Company Quick10K Filing
Ducommun
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 12 $521
10-Q 2019-10-30 Quarter: 2019-09-28
10-Q 2019-08-05 Quarter: 2019-06-29
10-Q 2019-05-06 Quarter: 2019-03-30
10-K 2019-02-28 Annual: 2018-12-31
10-Q 2018-11-05 Quarter: 2018-09-29
10-Q 2018-08-06 Quarter: 2018-06-30
10-Q 2018-05-10 Quarter: 2018-03-31
10-K 2018-02-28 Annual: 2017-12-31
10-Q 2017-11-02 Quarter: 2017-09-30
10-Q 2017-08-03 Quarter: 2017-07-01
10-Q 2017-05-04 Quarter: 2017-04-01
10-K 2017-03-06 Annual: 2016-12-31
10-Q 2016-11-03 Quarter: 2016-10-01
10-Q 2016-08-05 Quarter: 2016-07-02
10-Q 2016-05-09 Quarter: 2016-04-02
10-K 2016-03-14 Annual: 2015-12-31
10-Q 2015-11-04 Quarter: 2015-10-03
10-Q 2015-08-05 Quarter: 2015-07-04
10-Q 2015-05-12 Quarter: 2015-04-04
10-K 2015-04-10 Annual: 2014-12-31
10-Q 2014-10-27 Quarter: 2014-09-27
10-Q 2014-07-28 Quarter: 2014-06-28
10-Q 2014-04-28 Quarter: 2014-03-29
10-K 2014-02-27 Annual: 2013-12-31
10-Q 2013-10-28 Quarter: 2013-09-28
10-Q 2013-08-05 Quarter: 2013-06-29
10-Q 2013-05-06 Quarter: 2013-03-30
10-K 2013-03-04 Annual: 2012-12-31
10-Q 2012-11-07 Quarter: 2012-09-29
10-Q 2012-08-06 Quarter: 2012-06-30
10-Q 2012-05-07 Quarter: 2012-03-31
10-K 2012-03-05 Annual: 2011-12-31
10-Q 2011-11-07 Quarter: 2011-10-01
10-Q 2011-08-09 Quarter: 2011-07-02
10-Q 2011-05-02 Quarter: 2011-04-02
10-K 2011-02-22 Annual: 2010-12-31
10-Q 2010-11-01 Quarter: 2010-10-02
10-Q 2010-08-02 Quarter: 2010-07-03
10-Q 2010-05-03 Quarter: 2010-04-03
10-K 2010-02-22 Annual: 2009-12-31
8-K 2019-10-30 Earnings, Exhibits
8-K 2019-10-07 Enter Agreement, M&A, Off-BS Arrangement, Regulation FD, Exhibits
8-K 2019-08-05 Earnings, Exhibits
8-K 2019-06-26 Officers, Exhibits
8-K 2019-06-04 Officers
8-K 2019-05-06 Earnings, Exhibits
8-K 2019-05-01 Shareholder Vote
8-K 2019-02-28 Earnings, Exhibits
8-K 2018-11-21 Enter Agreement, Leave Agreement, Off-BS Arrangement, Other Events, Exhibits
8-K 2018-11-05 Earnings, Exhibits
8-K 2018-10-18 Officers, Exhibits
8-K 2018-08-06 Earnings, Exhibits
8-K 2018-05-17 Officers, Exhibits
8-K 2018-05-14 Officers
8-K 2018-05-10 Earnings, Exhibits
8-K 2018-05-02 Officers, Shareholder Vote, Exhibits
8-K 2018-04-23 Other Events, Exhibits
8-K 2018-02-28 Earnings, Exhibits
8-K 2018-02-21 Amend Bylaw, Exhibits
DCO 2019-09-28
Part I. Financial Information
Item 1. Financial Statements
Note 1. Summary of Significant Accounting Policies
Note 2. Adoption of Accounting Standards Codification 842
Note 3. Business Combinations
Note 4. Restructuring Activities
Note 5. Inventories
Note 6. Goodwill
Note 7. Accrued and Other Liabilities
Note 8. Long-Term Debt
Note 9. Employee Benefit Plans
Note 10. Indemnifications
Note 11. Income Taxes
Note 12. Contingencies
Note 13. Business Segment Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 4. Mine Safety Disclosures
Item 6. Exhibits
EX-31.1 dco-q3201910xqex31_1.htm
EX-31.2 dco-q3201910xqxex31_2.htm
EX-32 dco-q3201910xqxex32.htm

Ducommun Earnings 2019-09-28

DCO 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
ROAD 740 509 183 762 113 42 82 733 15% 9.0 8%
GLDD 704 869 618 701 162 29 84 901 23% 10.8 3%
DCO 521 680 407 677 138 20 52 746 20% 14.5 3%
WLDN 422 341 194 354 107 6 20 485 30% 24.0 2%
MG 405 733 452 740 214 0 40 663 29% 16.4 0%
VSEC 384 827 480 709 0 36 72 664 0% 9.2 4%
STRL 349 500 325 1,034 103 26 46 362 10% 7.9 5%
HIL 157 281 186 400 126 -16 -5 184 31% -37.9 -6%
CVU 98 154 55 100 21 4 11 100 21% 9.3 3%
ORN 68 363 230 166 10 -110 -70 148 6% -2.1 -30%

10-Q 1 dco-q3201910xq.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 _________________________________________________________
FORM 10-Q
 _________________________________________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 2019
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number 001-08174
 _________________________________________________________
DUCOMMUN INCORPORATED
(Exact name of registrant as specified in its charter)
 _________________________________________________________
Delaware
 
95-0693330
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
200 Sandpointe Avenue, Suite 700, Santa Ana, California
 
92707-5759
(Address of principal executive offices)
 
(Zip code)
Registrant’s telephone number, including area code: (657) 335-3665
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock, $.01 par value per share
 
DCO
 
New York Stock Exchange
 _________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x  No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
 
¨
Accelerated filer
 
x
 
 
 
 
Non-accelerated filer
 
¨
Smaller reporting company
 
¨
 
 
 
 
 
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
As of October 22, 2019, the registrant had 11,563,241 shares of common stock outstanding.



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


2


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)
 
 
September 28,
2019
 
December 31,
2018
Assets
 
 
 
 
Current Assets
 
 
 
 
Cash and cash equivalents
 
$
6,381

 
$
10,263

Restricted cash
 
361

 

Accounts receivable, net of allowance for doubtful accounts of $896 and $1,135 at September 28, 2019 and December 31, 2018, respectively
 
77,002

 
67,819

Contract assets
 
102,475

 
86,665

Inventories
 
109,848

 
101,125

Production cost of contracts
 
10,704

 
11,679

Other current assets
 
5,947

 
6,531

Total Current Assets
 
312,718

 
284,082

Property and equipment, net of accumulated depreciation of $164,907 and $154,840 at September 28, 2019 and December 31, 2018, respectively
 
112,597

 
107,045

Operating lease right-of-use assets
 
18,602

 

Goodwill
 
136,057

 
136,057

Intangibles, net
 
103,977

 
112,092

Non-current deferred income taxes
 
313

 
308

Other assets
 
5,290

 
5,155

Total Assets
 
$
689,554

 
$
644,739

Liabilities and Shareholders’ Equity
 
 
 
 
Current Liabilities
 
 
 
 
Accounts payable
 
$
78,310

 
$
69,274

Contract liabilities
 
11,850

 
17,145

Accrued and other liabilities
 
37,701

 
37,786

Operating lease liabilities
 
2,915

 

Current portion of long-term debt
 
2,281

 
2,330

Total Current Liabilities
 
133,057

 
126,535

Long-term debt
 
222,600

 
228,868

Non-current operating lease liabilities
 
17,156

 

Non-current deferred income taxes
 
18,107

 
18,070

Other long-term liabilities
 
14,855

 
14,441

Total Liabilities
 
405,775

 
387,914

Commitments and contingencies (Notes 10, 12)
 

 

Shareholders’ Equity
 
 
 
 
Common stock - $0.01 par value; 35,000,000 shares authorized; 11,561,987 and 11,417,863 shares issued and outstanding at September 28, 2019 and December 31, 2018, respectively
 
116

 
114

Additional paid-in capital
 
86,828

 
83,712

Retained earnings
 
203,682

 
180,356

Accumulated other comprehensive loss
 
(6,847
)
 
(7,357
)
Total Shareholders’ Equity
 
283,779

 
256,825

Total Liabilities and Shareholders’ Equity
 
$
689,554

 
$
644,739

See accompanying notes to Condensed Consolidated Financial Statements.

