DCO 10-Q Quarter ended Sept. 29, 2012

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q

September 29, 2012 For the quarterly period ended September 29, 2012

OR

For the transition period from             to

Commission File Number 1-8174

DUCOMMUN INCORPORATED

(Exact name of registrant as specified in its charter)

(310) 513-7200

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of September 29, 2012, there were outstanding 10,594,765 shares of common stock.

Table of Contents

DUCOMMUN INCORPORATED

FORM 10-Q

INDEX

- 2 -

Table of Contents

DUCOMMUN INCORPORATED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands)

See accompanying notes to consolidated financial statements.

- 3 -

Table of Contents

DUCOMMUN INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

(Unaudited)

See accompanying notes to consolidated financial statements.

- 4 -

Table of Contents

DUCOMMUN INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

(Unaudited)

See accompanying notes to consolidated financial statements.

- 5 -

Table of Contents

DUCOMMUN INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

See accompanying notes to consolidated financial statements.

- 6 -

Table of Contents

DUCOMMUN INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Consolidation

The consolidated financial statements include the accounts of Ducommun Incorporated and its subsidiaries (“Ducommun” or the “Company”), after eliminating intercompany balances and transactions. The consolidated balance sheet is unaudited as of September 29, 2012, the consolidated statements of income are unaudited for the three months and nine months ended September 29, 2012 and October 1, 2011 and the consolidated statements of cash flows are unaudited for the nine months ended September 29, 2012 and October 1, 2011.

The Company supplies products and services primarily to the aerospace and defense industries. The Company’s subsidiaries are organized into two strategic businesses, each of which is a reportable operating segment. Ducommun AeroStructures (“DAS”) engineers and manufactures aerospace structural components and assemblies. Ducommun LaBarge Technologies (“DLT”) was formed in June 2011 by the combination of our former Ducommun Technologies segment (“DTI”) and LaBarge (See Note 2). DLT designs, engineers and manufactures a broad range of electronic, electromechanical and interconnect systems and components. In addition, DLT provides technical and program management services (including design, development, integration and testing of prototype products) principally for advanced weapons and missile defense systems.

The Company’s significant accounting policies were described in “Note 1. Summary of Significant Accounting Policies” in the Form 10-K for the year ended December 31, 2011. Ducommun follows the same accounting policies for interim reporting, with the exception of accounting principles adopted as of January 1, 2012, as discussed below in Recent Accounting Pronouncements . All reportable operating segments follow the same accounting principles. The financial information included in this Form 10-Q should be read in conjunction with the Company’s consolidated financial statements and related notes thereto included in the Form 10-K for the year ended December 31, 2011.

In the opinion of management, all adjustments, consisting of recurring accruals, have been made that are necessary to fairly state the consolidated financial position, results of operations and cash flows in accordance with Generally Accepted Accounting Principles (“GAAP”) for the periods covered by this quarterly report on Form 10-Q. The results of operations for the three months and nine months ended September 29, 2012 are not necessarily indicative of the results to be expected for the full year ended December 31, 2012.

- 7 -

Table of Contents

Earnings Per Share

Basic earnings per share is 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 plus income associated with dilutive securities by the weighted average number of common shares outstanding plus any potential dilutive shares that could be issued if exercised or converted into common stock in each period.

The weighted average number of shares outstanding used to compute earnings per share is as follows:

The weighted average number of shares outstanding, included in the table below, are excluded from the computation of diluted earnings per share because the average market price did not exceed the exercise price. However, these shares may be potentially dilutive common shares in the future.

Accumulated Other Comprehensive Loss

Certain items such as pension liability adjustments are presented as a separate component of shareholders’ equity. Accumulated other comprehensive loss, as reflected in the Consolidated Balance Sheets under the equity section, is composed of cumulative pension and retirement liability adjustments of $7.3 million, net of tax, at September 29, 2012 and December 31, 2011, respectively.

- 8 -

Table of Contents

Inventory Adjustment

During the first quarter of 2012, the Company determined that approximately $0.4 million of engineering research and development costs had been capitalized in error in inventory in prior periods. The Company assessed the materiality of this error and concluded it was immaterial to previously reported annual and interim amounts.

