Note 4. Goodwill

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 Ducommun AeroStructures, Inc. (“DAS”), Ducommun Technologies, Inc. (“DTI”, now known as 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, 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 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%. The Company in turn concluded that the DLT reporting unit’s goodwill was not impaired based on the interim impairment evaluation. 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. As the DAS and Miltec reporting units did not underperform significantly during the six months ended June 30, 2012 and no other negative qualitative factors were present, the Company determined it was not necessary to perform an interim impairment assessment for these reporting units as it does not believe that there were any events or changes in circumstances since December 31, 2011 that make it more likely than not that the fair value of those reporting units have decreased below their carrying amount. However, impairment charges could be triggered in the future if:

•

the Company’s stock price continues to decline for an extended period of time and the reporting units begin to underperform for the reasons below,

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failure to win new business; and/or

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increased competition resulting in pressure on operating margins and cash flow.

In evaluating the Company’s market capitalization compared to its net book value as of June 30, 2012, the Company determined the difference to be reasonable based on the decline in its stock price being a recent event, which have been mitigated by recent significant increase in its stock price, the control premium being representative of current transaction levels in the market, debt and equity to EBITDA multiples being within a reasonable range, and performance within expectations at its reporting units. The Company will perform its annual goodwill impairment test by the end of the fourth quarter.

The carrying amounts of goodwill for the years ended December 31, 2011 and December 31, 2010 are as follows:


	Ducommun AeroStructures		Ducommun LaBarge			Total Ducommun
(In thousands)
Gross Goodwill	$	57,243	$	186,875		$	244,118
Accumulated Goodwill Impairment		—		(80,273	)		(80,273	)

Balance at December 31, 2011		57,243		106,602			163,845
Goodwill adjustment due to acquisition		—		(1,905	)		(1,905	)

Balance at June 30, 2012	$	57,243	$	104,697		$	161,940