3


Ducommun Incorporated and Subsidiaries
Condensed Consolidated Statements of Income
(Unaudited)
(Dollars in thousands, except per share amounts)

 
 
Three Months Ended
 
Nine Months Ended
 
 
September 28,
2019
 
September 29,
2018
 
September 28,
2019
 
September 29,
2018
Net Revenues
 
$
181,101

 
$
159,842

 
$
534,162

 
$
465,124

Cost of Sales
 
142,774

 
128,726

 
422,076

 
375,225

Gross Profit
 
38,327

 
31,116

 
112,086

 
89,899

Selling, General and Administrative Expenses
 
23,724

 
20,956

 
71,031

 
61,476

Restructuring Charges
 

 
3,373

 

 
10,784

Operating Income
 
14,603

 
6,787

 
41,055

 
17,639

Interest Expense
 
(4,363
)
 
(2,497
)
 
(13,140
)
 
(9,159
)
Income Before Taxes
 
10,240

 
4,290

 
27,915

 
8,480

Income Tax Expense
 
1,937

 
119

 
4,325

 
118

Net Income
 
$
8,303

 
$
4,171

 
$
23,590

 
$
8,362

Earnings Per Share
 
 
 
 
 
 
 
 
Basic earnings per share
 
$
0.72

 
$
0.37

 
$
2.05

 
$
0.73

Diluted earnings per share
 
$
0.70

 
$
0.36

 
$
2.00

 
$
0.72

Weighted-Average Number of Common Shares Outstanding
 
 
 
 
 
 
 
 
Basic
 
11,551

 
11,404

 
11,501

 
11,382

Diluted
 
11,794

 
11,683

 
11,784

 
11,639

See accompanying notes to Condensed Consolidated Financial Statements.

4


Ducommun Incorporated and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
(Dollars in thousands)
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 28,
2019
 
September 29,
2018
 
September 28,
2019
 
September 29,
2018
Net Income
 
$
8,303

 
$
4,171

 
$
23,590

 
$
8,362

Other Comprehensive Income, Net of Tax:
 
 
 
 
 
 
 
 
Amortization of actuarial loss and prior service costs, net of tax of $(51) and $(45) for the three months ended September 28, 2019 and September 29, 2018, respectively, and $(154) and $(134) for the nine months ended September 28, 2019 and September 29, 2018, respectively
 
170

 
140

 
510

 
423

Change in unrealized gains and losses on cash flow hedges, net of tax of $(29) and $(16) for the three months ended September 28, 2019 and September 29, 2018, respectively, and $(2) and $(104) for the nine months ended September 28, 2019 and September 29, 2018, respectively
 
91

 
129

 

 
594

Other Comprehensive Income, Net of Tax
 
261

 
269

 
510

 
1,017

Comprehensive Income
 
$
8,564

 
$
4,440

 
$
24,100

 
$
9,379

See accompanying notes to Condensed Consolidated Financial Statements.

5


Ducommun Incorporated and Subsidiaries
Condensed Consolidated Statements of Changes in Shareholders’ Equity
(Unaudited)
(Dollars in thousands)

 
 
Three Months Ended
 
Nine Months Ended
 
 
September 28,
2019
 
September 29,
2018
 
September 28,
2019
 
September 29,
2018
Common Stock and Paid-in-Capital
 
 
 
 
 
 
 
 
Balance, Beginning of Period
 
$
83,959

 
$
81,445

 
$
83,826

 
$
80,336

Employee Stock Purchase Plan
 
1,118

 

 
1,118

 

Stock Options Exercised
 
570

 
539

 
1,409

 
1,397

Stock Awards Vested
 
30

 
7

 
6,665

 
2,724

Stock Repurchased Related to Stock Options Exercised and Stock Awards Vested
 
(784
)
 
(729
)
 
(11,396
)
 
(5,467
)
Stock-Based Compensation
 
2,051

 
1,299

 
5,322

 
3,571

Balance, End of Period
 
86,944

 
82,561

 
86,944

 
82,561

Retained Earnings
 
 
 
 
 
 
 
 
Balance, Beginning of Period
 
195,379

 
175,512

 
180,356

 
161,364

Net Income
 
8,303

 
4,171

 
23,590

 
8,362

Adoption of ASC 842 Adjustment
 

 

 
(264
)
 

Adoption of ASC 606 Adjustment
 

 

 

 
8,665

Adoption of ASU 2018-02 Adjustment
 

 

 

 
1,292

Balance, End of Period
 
203,682

 
179,683

 
203,682

 
179,683

Accumulated Other Comprehensive Loss
 
 
 
 
 
 
 
 
Balance, Beginning of Period
 
(7,108
)
 
(6,687
)
 
(7,357
)
 
(6,117
)
Other Comprehensive Income, Net of Tax
 
261

 
269

 
510

 
1,017

Adoption of ASU 2018-02 Adjustment
 

 

 

 
(1,318
)
Balance, End of Period
 
(6,847
)
 
(6,418
)
 
(6,847
)
 
(6,418
)
Total Stockholders’ Equity
 
$
283,779

 
$
255,826

 
$
283,779

 
$
255,826

See accompanying notes to Condensed Consolidated Financial Statements.


6


Ducommun Incorporated and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
 
 
 
Nine Months Ended
 
 
September 28,
2019
 
September 29,
2018
Cash Flows from Operating Activities
 
 
 
 
Net Income
 
$
23,590

 
$
8,362

Adjustments to Reconcile Net Income to
 
 
 
 
Net Cash Provided by Operating Activities:
 
 
 
 
Depreciation and amortization
 
20,751

 
18,635

Non-cash operating lease cost
 
1,972

 

Property and equipment impairment due to restructuring
 

 
5,784

Stock-based compensation expense
 
5,322

 
3,414

Deferred income taxes
 
113

 
3,446

(Recovery of) provision for doubtful accounts
 
(239
)
 
344

Other
 
152

 
9,275

Changes in Assets and Liabilities:
 
 
 
 
Accounts receivable
 
(8,944
)
 
10,771

Contract assets
 
(15,810
)
 
(88,066
)
Inventories
 
(8,723
)
 
22,909

Production cost of contracts
 
(1,537
)
 
(1,447
)
Other assets
 
525

 
3,709

Accounts payable
 
8,806

 
22,610

Contract liabilities
 
(5,295
)
 
15,108

Accrued and other liabilities
 
(614
)
 
(1,452
)
Net Cash Provided by Operating Activities
 
20,069

 
33,402

Cash Flows from Investing Activities
 
 
 
 
Purchases of property and equipment
 
(14,698
)
 
(12,796
)
Proceeds from sale of assets
 

 
117

Payments for acquisition of Certified Thermoplastics Co., LLC, net of cash acquired
 

 
(30,711
)
Net Cash Used in Investing Activities
 
(14,698
)
 
(43,390
)
Cash Flows from Financing Activities
 
 
 
 
Borrowings from senior secured revolving credit facility
 
163,500

 
239,700

Repayments of senior secured revolving credit facility
 
(163,500
)
 
(227,100
)
Repayments of term loan
 
(6,570
)
 

Repayments of other debt and finance lease obligations
 
(118
)
 

Net cash paid upon issuance of common stock under stock plans
 
(2,204
)
 
(1,189
)
Net Cash (Used in) Provided by Financing Activities
 
(8,892
)
 
11,411

Net (Decrease) Increase in Cash, Cash Equivalents, and Restricted Cash
 
(3,521
)
 
1,423

Cash, Cash Equivalents, and Restricted Cash at Beginning of Period
 
10,263

 
2,150

Cash, Cash Equivalents, and Restricted Cash at End of Period
 
$
6,742

 
$
3,573

See accompanying notes to Condensed Consolidated Financial Statements.