Recent Accounting Pronouncements

In June 2011, the FASB issued amendments to disclosure requirements for presentation of comprehensive income. This guidance, effective retrospectively for the interim and annual periods beginning on or after December 15, 2011 (early adoption is permitted), requires presentation of total comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In December 2011, the FASB issued an amendment to defer the presentation on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for annual and interim financial statements. The implementation of the amended accounting guidance did not have a material impact on our consolidated financial position or results of operations. There was no comprehensive income or loss reported during the three months and nine months ended September 29, 2012 and October 1, 2011.

In December 2011, the FASB issued guidance enhancing disclosure requirements about the nature of an entity’s right to offset and related arrangements associated with its financial instruments and derivative instruments. The new guidance requires the disclosure of the gross amounts subject to rights of set-off, amounts offset in accordance with the accounting standards followed, and the related net exposure. The new guidance will be effective for us beginning July 1, 2013. Other than requiring additional disclosures, we do not anticipate any material impact on our financial statements upon adoption.

In May 2011, the FASB issued amendments to disclosure requirements for common fair value measurement. These amendments, effective for the interim and annual periods beginning on or after December 15, 2011 (early adoption is prohibited), result in common definition of fair value and common requirements for measurement of and disclosure requirements between U.S. Generally Accepted Accounting Principles (“GAAP”) and International Financial Reporting Standards (“IFRS”). Consequently, the amendments change some fair value measurement principles and disclosure requirements. The implementation of this amended accounting guidance did not have a material impact on our consolidated financial position and results of operations during the three months and nine months ended September 29, 2012.

Use of Estimates

Certain amounts and disclosures included in the consolidated financial statements required management to make estimates and judgments that affect the amounts of assets,

- 9 -

Table of Contents

liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

On June 28, 2011, the Company completed the acquisition of all the outstanding stock of LaBarge, Inc. (“LaBarge”), formerly a publicly-owned company based in St. Louis, Missouri for $325.3 million (net of cash acquired and excluding acquisition costs). LaBarge was a broad-based provider of electronics to technology-driven companies in diverse markets. LaBarge had significant sales to customers in the aerospace, defense, natural resources, industrial, medical and other commercial markets. The Company provided its customers with sophisticated electronic, electromechanical and mechanical products through contract design and manufacturing services. The operating results for the acquisition have been included in the consolidated statements of income since the date of the acquisition.

The LaBarge acquisition allowed the Company to expand its presence significantly in the aerospace and defense markets, as well as diversify its sales base across new markets, including industrial, natural resources, medical and other commercial end-use markets. More specifically, the Company realized the following benefits from the LaBarge acquisition:

- 10 -

Table of Contents

The following table presents unaudited pro forma consolidated operating results for the Company for the nine months ended October 1, 2011, as if the LaBarge acquisition had occurred as of January 1, 2010.

The consolidated financial statements reflect the fair value of the assets acquired and liabilities assumed and the related allocation of the purchase price for LaBarge. The principal estimates of fair value have been determined using expected net present value techniques utilizing a 14% discount rate. Customer relationships are valued assuming an annual attrition rate of 6.5%. The finalization of our initial purchase price allocation during the second quarter of 2012 did not result in any significant adjustments.

Inventories consist of the following:

The Company performs its annual goodwill impairment test during the fourth quarter. As of December 31, 2011, the date of the most recent annual impairment test, the DAS, DLT and Miltec reporting units had $57.2 million, $98.2 million and $8.4 million of recorded goodwill, respectively. However, certain factors may result in the need to perform an impairment test prior to the fourth quarter, including significant underperformance of the Company’s business relative to expected operating results, significant adverse economic and industry trends, significant decline in the Company’s market capitalization for an extended period of time relative to net book value, or a decision to divest an individual business within a reporting unit. Based upon the Company’s assessment of these factors in connection with the preparation of the Company’s second quarter financial statements, given a decline in the Company’s stock price in the second quarter of 2012, which has since recovered, the Company performed an interim impairment test for the DLT reporting unit using a discounted cash flow analysis and evaluated whether any adverse economic or industry trends would negatively affect the conclusions drawn from the

- 11 -

Table of Contents

prior period discounted cash flow analysis of DLT. The results of the Company’s interim impairment evaluation indicated that the fair value of the DLT reporting unit exceeded its carrying value by 9% and the Company in turn concluded that the DLT reporting unit’s goodwill was not impaired based on the interim impairment evaluation.

