Ducommun Incorporated
23301 Wilmington Avenue
Carson, CA 90745
310.513.7200
www.ducommun.com
2014 ANNUAL REPORT
to Shareholders
Contents
Letter to Shareholders
Successfully Driving
Our Growth Strategy
Form 10-K
01
04
09
Our Vision
To be our customers’ #1 provider
of innovative electronics and
structures solutions.
Company Profile
Founded in 1849, Ducommun Incorporated provides
engineering and manufacturing services to the aerospace,
defense, and other industries through a wide spectrum of
electronic and structural applications. The Company is an
established supplier of critical components and assemblies
for commercial aircraft and military and space vehicles as
well as for the energy market, medical field, and industrial
automation. It operates through two primary business
units—Ducommun AeroStructures (DAS) and Ducommun
LaBarge Technologies (DLT). Additional information can be
found at www.ducommun.com.
Fellow Shareholders:
During fiscal 2014 we experienced
a good deal of progress on a
number of fronts, even as we
faced some challenges within
the defense arena.
The growth in our commercial aerospace operations was
This is not how we do business at Ducommun. We are
certainly a highlight, driven by higher product shipments
dedicated to the utmost integrity in everything we do.
for large commercial aircraft. During the year we also
We have begun the process of taking corrective action,
noted many significant wins—such as on the Boeing 737
including termination of employees involved, and are
MAX and Airbus A320 and A350 platforms—and made
committing the necessary resources to insure that this
inroads penetrating the jet engine market, positioning us
never happens again. To be clear, our investigation revealed
for further growth going forward.
no other programs were involved in this misconduct and
there was no impact to our customers.
We are reaping the positive results from several cost
saving and efficiency improvement initiatives, propelling
At the same time, and unrelated to the employee
operating cash flow to $53 million and free cash flow to
misconduct, we discovered errors in our income tax
$38 million in 2014. We used this cash to pay down nearly
accounting. These errors are also unacceptable and we
$43 million of our credit facility, ending 2014 with a net
are committed to enhancing our controls and technical
debt to EBITDA ratio under 3.0—from a high of 4.5 following
expertise to insure that these mistakes are not repeated.
the acquisition of LaBarge in 2011. In addition, we are now
In addition, the restatement included previously identified
planning to refinance our debt in its entirety in mid-2015,
and disclosed immaterial adjustments.
market conditions permitting, which we expect to result
in significant interest expense savings going forward.
DEDICATED TO INTEGRITY
IN EVERYTHING WE DO
Before reviewing our financial results, I want to comment
FINANCIAL HIGHLIGHTS
Ducommun’s net revenues for 2014 were $742 million, up
slightly from $737 million in 2013. The higher revenue was
primarily due to a 14 percent increase in sales within the
Company’s commercial aerospace markets and a 7 percent
on our delayed year-end filing and restatement of prior-
increase in non-aerospace and defense (non-A&D) revenue,
periods. We are very disappointed by the restatement
more than offsetting an 8 percent decline in military and
which resulted from both internal control deficiencies
space revenue.
and employee misconduct.
Specifically, we discovered misconduct by employees in
the recording of direct labor costs to a single long-term
contract. The discovery lead to identification of a forward-
loss provision that should have been recorded in 2009
and the impact on subsequent periods of the adjustment
of the forward-loss provision as products were delivered.
This misconduct was concealed from Ducommun’s senior
management, internal auditors and external auditors.
We are reaping the positive
results from several cost saving
and efficiency improvement
initiatives, propelling operating
cash flow to $53 million and free
cash flow to $38 million in 2014.
2014 AnnuAl RepoRt 01
Additional 2014 financial highlights include:
last year we experienced several
• Net income of $20 million, or $1.79 per diluted share
• Operating income of $52 million, or 7 percent of revenue
• Adjusted EBITDA of $83 million, or 11 percent of revenue
• Operating cash flow of $53 million and free cash flow
of $38 million
Please see our financial statements and accompanying
notes to consolidated financial statements included in this
report for a detailed review of our performance metrics.
BUSINESS OVERVIEW
Our vision is to be the premier solutions provider of
successes in the commercial
aerospace arena (our best year
ever in that space) and saw
considerable progress in some of
the non-A&D industrial markets.
where we are working to build on already existing
structural and electronic solutions to a variety of end-use
partnerships. We feel confident that, even at the current
markets, the majority of which serve the aerospace and
robust levels, our commercial aerospace business can
defense (A&D) and non-A&D industrial niche segments. Last
expand substantially—driven by increased content of more
year we experienced several successes in the commercial
lightweight titanium, thermal formed solutions as well as
aerospace arena (our best year ever in that space) and saw
higher build rates. The consistent, sustainable growth in our
considerable progress in some of the non-A&D markets.
commercial programs these past few years has served to
somewhat offset a decline in military sales.
Commercial aerospace revenue rose to $242 million,
up 14 percent versus 2013. The growth across our large
Within our military and space markets, revenue fell
commercial airframe platforms was evidenced by our
8 percent to $366 million in 2014 versus 2013, reflecting
biggest program, the Boeing 737, which saw sales rise
the many challenges faced this past year—including the
to nearly $60 million for the year. Going forward, we are
wind-down of Boeing’s C-17 program, for which we made
optimistic about continued top-line growth in this area;
our last shipments in the fourth quarter. We also saw lower
there are many opportunities where Ducommun can expand,
sales within the military helicopter space, primarily as a
particularly with Airbus, and we’re focused on increasing our
reduction in requirements for the Apache main rotor blade.
penetration with this important customer. At the same time,
These program changes, in aggregate, caused our military
we are bidding on new electronic and structural solutions
structures business to decline more than our electronics
for Boeing, Spirit, Rolls-Royce, and United Technologies,
segment in 2014, although the latter saw lower sales as well,
particularly for the F-18 and F-15 aircraft.
