Overview

Ducommun Incorporated ("Ducommun" or the "Company"), through its subsidiaries designs, engineers and manufactures aerostructure and electromechanical components and subassemblies, and provides engineering, technical and program management services principally for the aerospace industry. These components, assemblies and services are provided principally for domestic and foreign commercial and military aircraft, helicopter, missile and related programs as well as space programs.

Domestic commercial aircraft programs include the Boeing 737NG, 747, 767, 777 and 787. Foreign commercial aircraft programs include the Airbus Industrie A330 and A340 aircraft, Bombardier business and regional jets, and the Embraer 145 and 170/190. Major military programs include the Boeing C-17, F-15 and F-18 and Lockheed Martin F-16 and F-22 aircraft, and various aircraft and shipboard electronics upgrade programs. Commercial and military helicopter programs include helicopters manufactured by Boeing (principally the Apache and Chinook helicopters), Sikorsky, Bell, Augusta and Carson. The Company also supports various unmanned space launch vehicle and satellite programs.

Sales, gross profit as a percentage of sales, selling, general and administrative expense as a percentage of sales, the effective tax rate and the diluted earnings per share, for the second quarter and six months of 2009 and 2008, respectively, were as follows:

                                   Second Quarter Ended             Six Months Ended
                                    2009           2008           2009           2008
    Sales (in $000's)            $  103,825      $ 102,865      $ 215,180      $ 201,523
    Gross Profit % of Sales            19.0 %         21.1 %         17.2 %         21.1 %
    SG&A Expense % of Sales            11.7 %         11.7 %         11.6 %         12.1 %
    Effective Tax Rate                 33.0 %         36.8 %         33.0 %         36.8 %
    Diluted Earnings Per Share   $     0.44      $    0.55      $    0.69      $    1.04

The Company manufactures components and assemblies principally for domestic and foreign commercial and military aircraft and space programs. The Company's Miltec subsidiary provides engineering, technical and program management services almost entirely for United States defense, space and homeland security programs.

The Company's mix of military, commercial and space business in the second quarter and six months of 2009 and 2008, respectively, were approximately as follows:

                           Second Quarter Ended           Six Months Ended
                           2009             2008         2009          2008
            Military           58 %             58 %        60 %          58 %
            Commercial         39               40          38            40
            Space               3                2           2             2

            Total             100 %            100 %       100 %         100 %

The Company is dependent on Boeing commercial aircraft, the C-17 aircraft and the Apache helicopter programs. Sales to these programs, as a percentage of total sales, for the second quarter and six months of 2009 and 2008, respectively, were approximately as follows:

                                   Second Quarter Ended           Six Months Ended
                                   2009             2008         2009          2008
    Boeing Commercial Aircraft         17 %             17 %        17 %          17 %
    Boeing Apache Helicopter            8               13          10            14
    Boeing C-17 Aircraft               10               10           9             9
    All Others                         65               60          64            60

    Total                             100 %            100 %       100 %         100 %

Sales in the second quarter and the first six months of 2009 were higher than the second quarter of 2008 by $960,000 and $13,657,000, respectively, due to sales from DAS-New York, which was acquired in December 2008. Sales in the second quarter and first six months of 2009 from DAS-New York were $9,900,000 and $21,200,000, respectively. Excluding DAS-New York, sales were lower for commercial aircraft and the Apache helicopter programs in the second quarter and first six months of 2009.

Net income for the second quarter and the first six months of 2009 was lower than the second quarter and first six months of 2008. The decline in net income in the second quarter of 2009 was driven by a decline in operating performance at Ducommun AeroStructures, Inc. ("DAS") which resulted primarily from fixed overhead expenses spread across lower sales, an unfavorable change in sales mix resulting from lower Apache helicopter sales, and inventory reserves and valuation adjustments at DAS. In the first quarter of 2009, the Company recorded a pre-tax inventory reserve of $4,359,000 related to inventory on-hand for Eclipse Aviation Corporation ("Eclipse"). In the second quarter of 2009, the Company recorded a pre-tax inventory valuation adjustment of $782,000 related to costs that were capitalized in error in prior periods. Because this error is not material to any of the prior years' financial statements, including 2009 financial statements, the Company recorded this correction in the second quarter of 2009 financial statements. Net income for the second quarter and the first six months of 2009 was also negatively impacted by an increase in interest expense due to higher debt in 2009, partially offset by the benefit of a lower effective tax rate in the second quarter and the first six months of 2009.