The Company determined it was not necessary to perform an interim impairment assessment for the DLT reporting unit during the three months ended September 29, 2012, based on the DLT reporting unit financial performance. The Company does not believe that there were any negative qualitative factors or events or changes in circumstances since the June 30, 2012 assessment that makes it more likely than not that the fair value of the DLT reporting unit has decreased below its carrying amount.

A discounted cash flow analysis requires the Company to make various judgmental assumptions about sales, operating margins, growth rates and discount rates. Assumptions about discount rates are based on a weighted-average cost of capital for comparable companies. Assumptions about sales, operating margins, and growth rates are based on the Company’s forecasts, business plans, economic projections, anticipated future cash flows and marketplace data. These assumptions could be adversely impacted by the current uncertainty surrounding global market conditions, as well as the competitive environment in which the Company operates.

The fair values of the DAS and Miltec reporting units had exceeded their carrying values by 20% and 14%, respectively, as of the most recent annual impairment test on December 31, 2011. The Company determined it was not necessary to perform an interim impairment assessment for the DAS and Miltec reporting units during the nine months ended September 29, 2012, based upon their financial performance. The Company does not believe that there were negative qualitative factors or any events or changes in circumstances since December 31, 2011 that make it more likely than not that the fair values of those reporting units have decreased below their carrying amounts. However, impairment charges could be triggered in the future if:

The Company will perform its annual goodwill impairment test by the end of the fourth quarter.

- 12 -

Table of Contents

The carrying amounts of goodwill at September 29, 2012 and December 31, 2011 are as follows:

Long-term debt is summarized as follows:

As of September 29, 2012, the Company had $380.8 million of long-term debt. On September 28, 2012, the Company made a voluntary principal pre-payment of $10.0 million on its senior secured term loan, eliminating all required quarterly principal payments going forward.

At September 29, 2012, the Company had $58.4 million of unused revolving lines of credit, after deducting $1.6 million for outstanding standby letters of credit. The Company had no outstanding revolver loans and was in compliance with all covenants at September 29, 2012.

The weighted average interest rate on borrowings outstanding was 7.73% at September 29, 2012, compared to 7.66% at October 1, 2011. The carrying amount of long-term debt approximates fair value, which was estimated using Level 2 inputs, including the terms of the related debt, recent transactions and interest rates currently available to the Company for debt with similar terms and remaining maturities.

In connection with the acquisition of LaBarge on June 28, 2011, the Company borrowed $190.0 million under a senior secured term loan and entered into a senior secured revolving credit facility of $60.0 million. Both the term loan and the revolving credit facility provide the option of choosing the LIBOR rate (with a Libor rate floor of 1.25%) plus 4.25%, or the Alternate Base Rate (with an Alternate Base Rate floor of 2.25%) plus 3.25%. The Alternate Base Rate is the greater of the (a) Prime rate and (b) Federal Funds rate plus 0.5%. The term loan requires quarterly principal payments of $0.5 million beginning on September 30, 2011 and mandatory pre-payment of certain amounts of excess cash flow on an annual basis beginning

- 13 -

Table of Contents

2012. Principal payments of $0.5 million were paid in September and December 2011, and March, June and September 2012. The revolving credit facility matures on June 28, 2016 and the term loan matures on June 30, 2017. The revolving credit facility and term loan contain minimum EBITDA and maximum leverage ratio covenants under certain circumstances, as well as limitations on future disposition of property, capital expenditures, investments, acquisitions, repurchase of stock, dividends, and outside indebtedness.

In connection with the acquisition of LaBarge, the Company also issued $200.0 million of senior unsecured notes with interest of 9.75% per annum, payable semi-annually on January 15 and July 15 of each year, beginning in 2012. The senior unsecured notes mature on July 15, 2018, at which time the entire principal amount is due.

In connection with the DAS-New York acquisition in December 2008, the Company issued a promissory note in the initial principal amount of $7.0 million with interest of 5% per annum payable annually on each anniversary of the closing date (December 23). Principal of the promissory note in the amount of $4.0 million was paid on June 23, 2011 and $3.0 million is payable December 23, 2013.

The Company is authorized to issue five million shares of preferred stock. At September 29, 2012 and December 31, 2011, no preferred shares were issued or outstanding.