We expect that revenue within our military and space
markets will continue to trend somewhat lower in 2015,
reflecting budget realities and platform curtailments,
with sales stabilizing toward the second half of the year.
We also believe that ongoing global conditions, combined
with the crucial nature of the platforms we serve, support
a core level of demand even in an environment of lower
military budgets. Electronic upgrades for aircraft will
continue, as will the need for new or replacement electronic
parts for key helicopters such as the BLACK HAWK—our
largest military program.
We continue to bid on new opportunities within the military
and missile defense arena and believe our customer
relationships and quality reputation put us on sound footing
to win additional content going forward. We are targeting
Global demand for commercial aircraft is expected to be
very strong for the foreseeable future, with large, fixed-wing
aircraft leading the way. Ducommun has secured a place
on key aircraft platforms with Airbus, including the A320
series, A350 and A380, as well as with Boeing.
02 Ducommun IncoRpoRAteD
applications that best leverage our technology advances
and structural expertise, as there remains room to expand
our defense business portfolio. At the same time, we are
actively taking steps across our facilities to reduce costs,
increase efficiency and expand margins. We know we can
do this even with run-rates dropping on certain platforms,
as we look to reduce working capital and drive higher cash
flow for investment elsewhere.
Lastly, within our non-A&D markets, the end of 2014 saw
continued upward momentum—with fourth quarter
revenue of $38 million, the highest there since the third
quarter of 2012, and total annual revenue of $134 million,
increasing 6 percent versus $126 million in 2013. We remain
During 2014 Ducommun won several new pieces of business on
the Boeing 737 mAX program, including the aircraft’s ground
and flight spoilers, titanium assemblies used in the propulsion
and thrust reversers, and titanium engine inlet bulkheads to be
integrated into the plane’s engine nacelle inlets.
focused on winning new customers within this space and
That said, we believe that the first half of 2015 will be
have made good inroads into several heavy industrial
negatively impacted—in terms of both top-line revenue as
markets. We feel confident in the steps we’ve taken over
well as margins—by lower defense spending versus 2014.
the past year to broaden our business and expand our
In addition, our non-A&D business is seeing some softness
market penetration.
OUTLOOK
We view 2015 as a year of transition—where we’ll focus
within the energy space due to lower oil prices while, at the
same time, we’re investing in ramping up new programs that
will also hurt margins near-term.
on replacing reduced military sales by leveraging strong
We see plenty of room for operational improvement and
customer relationships and aggressively pursuing new
margin expansion and are looking forward to refinancing
business development opportunities, particularly within
our debt in 2015, potentially unlocking further value for
the commercial aerospace market. Overall, we have a
our shareholders.
robust plan in place to improve margins and drive growth,
positioning the Company for higher returns.
In closing, we want to thank our shareholders for their
continued interest in Ducommun. Our employees are
Over the past year Ducommun has accomplished a great
dedicated to our success and that of our customers, and we
deal in growing the business despite adverse conditions
believe 2015 will lay the groundwork for higher growth and
within the defense industry. We’ve seen many challenges,
improved margins in 2016 and beyond. We have the talent
but built a solid business across a multitude of platforms
and the technology to take this Company to the next level,
and technologies that is a leader in its field, dedicated to
and that’s exactly what we intend to do.
improving performance across all aspects of our operations.
In addition, we’ve realigned our Company to offer faster,
Best regards,
more innovative responses to our customers and built a
strong management team. Our commercial aerospace
business is firing on all cylinders, and we’ve grown this
part of Ducommun over 50 percent organically in the past
Anthony J. Reardon
five years through a combination of broader structural
Chairman and Chief Executive Officer
offerings, advanced technology applications, higher run
April 9, 2015
rates, and excellent customer service. At the same time,
our non-A&D operations have rebounded, and we see
further room for growth by targeting electronic solutions
for advanced automation within the industrial, energy,
and medical end-use markets.
2014 AnnuAl RepoRt 03
Successfully Driving Our Growth Strategy
The Ducommun Way is our internal operating methodology for executing
successfully, solving problems effectively, and finding better ways of
serving our customers. During 2014 we used these guiding principles
to successfully drive our business strategy and advance our profitable
growth initiatives. See a few examples at right.
profitable Growth
Gained traction with our strategy to be recognized as a unified company whose
value proposition is to passionately deliver innovative solutions to our customers
Leveraged broad-based capabilities to achieve key wins on the Boeing 737 MAX,
Airbus A320 and A350, and strategic industrial programs
Secured or pursuing long-term supply agreements with Airbus, Boeing,
Parker Aerospace, Rolls-Royce, Spirit and United Technologies
operational excellence
Launched a comprehensive supply chain initiative to expand buying power,
reduce cost, and improve supplier quality and on-time delivery
Enhanced customer satisfaction and profitable growth through unified
program management disciplines
Developed a companywide new product introduction (NPI) process, creating standard
work for how first-time products are pursued, won and entered into production
organizational Development
Restructured the organization to drive greater collaboration between
operations and functional areas and improve goal alignment and accountability
Expanded our talent pool with several highly capable additions to our
management team and promotions of internal leaders to new positions
Launching additional talent development programs and new methods and
technologies to recruit outside talent
Fellow Shareholders:
I am pleased to report that
Ducommun meaningfully advanced
its strategies for profitable growth
and performance improvement
during fiscal 2014.