7


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

Note 1. Summary of Significant Accounting Policies
Description of Business
We are a leading global provider of engineering and manufacturing services for high-performance products and high-cost-of failure applications used primarily in the aerospace and defense (“A&D”), industrial, medical and other industries (collectively, “Industrial”). Our operations are organized into two primary businesses: Electronic Systems segment and Structural Systems segment, each of which is a reportable operating segment. Electronic Systems designs, engineers and manufactures high-reliability electronic and electromechanical products used in worldwide technology-driven markets including A&D and Industrial end-use markets. Electronic Systems’ product offerings primarily range from prototype development to complex assemblies. Structural Systems designs, engineers and manufactures large, complex contoured aerostructure components and assemblies and supplies composite and metal bonded structures and assemblies. Structural Systems’ products are primarily used on commercial aircraft, military fixed-wing aircraft, and military and commercial rotary-wing aircraft. All reportable operating segments follow the same accounting principles.
Basis of Presentation
The unaudited condensed consolidated financial statements include the accounts of Ducommun Incorporated and its subsidiaries (“Ducommun,” the “Company,” “we,” “us” or “our”), after eliminating intercompany balances and transactions. The December 31, 2018 condensed consolidated balance sheet data was derived from audited financial statements, but does not contain all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”).
Our significant accounting policies were described in Part IV, Item 15(a)(1), “Note 1. Summary of Significant Accounting Policies” in our Annual Report on Form 10-K for the year ended December 31, 2018. We followed the same accounting policies for interim reporting except for the change in our lease accounting practices described below. The financial information included in this Quarterly Report on Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2018.
In the opinion of management, all adjustments, consisting of recurring accruals, have been made that are necessary to fairly state our condensed consolidated financial position, statements of income, comprehensive income and cash flows in accordance with GAAP for the periods covered by this Quarterly Report on Form 10-Q. The results of operations for the three and nine months ended September 28, 2019 are not necessarily indicative of the results to be expected for the full year ending December 31, 2019.
Our fiscal quarters typically end on the Saturday closest to the end of March, June and September for the first three fiscal quarters of each year, and ends on December 31 for our fourth fiscal quarter. As a result of using fiscal quarters for the first three quarters combined with leap years, our first and fourth fiscal quarters can range between 12 1/2 weeks to 13 1/2 weeks while the second and third fiscal quarters remain at a constant 13 weeks per fiscal quarter.
Certain reclassifications have been made to prior period amounts to conform to the current year’s presentation.
Changes in Accounting Policies
We adopted Accounting Standards Codification (“ASC”) 842, “Leases” (“ASC 842”), on January 1, 2019. As a result, we changed our accounting policy for lease accounting as discussed in Note 2.
We applied ASC 842 using the additional transition method and therefore, recognized the cumulative effect of initially applying ASC 842 as an adjustment to the opening condensed consolidated balance sheet at January 1, 2019. Therefore, the comparative information has not been adjusted and continues to be reported under the previous lease accounting standard, ASC 840, “Leases” (“ASC 840”). The details of the significant changes and quantitative impact of the changes are described in Note 2.
Use of Estimates
Certain amounts and disclosures included in the unaudited condensed consolidated financial statements require management to make estimates and judgments that affect the amounts of assets, liabilities (including forward loss reserves), revenues and expenses, and related disclosures of contingent assets and liabilities. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

8


Supplemental Cash Flow Information
 
 
(In thousands)
 
 
Nine Months Ended
 
 
September 28,
2019
 
September 29,
2018
Interest paid
 
$
11,597

 
$
8,073

Taxes paid
 
$
4,610

 
$
195

Non-cash activities:
 
 
 
 
     Purchases of property and equipment not paid
 
$
1,054

 
$
970

Earnings Per Share
Basic earnings per share are computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding in each period. Diluted earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding, plus any potentially dilutive shares that could be issued if exercised or converted into common stock in each period.
The net income and weighted-average common shares outstanding used to compute earnings per share were as follows:
 
 
(In thousands, except per share data)
 
(In thousands, except per share data)
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 28,
2019
 
September 29,
2018
 
September 28,
2019
 
September 29,
2018
Net income
 
$
8,303

 
$
4,171

 
$
23,590

 
$
8,362

Weighted-average number of common shares outstanding
 
 
 
 
 
 
 
 
Basic weighted-average common shares outstanding
 
11,551

 
11,404

 
11,501

 
11,382

Dilutive potential common shares
 
243

 
279

 
283

 
257

Diluted weighted-average common shares outstanding
 
11,794

 
11,683

 
11,784

 
11,639

Earnings per share
 
 
 
 
 
 
 
 
Basic
 
$
0.72

 
$
0.37

 
$
2.05

 
$
0.73

Diluted
 
$
0.70

 
$
0.36

 
$
2.00

 
$
0.72

Potentially dilutive stock awards to purchase common stock, as shown below, were excluded from the computation of diluted earnings per share because their inclusion would have been anti-dilutive. However, these shares may be potentially dilutive common shares in the future.
 
 
(In thousands)
 
(In thousands)
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 28,
2019
 
September 29,
2018
 
September 28,
2019
 
September 29,
2018
Stock options and stock units
 
206

 
171

 
100

 
216

Fair Value
Assets and liabilities that are measured, recorded or disclosed at fair value on a recurring basis are categorized using the fair value hierarchy. The fair value hierarchy has three levels based on the reliability of the inputs used to determine the fair value. Level 1, the highest level, refers to the values determined based on quoted prices in active markets for identical assets. Level 2 refers to fair values estimated using significant observable inputs. Level 3, the lowest level, includes fair values estimated using significant unobservable inputs.
We have money market funds and they are included as cash and cash equivalents. We also have interest rate cap hedge agreements and the fair value of the interest rate cap hedge agreements were determined using pricing models that use observable market inputs as of the balance sheet date, a Level 2 measurement. The interest rate cap hedge premium as of September 28, 2019 is less than $0.1 million and is included as other current assets.
There were no transfers between Level 1, Level 2, or Level 3 financial instruments in the three months ended September 28, 2019.

9


Cash and Cash Equivalents
Cash equivalents consist of highly liquid instruments purchased with original maturities of three months or less. These assets are valued at cost, which approximates fair value, which we classify as Level 1. See Fair Value above.
Restricted Cash
Restricted cash consists of cash withheld from our employees’ salary who have enrolled in our employee stock purchase plan (“ESPP”). An offering period is six months and each employee determines the percentage of their salary that will be withheld during that six month offering period. At the end of the six month offering period, the amounts withheld will be used to purchase our Company’s stock at a discounted price. Employees have the option to withdraw from the ESPP during the six month offering period and the cash withheld to date will be returned to the employee.
Derivative Instruments
We recognize derivative instruments on our condensed consolidated balance sheets at their fair value. On the date that we enter into a derivative contract, we designate the derivative instrument as a fair value hedge, a cash flow hedge, a hedge of a net investment in a foreign operation, or a derivative instrument that will not be accounted for using hedge accounting methods. As of September 28, 2019, all of our derivative instruments were designated as cash flow hedges.
We record changes in the fair value of a derivative instrument that is highly effective and that is designated and qualifies as a cash flow hedge in other comprehensive income (loss), net of tax until our earnings are affected by the variability of cash flows of the underlying hedge. We record any hedge ineffectiveness and amounts excluded from effectiveness testing in current period earnings within interest expense. We report changes in the fair values of derivative instruments that are not designated or do not qualify for hedge accounting in current period earnings. We classify cash flows from derivative instruments in the condensed consolidated statements of cash flows in the same category as the item being hedged or on a basis consistent with the nature of the instrument. For the three and nine months ended September 28, 2019, the impact of cash flow hedges in the respective periods were insignificant.
When we determine that a derivative instrument is not highly effective as a hedge, we discontinue hedge accounting prospectively. In all situations in which we discontinue hedge accounting and the derivative instrument remains outstanding, we will carry the derivative instrument at its fair value on our condensed consolidated balance sheets and recognize subsequent changes in its fair value in our current period earnings.
Inventories
Inventories are stated at the lower of cost or net realizable value with cost being determined using a moving average cost basis for raw materials and actual cost for work-in-process and finished goods. The majority of our inventory is charged to cost of sales as raw materials are placed into production and the related revenue is recognized. Inventoried costs include raw materials, outside processing, direct labor and allocated overhead, adjusted for any abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) incurred. We assess the inventory carrying value and reduce it, if necessary, to its net realizable value based on customer orders on hand, and internal demand forecasts using management’s best estimates given information currently available. 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.
Production Cost of Contracts
Production cost of contracts includes non-recurring production costs, such as design and engineering costs, and tooling and other special-purpose machinery necessary to build parts as specified in a contract. Production costs of contracts are recorded to cost of sales using the over time revenue recognition model. We review the value of the production cost of contracts on a quarterly basis to ensure when added to the estimated cost to complete, the value is not greater than the estimated realizable value of the related contracts.
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss, as reflected on the condensed consolidated balance sheets under the equity section, was comprised of cumulative pension and retirement liability adjustments, net of tax, and change in net unrealized gains and losses on cash flow hedges, net of tax.