The Company has a defined benefit pension plan covering certain hourly employees of a subsidiary. Pension plan benefits are generally determined on the basis of the retiree’s age and length of service. Assets of the defined benefit pension plan are composed primarily of fixed income and equity securities. The Company also has a retirement plan covering certain current and retired employees from the LaBarge acquisition (the “LaBarge Retirement Plan”). The liability for the LaBarge Retirement Plan included in accrued liabilities and other long-term liabilities was $0.6 million and $7.6 million at September 29, 2012 and $0.6 million and $5.5 million, at December 31, 2011. These two plans above have been combined in the tables below.

- 14 -

Table of Contents

The components of net periodic pension cost for the defined benefit pension plan and the LaBarge Retirement Plan are as follows:

The Company has made guarantees and indemnities under which it 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, the Company has indemnified its lessors for certain claims arising from the facility or the lease. The Company indemnifies its directors and officers to the maximum extent permitted under the laws of the State of Delaware. However, the Company has a directors and officers insurance policy that may reduce its exposure in certain circumstances and may enable it to recover a portion of future amounts that may be payable, if any. The duration of the guarantees and indemnities varies and, in many cases is indefinite but subject to statute of limitations. The majority of guarantees and indemnities do not provide any limitations of the maximum potential future payments the Company could be obligated to make. Historically, payments related to these guarantees and indemnities have been immaterial. The Company estimates the fair value of its indemnification obligations as insignificant based on this history and insurance coverage and has, therefore, not recorded any liability for these guarantees and indemnities in the accompanying consolidated balance sheets.

The Company records the interest charge and the penalty charge, if any, with respect to uncertain tax positions as a component of tax expense. During the nine months ended September 29, 2012 and October 1, 2011, the Company recognized approximately $22 thousand and $66 thousand, in interest benefit and charges, respectively, related to uncertain tax positions. The Company had approximately $0.2 million for the payment of interest and penalties accrued at both September 29, 2012 and December 31, 2011.

The Company’s total amount of unrecognized tax benefits was approximately $1.8 million and $2.2 million at September 29, 2012 and December 31, 2011, respectively. These amounts, if recognized, would affect the annual income tax rate.

- 15 -

Table of Contents

The Company’s California franchise (income) tax returns for 2008 and 2009 and Texas franchise (margin) tax returns for 2010 and 2011 were selected for examination. The Company does not expect the results of these examinations to have a material impact on the Company’s financial statements. During the three months ended September 29, 2012, the Company concluded the examination of the Company’s 2009 federal income tax return and the examination of its 2010 and 2011 Texas franchise (margin) tax returns with no significant adjustments required. Federal income tax returns after 2009, California franchise (income) tax returns after 2006 and other state income tax returns after 2006 are subject to examination.

The Company had an effective tax rate of 14.9% in the third quarter of 2012, compared to an effective tax rate of 30.2% in the third quarter of 2011. The Company had an effective tax rate of 15.6% for the nine months ended September 29, 2012, compared to an effective tax rate of 27.2% for the nine months ended October 1, 2011. The effective tax rate for the nine months of 2012 benefitted from the LaBarge acquisition which allows the Company to file a state consolidated tax return (“combined report”) in certain states. This lower tax rate reduced the Company’s tax provision by approximately $1.6 million. The effective tax rate in the third quarter and nine months ended September 29, 2012 also benefitted from expiring federal tax statutes and a favorable resolution of an open tax year that was subject to examination. The Company’s effective tax rate for the third quarter and nine months ended September 29, 2012 reflected no current year federal research and development tax benefits and the effective tax rate for the third quarter and nine months of 2011 included federal research and development tax benefits.

Ducommun is a defendant in a lawsuit entitled United States of America ex rel Taylor Smith, Jeannine Prewitt and James Ailes v. The Boeing Company and Ducommun Inc., filed in the United States District Court for the District of Kansas (the “District Court”). The lawsuit is a qui tam action brought by three former Boeing employees (“Relators”) against Boeing and Ducommun on behalf of the United States of America for violations of the United States False Claims Act. The lawsuit alleges that Ducommun sold unapproved parts to the Boeing Commercial Airplane Group-Wichita Division which were installed by Boeing in aircraft ultimately sold to the United States Government. The number of Boeing aircraft subject to the lawsuit has been reduced to 21 aircraft following the District Court’s granting of partial summary judgment in favor of Boeing and Ducommun. The lawsuit seeks damages, civil penalties and other relief from the defendants for presenting or causing to be presented false claims for payment to the United States Government. Although the amount of alleged damages are not specified, the lawsuit seeks damages in an amount equal to three times the amount of damages the United States Government sustained because of the defendants’ actions, plus a civil penalty of $10 thousand for each false claim made on or before September 28, 1999, and $11 thousand for each false claim made on or after September 28, 1999, together with attorneys’ fees and costs. One of Relators’ experts has opined that the United States Government’s damages are in the amount of $833 million. After investigating the allegations, the United States Government has declined to intervene in the lawsuit. Ducommun intends to defend itself vigorously against the lawsuit. Ducommun, at this time, is unable to estimate what, if any, liability it may have in connection with the lawsuit.

