debt balance during the three months ended March 30, 2024.

Current wording

Interest expense decreased $1.8 million and $2.1 million year-over-year in the three and six months ended June 29, 2024, compared to the three and six months ended July 1, 2023, respectively, primarily due to the interest rate swaps that became effective as of January 1, 2024, along with a lower debt balance.

Previous wording

We recorded income tax expense of $1.9 million for the three months ended March 30, 2024 compared to $0.8 million for the three months ended April 1, 2023. The increase in income tax expense for the first quarter of 2024 compared to the first quarter of 2023 was primarily due to higher pre-tax income in the first quarter of 2024 compared to the first quarter of 2023 and higher discrete income tax expense recognized in the first quarter of 2024 related to stock-based compensation.

Current wording

We recorded income tax expense of $2.2 million for the three months ended June 29, 2024 compared to $1.0 million for the three months ended July 1, 2023. The increase in income tax expense for the second quarter of 2024 compared to the second quarter of 2023 was primarily due to higher pre-tax income and higher income tax expense related to non-deductible book compensation expenses in the second quarter of 2024 compared to the second quarter of 2023. The increase in income tax expense was partially offset by higher income tax benefits related to the U.S. Federal research and development credit recognized in the second quarter of 2024 compared to the second quarter of 2023.

Previous wording

Our total amount of unrecognized tax benefits was $4.6 million and $4.5 million as of March 30, 2024 and December 31, 2023, 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 March 30, 2024 and December 31, 2023 were not significant. As a result of statute of limitations set to expire in the fourth quarter of 2024, we expect decreases to our unrecognized tax benefits of approximately $1.0 million in the next twelve months.

Current wording

Our total amount of unrecognized tax benefits was $4.8 million and $4.5 million as of June 29, 2024 and December 31, 2023, respectively. If recognized, $3.0 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 June 29, 2024 and December 31, 2023 were not significant. As a result of statute of limitations set to expire in the fourth quarter of 2024, we expect decreases to our unrecognized tax benefits of approximately $1.0 million in the next twelve months.

Previous wording

Net income and earnings per share for the three months ended March 30, 2024 were $6.8 million, or 3.6% of revenues, or $0.46 per diluted share, compared to $5.2 million, or 2.9% of revenues, or $0.42 per diluted share, for the three months ended April 1, 2023. The increase in net income for the three months ended March 30, 2024 compared to the three months ended April 1, 2023 was primarily due to higher gross profit of $10.2 million and lower restructuring charges of $2.8 million, partially offset by higher SG&A expenses of $6.7 million and lower other income of $3.9 million. The higher SG&A expenses were primarily due to BLR SG&A expenses of $5.5 million which did not exist in the prior year period as the acquisition of BLR was completed during the three months ended July 1, 2023.

Current wording

Net income and earnings per share for the three months ended June 29, 2024 were $7.7 million, or 3.9% of revenues, or $0.52 per diluted share, compared to $2.4 million, or 1.3% of revenues, or $0.17 per diluted share, for the three months ended July 1, 2023. The increase in net income for the three months ended June 29, 2024 compared to the three months ended July 1, 2023 was primarily due to higher gross profit of $11.1 million and lower restructuring charges of $2.7 million ($0.9 million was recorded as cost of sales), partially offset by higher SG&A expenses of $5.7 million and lower other income of $4.1 million. A portion of the higher SG&A expenses were due to BLR SG&A expenses of $1.3 million which did not exist until the end of April 2023.

Previous wording

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 months ended March 30, 2024 and April 1, 2023:

Current wording

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 June 29, 2024 and July 1, 2023:

Previous wording

(2)The three months ended March 30, 2024 and April 1, 2023 both included less than $0.1 million of stock-based compensation expense recorded as cost of sales.

Current wording

(2)The three and six months ended June 29, 2024 each included less than $0.1 million of stock-based compensation expense recorded as cost of sales. The three and six months ended July 1, 2023 included less than $0.1 million and $0.1 million, respectively, of stock-based compensation expense recorded as cost of sales.