Despite the year’s challenges, we made tremendous strides
We consider important wins on key programs and our recent
in our journey to become our customers’ #1 provider of
and imminent long-term supply agreements with industry
innovative electronics and structures solutions. We are
leaders like Airbus, Boeing, Parker Aerospace, Rolls-Royce,
confident that our vision for Ducommun is achievable, and
Spirit, and United Technologies to be evidence of our
we are excited to be making excellent headway as we move
success in positioning Ducommun as a valued strategic
briskly toward it.
2014 RECAP
We are guided on our journey by the Ducommun Way, our
supplier-partner. Also illustrating our progress in this area
are the multiple supplier excellence awards conferred on
Ducommun during 2014 by customers, including United
Technologies, NATEL EMS, and Deere & Company, the parent
internal operating methodology for executing successfully,
company of John Deere Electronic Solutions.
solving problems effectively, and finding better ways
of serving our customers through a combined focus on
operational excellence, organizational development and
Operational Excellence
We also intensified our operational excellence activities
profitable growth. Implemented in late 2012, the guiding
during 2014. This critical initiative touches every aspect
principles of the Ducommun Way are making a tangible
of our organization and is instrumental in transforming
difference and helping us capitalize on the limitless
Ducommun into a more effective and competitive company.
opportunities we see on the horizon for our Company.
We are capitalizing on the natural synergies between lean
Profitable Growth
During 2014 we gained additional traction in our business
development strategy to be recognized as a unified company
initiatives, product integrity, program management and
supply chain management to drive meaningful improvements
in productivity, efficiency and customer service.
where customers have access to broad-based capabilities
The result during 2014 was expanded adoption of standard
through common, companywide processes. Our customers
operating methodologies and improved goal alignment from
are embracing this approach and finding that our value
top to bottom throughout the organization. One example is
proposition to passionately deliver reliable and innovative
our development and companywide implementation of a new
solutions via collaboration, transparency and ease of doing
product introduction (NPI) process. The purpose of NPI is to
business resonates with them.
promote standard work across the organization for how first-
time products are pursued, won and entered into production.
Our customers are leaders and innovators in their industries,
This process is helping us improve customer satisfaction,
and we are leveraging our electronics, engineering and
increase speed to market and reduce our cost of development.
structures capabilities to create innovative solutions for
their complex manufacturing and engineering problems.
Also during 2014 we launched a comprehensive supply
This is a critical differentiator for Ducommun as customers
chain initiative to expand our buying power, reduce cost and
are implementing strategies to replace their large supplier
improve supplier quality and on-time delivery. Like many
constellations with fewer, more sophisticated, and higher
of our customers, Ducommun is building a truly strategic
performing supplier-partners.
supply base that is committed to meeting customer needs
and helping us achieve our growth objectives.
06 Ducommun IncoRpoRAteD
Organizational Development
During 2014 we made very good progress adapting our
organizational structure to better support our vision,
strategic business approach and customers’ needs.
This ongoing effort is driving greater collaboration between
our operations and functional areas, as well as improved
goal alignment and more accountability throughout the
Company—all of which is essential to better performance
and customer satisfaction.
And, of course, we need the best talent to drive growth and
achieve our goals. During 2014, we made several excellent,
highly capable additions to our management team and
promoted a number of internal leaders to new positions
through our expanding employee development programs.
2015 AND BEYOND
One of the biggest challenges we face right now is the
fundamental shift happening in our key markets. Today,
our revenues are heavily weighted in defense and aerospace
with about half coming from defense and another third
generated by commercial aerospace. Our objective over
the next several years is to create a greater balance in
our market diversification. This balance will help protect
Ducommun from downturns in any single industry and
provide a stronger platform from which to grow when
downturns inevitably occur.
To achieve this, we must target customers in strategic
niche markets where our impressive portfolio of broad,
complementary capabilities is sought after, and establish
Ducommun as the innovative solutions provider that can
meet their needs. These markets include:
commercial aerospace—Global demand for commercial
aircraft is expected to be very strong for the foreseeable
future with large, fixed-wing aircraft leading the way.
We’ve done a very good job of securing a place on key
aircraft platforms with Boeing and Airbus, as well as with
their partners Parker Aerospace, Spirit and others. Many
opportunities still exist for Ducommun to win critical
electronic systems and structural components for these
programs, as well as their related engine platforms. The
competition is tough and the key platforms will continue
for decades, so we must be diligent now to win the biggest
possible piece of the pie.
Defense—Near-term overall defense spending is uncertain
at best and, more likely, will decline during the next several
years. Ducommun has already been impacted by the end of
Ducommun was awarded its first direct contract with Airbus
for the all-new A350 XWB wide-body aircraft in 2014. We are
providing titanium components that are installed on the aft
fuselage section of the jet. the contract expands Ducommun’s
support of Airbus in north America.
During 2014
Ducommun made
inroads into the
engine market where
we believe growth
in key commercial
aviation programs
like the 737 mAX
and A320 and A350
will drive increased
demand. We have
extensive experience
producing structural
and electronic
components for
jet engines.
Despite declines in overall defense spending, funding for missile
defense, where we have carved out a strong niche, is expected
to grow. Ducommun produces a variety of interconnect and
electronic assemblies for the u.S. navy’s tomahawk cruise
missile as well as other missile defense programs.
2014 AnnuAl RepoRt 07
some legacy programs like the C-17. We feel the bright spot
steps we’ve taken over the past year to broaden our business
for us is that funding for missile defense, where we have
and expand our industrial segment market penetration.
carved out a strong niche, is expected to grow, and upgrade
opportunities on existing military aircraft should continue.
Through all of this, our operational excellence initiatives
will remain absolutely critical to our future success and we
Industrial—An essential component of Ducommun’s
will continue to look for opportunities to drive synergies and
profitable growth strategy is further expansion into targeted
productivity improvements through lean, product integrity,
industrial markets. This area offers many attractive
program management and supply chain management.
prospects and we are carefully matching our specialized
We expect our disciplined NPI process will mature further
capabilities with the right opportunities. Technology-driven
during 2015 and we anticipate new cost savings as a result
heavy industrial applications, like the ones we work on
of our revamped supply chain strategy.
for John Deere, are a good fit. Within natural resources,
we know the impact of lower oil prices on future capital
The collaboration within operational excellence is also
spending, and we have strategies in place to deal with the
expanding to other key areas of the Company like
current market fluctuations. Although we expect overall oil-
engineering where internal experts are sharing their
and-gas sales to be down in 2015, we feel confident in the
expertise to develop innovative solutions and drive
continuous improvement throughout the organization.
Like all employers, Ducommun is challenged by the
demands of a constantly changing world and an aging
workforce. However, we are taking critical steps to ensure
our organization attracts and retains the talent we
need to grow our business profitably within an evolving
employment landscape. Over the last few years, Ducommun
has implemented new leadership development programs
to identify and grow talented new leaders within our
organization. We are preparing our people to be problem
solvers and empowered leaders who bring forth their best
ideas, suggest better ways of doing things, spot problems
quickly and prevent defects from getting to the customer.
In 2015, we are launching additional talent development
programs, including mentorship and workplace ethics,
as well as implementing new methods and technologies
to recruit outside talent.
OUR PATH FORWARD
Ducommun is growing into a larger, more capable company
with greater resources and unlimited opportunities.
The combination of our strong growth strategy, sought-
after capabilities and the disciplines of the Ducommun Way
are paving the path forward. I believe that we have not yet
scratched the surface of what Ducommun can achieve and
I am looking forward to the exciting journey ahead.
Best regards,
Joel H. Benkie
President and Chief Operating Officer
the combination of our strong
growth strategy, sought-after
capabilities and the disciplines
of the Ducommun Way are paving
the path forward.
Further expansion into technology-driven heavy industrial
markets is an essential component of Ducommun’s
profitable growth strategy. An example is the complex, high-
reliability printed circuit board assemblies and electronic
systems we provide to John Deere electronic Solutions.
08 Ducommun IncoRpoRAteD
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________________
FORM 10-K
_________________________________________________________
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-8174
_________________________________________________________
DUCOMMUN INCORPORATED
(Exact name of registrant as specified in its charter)
_________________________________________________________
Delaware
(State or other jurisdiction of
incorporation or organization)
23301 Wilmington Avenue, Carson, California
(Address of principal executive offices)
95-0693330
(I.R.S. Employer
Identification No.)
90745-6209
(Zip code)
Registrant’s telephone number, including area code: (310) 513-7200
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $.01 par value per share
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
_________________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2
of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price of
which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the
registrant’s most recently completed second fiscal quarter ended June 28, 2014 was approximately $286 million.
The number of shares of common stock outstanding on March 31, 2015 was 10,964,901.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference:
(a) Proxy Statement for the 2015 Annual Meeting of Shareholders (the “2015 Proxy Statement”), incorporated partially in Part
III hereof.
Table of Contents
DUCOMMUN INCORPORATED AND SUBSIDIARIES
PART I
Explanatory Note
Forward-Looking Statements and Risk Factors
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosures
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
PART III
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
PART IV
Item 15.
Exhibits and Financial Statement Schedules
Signatures
Page
3
5
6
12
21
22
22
22
23
25
26
44
44
44
44
46
47
47
47
48
48
49
102
2
EXPLANATORY NOTE
This Annual Report on Form 10-K for the year ended December 31, 2014 (“Form 10-K”) includes the restatement of certain of
our previously issued consolidated financial statements and selected financial data. It also amends previously filed
management’s discussion and analysis of financial condition and results of operations and other disclosures for the periods
presented in this Form 10-K. As indicated in Note 2 to our consolidated financial statements included in Part IV, Item 15(a) of
this Form 10-K, we corrected errors in prior periods primarily related to (i) a long-term contract (“Contract”) following the
discovery of misconduct by employees in the recording of direct labor costs to the Contract from 2009 through the third quarter
2014 which resulted in the identification of a forward loss provision that should have been recorded in 2009 and the impact on
subsequent periods of adjustments to the forward loss provision based on information available at the time (“Forward Loss
Adjustments”); and (ii) the year end reconciliation of income taxes payable and deferred tax balances identified errors primarily
in 2013, 2012, and 2011 (“Tax Adjustments”). The misconduct and its related financial impact were concealed from our senior
management, internal auditors, and external auditors.
The Forward Loss Adjustments were based on certain assumptions and estimates. To determine the loss on the Contract, we
estimated the number of units we would have expected to ship over the life of the Contract at inception of the Contract using
external market industry data for fiscal years 2009, 2010, 2011, 2012, and 2013. We used data obtained directly from the
customer for 2014 and 2015. The total estimated costs at any given point in time would typically include actual historical costs
up to that time plus the estimated cost to produce units to be delivered. In addition, the estimated total cost for the life of the
Contract includes certain inefficiencies on labor, material, and overhead costs during the initial start-up period. However, as we
progress along the learning curve, the direct labor hours and overhead rates are expected to decrease as we gain technical
knowhow and efficiency in producing the product. As a result of the misconduct by the employees in the recording of direct
labor hours to the Contract, the historical actual direct labor hours charged to the Contract were inaccurate. As a result, we
estimated the costs to complete future units at the end of each period based on an estimate of the direct labor hours chargeable
to the Contract, including consideration of anticipated learning curve efficiencies that would decrease the direct labor hours
over the remaining term of the Contract. Further, we used the actual direct labor hours incurred by the employees assigned to
the Contract as a basis for projecting future hours, less an estimate of the time not allocable to the Contract. Using this model,
we calculated the Forward Loss Adjustments from the inception of the Contract in 2009 through the expected life of the
Contract. As a result of the Forward Loss Adjustments, cost of goods sold increased (decreased) approximately $6.7 million in
2009, $1.3 million in 2010, $(0.3) million in 2011, $(2.2) million in 2012, $(0.9) million in 2013, and $(0.8) million in the nine
months ended September 27, 2014.
The Tax Adjustments were necessary as a result of certain calculation errors. The Tax Adjustments resulted in a net decrease to
income tax expense of approximately $0.9 million in 2013 and zero in 2012. The Tax Adjustments in 2011 resulted in a
reduction to the carrying value of goodwill totaling approximately $4.0 million due to a calculation error in the original
purchase price allocation and subsequent performance of step 2 of our annual goodwill impairment analysis related to deferred
income taxes and thus, (i) reduced deferred income taxes by approximately $2.7 million and (ii) generated a pre-tax goodwill
impairment charge of approximately $1.4 million. Further, the Tax Adjustments in 2011 reduced deferred tax assets by
approximately $1.6 million that were established as a result of shared-based compensation expenses recorded previously and
should have been reduced as the tax deductions were utilized. Moreover, the restated amounts include previously identified and
disclosed immaterial adjustments. In this Form 10-K, we therefore have restated the following financial information as of and
for the periods (collectively, the “Restated Periods”) noted in the table below.
Type of Financial Information:
Consolidated balance sheet
Date or Period:
As of December 31, 2013
Consolidated statements of income, comprehensive
income, shareholders’ equity, and cash flows
Years ended December 31, 2013 and 2012
Selected financial data
Unaudited quarterly financial information
Years ended December 31, 2013, 2012, 2011 and
2010
Quarters ended September 27, 2014, June 28, 2014
and March 29, 2014 and each quarter in the year
ended December 31, 2013
Management’s discussion and analysis of financial
condition and results of operations
As of and for the years ended December 31, 2013
and 2012
In addition, we have identified material weaknesses related to our internal control over financial reporting for the year ended
December 31, 2014. Disclosures related to these matters are included in Part II, Item 9A of this Form 10-K.
3
We believe that presenting all of the amended and restated information regarding the Restated Periods in this Form 10-K allows
investors to review all pertinent information in a single presentation. In addition, our Quarterly Reports on Form 10-Q to be
filed during 2015 will include the restated 2014 comparable prior quarter and year to date periods. We have not filed and do not
intend to file amendments to (i) our Quarterly Reports on Form 10-Q for the first three quarterly periods in the year ended
December 31, 2014 or (ii) our Annual Report on Form 10-K for the year ended December 31, 2013 (collectively, the “Affected
Periods”). Accordingly, investors should rely only on the financial information and other disclosures regarding the Restated
Periods in this Form 10-K or in future filings with the SEC (as applicable), and not on any previously issued or filed reports,
earnings releases or similar communications relating to those periods.
The combined impact of the adjustments and specified line items in the Affected Periods resulting from the restatement is
described in Note 2 to our consolidated financial statements included in Part IV, Item 15(a) of this Form 10-K. The following
items of this Form 10-K are impacted as a result of the restatement:
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Part I, Item 1A, Risk Factors
Part II, Item 6, Selected Financial Data
Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations
Part II, Item 9A, Controls and Procedures
Part IV, Item 15, Exhibits and Financial Statement Schedules
4
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
This Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933,
Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. Forward-looking
statements may be preceded by, followed by or include the words “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate”
or similar expressions. These statements are based on the beliefs and assumptions of our management. Generally, forward-
looking statements include information concerning our possible or assumed future actions, events or results of operations.
Forward-looking statements specifically include, without limitation, the information in this Form 10-K regarding: future sales,
earnings, cash flow, uses of cash and other measures of financial performance, projections or expectations for future operations,
our plans with respect to completed acquisitions, future acquisitions and dispositions and expected business opportunities that
may be available to us.
Although we believe that the expectations reflected in the forward-looking statements are based on reasonable assumptions,
these forward-looking statements are subject to numerous factors, risks and uncertainties that could cause actual outcomes and
results to be materially different from those projected. We cannot guarantee future results, performance or achievements.
Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking
statements. All written and oral forward-looking statements made in connection with this Form 10-K that are attributable to us
or persons acting on our behalf are expressly qualified in their entirety by “Risk Factors” contained within Part I, Item 1A of
this Form 10-K and other cautionary statements included herein. We are under no duty to update any of the forward-looking
statements after the date of this Form 10-K to conform such statements to actual results or to changes in our expectations.
The information in this Form 10-K is not a complete description of our business. There can be no assurance that other factors
will not affect the accuracy of these forward-looking statements or that our actual results will not differ materially from the
results anticipated in such forward-looking statements. While it is impossible to identify all such factors, factors that could
cause actual results to differ materially from those estimated by us include, but are not limited to, those factors or conditions
described under “Risk Factors” contained within Part I, Item 1A of this Form 10-K and the following:
•
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•
•
•
•
•
•
•
•
•
•
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our ability to manage and otherwise comply with our covenants with respect to our outstanding indebtedness;
our ability to service our indebtedness;
the cyclicality of our end-use markets and the level of new commercial and military aircraft orders;
industry and customer concentration;
production rates for various commercial and military aircraft programs;
the level of U.S. Government defense spending, including the impact of sequestration;
compliance with applicable regulatory requirements and changes in regulatory requirements, including regulatory
requirements applicable to government contracts and sub-contracts;
further consolidation of customers and suppliers in our markets;
product performance and delivery;
start-up costs, manufacturing inefficiencies and possible overruns on contracts;
increased design, product development, manufacturing, supply chain and other risks and uncertainties associated
with our growth strategy to become a Tier 2 supplier of higher-level assemblies;
our ability to manage the risks associated with international operations and sales;
possible goodwill and other asset impairments;
the impact and timing of our internal controls remediation;
economic and geopolitical developments and conditions;
unfavorable developments in the global credit markets;
our ability to operate within highly competitive markets;
technology changes and evolving industry and regulatory standards;
the risk of environmental liabilities; and
litigation with respect to us.
5
We caution the reader that undue reliance should not be placed on any forward-looking statements, which speak only as of the
date of this Form 10-K. We do not undertake any duty or responsibility to update any of these forward-looking statements to
reflect events or circumstances after the date of this Form 10-K or to reflect actual outcomes.
ITEM 1. BUSINESS
GENERAL
PART I
Ducommun Incorporated (“Ducommun,” “the Company,” “we,” “us” or “our”) is a leading global provider of engineering and
manufacturing services for high-performance products and high-cost-of failure applications used primarily in the aerospace,
defense, industrial, natural resources, medical and other industries. Ducommun differentiates itself as a full-service solution-
based provider, offering a wide range of value-added products and services in our primary businesses of electronics, structures
and integrated solutions. We operate through two primary business units: Ducommun LaBarge Technologies and Ducommun
AeroStructures. We are the successor to a business that was founded in California in 1849 and reincorporated in Delaware in
1970.
ACQUISITIONS
Acquisitions have been an important element of our growth strategy. We have supplemented our organic growth by identifying,
acquiring and integrating acquisition opportunities that result in broader, more sophisticated product and service offerings while
diversifying and expanding our customer base and markets.
For example, in June 2011, we acquired all of the outstanding stock of LaBarge Inc., (the “LaBarge Acquisition”), a provider of
electronics manufacturing services to aerospace, defense and other diverse markets for $325.3 million (net of cash acquired and
acquisition costs), funded by internally generated cash, senior unsecured notes and a senior secured term loan totaling $390.0
million. The LaBarge Acquisition has positioned us to benefit from customers that are increasingly outsourcing their integrated
electronic content on their platforms and consolidating their supplier base to companies with expanded capabilities.
PRODUCTS AND SERVICES
Business Segment Information
We operate through two primary strategic businesses, Ducommun LaBarge Technologies (“DLT”) and Ducommun
Aerostructures (“DAS”), each of which is a reportable operating segment. The results of operations among our operating
segments vary due to differences in competitors, customers, extent of proprietary deliverables and performance. DLT designs,
engineers and manufactures high-reliability products used in worldwide technology-driven markets including aerospace,
defense, natural resources, industrial, and medical and other end-use markets. DLT’s product offerings primarily range from
prototype development to complex assemblies as discussed in more detail below. DAS designs, engineers and manufactures
large, complex contoured aerospace structural components and assemblies and supplies composite and metal bonded structures
and assemblies. DAS’s products are primarily used on commercial aircraft, military fixed-wing aircraft and military and
commercial rotary-wing aircraft.
Ducommun LaBarge Technologies (“DLT”)
DLT has three major product offerings in electronics manufacturing for diverse, high-reliability applications: complex cable
assemblies and interconnect systems, printed circuit board assemblies, and higher-level electronic, electromechanical and
mechanical assemblies. Components and assemblies are provided principally for domestic and foreign commercial and military
fixed-wing aircraft, military and commercial rotary-wing aircraft and space programs. In addition, we provide select industrial
high-reliability applications for the industrial automation, natural resources (mine automation and drilling), and medical and
other end-use markets. We build custom, high-performance electronics and electromechanical systems. Our products include
sophisticated radar enclosures, aircraft avionics racks and shipboard communications and control enclosures, printed circuit
board assemblies, cable assemblies, wire harnesses, and interconnect systems and other high-level complex assemblies. DLT
utilizes a highly-integrated production process, including manufacturing, engineering, fabrication, machining, assembly,
electronic integration, and related processes. Engineering, technical and program management services, including design,
development, and integration and testing of circuit card assemblies and cable assemblies, are provided to a wide range of
customers.
In response to customer needs and utilizing our in-depth engineering expertise, DLT is also considered a leading supplier of
engineered products including, illuminated pushbutton switches and panels for aviation and test systems, microwave and
millimeter switches and filters for radio frequency systems and test instrumentation, and motors and resolvers for motion
control.
6
DLT also provides engineering expertise for aerospace system design, development, integration, and test. We leverage the
knowledge base, capabilities, talent, and technologies of this focused capability into direct support of our customers. Our
expertise includes engineering capabilities in systems engineering, aerodynamics, propulsion, guidance-navigation-and control
(“GNC”), lethality/warheads, simulations, avionics, structures, software, inertial measurement units, seeker/sensors, and signal/
data processing.
Ducommun AeroStructures (“DAS”)
DAS has three major product offerings to support a global customer base: commercial aircraft, military fixed-wing aircraft, and
military and commercial rotary-wing aircraft. Our applications include structural components, structural assemblies and bonded
(metal and composite) components. In the structural components products, DAS designs, engineers, and manufactures large
complex contoured aluminum, titanium and Inconel® aerostructure components for the aerospace industry. Structural assembly
products include winglets, engine components, and fuselage structural panels for aircraft. Metal and composite bonded
structures and assemblies products include aircraft wing spoilers, large fuselage skins, rotor blades on rotary-wing aircraft and
components, flight control surfaces and engine components. To support these products, DAS maintains advanced machine
milling, stretch-forming, hot-forming, metal bonding, composite layup, and chemical milling capabilities and has an extensive
engineering capability to support both design and manufacturing.
AEROSPACE AND DEFENSE END-USE MARKETS OVERVIEW
Our largest end-use markets are the aerospace and defense markets and our sales to these markets represent approximately 82%
of our net revenues in 2014. These markets are serviced by suppliers which are stratified, from the lowest value provided to the
highest, into four tiers; Tier 3, Tier 2, Tier 1 and original equipment manufacturers (“OEMs”). The OEMs provide the highest
value and are also known as prime contractors or primes. We derive a significant portion of our revenue from subcontracts with
OEMs. As the prime contractor for various programs and platforms, the OEMs sell to their customers, who may include,
depending upon the application, the U.S. Federal Government, foreign, state and local governments, global commercial airline
carriers, regional jet carriers and various other customers. The OEMs also sell to global leasing companies that lease
commercial aircraft. A significant portion of our revenue is earned from subcontracts with the primes. Tier 3 suppliers
principally provide components or detailed parts. Tier 2 suppliers provide more complex, value-added parts and may also
assume more design risk, manufacturing risk, supply chain risk and project management risk than Tier 3 suppliers. Tier 1
suppliers manufacture aircraft sections and purchase assemblies. We currently compete primarily with Tier 2 and Tier 3
suppliers. Our business growth strategy is to differentiate ourselves from competitors by providing more complex assemblies to
our customers as a Tier 2 supplier.
Commercial Aerospace End-Use Market
The commercial aerospace end-use market is highly cyclical and is impacted by the level of global air passenger traffic in
general, which in turn is influenced by global economic conditions, fleet fuel and maintenance costs and geopolitical
developments. Sales into the commercial aerospace end-use market represented approximately 33% of our 2014 net revenues.
Growth in the world’s gross domestic product (“GDP”) is a contributor to global air passenger traffic expansion. Emerging
economies in Asia, the Middle East and Latin America, where the GDP per capita expands at a faster rate than the developed
markets, are contributing to the growth rate for new commercial aircraft. The demand for air travel is also expected to be
influenced by a cyclical rebound and improvement in the economies of the more mature markets of Europe and North America.
Fuel performance has been and will continue to be an increasingly important component of the commercial airlines’
profitability and will continue to be driving demand for newer, more fuel efficient engine designs. Market acceptance is
growing for these types of more fuel efficient aircraft from The Boeing Company (“Boeing”) and Airbus Group, formerly
known as the European Aeronautic, Defense & Space Company (“EADS”), through their wholly owned subsidiary Airbus
(“Airbus”). Replacement of aging fleets due to increasing costs of maintenance or obsolescence and availability of newer, more
efficient aircraft also influences commercial aircraft build rates, but to a lesser degree.
Further, the availability of internal or external funding impacts commercial aircraft build rates. Failure of our customers to
obtain financing may result in cancellation or deferral of orders.
Industry projections estimate growth rates in air traffic in the mid-single digits and strength in commercial aerospace over the
next few years. Boeing’s projections in their 2014 Annual Report on Form 10-K filed with the SEC estimate a growth rate of
5% per year for passenger and cargo traffic, based on a projected average annual worldwide real economic growth rate of 3%,
over the next 20 years in the commercial aircraft market. We believe we are well positioned given our product capabilities to
participate in the steady projected growth rate for commercial air traffic and build rates for large commercial aircraft for the
airframe manufacturing industry.