10


Provision for Estimated Losses on Contracts
We record provisions for the total anticipated losses on contracts, considering total estimated costs to complete the contract compared to total anticipated revenues, in the period in which such losses are identified. The provisions for estimated losses on contracts require us to make certain estimates and assumptions, including those with respect to the future revenue under a contract and the future cost to complete the contract. Our estimate of the future cost to complete a contract may include assumptions as to changes in manufacturing efficiency, operating and material costs, and our ability to resolve claims and assertions with our customers. If any of these or other assumptions and estimates do not materialize in the future, we may be required to adjust the provisions for estimated losses on contracts. The provision for estimated losses on contracts is included as part of contract liabilities on the condensed consolidated balance sheets.
Revenue Recognition
Our customers typically engage us to manufacture products based on designs and specifications provided by the end-use customer. This 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 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. In addition, at times, in order to achieve economies of scale and based on our customer’s forecasted demand, we may build in advance of receiving a purchase order from our 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 met 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.
The majority of our performance obligations are satisfied over time as work progresses. Typically, revenue is recognized over time using an input measure (i.e., costs incurred to date relative to total estimated costs at completion, also known as cost-to-cost plus reasonable profit) to measure progress. Our typical revenue contract is a firm fixed price contract, and the cost of raw materials could make up a significant amount of the total costs incurred. As such, we believe using the total costs incurred input method would be the most appropriate method. While the cost of raw materials could make up a significant amount of the total costs incurred, there is a direct relationship between our inputs and the transfer of control of goods or services to the customer. In the event the customer invokes a termination for convenience clause, we would be entitled to costs incurred to date plus a reasonable profit. The majority of our revenues are recognized over time. Contract costs typically include labor, materials, overhead, and when applicable, subcontractor costs.
Contract estimates are based on various assumptions to project the outcome of future events that can span multiple months or years. These assumptions include labor productivity and availability; the complexity of the work to be performed; the cost and availability of materials; and the performance of subcontractors.
As a significant change in one or more of these estimates could affect the profitability of our contracts, we review and update our contract-related estimates on a regular basis. We recognize adjustments in estimated profit on contracts under the cumulative catch-up method. Under this method, the impact of the adjustment on profit recorded to date is recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance is recognized using the adjusted estimate. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, we recognize the total loss in the quarter it is identified.
The impact of adjustments in contract estimates on our operating earnings can be reflected in either operating costs and expenses or revenue.
Net cumulative catch up adjustments on profit recorded were not material during the three and nine months ended for both September 28, 2019 and September 29, 2018.

11


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, a contract liability is created for the advance or progress payment.
Contract Assets and Contract Liabilities
Contract assets consist of our right to payment for work performed but not yet billed. Contract assets are transferred to accounts receivable when we 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.
Contract assets and contract liabilities from revenue contracts with customers are as follows:
 
 
(In thousands)
 
 
September 28,
2019
 
December 31,
2018
Contract assets
 
$
102,475

 
$
86,665

Contract liabilities
 
$
11,850

 
$
17,145

Remaining performance obligations are defined as customer placed purchase orders (“POs”) with firm fixed price and firm delivery dates. Our remaining performance obligations as of September 28, 2019 totaled $682.2 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 2020 and beyond.
Revenue by Category
In addition to the revenue categories disclosed above, the following table reflects our revenue disaggregated by major end-use market:
 
 
(In thousands)
 
(In thousands)
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 28
2019
 
September 29,
2018
 
September 28
2019
 
September 29,
2018
Consolidated Ducommun
 
 
 
 
 
 
 
 
Military and space
 
$
80,487

 
$
71,459

 
$
231,635

 
$
208,140

Commercial aerospace
 
88,922

 
76,343

 
269,080

 
219,019

Industrial
 
11,692

 
12,040

 
33,447

 
37,965

Total
 
$
181,101

 
$
159,842

 
$
534,162

 
$
465,124

 
 
 
 
 
 
 
 
 
Electronic Systems
 
 
 
 
 
 
 
 
Military and space
 
$
59,081

 
$
54,068

 
$
176,813

 
$
160,969

Commercial aerospace
 
19,815

 
19,588

 
53,785

 
53,672

Industrial
 
11,692

 
12,040

 
33,447

 
37,965

Total
 
$
90,588

 
$
85,696

 
$
264,045

 
$
252,606

 
 
 
 
 
 
 
 
 
Structural Systems
 
 
 
 
 
 
 
 
Military and space
 
$
21,406

 
$
17,391

 
$
54,822

 
$
47,171

Commercial aerospace
 
69,107

 
56,755

 
215,295

 
165,347

Total
 
$
90,513

 
$
74,146

 
$
270,117

 
$
212,518

Recent Accounting Pronouncements
New Accounting Guidance Adopted in 2019
In July 2019, the FASB issued ASU 2019-07, “Codification Updates to SEC Sections: Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization, and Miscellaneous Updates” (“ASU 2019-07”), which improve, update, and simplify its regulations on financial reporting and disclosure. The new guidance was effective when issued, which is our interim period ending September 28, 2019. The adoption of this standard did not have a material impact on our condensed consolidated financial statements.

12


In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging” (“ASU 2017-12”), which intends to improve and simplify accounting rules around hedge accounting. ASU 2017-12 refines and expands hedge accounting for both financial (i.e., interest rate) and commodity risks. In addition, it creates more transparency around how economic results are presented, both on the face of the financial statements and in the footnotes. The new guidance is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods, which is our interim period beginning January 1, 2019. Early adoption is permitted, including adoption in any interim period after the issuance of ASU 2017-12. The adoption of this standard did not have a material impact on our condensed consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”), which simplifies the subsequent measurement of goodwill, the amendments eliminate Step Two from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step Two of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The new guidance is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this standard did not have a material impact on our condensed consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which requires lessees to present right-of-use assets and lease liabilities on the balance sheet. Lessees are required to apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements or the additional transition method. Under the additional transition method, the cumulative effect of applying the new guidance is recognized as an adjustment to certain captions on the balance sheet, including the opening balance of retained earnings in the first quarter of 2019, and the prior years’ financial information will be presented under the prior accounting standard, ASC 840, “Leases,” (“ASC 840”). Additional guidance was issued subsequently as follows:
July 2018, the FASB issued ASU 2018-11, “Leases (Topic 842): Targeted Improvements” (“ASU 2018-11”); and
July 2018, the FASB issued ASU 2018-10, “Codification Improvements to Topic 842, Leases” (“ASU 2018-10”)
All the new guidance is effective for us beginning January 1, 2019. The cumulative impact to our retained earnings at January 1, 2019 was a net decrease of $0.3 million. See Note 2.
Recently Issued Accounting Standards
In April 2019, the FASB issued ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Statements” (“ASU 2019-04”), which clarify, correct, and improve various aspects of the guidance in ASU 2016-01, ASU 2016-13, and ASU 2017-12. The new guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, which will be our interim period beginning January 1, 2020. We are evaluating the impact of this standard.
In March 2019, the FASB issued ASU 2019-01, “Leases (Topic 842): Codification Improvements” (“ASU 2019-01”), which addresses various lessor implementation issues and clarifies that lessees and lessors are exempt from certain interim disclosure requirements associated with the adoption of ASC 842. The new guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, which will be our interim period beginning January 1, 2020. Early adoption is permitted. We are evaluating the impact of this standard.
In August 2018, the FASB issued ASU 2018-14, “Compensation - Retirement Benefits - Defined Benefit Plans - General (Topic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans” (“ASU 2018-14”), which will remove disclosures that no longer are considered cost-beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. The new guidance is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years, which will be our interim period beginning January 1, 2021. Early adoption is permitted. We are evaluating the impact of this standard.
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”), which should improve the effectiveness of fair value measurement disclosures by removing certain requirements, modifying certain requirements, and adding certain new requirements. The new guidance is effective for fiscal years beginning after December 15, 2019, including interim periods

13


within those fiscal years, which will be our interim period beginning January 1, 2020. Early adoption is permitted. We are evaluating the impact of this standard.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), which is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. ASU 2016-13 requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. The new guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, which will be our interim period beginning January 1, 2020. We are evaluating the impact of this standard.

Note 2. Adoption of Accounting Standards Codification 842
We adopted ASC 842 with an initial application as of January 1, 2019. We utilized the additional transition method, under which the cumulative effect of initially applying the new guidance is recognized as an adjustment to certain captions on the condensed consolidated balance sheet, including the opening balance of retained earnings in the nine months ended September 28, 2019. As part of the adoption of ASC 842, we have elected to utilize the following practical expedients that are permitted under ASC 842:
Need not reassess whether any expired or existing contracts are or contain leases;
Need not reassess the lease classification for any expired or existing leases;
Need not reassess initial direct costs for any existing leases;
As an accounting policy election by class of underlying asset, choose not to separate nonlease components from lease components and instead to account for each separate lease component and the nonlease components associated with that lease component as a single lease component; and
As an accounting policy election not to apply the recognition requirements in ASC 842 to short term leases (a lease at commencement date has a lease term of 12 months or less and does not contain a purchase option that the lessee is reasonably certain to exercise).

