DUCOMMUN INC current report, Q2 FY2011

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Business Context and Reporting Period

This Form 8-K, dated June 20, 2011, reports on Ducommun Incorporated's (Ducommun) agreement to acquire LaBarge, Inc. (LaBarge) for approximately $338.1 million. The transaction involves a cash payment of $19.25 per share to LaBarge shareholders and the assumption of $27.8 million in LaBarge debt. Ducommun, a provider of engineering and manufacturing services to the aerospace and defense industries, intends to integrate LaBarge into its Ducommun Technologies segment to form a new unit, Ducommun LaBarge Technologies (DLT). The filing also details the financing arrangements required to consummate the merger.

Key Financial Metrics

Transaction Financing

  • Total Purchase Price: Approximately $338.1 million ($310.3 million equity + $27.8 million debt).
  • Senior Notes Offering: $200.0 million aggregate principal amount due 2018.
  • New Term Loan Facility: $190.0 million maturing June 2017.
  • New Revolving Credit Facility: Up to $60.0 million maturing June 2016.
  • Pro Forma Total Indebtedness: Approximately $393.3 million as of April 2, 2011.

Pro Forma Financial Performance (Twelve Months Ended April 2, 2011)

  • Net Sales: $736.2 million.
  • Adjusted EBITDA: $90.5 million (12.3% margin).
  • Net Income: $12.5 million.
  • Backlog: $600.2 million.

Historical Stand-Alone Performance (LaBarge)

  • Net Sales (12 months ended April 3, 2011): $332.5 million.
  • Adjusted EBITDA: $41.0 million.
  • Backlog (as of April 3, 2011): $241.6 million.

Material Changes and Strategic Rationale

The acquisition represents a significant expansion of Ducommun's capabilities and market reach. Key strategic drivers include:

  • Market Diversification: Expanding beyond aerospace and defense into industrial, natural resources, and medical markets. LaBarge's sales in these non-aerospace sectors represented approximately 63% of its net sales for the twelve months ended April 3, 2011.
  • Platform Expansion: Strengthening presence on major defense programs such as the UH-60 Black Hawk and F-35 Joint Strike Fighter.
  • Operational Synergies: Anticipated cost savings from corporate overhead, public company costs, and supply chain improvements.
  • Customer Concentration: Reducing reliance on specific customers; pro forma sales to Boeing decreased from 26% (stand-alone Ducommun) to 15% (combined).

Guidance, Outlook, and Risks

Management expects the combined company to operate as two segments: Ducommun LaBarge Technologies (DLT) and Ducommun AeroStructures (DAS). The filing highlights several material risks and contingencies:

  • Debt Service: The company will be highly leveraged post-transaction. Failure to generate sufficient cash flow to service the new $393.3 million debt load could lead to default.
  • Integration Risks: Uncertainty regarding the successful integration of operations, retention of key employees, and realization of projected synergies.
  • Customer Concentration: Specific risk regarding LaBarge's customer American Superconductor, which has delayed shipments and is past due on payments. A significant reduction in sales to this customer could trigger goodwill impairment.
  • Legal Proceedings:
    • SEC Investigation: LaBarge reached a settlement with the SEC regarding financial reporting processes in 2006-2007, agreeing to a cease and desist order and a $200,000 penalty.
    • Merger Litigation: Five putative class actions filed by LaBarge shareholders challenging the merger. A preliminary settlement was reached in Delaware, pending court approval.
    • Qui Tam Action: Ducommun is a defendant in a False Claims Act lawsuit regarding unapproved parts sold to Boeing; the government has declined to intervene.
  • Environmental Liabilities: Ducommun has established reserves of approximately $1.5 million for groundwater contamination and $1.1 million for hazardous waste landfills.

Investor Verification Checklist

  • Verify the final approval of the LaBarge shareholder vote and the SEC settlement terms.
  • Monitor the status of the preliminary settlement in the Delaware Chancery Court regarding the merger litigation.
  • Assess the financial stability of American Superconductor and the potential impact on LaBarge's backlog and goodwill.
  • Review the final terms of the $200 million senior notes and the new credit facilities, specifically interest rates and covenants.
  • Track the progress of the integration plan and the realization of projected cost synergies.
  • Confirm the outcome of the Qui Tam lawsuit regarding Boeing parts.