- 16 -

Table of Contents

DAS has been directed by California environmental agencies to investigate and take corrective action for ground water contamination at its facilities located in El Mirage and Monrovia, California. Based on currently available information, the Company has established a reserve for its estimated liability for such investigation and corrective action of approximately $1.5 million at September 29, 2012. DAS also faces liability as a potentially responsible party for hazardous waste disposed at two landfills located in Casmalia and West Covina, California. DAS and other companies and government entities have entered into consent decrees with respect to each landfill 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, at the West Covina landfill the Company preliminarily estimates that the range of its future liabilities in connection with the landfill is between approximately $0.6 million and $3.3 million. The Company has established a reserve for its estimated liability, in connection with the West Covina landfill of approximately $0.6 million at September 29, 2012. The Company’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, the Company makes various commitments and incurs contingent liabilities. While it is not feasible to predict the outcome of these matters, the Company 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 consolidated financial position, results of operations or cash flows.

The Company’s subsidiaries are organized into two strategic businesses, each of which is a reportable operating segment.

- 17 -

Table of Contents

Financial information by reportable operating segment is set forth below:

Segment assets include assets directly identifiable with each segment. Corporate assets include assets not specifically identified with a business segment, including cash.

- 18 -

Table of Contents

Overview

Ducommun Incorporated (“Ducommun” or the “Company”) provides engineering and manufacturing services primarily to the aerospace and defense industry through a wide spectrum of electronics and structural applications. We design, engineer and manufacture mission-critical aerostructure components and subassemblies and a broad range of electronic, electromechanical and interconnect systems and components. We also provide engineering, technical and program management services (including design, development, and integration and testing of prototype products) principally for advanced weapons and missile defense systems. Our products and services are used on domestic and foreign commercial and military aircraft, helicopter, missile and space programs, as well as in certain industrial, natural resources, medical and other commercial markets. We operate through two primary business units: Ducommun LaBarge Technologies (“DLT”) and Ducommun AeroStructures (“DAS”).

A summary of highlights for the third quarter ended September 29, 2012 includes:

In connection with the acquisition of LaBarge on June 28, 2011, the Company borrowed $190.0 million under a senior secured term loan and entered into a senior secured revolving credit facility of $60.0 million. Both the term loan and the revolving credit facility provide the option of choosing the LIBOR rate (with a Libor rate floor of 1.25%) plus 4.25%, or the Alternate Base Rate (with an Alternate Base Rate floor of 2.25%) plus 3.25%. The Alternate Base Rate is the greater of the (a) Prime rate and (b) Federal Funds rate plus 0.5%. The term loan requires quarterly principal payments of $0.5 million beginning on September 30, 2011 and mandatory pre-payment of certain amounts of excess cash flow on an annual basis beginning in 2012. Principal payments of $0.5 million were paid in September and December 2011, and March, June, and September 2012. On September 28, 2012, a voluntary principal pre-payment of $10.0 million was made, eliminating all required quarterly principal payments going forward. The revolving credit facility matures on June 28, 2016 and the term loan matures on June 30, 2017. The revolving credit facility and term loan contain minimum Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) and maximum leverage ratio covenants under certain circumstances, as well as limitations on future disposition of property, capital expenditures, investments, acquisitions, repurchase of stock, dividends, and outside indebtedness.

- 19 -

Table of Contents

In connection with the acquisition of LaBarge, the Company also issued $200.0 million of senior unsecured notes with interest of 9.75% per annum, payable semi-annually on January 15 and July 15 of each year, beginning in 2012 and ending 2018, at which time the entire principal amount is due. The first interest payment was made in January 2012 and the third payment was made in July 2012.

The LaBarge acquisition allowed the Company to expand its presence significantly in the aerospace and defense markets, as well as diversify its sales base across new markets, including industrial, natural resources, medical and other commercial end-use markets. More specifically, the Company realized the following benefits from the LaBarge acquisition: