DCO Ducommun Inc

Improved Operating Performance; Gross Margin Percentage Strengthens

Ducommun Incorporated (NYSE:DCO) (“Ducommun” or the “Company”) today reported results for its second quarter ended July 2, 2016.

Second Quarter 2016 Highlights

• Second quarter revenues were $133.4 million
• Net income was $3.9 million, or $0.34 per diluted share
• Adjusted EBITDA for the quarter was $13.7 million

“We are pleased to report that Ducommun continued to show improved financial performance as a result of the many strategic initiatives undertaken this past year to reduce costs and streamline operations. At the same time, we have sharpened our focus on the key markets we serve and invested in attractive, long-term growth opportunities,” said Anthony J. Reardon, chairman, president and chief executive officer. “Revenue for the quarter was roughly flat sequentially, net of our Miltec and Pittsburgh divestitures, and we posted strong margins as well as solid bottom line results. Although our backlog and sales were slightly impacted by temporary program delays, we expect our improved performance to continue in the second half of 2016. We remain upbeat about our supply chain initiatives, our focus on both customers and shareholders, and our drive towards improving the Company’s balance sheet as well as top line growth.”

Second Quarter Results

Net revenues for the second quarter of 2016 were $133.4 million compared to $174.8 million for the second quarter of 2015. The net revenues decrease year-over-year was primarily due to the following:

• $17.1 million lower revenues within the Company’s industrial end-use markets mainly due to the divestiture of the Pittsburgh operation in January 2016 and the closure of the Houston operation in December 2015; and
• $25.8 million lower revenues within the Company’s military and space end-use markets mainly due to the divestiture of the Miltec operations in March 2016 and program cancellations and budget changes in the prior year; which impacted the Company’s fixed-wing and helicopter platforms and pushed out scheduled deliveries.

Net income for the second quarter of 2016 was $3.9 million, or $0.34 per diluted share, compared to net income of $1.8 million, or $0.16 per diluted share, for the second quarter of 2015. The increase in net income for the second quarter of 2016 compared to the second quarter of 2015 was primarily due to lower interest expense of $4.5 million and improved operating performance, partially offset by the effect of lower revenues.

Gross profit for the second quarter of 2016 was $26.2 million, or 19.6% of revenues, compared to gross profit of $31.2 million, or 17.8% of revenue, for the second quarter of 2015. The higher gross margin percentage was primarily due to total material costs as a percentage of sales decreasing 2% or $2.8 million year-over-year as a result of the Company’s ongoing supply chain initiatives, improved operating performance, and favorable product mix.

Operating income for the second quarter of 2016 was $7.3 million, or 5.4% of revenue, compared to $10.8 million, or 6.2% of revenue, in the comparable period last year. The decrease in operating income was primarily due to the effect of lower revenues.

Interest expense decreased to $1.9 million in the second quarter of 2016, compared to $6.4 million in the previous year’s second quarter, primarily due to a lower outstanding debt balance as a result of voluntary principal prepayments on the term loan and a lower average interest rate as a result of completing the refinancing of the Company’s debt in July 2015.

Adjusted EBITDA for the second quarter of 2016 was $13.7 million, or 10.3% of revenue, compared to $19.7 million, or 11.3% of revenue, for the comparable period in 2015.

During the second quarter of 2016, the Company generated $6.6 million of cash from operations compared to $14.1 million during the second quarter of 2015. The decrease in cash flow from operations was primarily due to higher inventories and other assets, partially offset by higher net income as a result of higher gross margin percentage in the current-year quarter.

The Company’s firm backlog as of July 2, 2016 was $537 million, which decreased $26 million sequentially, primarily due to a $28 million decrease in commercial aerospace backlog as a result of the timing of commercial aerospace orders.

Structural Systems

The Structural Systems segment net revenues for the current-year second quarter were $60.7 million, compared to $76.1 million for the second quarter of 2015. The lower net revenues were primarily due to the following:

• $10.8 million decrease in military and space revenues mainly due to program cancellations and budget changes in the prior year which impacted scheduled deliveries on the Company’s fixed-wing and helicopter platforms; and
• $4.6 million decrease in commercial aerospace revenue related to the timing of certain shipments on a large airframe platform and the wind down of a regional jet program.

Structural Systems segment operating income for the current-year second quarter was $4.7 million, or 7.8% of revenue, compared to operating income of $6.9 million, or 9.0% of revenue, for the second quarter of 2015. The decrease in operating income was primarily due to the effect of lower revenues.

Structural Systems segment Adjusted EBITDA was $6.5 million for the current quarter, or 10.7% of revenue, compared to $10.5 million, or 13.8% of revenue, for the comparable quarter in the prior year.

Electronic Systems

The Electronic Systems segment net revenues for the current-year second quarter were $72.7 million, compared to $98.8 million for the second quarter of 2015. The lower net revenues were primarily due to the following:

• $17.1 million decrease in industrial revenues mainly due to the divestiture of the Pittsburgh operations in January 2016 and the closure of the Houston operation in December 2015; and
• $15.0 million decrease in military and space revenue mainly due to the divestiture of the Miltec operation in March 2016 and program cancellations and budget changes in the prior year; which impacted scheduled deliveries on the Company’s fixed-wing and helicopter platforms;
• Partially offset by $6.1 million increase in commercial aerospace revenue mainly due to added content with the Company’s existing customers.

Electronic Systems’ segment operating income for the current-year second quarter was $6.8 million, or 9.3% of revenue, compared to $7.7 million, or 7.8% of revenue, for the second quarter of 2015. The decrease in operating income was primarily due to the effect of lower revenues.

Electronic Systems segment Adjusted EBITDA was $10.5 million for the current-year quarter, or 14.4% of revenue, compared to $12.1 million, or 12.2% of revenue, for the comparable quarter in the prior year.

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

CG&A expenses for the second quarter of 2016 were $4.2 million, or 3.2% of total Company revenue, compared to $3.7 million, or 2.1% of total Company revenue, for the comparable quarter in the prior year. The increase in CG&A expenses in the current year quarter was primarily due to higher compensation and benefit costs of $1.0 million partially offset by other cost reduction initiatives of $0.5 million.

Conference Call

A teleconference hosted by Anthony J. Reardon, the Company’s chairman, president and chief executive officer, and Douglas L. Groves, the Company’s vice president, chief financial officer and treasurer, will be held today, August 4, 2016 at 2:00 p.m. PT (5:00 p.m. ET) to review these financial results. To participate in the teleconference, please call 844-239-5278 (international 574-990-1017) approximately ten minutes prior to the conference time. The participant passcode is 52428953. Mr. Reardon and Mr. Groves will be speaking on behalf of the Company and anticipate the meeting and Q&A period to last approximately 45 minutes.

This call is being webcast by Thomson Reuters and can be accessed directly at the Ducommun website at www.ducommun.com. Conference call replay will be available after that time at the same link or by dialing 855-859-2056, passcode 52428953.

About Ducommun Incorporated

Ducommun Incorporated delivers innovative manufacturing solutions to customers in the aerospace, defense and industrial markets. Founded in 1849, the Company specializes in two core areas -- Electronic Systems and Structural Systems -- to produce complex products and components for commercial aircraft platforms, mission-critical military and space programs, and sophisticated industrial applications. For more information, visit www.ducommun.com.

Forward Looking Statements

Statements contained in this press release regarding other than recitation of historical facts are forward-looking statements. These statements are identified by words such as “may,” “will,” “ begin,” “ look forward,” “expect,” “believe,” “intend,” “anticipate,” “should,” “potential,” “estimate,” “continue,” “momentum” and other words referring to events to occur in the future. These statements reflect the Company’s current view of future events and are based on its assessment of, and are subject to, a variety of risks and uncertainties beyond its control, including, but not limited to, the state of the world financial, credit, commodities and stock markets, and uncertainties regarding the Company, its businesses and the industries in which it operates, which are described in the Company’s filings with the Securities and Exchange Commission. The Company is under no obligation to (and expressly disclaims any such obligation to) update or alter its forward-looking statements whether as a result of new information, future events or otherwise.

Note Regarding Non-GAAP Financial Information

This release contains non-GAAP financial measures, including Adjusted EBITDA (which excludes interest expense, income tax expense, depreciation, amortization, stock-based compensation expense, gain on divestitures, and loss on extinguishment of debt).

The Company believes the presentation of these non-GAAP measures provide important supplemental information to management and investors regarding financial and business trends relating to its financial condition and results of operations. The Company’s management uses these non-GAAP financial measures along with the most directly comparable GAAP financial measures in evaluating the Company’s actual and forecasted operating performance, capital resources and cash flow. The non-GAAP financial information presented herein should be considered supplemental to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP.

      DUCOMMUN INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands)   July 2,2016 December 31,2015 Assets Current Assets Cash and cash equivalents $ 9,176 $ 5,454 Accounts receivable, net 76,857 77,089 Inventories 127,589 115,404 Production cost of contracts 9,444 10,290 Other current assets 8,100 13,389 Assets held for sale —   41,636   Total Current Assets 231,166 263,262 Property and Equipment, Net 97,243 96,551 Goodwill 82,554 82,554 Intangibles, Net 106,097 110,621 Deferred income taxes 282 324 Other Assets 2,957   3,769   Total Assets $ 520,299   $ 557,081   Liabilities and Shareholders’ Equity Current Liabilities Current portion of long-term debt $ 12 $ 26 Accounts payable 51,049 40,343 Accrued liabilities 35,921 36,458 Liabilities held for sale —   6,780  

Total Current Liabilities

86,982 83,607 Long-Term Debt, Less Current Portion 186,317 240,661 Deferred Income Taxes 24,399 26,528 Other Long-Term Liabilities 17,175   18,954   Total Liabilities 314,873   369,750   Commitments and Contingencies Shareholders’ Equity Common stock 112 111 Additional paid-in capital 76,199 75,200 Retained earnings 135,034 117,623 Accumulated other comprehensive loss (5,919 ) (5,603 ) Total Shareholders’ Equity 205,426   187,331   Total Liabilities and Shareholders’ Equity $ 520,299   $ 557,081         DUCOMMUN INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands, except per share amounts)   Three Months Ended Six Months Ended July 2,2016   July 4,2015 July 2,2016   July 4,2015 Net Revenues $ 133,437 $ 174,845 $ 275,585 $ 347,765 Cost of Sales 107,222   143,638   222,401   289,797   Gross Profit 26,215 31,207 53,184 57,968 Selling, General and Administrative Expenses 18,949   20,368   41,625   43,502   Operating Income 7,266 10,839 11,559 14,466 Interest Expense (1,935 ) (6,446 ) (4,334 ) (13,107 ) Loss on Extinguishment of Debt — (2,842 ) — (2,842 ) Other Income — 1,510 — 1,510 Gain on Divestitures —   —   18,815   —   Income Before Taxes 5,331 3,061 26,040 27 Income Tax Expense 1,470   1,279   8,629   218   Net Income (Loss) $ 3,861   $ 1,782   $ 17,411   $ (191 ) Earnings (Loss) Per Share Basic earnings (loss) per share $ 0.35 $ 0.16 $ 1.56 $ (0.02 ) Diluted earnings (loss) per share $ 0.34 $ 0.16 $ 1.55 $ (0.02 ) Weighted-Average Number of Common Shares Outstanding Basic 11,155 11,062 11,127 11,012 Diluted 11,264 11,276 11,245 11,012   Gross Profit % 19.6 % 17.8 % 19.3 % 16.7 % SG&A % 14.2 % 11.6 % 15.1 % 12.5 % Operating Income % 5.4 % 6.2 % 4.2 % 4.2 % Net Income (Loss) % 2.9 % 1.0 % 6.3 % (0.1 )% Effective Tax Rate 27.6 % 41.8 % 33.1 % 807.4 %           DUCOMMUN INCORPORATED AND SUBSIDIARIES BUSINESS SEGMENT PERFORMANCE (Unaudited) (In thousands)   Three Months Ended Six Months Ended %

Change

    July 2,2016     July 4,2015     %

of Net Revenues

2016

    %

of Net Revenues

2015

%

Change

    July 2,2016     July 4,2015     %

of Net Revenues

2016

    %

of Net Revenues

2015

Net Revenues Structural Systems (20.2 )% $ 60,694 $ 76,078 45.5 % 43.5 % (15.8 )% $ 124,711 $ 148,136 45.3 % 42.6 % Electronic Systems (26.3 )% 72,743   98,767   54.5 % 56.5 % (24.4 )% 150,874   199,629   54.7 % 57.4 % Total Net Revenues (23.7 )% $ 133,437   $ 174,845   100.0 % 100.0 % (20.8 )% $ 275,585   $ 347,765   100.0 % 100.0 % Segment Operating Income Structural Systems $ 4,730 $ 6,870 7.8 % 9.0 % $ 7,454 $ 9,008 6.0 % 6.1 % Electronic Systems (1) 6,782   7,692   9.3 % 7.8 % 13,169   13,977   8.7 % 7.0 % 11,512 14,562 20,623 22,985 Corporate General and Administrative Expenses (1)(2) (4,246 ) (3,723 ) (3.2 )% (2.1 )% (9,064 ) (8,519 ) (3.3 )% (2.4 )% Total Operating Income $ 7,266   $ 10,839   5.4 % 6.2 % $ 11,559   $ 14,466   4.2 % 4.2 % Adjusted EBITDA Structural Systems Operating Income $ 4,730 $ 6,870 $ 7,454 $ 9,008 Other Income (3) — 1,510 — 1,510 Depreciation and Amortization 1,775   2,111   3,832   4,624   6,505 10,491 10.7 % 13.8 % 11,286 15,142 9.0 % 10.2 % Electronic Systems Operating Income 6,782 7,692 13,169 13,977 Gain on Divestitures (4) — — 18,815 — Depreciation and Amortization 3,668   4,361   7,429   8,720   10,450 12,053 14.4 % 12.2 % 39,413 22,697 26.1 % 11.4 % Corporate General and Administrative Expenses (1)(2) Operating loss (4,246 ) (3,723 ) (9,064 ) (8,519 ) Gain on Divestitures (4) — — (18,815 ) — Depreciation and Amortization 33 42 70 84 Stock-Based Compensation Expense 985   837   1,985   2,461   (3,228 ) (2,844 ) (25,824 ) (5,974 ) Adjusted EBITDA $ 13,727   $ 19,700   10.3 % 11.3 % $ 24,875   $ 31,865   9.0 % 9.2 % Capital Expenditures Structural Systems $ 4,540 $ 2,417 $ 6,594 $ 5,751 Electronic Systems 407 948 754 2,438 Corporate Administration —   2   —   6   Total Capital Expenditures $ 4,947   $ 3,367   $ 7,348   $ 8,195     (1)  

Includes correction of an error for the three months ended April 2, 2016 related to a credit of general and administrative expenses being reflected in the Electronic Systems operating segment instead of Corporate General and Administrative Expenses of $0.7 million in the six months ended July 2, 2016 results. There was no impact to total consolidated operating income.

(2)

Costs not allocated to either the Electronic Systems or Structural Systems operating segments.

(3) Insurance recoveries related to property and equipment included as other income. (4) Includes gain on divestitures of the Pittsburgh and Miltec operations.

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Ducommun IncorporatedDouglas L. GrovesVice President, Chief Financial Officer and Treasurer310.513.7224orChris Witty, Investor Relations646.438.9385cwitty@darrowir.com