Results of Operations

Second Quarter 2009 Compared to Second Quarter 2008

Net sales in the second quarter of 2009 were $103,825,000, compared to net sales in the second quarter 2008 of $102,865,000. Net sales in the second quarter of 2009 increased $960,000 from the same period last year due to sales of $9,928,000 from DAS-New York, which was acquired in December 2008. Excluding DAS-New York, sales were lower for commercial aircraft and the Apache helicopter programs. The Company's mix of business in the second quarter of 2009 was approximately 58% military, 39% commercial, and 3% space, compared to 58% military, 40% commercial, and 2% space in the second quarter of 2008.

The Company had substantial sales, through both of its business segments, to Boeing, the United States government, Sikorsky and Raytheon. During the second quarters of 2009 and 2008, sales to these customers were as follows:

                                                 (In thousands)
                                              Second Quarter Ended
                                              July 4,      June 28,
                                               2009          2008
                 Boeing                     $    33,079    $  34,488
                 United States government         7,790        8,092
                 Sikorsky                         6,386        2,156
                 Raytheon                         6,438        6,973

                 Total                      $    53,693    $  51,709

At July 4, 2009, trade receivables from Boeing, the United States government, Sikorsky and Raytheon were $10,349,000, $1,897,000, $3,664,000 and $1,585,000, respectively. The sales and receivables relating to these customers are diversified over a number of different commercial, space and military programs.

Military components manufactured by the Company are employed in many of the country's front-line fighters, bombers, helicopters and support aircraft, as well as sea-based applications. Engineering, technical and program management services are provided principally for United States defense, space and homeland security programs. The Company's defense business is diversified among military manufacturers and programs. Sales related to military programs were approximately $60,571,000, or 58% of total sales, in the second quarter 2009, compared to $59,176,000, or 58% of total sales, in the second quarter of 2008. The increase in military sales in the second quarter of 2009 resulted principally from a $6,332,000 increase in sales to the Blackhawk program, primarily at the DAS-New York operation, and a $1,735,000 increase in all other military programs at DAS and DTI, partially offset by a $5,025,000 reduction in sales to the Apache helicopter program at DAS and a $1,647,000 reduction in sales to the F-18

program, primarily at DTI. The C-17 program accounted for approximately $10,626,000 in sales in the second quarter of 2009, compared to $10,031,000 in sales, in the second quarter of 2008. The Blackhawk program accounted for approximately $8,608,000 in sales in the second quarter 2009, compared to $2,276,000 in sales in 2008. The Apache helicopter program accounted for approximately $8,509,000 in sales in the second quarter of 2009, compared to $13,534,000 in sales in the second quarter of 2008. The F-18 program accounted for approximately $2,944,000 in sales in the second quarter 2009, compared to $4,591,000 in sales in the second quarter of 2008. The F-15 program accounted for approximately $2,686,000 in sales in the second quarter 2009, compared to $2,024,000 in sales in the second quarter of 2008.

The Company's commercial business is represented on many of today's major commercial aircraft. Sales related to commercial business were approximately $40,111,000, or 39% of total sales in the second quarter of 2009, compared to $41,387,000, or 40% of total sales, in the second quarter of 2008. During the second quarter of 2009, commercial sales were lower principally because of a $4,836,000 reduction in sales to commercial programs at DAS and DTI, partially offset by an increase of $3,560,000 in commercial sales at DAS-New York. Sales to the Boeing 737NG program accounted for approximately $10,611,000 in sales in the second quarter of 2009, compared to $11,556,000 in sales in the second quarter of 2008. The Boeing 777 program accounted for approximately $4,202,000 in sales in the second quarter of 2009, compared to $3,263,000 in sales in the second quarter of 2008.

In the space sector, the Company produces components for a variety of unmanned launch vehicles and satellite programs and provides engineering services. Sales related to space programs were approximately $3,143,000, or 3% of total sales, in the second quarter of 2009, compared to $2,302,000, or 2% of total sales, in the second quarter of 2008. The increase in sales for space programs resulted principally from an increase in engineering services at DTI.

Gross profit, as a percent of sales, decreased to 19.0% in the second quarter of 2009 compared to 21.1% in the second quarter of 2008. Gross profit margin was negatively impacted by a decline in operating performance at DAS, which resulted primarily from fixed overhead expenses spread across lower sales, an unfavorable change in sales mix resulting from lower Apache helicopter sales and an inventory valuation adjustment of $782,000, partially offset by improved operations performance at DTI.

Selling, general and administrative ("SG&A") expenses were $12,135,000, or 11.7% of sales in the second quarter of 2009, compared to $12,079,000, or 11.7% of sales, in the second quarter of 2008. The increase in SG&A expenses was due primarily to the expenses of DAS-New York, partially offset by lower SG&A expenses for the remainder of the Company.

Interest expense was $714,000 in the second quarter of 2009, compared to $390,000 in the second quarter of 2008. The increase was primarily due to higher debt in 2009, partially offset by lower interest rates in 2009.

Income tax expense decreased to $2,270,000 in the second quarter of 2009, compared to $3,393,000 in the second quarter of 2008. The decrease in income tax expense was due to a decrease in income before taxes and a lower effective income tax rate. The Company's effective tax rate for the second quarter of 2009 was 33.0%, compared to 36.8% in the second quarter of 2008. The Company's effective tax rate in the second quarter of 2009 included the benefit of research and development tax credits. The Company's effective tax rate in the second quarter of 2008 did not include the benefit of research and development tax credits. The federal tax law providing for research and development tax credits had not been extended by the end of June 28, 2008.

Net income was $4,609,000, or $0.44 diluted earnings per share, in the second quarter of 2009 compared to $5,831,000, or $0.55 diluted earnings per share, in the second quarter of 2008.

Six Months 2009 Compared to Six Months 2008

Net sales in the first six months of 2009 were $215,180,000, compared to net sales in the six months 2008 of $201,523,000. Net sales in the first six months of 2009 increased 7% from the same period last year due to sales of $21,249,000 from DAS-New York, which was acquired in December 2008. Excluding DAS-New York, sales were lower for commercial aircraft and the Apache helicopter programs in the first six months of 2009. The Company's mix of business in the first six months of 2009 was approximately 60% military, 38% commercial, and 2% space, compared to 58% military, 40% commercial, and 2% space in the first six months of 2008.

The Company had substantial sales, through both of its business segments, to Boeing, the United States government, Sikorsky and Raytheon. During the first six months of 2009 and 2008, sales to these customers were as follows:

                                                 (In thousands)
                                                Six Months Ended
                                               July 4,    June 28,
                                                2009        2008
                   Boeing                     $  66,942   $  68,510
                   United States government      17,389      15,955
                   Sikorsky                      15,508       3,963
                   Raytheon                      12,807      13,914

                   Total                      $ 112,646   $ 102,342

At July 4, 2009, trade receivables from Boeing, the United States government, Sikorsky and Raytheon were $10,349,000, $1,897,000, $3,664,000 and $1,585,000, respectively. The sales and receivables relating to these customers are diversified over a number of different commercial, space and military programs.

Military components manufactured by the Company are employed in many of the country's front-line fighters, bombers, helicopters and support aircraft, as well as sea-based applications. Engineering, technical and program management services are provided principally for United States defense, space and homeland security programs. The Company's defense business is diversified among military manufacturers and programs. Sales related to military programs were approximately $128,514,000, or 60% of total sales in the six months 2009, compared to $117,313,000, or 58% of total sales in the six months of 2008. The increase in military sales in the first six months of 2009 resulted principally from a $13,527,000 increase in sales to the Blackhawk program, primarily at the DAS-New York operation, a $3,778,000 increase in sales to the DTI military missiles programs, a $3,306,000 increase in sales to the F-15 program, primarily at DTI, a $1,310,000 increase in sales to the C-17 program and a $456,000 increase in all other military programs at DAS and DTI, partially offset by a reduction of $7,955,000 in sales to the Apache helicopter program at DAS and $3,221,000 in sales to the F-18 program, primarily at DTI. The Apache helicopter program accounted for approximately $20,577,000 in sales in the first six months of 2009, compared to $28,532,000 in sales in the first six months of 2008. The C-17 program accounted for approximately $20,338,000 in sales in the first six months of 2009 compared to $19,028,000 in sales, in the first six months of 2008. The Blackhawk program accounted for approximately $18,477,000 in sales in the first six months 2009, compared to $4,950,000 in sales in the first six months of 2008. The F-15 program accounted for approximately $7,348,000 in sales in the first six months of 2009, compared to $4,042,000 in sales in the first six months of 2008. The F-18 program accounted for approximately $5,626,000 in sales in the first six months 2009, compared to $8,847,000 in sales in the first six months of 2008.

The Company's commercial business is represented on many of today's major commercial aircraft. Sales related to commercial business were approximately $81,354,000, or 38% of total sales, in the first six months of 2009, compared to $79,857,000, or 40% of total sales, in the first six months of 2008. During the first six months of 2009, commercial sales were higher principally because of a $2,289,000 increase in sales to the Boeing 777 program, primarily at DAS-New York, partially offset by a $1,220,000 reduction in sales to the Boeing 737NG program and a $428,000 increase in all other commercial programs at DAS and DTI. Sales to the Boeing 737NG program accounted for approximately $20,714,000 in sales in the first six months of 2009, compared to $21,934,000 in sales in the first six months of 2008. The Boeing 777 program accounted for approximately $8,285,000 in sales in the first six months of 2009 compared to $5,996,000 in sales in the first six months of 2008.

In the space sector, the Company produces components for a variety of unmanned launch vehicles and satellite programs and provides engineering services. Sales related to space programs were approximately $5,312,000, or 2% of total sales, in the first six months of 2009, compared to $4,353,000, or 2% of total sales, in the first six months of 2008. The increase in sales for space programs resulted principally from an increase in engineering services at DTI.

Backlog is subject to delivery delays or program cancellations, which are beyond the Company's control. As of July 4, 2009, backlog believed to be firm was approximately $399,546,000 compared to $475,800,000 at December 31, 2008. Approximately $156,000,000 of total backlog is expected to be delivered during the remainder of 2009. The backlog at July 4, 2009 included the following programs:

                                                 Backlog
                                              (In thousands)
                      737NG                  $         45,820
                      Apache Helicopter                39,173
                      F-18                             37,820
                      Blackhawk Helicopter             30,934
                      C-17                             27,118
                      Carson Helicopter                24,700
                      Chinook Helicopter               16,721
                      777                              15,128
                      Other                           162,132

                                             $        399,546

Trends in the Company's overall level of backlog, however, may not be indicative of trends in future sales because the Company's backlog is affected by timing differences in the placement of customer orders and because the Company's backlog tends to be concentrated in several programs to a greater extent than the Company's sales. The production rate and the Company's sales for the Apache helicopter program are expected to be reduced by approximately one-half from the rate in 2008. Current program backlog will be shipped over an extended delivery schedule.

Gross profit, as a percent of sales, decreased to 17.2% in the first six months of 2009 compared to 21.1% in the first six months of 2008. Gross profit margin was negatively impacted by inventory reserves and valuation adjustments of $5,141,000 at DAS, related to Eclipse and prior periods, or 2.4% of sales, fixed overhead expenses spread across lower sales, and an unfavorable change in sales mix resulting from lower Apache helicopter sales at DAS, partially offset by higher operating performance at DTI.

Selling, general and administrative ("SG&A") expenses increased to $24,944,000, or 11.6% of sales in the first six months of 2009, compared to $24,458,000, or 12.1% of sales, in the first six months of 2008. The increase in SG&A expenses was due primarily to expenses at DAS-New York, partially offset by lower SG&A expenses for the remainder of the Company.

Interest expense was $1,353,000 in the first six months of 2009, compared to $593,000 in the first six months of 2008. The increase was primarily due to higher debt in 2009, partially offset by lower interest rates in 2009.

Income tax expense decreased to $3,543,000 in the first six months of 2009, compared to $6,450,000 in the first six months of 2008. The decrease in income tax expense was due to a decrease in income before taxes and a lower effective income tax rate. The Company's effective tax rate for the first six months of 2009 was 33.0%, compared to 36.8% in the first six months of 2008. The Company's effective tax rate in the first six months of 2009 included the benefit of research and development tax credits. The Company's effective tax rate in the first six months of 2008 did not include the benefit of research and development tax credits. The federal tax law providing for research and development tax credits had not been extended by the end of June 28, 2008.

Net income was $7,194,000, or $0.69 diluted earnings per share, in the first six months of 2009 compared to $11,083,000, or $1.04 diluted earnings per share, in the first six months of 2008. Net income for the first six months of 2009 includes an after-tax charge of $2,920,000 for the Eclipse inventory reserve and an after-tax charge of $524,000 for the inventory valuation adjustment discussed above, or $0.33 per diluted share.

Financial Condition

Cash Flow Summary

Net cash used in operating activities for the first six months of 2009 and 2008 was $15,069,000 and $17,717,000, respectively. Net cash used in operating activities for the first six months of 2009 resulted principally from a decrease in accrued and other liabilities of $13,165,000 (consisting primarily of a $7,091,000 decrease in accrued bonuses and incentives, a $5,769,000 decrease in customer deposits, a $2,165,000 decrease in deferred compensation and a $1,860,000 increase in other accrued liabilities), an increase in accounts and unbilled receivables of $7,034,000 primarily related to the timing of billings to customers and extension of payments by the customers, and an increase in inventory of $5,949,000 primarily related to work-in-process for production jobs scheduled to be shipped in 2009 and 2010.

Net cash used in investing activities for the first six months of 2009 consisted primarily of $4,060,000 of capital expenditures.

Net cash provided by financing activities for the first six months of 2009 of $16,885,000 included approximately $20,622,000 of net borrowings of debt, $938,000 for repurchase of stock, $1,573,000 of cash dividends paid, $1,133,000 of debt issue cost paid and $93,000 of cash payments related to the exercise of stock options.

The Company continues to depend on operating cash flow and the availability of its bank line of credit to provide short-term liquidity. Cash from operations and bank borrowing capacity are expected to provide sufficient liquidity to meet the Company's obligations during the next twelve months.

Liquidity and Capital Resources

The Company is party to a Second Amended and Restated Credit Agreement with Bank of America, N.A., as Administrative Agent, Wells Fargo Bank, National Association, as Syndication Agent, Union Bank, N.A., as Documentation Agent and the other lenders named therein dated June 26, 2009 (the "Credit Agreement"). The Credit Agreement provides for an unsecured revolving credit line of $120,000,000 maturing on June 26, 2014. Interest is payable quarterly on the outstanding borrowings at Bank of America's prime rate (3.25% at July 4, 2009) plus a spread (1.5% to 2.0% per annum based on the leverage ratio of the Company) or, at the election of the Company, for terms of up to six months at the LIBOR rate (0.31% at July 4, 2009 for one month LIBOR) plus a spread (2.5% to 3.0% per annum depending on the leverage ratio of the Company). The Credit Agreement includes minimum fixed charge coverage, maximum leverage and minimum net worth covenants, an unused commitment fee (0.50% to 0.60% per annum depending on the leverage ratio of the Company), and limitations on future dispositions of property, repurchases of common stock, dividends, outside indebtedness, and acquisitions. At July 4, 2009, the Company had $76,844,000 of unused lines of credit, after deducting $856,000 for outstanding standby letters of credit. The Company had outstanding loans of $42,300,000 and was in compliance with all covenants at July 4, 2009.

On September 5, 2007 the Company entered into a $20,000,000 interest rate swap with Banc of America Securities. The interest rate swap is for a $20,000,000 notional amount, under which the Company receives a variable interest rate (one month LIBOR) and pays a fixed 4.88% interest rate, with monthly settlement dates. The interest rate swap expires on September 13, 2010. As of July 4, 2009, the one month LIBOR rate was approximately 0.31%, and the fair value of the interest rate swap was a liability of approximately $1,048,000. The Company believes that the credit risk associated with the counterparty is nominal.

In connection with the DAS-New York acquisition in December 2008, the Company issued a promissory note in the initial principal amount of $7,000,000 with interest of five (5%) percent per annum payable annually on each anniversary of the closing date (December 23). Principal of the promissory note is payable in the amount of $4,000,000 on June 23, 2010 and $3,000,000 on December 23, 2013.

The weighted average interest rate on borrowings outstanding was 4.03% at July 4, 2009, compared to 4.90% at June 28, 2008. The carrying amount of long-term debt approximates fair value based on the terms of the related debt, recent transactions and estimates using interest rates currently available to the Company for debt with similar terms and remaining maturities.

The Company expects to spend less than $12,000,000 for capital expenditures in . . .