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Ducommun Incorporated (NYSE: DCO) (“Ducommun” or the “Company”) today announced that it expects to record pre-tax program-related charges of approximately $14.1 million in the 2013 fourth quarter, partially offset by reduced accrued compensation expenses of approximately $5.3 million. The program-related charges and compensation expense reductions are expected to decrease net income by approximately $5.5 million, or approximately $0.51 per diluted share, in the fourth quarter; the number of shares used in computing diluted earnings per share is approximately 10.9 million.
The program-related charges are for contracts in the Ducommun AeroStructures segment on the Embraer Legacy 450/500 aircraft and the Boeing 777 wing tip. The charge for the Embraer aircraft contracts consists of a $5.7 million asset impairment charge (principally tooling and development costs), a $1.9 million inventory write-off, and a $3.9 million contract loss reserve. The charge for the Boeing contract consists of a $1.3 million asset impairment charge (principally tooling) and a $1.3 million contract loss reserve. These charges result from estimated cost overruns for the development and production phases of the Embraer aircraft contracts, as well as difficulties in achieving previously-anticipated cost reductions for both the Embraer and Boeing contracts.
Anthony J. Reardon, the Company's chairman and chief executive officer, stated, “We are clearly disappointed in the execution of these programs. To expand our content on such platforms, we bid somewhat aggressively and, unfortunately, did not meet our planned productivity improvements at the required pace. Moreover, the programs' profitability problems were exacerbated by customer-generated product changes. While discussions with Boeing and Embraer continue, we’ve been unable to resolve these issues with equitable price adjustments to date. That said, we have implemented more rigorous program management protocols to improve our product development process, as well as our change control and pricing procedures, to mitigate such risks going forward.”
Recognition of additional losses in future periods continues to be a risk and will depend upon numerous factors including the Company’s sales forecast, the ability to achieve expected cost reductions, and the ability to resolve claims and assertions with the aforementioned customers.