Previous wording

(1) The three months ended March 30, 2024 and April 1, 2023 included $1.4 million and $0.4 million, respectively, of stock-based compensation expense for awards with both performance and market conditions that will be settled in cash. The three months ended March 30, 2024 and April 1, 2023 included less than $0.1 million and $0.1 million, respectively, of stock-based compensation expense recorded as cost of sales.

Current wording

(4)The three and six months ended June 29, 2024 included $0.5 million and $1.9 million, respectively, of stock-based compensation expense for awards with both performance and market conditions that will be settled in cash. The three and six months ended July 1, 2023 included $0.8 million and $1.2 million, respectively, of stock-based compensation expense for awards with both performance and market conditions that will be settled in cash.

Previous wording

Electronic Systems segment operating income in the three months ended March 30, 2024 compared to the three months ended April 1, 2023 increased $9.0 million primarily due to higher manufacturing volume, favorable product mix, and lower restructuring charges.

Current wording

Electronic Systems segment operating income in the three months ended June 29, 2024 compared to the three months ended July 1, 2023 increased $7.3 million primarily due to higher manufacturing volume, favorable product mix, and lower restructuring charges.

Previous wording

•$2.1 million higher revenues in our military and space end-use markets due to higher rates on fixed-wing and rotary-wing platforms, partially offset by lower rates on missile platforms.

Current wording

•$7.0 million higher revenues in our military and space end-use markets due to higher rates on fixed-wing and rotary-wing aircraft platforms, and naval and submarine platforms, partially offset by lower rates on missile platforms.

Previous wording

The Structural Systems segment operating income in the three months ended March 30, 2024 compared to the three months ended April 1, 2023 decreased $1.9 million primarily due to higher costs associated with the wind down of our Monrovia performance center, partially offset by favorable product mix and lower restructuring charges.

Current wording

The Structural Systems segment operating income in the six months ended June 29, 2024 compared to the six months ended July 1, 2023 increased $3.3 million primarily due to higher manufacturing volume, favorable product mix, lower Guaymas fire related expenses, and lower restructuring charges, partially offset by higher costs associated with the wind down of our Monrovia performance center.

Previous wording

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 absorbed by our other existing performance centers, however, we have reestablished and are in the process of certification with various customers and 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. As responsibility for the fire is still undetermined, 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 12 to our condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q.

Current wording

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 absorbed by our other existing performance centers, however, we have reestablished and are in the process of certification with various customers and 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. In addition, subsequent to the quarter end, we received a subrogation demand from our landlord’s insurer, which we are currently evaluating. As responsibility for the fire is still undetermined, 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 12 to our condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q.

Previous wording

CG&A expenses increased $0.8 million for the three months ended March 30, 2024 compared to the three months ended April 1, 2023 primarily due to higher stock-based compensation expense of $1.0 million and higher compensation and benefits costs of $0.6 million, partially offset by lower professional services fees of $0.8 million.

Current wording

CG&A expenses increased $4.4 million for the six months ended June 29, 2024 compared to the six months ended July 1, 2023 primarily due to higher professional services fees of $2.1 million, of which $1.4 million was related to the unsolicited non-binding offer to acquire all common stock outstanding of Ducommun Incorporated, and higher compensation and benefits expense of $1.5 million.

Previous wording

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, and inventory purchase accounting adjustments (“Adjusted EBITDA”) were $27.4 million and $23.1 million for the three months ended March 30, 2024 and April 1, 2023, respectively.

Current wording

Adjusted earnings before interest, taxes, depreciation, amortization, stock-based compensation expense, restructuring charges, professional fees related to unsolicited non-binding acquisition offer, Guaymas fire related expenses, insurance recoveries related to loss on operating assets, and inventory purchase accounting adjustments (“Adjusted EBITDA”) were $30.0 million and $26.1 million for the three months ended June 29, 2024 and July 1, 2023, respectively.

Previous wording

•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; and

Current wording

•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;

Previous wording

The increase in backlog was primarily in the military and space end-use markets and commercial aerospace end-use markets. $672.0 million of total backlog is expected to be delivered over the next 12 months. The following table summarizes our backlog as of March 30, 2024 and December 31, 2023:

Current wording

The increase in backlog was primarily in the military and space end-use markets and commercial aerospace end-use markets. $668.0 million of total backlog is expected to be delivered over the next 12 months. The following table summarizes our backlog as of June 29, 2024 and December 31, 2023:

Previous wording

We made the mandatory quarterly amortization payments under our existing term loan of $1.6 million during both three months ended March 30, 2024 and April 1, 2023. We made no voluntary prepayments on our term loans during both three months ended March 30, 2024 and April 1, 2023.

Current wording

For each of the three months ended June 29, 2024 and July 1, 2023, we made the required quarterly amortization payments on the 2022 Term Loan of $1.6 million. For each of the six months ended June 29, 2024 and July 1, 2023, we made the required amortization payments on the 2022 Term Loan of $3.1 million. We made no voluntary prepayments on our term loans during each of the three and six months ended June 29, 2024 and July 1, 2023.

Previous wording

In 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 March 30, 2024, we estimate the remaining amount of charges related to this initiative will be $4.0 million to $6.0 million in total pre-tax restructuring charges through 2024. Of these charges, we estimate $3.5 million to $5.0 million to be cash payments for employee separation and other facility consolidation related expenses, and $0.5 million to $1.0 million to be non-cash charges for impairment of long-lived assets. The restructuring accrual for severance and benefits of $4.5 million as of March 30, 2024 are expected to be paid out through 2024. On an annualized basis, we anticipate these restructuring actions will result in total cost savings of $11.0 million to $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.

Current wording

In 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 June 29, 2024, we estimate the remaining amount of charges related to this initiative will be $3.0 million to $4.0 million in total pre-tax restructuring charges through early 2025 for employee separation and other facility consolidation related expense. The restructuring accrual for severance and benefits of $4.5 million as of June 29, 2024 are expected to be paid out through 2024. On an annualized basis, we anticipate these restructuring actions will result in total cost savings of $11.0 million to $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.

Previous wording

In May 2023, we completed a public offering of our common stock resulting in net proceeds 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, Note 8, and Note 9 to our condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q for further information.

Current wording

In May 2023, we completed a public offering of our common stock resulting in net proceeds of $85.1 million. The net proceeds of the public stock offering 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 8, and Note 9 to our condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q for further information.

Previous wording

Net cash used in operating activities for the three months ended March 30, 2024 was $1.6 million, compared to $18.9 million for the three months ended April 1, 2023. The lower net cash used in operating activities during the first three months of 2024 was mainly due to a smaller increase in inventories and higher contract liabilities, partially offset by higher contract assets.

Current wording

Net cash provided by operating activities for the six months ended June 29, 2024 was $1.8 million, compared to a net cash used of $9.7 million for the six months ended July 1, 2023. The higher net cash provided by operating activities during the first six months of 2024 was mainly due to higher net income and higher accounts payable, partially offset by higher contract assets.

Previous wording

Net cash used in investing activities was $5.0 million for the three months ended March 30, 2024, compared to $5.4 million in the three months ended April 1, 2023. The lower net cash used in investing activities during the first three months of 2024 compared to the prior year period was due to lower purchases of property and equipment.

Current wording

Net cash used in investing activities was $8.3 million for the six months ended June 29, 2024, compared to $125.3 million in the six months ended July 1, 2023. The lower net cash used in investing activities during the first six months of 2024 compared to the prior year period was mainly due to no acquisitions in the first six months of 2024.

Previous wording

Net cash used in financing activities was $4.2 million for the three months ended March 30, 2024, compared to a net cash used in financing activities of $4.8 million for the three months ended April 1, 2023. The lower net cash used in financing activities during the first three months of 2024 was mainly due to lower net cash paid upon issuance of common stock under stock plans.

Current wording

Net cash used in financing activities was $7.0 million for the six months ended June 29, 2024, compared to a net cash provided by financing activities of $111.6 million for the six months ended July 1, 2023. The higher net cash used in financing activities during the first six months of 2024 was mainly due to the issuance of common stock in a public offering in the first six months of 2023 that did not recur in 2024 and lower net borrowings in the first six months of 2024.