14


The net impact to the various captions on our January 1, 2019 opening unaudited condensed consolidated balance sheets was as follows:
 
 
(In thousands)
 
 
December 31, 2018
 
 
 
January 1, 2019
Unaudited Condensed Consolidated Balance Sheets
 
Balances Without Adoption of ASC 842
 
Effect of Adoption
 
Balances With Adoption of ASC 842
Assets
 
 
 
 
 
 
Other current assets
 
$
6,531

 
$
(208
)
 
$
6,323

Operating lease right-of-use assets
 
$

 
$
18,985

 
$
18,985

Non-current deferred income taxes
 
$
308

 
$
5

 
$
313

Other assets
 
$
5,155

 
$
254

 
$
5,409

Liabilities
 
 
 


 
 
Operating lease liabilities
 
$

 
$
2,544

 
$
2,544

Accrued and other liabilities
 
$
37,786

 
$
(329
)
 
$
37,457

Non-current operating lease liabilities
 
$

 
$
18,117

 
$
18,117

Non-current deferred income taxes
 
$
18,070

 
$
(76
)
 
$
17,994

Other long-term liabilities
 
$
14,441

 
$
(956
)
 
$
13,485

Shareholders’ Equity
 
 
 


 
 
Retained earnings
 
$
180,356

 
$
(264
)
 
$
180,092

The net impact to retained earnings as a result of adopting ASC 842 on the January 1, 2019 opening balance sheet was shown as a change in “other” on the condensed consolidated statements of cash flows.
We have operating and finance leases for manufacturing facilities, corporate offices, and various equipment. Our leases have remaining lease terms of 1 year to 10 years, some of which include options to extend the leases for up to 10 years, and some of which include options to terminate the leases within 1 year.
The components of lease expense for the three and nine months ended September 28, 2019 were as follows:
 
(In thousands)
 
Three Months Ended
 
Nine Months Ended
 
September 28, 2019
 
September 28, 2019
Operating leases expense
$
1,041

 
$
2,960

 
 
 
 
Finance leases expense:
 
 
 
Amortization of right-of-use assets
$
59

 
$
159

Interest on lease liabilities
12

 
32

Total finance lease expense
$
71

 
$
191

Short term lease expense for the three and nine months ended September 28, 2019 were not material.

15


Supplemental cash flow information related to leases for the nine months ended September 28, 2019 was as follows:
 
(In thousands)
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash flows from operating leases
$
3,005

Operating cash flows from finance leases
$
32

Financing cash flows from finance leases
$
119

 
 
Right-of-use assets obtained in exchange for lease obligations:
 
Operating leases
$
1,437

Finance leases
$
483

The weighted average remaining lease terms as of September 28, 2019 were as follows:
 
(In years)
Operating leases
7
Finance leases
4
When a lease is identified, we recognize a right-of-use asset and a corresponding lease liability based on the present value of the lease payments over the lease term discounted using our incremental borrowing rate, unless an implicit rate is readily determinable. As the discount rate in our leases is usually not readily available, we use our own incremental borrowing rate as the discount rate. Our incremental borrowing rate is based on the interest rate on our term loan, which is a secured rate.
The weighted average discount rate as of September 28, 2019 was as follows:
Operating leases
6.5
%
Finance leases
6.5
%
Maturity of operating and finance lease liabilities are as follows:
 
 
(In thousands)
 
 
Operating Leases
 
Finance Leases
2019 (Excluding the nine months ended September 28, 2019)
 
$
1,025

 
$
60

2020
 
4,129

 
242

2021
 
4,005

 
229

2022
 
3,610

 
92

2023
 
3,275

 
53

Thereafter
 
8,832

 
73

Total lease payments
 
24,876

 
749

Less imputed interest
 
4,805

 
84

Total
 
$
20,071

 
$
665

Operating lease payments include $11.4 million related to options to extend lease terms that are reasonably certain of being exercised. As of September 28, 2019, there are no legally binding minimum lease payments for leases signed but not yet commenced.
Finance lease payments related to options to extend lease terms that are reasonably certain of being exercised are not significant. As of September 28, 2019, it excludes $2.1 million of legally binding minimum lease payments for leases signed but not yet commenced. These finance leases will commence during 2019 with lease terms of 5 years to 10 years.

16


As previously disclosed in our 2018 Annual Report on Form 10-K and under the previous accounting maturities of lease liabilities were as follows as of December 31, 2018:
 
(In thousands)
2019
$
3,680

2020
3,405

2021
2,789

2022
1,404

2023
980

Thereafter
580

Total
$
12,838


Note 3. Business Combinations
In April 2018, we acquired 100.0% of the outstanding equity interests of Certified Thermoplastics Co., LLC (“CTP”), a privately-held leader in precision profile extrusions and extruded assemblies of engineered thermoplastic resins, compounds, and alloys for a wide range of commercial aerospace, defense, medical, and industrial applications. CTP is located in Santa Clarita, California. The acquisition of CTP was part of our strategy to diversify towards more customized, higher value, engineered products with greater aftermarket potential.
The purchase price for CTP was $30.7 million, net of cash acquired, all payable in cash. We paid an aggregate of $30.8 million in cash related to this transaction. We allocated the gross purchase price of $30.8 million to the assets acquired and liabilities assumed at estimated fair values. The estimated fair value of the assets acquired included $8.1 million of intangible assets, $2.2 million of inventories, $1.5 million of accounts receivable, $0.6 million of property and equipment, $0.1 million of cash, less than $0.1 million of other current assets, and $0.4 million of liabilities assumed. The excess of the purchase price over the aggregate fair values of the assets acquired and liabilities assumed of $18.6 million was recorded as goodwill. The intangible assets acquired were comprised of $6.9 million for customer relationships and $1.2 million for trade names and trademarks, all of which were assigned an estimated useful life of 10 years. All the goodwill was assigned to the Structural Systems segment. Since the CTP acquisition, for tax purposes, was deemed an asset acquisition, the goodwill recognized is deductible for income tax purposes.
CTP’s results of operations have been included in our condensed consolidated statements of income since the date of acquisition as part of the Structural Systems segment.
Subsequent to our quarter ended September 28, 2019, on October 8, 2019, we acquired 100.0% of the outstanding equity of Nobles Parent Inc., the parent company of Nobles Worldwide, Inc. (“Nobles”), a privately-held global leader in the design and manufacturing of high performance ammunition handling systems for a wide range of military platforms including fixed-wing aircraft, rotary-wing aircraft, ground vehicles, and shipboard systems. Nobles is located in St. Croix Falls, Wisconsin. The purchase price was $77.0 million, net of cash acquired, all payable in cash. The acquisition of Nobles advances our strategy to diversify and offer more customized, value-driven engineered products with aftermarket opportunities. We paid $77.3 million upon the closing of the transaction.

Note 4. Restructuring Activities
In November 2017, management approved and commenced a restructuring plan that was intended to increase operating efficiencies (“2017 Restructuring Plan”). We completed the 2017 Restructuring Plan as of December 31, 2018 and have recorded cumulative expenses of $23.6 million, with $14.8 million recorded during 2018, and $8.8 million recorded during 2017.
In the Electronic Systems segment, we recorded cumulative expenses of $3.8 million for severance and benefits which were classified as restructuring charges. We recorded cumulative $0.9 million for loss on early exit from lease termination which was classified as restructuring charges. We also recorded cumulative expenses of $0.9 million of other expenses which were classified as restructuring charges. In addition, we have recorded cumulative expenses of $0.2 million for professional service fees which were classified as restructuring charges. Further, we also recorded cumulative non-cash expenses of $0.1 million for inventory write down which were classified as cost of sales. Finally, we recorded cumulative non-cash expenses of $0.1 million for property and equipment impairment which were classified as restructuring charges.
In the Structural Systems segment, we recorded cumulative expenses of $3.0 million for severance and benefits which were classified as restructuring charges. We have recorded cumulative non-cash expenses of $9.8 million for property and equipment impairment which were classified as restructuring charges. We also recorded cumulative non-cash expenses of $0.5 million for

17


inventory write down which were classified as cost of sales. Further, we recorded cumulative other expenses of $0.4 million which were classified as restructuring charges.
In Corporate, we recorded cumulative expenses of $1.4 million for severance and benefits and cumulative non-cash expenses of $1.4 million for stock-based compensation awards which were modified, all of which were classified as restructuring charges. We also recorded cumulative expenses of $1.0 million for professional service fees which were classified as restructuring charges.
During the three months ended September 28, 2019, the activities were not significant.
As of September 28, 2019, we have accrued $0.1 million and $0.1 million for severance and benefits and professional service fees in the Electronic Systems segment and Structural Systems segment, respectively.
Our restructuring activities in the nine months ended September 28, 2019 were as follows (in thousands):
 
 
December 31, 2018
 
Nine Months Ended September 28, 2019
 
September 28, 2019
 
 
Balance
 
Cash Payments
 
Adoption of ASU 842 Adjustment
 
Change in Estimates
 
Balance
Severance and benefits
 
$
2,631

 
$
(2,493
)
 
$

 
$

 
$
138

Lease termination
 
861

 
(126
)
 
(735
)
 

 

Professional service fees
 
43

 
(43
)
 

 

 

Other
 
416

 
(416
)
 

 

 

Total charged to restructuring charges
 
3,951

 
(3,078
)
 
(735
)
 

 
138

Inventory reserve
 
50

 

 

 
(50
)
 

Total charged to cost of sales
 
50

 

 

 
(50
)
 

Ending balance
 
$
4,001

 
$
(3,078
)
 
$
(735
)
 
$
(50
)
 
$
138


Note 5. Inventories
Inventories consisted of the following:
 
 
(In thousands)
 
 
September 28,
2019
 
December 31,
2018
Raw materials and supplies
 
$
97,551

 
$
89,767

Work in process
 
9,459

 
9,199

Finished goods
 
2,838

 
2,159

Total
 
$
109,848

 
$
101,125


Note 6. Goodwill
We perform our annual goodwill impairment test as of the first day of the fourth quarter. If certain factors occur, including significant under performance of our business relative to expected operating results, significant adverse economic and industry trends, significant decline in our market capitalization for an extended period of time relative to net book value, a decision to divest individual businesses within a reporting unit, or a decision to group individual businesses differently, we may perform an impairment test prior to the fourth quarter. In addition, we early adopted ASU 2017-04 on January 1, 2019 which simplified our goodwill impairment testing by eliminating Step Two of the goodwill impairment test. See Note 1.
We acquired Certified Thermoplastics Co., LLC (“CTP”) in April 2018 and recorded goodwill of $18.6 million in our Structural Systems segment. Since a goodwill impairment analysis is required to be performed within one year of the acquisition date or sooner upon a triggering event, we performed a Step One goodwill impairment analysis as of April 2019 for our Structural Systems segment. The fair value of our Structural Systems segment exceeded its carrying value by 85% and thus, was not deemed impaired.
The carrying amounts of our goodwill were as follows:

18


 
 
 
 
 
Electronic
Systems
 
Structural
Systems
 
Consolidated
Ducommun
Gross goodwill
 
$
199,157

 
$
18,622

 
$
217,779

Accumulated goodwill impairment
 
(81,722
)
 

 
(81,722
)
Balance at December 31, 2018
 
$
117,435

 
$
18,622

 
$
136,057

Balance at September 28, 2019
 
$
117,435

 
$
18,622

 
$
136,057


Note 7. Accrued and Other Liabilities
The components of accrued and other liabilities were as follows:
 
 
(In thousands)
 
 
September 28,
2019
 
December 31,
2018
Accrued compensation
 
$
28,938

 
$
29,616

Accrued income tax and sales tax
 
55

 
82

Other
 
8,708

 
8,088

Total
 
$
37,701

 
$
37,786


Note 8. Long-Term Debt
Long-term debt and the current period interest rates were as follows:
 
 
(In thousands)
 
 
September 28,
2019
 
December 31,
2018
Term loan
 
$
226,429

 
$
233,000

Revolving credit facility
 

 

Total debt
 
226,429

 
233,000

Less current portion
 
2,281

 
2,330

Total long-term debt, less current portion
 
224,148

 
230,670

Less debt issuance costs - term loan
 
1,548

 
1,802

Total long-term debt, net of debt issuance costs - term loan
 
222,600

 
228,868

Less debt issuance costs - revolving credit facility (1)
 
1,669

 
1,907

Total long-term debt, net of debt issuance costs
 
$
220,931

 
$
226,961

Weighted-average interest rate
 
6.87
%
 
4.71
%
(1) Included as part of other assets

In November 2018, we completed new credit facilities to replace the credit facilities existing at that time (“Existing Credit Facilities”). The new credit facilities consist of a $240.0 million senior secured term loan, which matures on November 21, 2025 (“New Term Loan”), and a $100.0 million senior secured revolving credit facility (“New Revolving Credit Facility”), which matures on November 21, 2023 (collectively, the “New Credit Facilities”).
The New Term Loan bears interest, at our option, at a rate equal to either (i) the Eurodollar Rate (defined as the London Interbank Offered Rate [“LIBOR”]) plus an applicable margin ranging from 3.75% to 4.00% per year or (ii) the Base Rate (defined as the highest of [a] Federal Funds Rate plus 0.50%, [b] Bank of America’s prime rate, and [c] the Eurodollar Rate plus 1.00%) plus an applicable margin ranging from 3.75% to 4.00% per year, in each case based upon the consolidated total net adjusted leverage ratio, typically payable quarterly. In addition, the New Term Loan requires installment payments of 0.25% of the outstanding principal balance of the New Term Loan amount on a quarterly basis. We made an aggregate total of $0.6 million and $6.6 million of voluntary and mandatory principal prepayments under the New Term Loan during the three and nine months ended September 28, 2019, respectively.

19


The New Revolving Credit Facility bears interest, at our option, at a rate equal to either (i) the Eurodollar Rate (defined as LIBOR) plus an applicable margin ranging from 1.75% to 2.75% per year or (ii) the Base Rate (defined as the highest of [a] Federal Funds Rate plus 0.50%, [b] Bank of America’s prime rate, and [c] the Eurodollar Rate plus 1.00%) plus an applicable margin ranging from 0.75% to 1.75% per year, in each case based upon the consolidated total net adjusted leverage ratio, typically payable quarterly. The undrawn portion of the commitment of the New Revolving Credit Facility is subject to a commitment fee ranging from 0.20% to 0.30%, based upon the consolidated total net adjusted leverage ratio.
Further, if we meet the annual excess cash flow threshold, we will be required to make excess cash flow payments. The annual mandatory excess cash flow payments will be based on (i) 50% of the excess cash flow amount if the adjusted leverage ratio is greater than 3.25 to 1.0, (ii) 25% of the excess cash flow amount if the adjusted leverage ratio is less than or equal to 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 adjusted leverage ratio is less than or equal to 2.50 to 1.0. As of September 28, 2019, we were in compliance with all covenants required under the New Credit Facilities.
We had been making periodic voluntary principal prepayments on our Existing Credit Facilities and in conjunction with the closing of the New Credit Facilities on November 21, 2018, we drew down $240.0 million on the New Term Loan, $7.9 million on the New Revolving Credit Facility and used those proceeds along with current cash on hand to pay off the Existing Credit Facilities of $247.9 million. The New Term Loan replacing the term loan that was a part of the Existing Credit Facilities (“Existing Term Loan”) was considered an extinguishment of debt except for the portion related to a creditor that was part of the Existing Term Loan and the New Term Loan and in which case, it was considered a modification of debt. As a result, we expensed the portion of the unamortized debt issuance costs related to the Existing Term Loan that was considered an extinguishment of debt of $0.4 million. In addition, the New Revolving Credit Facility replacing the existing revolving credit facility that was part of the Existing Credit Facilities (“Existing Revolving Credit Facility”) was considered an extinguishment of debt except for the portion related to the creditors that were part of the Existing Revolving Credit Facility and the New Revolving Credit Facility and in which case, it was considered a modification of debt. As a result, we expensed the portion of the unamortized debt issuance costs related to the Existing Revolving Credit Facility that was considered an extinguishment of debt of $0.5 million. As such, an aggregate total loss on extinguishment of debt of $0.9 million was recorded.
Further, we incurred $3.5 million of new debt issuance costs that can be capitalized related to the New Credit Facilities, of which $1.7 million were allocated to the New Term Loan and the $1.8 million was allocated to the New Revolving Credit facility. The New Term Loan new debt issuance costs of $1.7 million and remaining unamortized Existing Term Loan debt issuance costs of $0.1 million, for an aggregate total of $1.8 million of debt issuance costs related to the New Term Loan were capitalized and are being amortized over the seven years life of the New Term Loan. The New Revolving Credit Facility new debt issuance costs of $1.8 million and remaining unamortized Existing Revolving Credit Facility debt issuance costs of $0.2 million, for an aggregate total of $2.0 million of debt issuance costs related to the New Revolving Credit Facility were capitalized and are being amortized over the five years life of the New Revolving Credit Facility.
Subsequent to our quarter ended September 28, 2019, on October 8, 2019, we acquired Nobles for a purchase price of $77.0 million, net of cash acquired, all payable in cash. Upon the closing of the transaction, we paid $77.3 million in cash by drawing down on the Revolving Credit Facility. See Note 3.
In April 2018, we acquired CTP for a purchase price of $30.7 million, net of cash acquired, all payable in cash. We paid an aggregate of $30.8 million in cash related to this transaction by drawing down on the Existing Revolving Credit Facility. See Note 3.
As of September 28, 2019, we had $99.8 million of unused borrowing capacity under the Revolving Credit Facility, after deducting $0.2 million for standby letters of credit.
The New Credit Facilities were entered into by us (“Parent Company”) and guaranteed by all of our domestic subsidiaries, other than two subsidiaries that were considered minor (“Subsidiary Guarantors”). The Subsidiary Guarantors jointly and severally guarantee the New Credit Facilities. The Parent Company has no independent assets or operations and therefore, no consolidating financial information for the Parent Company and its subsidiaries are presented.
In October 2015, we entered into interest rate cap hedges designated as cash flow hedges with a portion of these interest rate cap hedges maturing on a quarterly basis, and a final quarterly maturity date of June 2020, and in aggregate, totaling $135.0 million of our debt. We paid a total of $1.0 million in connection with entering into the interest rate cap hedges. See Note 1 for further information.
In December 2018, 2017, and 2016, we entered into agreements to purchase $2.2 million, $14.2 million, and $9.9 million of industrial revenue bonds (“IRBs”) issued by the city of Parsons, Kansas (“Parsons”) and concurrently, sold $2.2 million, $14.2 million, and $9.9 million of property and equipment (“Property”) to Parsons as well as entered into lease agreements to lease the Property from Parsons (“Leases”) with lease payments totaling $2.2 million, $14.2 million, and $9.9 million over the lease

20


terms, respectively. The sale of the Property and concurrent lease back of the Property in December 2018, 2017, and 2016 did not meet the sale-leaseback accounting requirements as a result of control not deemed to have transferred to the buyer-lessor under ASC 842 and our continuous involvement with the Property under ASC 840 and thus, the $2.2 million, $14.2 million, and $9.9 million in cash received from Parsons was not recorded as a sale but as a financing obligation, respectively. Further, the Leases included a right of offset so long as we continue to own the IRBs and thus, the financing obligations of $2.2 million, $14.2 million, and $9.9 million were offset against the $2.2 million, $14.2 million, and $9.9 million, respectively, of IRBs assets and are presented net on the condensed consolidated balance sheets with no impact to the condensed consolidated statements of income or condensed consolidated cash flow statements.

Note 9. Employee Benefit Plans
The components of net periodic pension expense were as follows:
 
 
(In thousands)
 
(In thousands)
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 28,
2019
 
September 29,
2018
 
September 28,
2019
 
September 29,
2018
Service cost
 
$
126

 
$
150

 
$
377

 
$
450

Interest cost
 
347

 
317

 
1,041

 
951

Expected return on plan assets
 
(411
)
 
(446
)
 
(1,233
)
 
(1,338
)
Amortization of actuarial losses
 
221

 
185

 
664

 
557

Net periodic pension cost
 
$
283

 
$
206

 
$
849

 
$
620

The components of the reclassifications of net actuarial losses from accumulated other comprehensive loss to net income for the three and nine months ended September 28, 2019 were as follows:
 
 
(In thousands)
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 28,
2019
 
September 28,
2019
Amortization of actuarial losses - total before tax (1)
 
$
221

 
$
664

Tax benefit
 
(51
)
 
(154
)
Net of tax
 
$
170

 
$
510

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

Note 10. Indemnifications
We have made guarantees and indemnities under which we may be required to make payments to a guaranteed or indemnified party, in relation to certain transactions, including revenue transactions in the ordinary course of business. In connection with certain facility leases, we have indemnified our lessors for certain claims arising from our use of the facility under our lease. We indemnify our directors and officers to the maximum extent permitted under the laws of the State of Delaware.
However, we have a directors and officers insurance policy that may reduce our exposure in certain circumstances and may enable us to recover a portion of future amounts that may be payable, if any. The duration of the guarantees and indemnities vary and, in many cases, are subject to statutes of limitations. The majority of guarantees and indemnities do not provide any limitations of the maximum potential future payments we could be obligated to make. Historically, payments related to these guarantees and indemnities have been immaterial. We estimate the amount of our indemnification obligations as insignificant based on this history and insurance coverage and therefore, have not recorded any liability for these guarantees and indemnities on the accompanying condensed consolidated balance sheets. Further, when considered with our insurance coverage, although recorded through different captions on our condensed consolidated balance sheets, the potential impact is further mitigated.
 
Note 11. Income Taxes
The provision for income taxes is determined using an estimated annual effective tax rate, which is generally less than the U.S. federal statutory rate, primarily due to research and development (“R&D”) tax credits. Our effective tax rate may be subject to

21


fluctuations during the year as new information is obtained, which may affect the assumptions used to estimate the annual effective tax rate, including factors such as expected utilization of R&D tax credits, valuation allowances against deferred tax assets, the recognition or derecognition of tax benefits related to uncertain tax positions, and changes in or the interpretation of tax laws in jurisdictions where we conduct business. Also, excess tax benefits and tax deficiencies related to our equity compensation recognized in the income statement could result in fluctuations in our effective tax rate period-over-period depending on the volatility of our stock price and how many awards vest in the period. We recognize deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities along with net operating loss and tax credit carryovers.
We record a valuation allowance against our deferred tax assets to reduce the net carrying value to an amount that we believe is more likely than not to be realized. When we establish or reduce our valuation allowances against our deferred tax assets, the provision for income taxes will increase or decrease, respectively, in the period when that determination is made.
We recorded income tax expense of $1.9 million for the three months ended September 28, 2019 compared to $0.1 million for the three months ended September 29, 2018. The increase in income tax expense for the third quarter of 2019 compared to the third quarter of 2018 was primarily due to higher pre-tax income and non-deductible expenses related to officers compensation for the third quarter of 2019 compared to the third quarter of 2018.
We recorded income tax expense of $4.3 million for the nine months ended September 28, 2019 compared to $0.1 million for the nine months ended September 29, 2018. The increase in income tax expense for the first nine months of 2019 compared to the first nine months of 2018 was primarily due to higher pre-tax income and non-deductible expenses related to officers compensation for the first nine months of 2019 compared to the first nine months of 2018. The increase in income tax expense was partially offset by higher discrete tax benefits recognized in the first nine months of 2019 for net tax windfalls related to stock-based compensation.
Our total amount of unrecognized tax benefits was $5.5 million and $5.3 million as of September 28, 2019 and December 31, 2018, respectively. If recognized, $3.5 million would affect the effective tax rate. We do not reasonably expect significant increases or decreases to our unrecognized tax benefits in the next twelve months.

Note 12. Contingencies
Structural Systems has been directed by California environmental agencies to investigate and take corrective action for groundwater contamination at its facilities located in El Mirage and Monrovia, California. Based on currently available information, Ducommun has established an accrual for its estimated liability for such investigation and corrective action of $1.5 million at both September 28, 2019 and December 31, 2018, which is reflected in other long-term liabilities on its condensed consolidated balance sheets.
Structural Systems also faces liability as a potentially responsible party for hazardous waste disposed at landfills located in Casmalia and West Covina, California. Structural Systems and other companies and government entities have entered into consent decrees with respect to these landfills with the United States Environmental Protection Agency and/or California environmental agencies under which certain investigation, remediation and maintenance activities are being performed. Based on currently available information, Ducommun preliminarily estimates that the range of its future liabilities in connection with the landfill located in West Covina, California is between $0.4 million and $3.1 million. Ducommun has established an accrual for its estimated liability in connection with the West Covina landfill of $0.4 million at September 28, 2019, which is reflected in other long-term liabilities on its condensed consolidated balance sheet. Ducommun’s ultimate liability in connection with these matters will depend upon a number of factors, including changes in existing laws and regulations, the design and cost of construction, operation and maintenance activities, and the allocation of liability among potentially responsible parties.
In the normal course of business, Ducommun and its subsidiaries are defendants in certain other litigation, claims and inquiries, including matters relating to environmental laws. In addition, Ducommun makes various commitments and incurs contingent liabilities 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.
 

22


Note 13. Business Segment Information
We supply products and services primarily to the aerospace and defense industries. Our subsidiaries are organized into two strategic businesses, Electronic Systems and Structural Systems, each of which is a reportable operating segment.

Financial information by reportable operating segment was as follows:
 
 
(In thousands)
Three Months Ended
 
(In thousands)
Nine Months Ended
 
 
September 28,
2019
 
September 29,
2018
 
September 28,
2019
 
September 29,
2018
Net Revenues
 
 
 
 
 
 
 
 
Electronic Systems
 
$
90,588

 
$
85,696

 
$
264,045

 
$
252,606

Structural Systems
 
90,513

 
74,146

 
270,117

 
212,518

Total Net Revenues
 
$
181,101

 
$
159,842

 
$
534,162

 
$
465,124

Segment Operating Income
 
 
 
 
 
 
 
 
Electronic Systems
 
$
9,657

 
$
9,050

 
$
28,750

 
$
23,463

Structural Systems
 
12,877

 
3,963

 
35,199

 
13,380

 
 
22,534

 
13,013

 
63,949

 
36,843

Corporate General and Administrative Expenses (1)
 
(7,931
)
 
(6,226
)
 
(22,894
)
 
(19,204
)
Operating Income
 
$
14,603

 
$
6,787

 
$
41,055

 
$
17,639

Depreciation and Amortization Expenses
 
 
 
 
 
 
 
 
Electronic Systems
 
$
3,569

 
$
3,707

 
$
10,602

 
$
11,022

Structural Systems
 
3,350

 
2,576

 
9,750

 
7,510

Corporate Administration
 
73

 
37

 
399

 
103

Total Depreciation and Amortization Expenses
 
$
6,992

 
$
6,320

 
$
20,751

 
$
18,635

Capital Expenditures
 
 
 
 
 
 
 
 
Electronic Systems
 
$
1,768

 
$
879

 
$
4,820

 
$
5,091

Structural Systems
 
2,747

 
3,935

 
10,108

 
6,565

Corporate Administration
 

 
185

 

 
375

Total Capital Expenditures
 
$
4,515

 
$
4,999

 
$
14,928

 
$
12,031

(1)
Includes costs not allocated to either the Electronic Systems or Structural Systems operating segments.
Segment assets include assets directly identifiable to or allocated to each segment. Our segment assets are as follows:
 
 
(In thousands)
 
 
September 28,
2019
 
December 31,
2018
Total Assets
 
 
 
 
Electronic Systems
 
$
418,187

 
$
405,743

Structural Systems
 
254,171

 
220,993

Corporate Administration (1)
 
17,196

 
18,003

Total Assets
 
$
689,554

 
$
644,739

Goodwill and Intangibles
 
 
 
 
Electronic Systems
 
$
212,808

 
$
219,872

Structural Systems
 
27,226

 
28,277

Total Goodwill and Intangibles
 
$
240,034

 
$
248,149

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

23


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Ducommun Incorporated (“Ducommun,” “the Company,” “we,” “us” or “our”) is a leading global provider of engineering and manufacturing services for high-performance products and high-cost-of failure applications used primarily in the aerospace and defense (“A&D”), industrial, medical and other industries (collectively, “Industrial”). We differentiate ourselves as a full-service solution-based provider, offering a wide range of value-added products and services in our primary businesses of electronics, structures and integrated solutions. We operate through two primary business segments: Electronic Systems and Structural Systems, each of which is a reportable segment.
We adopted ASC 842, “Leases” (“ASC 842”), as of January 1, 2019, using the additional transition method of adoption. As such, our results for the three and nine months ended September 28, 2019 are reported under ASC 842 while our results for the three and nine months ended September 29, 2018 are reported under the prior lease accounting standard, ASC 840, “Leases” (“ASC 840”). See Note 2 to condensed consolidated financial statements included in Part I, Item I of this Form 10-Q.
Third quarter 2019 highlights:
Revenues of $181.1 million
Net income of $8.3 million, or $0.70 per diluted share
Adjusted EBITDA of $23.6 million
Acquired Nobles Worldwide, Inc. (Nobles) subsequent to quarter end
Non-GAAP Financial Measures
Adjusted earnings before interest, taxes, depreciation, amortization, stock-based compensation expense, and restructuring charges (“Adjusted EBITDA”) was $23.6 million and $18.1 million for the three months ended September 28, 2019 and September 29, 2018, respectively.
When viewed with our financial results prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and accompanying reconciliations, we believe Adjusted EBITDA provides additional useful information to clarify and enhance the understanding of the factors and trends affecting our past performance and future prospects. We define these measures, explain how they are calculated and provide reconciliations of these measures to the most comparable GAAP measure in the table below. Adjusted EBITDA and the related financial ratios, as presented in this Quarterly Report on Form 10-Q (“Form 10-Q”), are supplemental measures of our performance that are not required by, or presented in accordance with, GAAP. They are not a measurement of our financial performance under GAAP and should not be considered as alternatives to net income or any other performance measures derived in accordance with GAAP, or as an alternative to net cash provided by operating activities as measures of our liquidity. The presentation of these measures should not be interpreted to mean that our future results will be unaffected by unusual or nonrecurring items.
We use Adjusted EBITDA non-GAAP operating performance measures internally as complementary financial measures to evaluate the performance and trends of our businesses. We present Adjusted EBITDA and the related financial ratios, as applicable, because we believe that measures such as these provide useful information with respect to our ability to meet our operating commitments.
Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations include:
They do not reflect our cash expenditures, future requirements for capital expenditures or contractual commitments;
They do not reflect changes in, or cash requirements for, our working capital needs;
They do not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on our debt;
Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements;
They are not adjusted for all non-cash income or expense items that are reflected in our statements of cash flows;

24


They do not reflect the impact on earnings of charges resulting from matters unrelated to our ongoing operations; and
Other companies in our industry may calculate Adjusted EBITDA differently from us, limiting their usefulness as comparative measures.
Because of these limitations, Adjusted EBITDA and the related financial ratios should not be considered as measures of discretionary cash available to us to invest in the growth of our business or as a measure of cash that will be available to us to meet our obligations. You should compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA only as supplemental information. See our Condensed Consolidated Financial Statements contained in this Form 10-Q.
However, in spite of the above limitations, we believe that Adjusted EBITDA is useful to an investor in evaluating our results of operations because these measures:
Are widely used by investors to measure a company’s operating performance without regard to items excluded from the calculation of such terms, which can vary substantially from company to company depending upon accounting methods and book value of assets, capital structure and the method by which assets were acquired, among other factors;
Help investors to evaluate and compare the results of our operations from period to period by removing the effect of our capital structure from our operating performance; and
Are used by our management team for various other purposes in presentations to our Board of Directors as a basis for strategic planning and forecasting.
The following financial items have been added back to or subtracted from our net income when calculating Adjusted EBITDA:
Interest expense may be useful to investors for determining current cash flow;
Income tax expense may be useful to investors because it represents the taxes which may be payable for the period and the change in deferred taxes during the period, and may reduce cash flow available for use in our business;
Depreciation may be useful to investors because it generally represents the wear and tear on our property and equipment used in our operations;
Amortization expense may be useful to investors because it represents the estimated attrition of our acquired customer base and the diminishing value of product rights;
Stock-based compensation may be useful to our investors for determining current cash flow;
Restructuring charges 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)
Three Months Ended
 
(Dollars in thousands)
Nine Months Ended
 
September 28,
2019
 
September 29,
2018
 
September 28,
2019
 
September 29,
2018
Net income
$
8,303

 
$
4,171

 
$
23,590

 
$
8,362

Interest expense
4,363

 
2,497

 
13,140

 
9,159

Income tax expense
1,937

 
119

 
4,325

 
118

Depreciation
3,291

 
3,276

 
10,126

 
10,058

Amortization
3,701

 
3,044

 
10,625

 
8,577

Stock-based compensation expense
2,051

 
1,299

 
5,322

 
3,414

Restructuring charges

 
3,373

 

 
10,952

Inventory purchase accounting adjustments

 
293

 

 
622

Adjusted EBITDA
$
23,646

 
$
18,072

 
$
67,128

 
$
51,262

% of net revenues
13.1
%
 
11.3
%
 
12.6
%
 
11.0
%
 


25


Results of Operations
Third Quarter of 2019 Compared to Third Quarter of 2018
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)
Nine Months Ended
 
 
September 28,
2019
 
%
of Net  Revenues
 
September 29,
2018
 
%
of Net  Revenues
 
September 28,
2019
 
%
of Net  Revenues
 
September 29,
2018
 
%
of Net  Revenues
Net Revenues
 
$
181,101

 
100.0
 %
 
$
159,842

 
100.0
 %
 
$
534,162

 
100.0
 %
 
$
465,124

 
100.0
 %
Cost of Sales
 
142,774

 
78.8
 %
 
128,726

 
80.5
 %
 
422,076

 
79.0
 %
 
375,225

 
80.7
 %
Gross Profit
 
38,327

 
21.2
 %
 
31,116

 
19.5
 %
 
112,086

 
21.0
 %
 
89,899

 
19.3
 %
Selling, General and Administrative Expenses
 
23,724

 
13.1
 %
 
20,956

 
13.1
 %
 
71,031

 
13.3
 %
 
61,476

 
13.2
 %
Restructuring Charges
 

 
 %
 
3,373

 
2.1
 %
 

 
 %
 
10,784

 
2.3
 %
Operating Income
 
14,603

 
8.1
 %
 
6,787

 
4.3
 %
 
41,055

 
7.7
 %
 
17,639

 
3.8
 %
Interest Expense
 
(4,363
)
 
(2.4
)%
 
(2,497
)
 
(1.6
)%
 
(13,140
)
 
(2.5
)%
 
(9,159
)
 
(2.0
)%
Income Before Taxes
 
10,240

 
5.7
 %
 
4,290

 
2.7
 %
 
27,915

 
5.2
 %
 
8,480