Defense End-Use Market
7
Our defense end-use market includes products used in military and space, including technologies and structures applications.
The defense end-use market is highly cyclical and is impacted by the level of government defense spending. Government
defense spending is impacted by national defense policies and priorities, political climates, fiscal budgetary constraints, U.S.
Federal budget deficits, projected economic growth and the level of global military or security threats, or other conflicts. Sales
into the military and space end-use market represented approximately 49% of our net revenues during 2014.
U.S. Government appropriations have and likely will continue to be affected by larger U.S. Government budgetary issues and
related legislation. In 2011, the Congress enacted the Budget Control Act, as amended by the American Taxpayer Relief Act of
2012 (“BCA”), and the Bipartisan Budget Act of 2013. Pursuant to the terms of the BCA, a sequestration went into effect on
March 1, 2013 resulting in an approximate 8% reduction to the Department of Defense (“DoD”) budget for fiscal year (“FY”)
2013 to approximately $496 billion, excluding funding for military personnel. The FY 2014 DoD base budget was essentially
flat at $496 billion and FY 2015 remains at a similar level. Unless Congress and the President of the United States (the
“Administration”) agree to further amend or revoke the BCA, the DoD base budget is expected to increase very modestly to
approximately $500 billion for FY 2016. In the years beyond FY 2016, the BCA permits annual increases for DoD base budget
funding of approximately 2% with such caps remaining in effect through FY 2023. The Administration has publicly signaled its
intent to submit budget requests that are significantly higher than the BCA caps, as it did in submitting the FY 2016 budget
request with all the years exceeding the caps under the BCA. Such levels of DoD budget funding would require the Congress to
enact legislation to raise the BCA caps. In the event that DoD appropriations exceed the BCA caps in any fiscal year through
FY 2023, an across-the-board sequestration would go into effect, as occurred in FY 2013. Conversely, the Congress could
choose to reduce any above-BCA cap budget request, as it did for FY 2014 appropriations.
We derive a significant portion of our business from customers whose principal sales are to the U.S. Government and from
direct sales by us to the U.S. Government. Thus, future budget cuts, including cuts mandated by sequestration, or future
procurement decisions associated with the authorization and appropriations process could have a material effect on our results
of operations, financial position and cash flows. In addition, if Congress is unable to pass appropriation bills in a timely
manner, a government shutdown could result which could have impact above and beyond those resulting from budget cuts or
sequestration. For additional information related to our sales from customers whose principal sales are to the U.S. Government
and our direct sales to the U.S. Government, see “Risk Factors” contained within Part I, Item 1A of this Annual Report on Form
10-K (“Form 10-K”).
NON-AEROSPACE AND DEFENSE END-USE MARKETS OVERVIEW
Our non-aerospace and defense end-use markets, (natural resources, industrial, and medical and other) are diverse and are
impacted by the customers’ needs for increasing electronic content and a desire to outsource. Factors expected to impact these
markets include capital and industrial goods spending, the number of oil-rigs operating and the level of natural gas exploration
in North America and general economic conditions. Our products are used in industrial test systems, energy exploration
systems, semiconductor fabrication units, glass electronic manufacturing systems, mine automation and control systems, patient
monitoring devices, respiratory care devices, biodecontamination equipment and other technology-driven products. Sales into
the industrial end-use markets were approximately 18% of our net revenues during 2014.
We believe our business in these markets has stabilized and we are well positioned for these markets.
SALES AND MARKETING
Our commercial sales are substantially dependent on airframe manufacturers’ production rates of new aircraft. Deliveries of
new aircraft by airframe manufacturers are dependent on the financial capacity of its customers, primarily airlines and leasing
companies, to purchase the aircraft. Thus, sales of commercial aircraft could be affected as a result of changes in new aircraft
orders, or the cancellation or deferral by airlines of purchases of ordered aircraft. Further, our sales for commercial aircraft
programs could be affected by changes in our customers’ inventory levels and changes in our customers’ aircraft production
build rates. In recent years, both major large aircraft manufacturers, Boeing and Airbus, have announced higher build rates due
to increases in production of existing programs, including more fully-developed models, and by the introduction of new
platforms.
Military components manufactured by us are employed in many of the country’s front-line fighters, bombers, rotary-wing
aircraft and support aircraft, as well as land and sea-based applications. Engineering, technical and program management
services are provided principally for the United States defense, space and homeland security programs. Our defense business is
diversified among a number of military manufacturers and programs. In the space sector, we continue to support various
unmanned launch vehicle and satellite programs.
Our sales into the industrial, natural resources, and medical and other commercial markets are customer focused in the various
markets and driven primarily by their capital spending and manufacturing outsourcing demands.
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Table of Contents
We continue to broaden and diversify our customer base in the end-use markets we serve by providing innovative product and
service solutions through drawing on our core competencies, experience and technical expertise. Net revenues related to
military and space (defense technologies and defense structures), commercial aerospace, and non-aerospace and defense end-
use markets in 2014 and 2013 were as follows:
2014 Net Sales of $742.0 Million
2013 Net Sales of $736.7 Million
Military and space
(defense technologies): 32%
Commercial aerospace: 33%
Military and space
(defense structures): 17%
Non-aerospace and
defense: 18%
Military and space
(defense technologies): 35%
Commercial aerospace: 29%
Military and space
(defense structures): 19%
Non-aerospace and
defense: 17%
Many of our contracts are fixed price contracts subject to termination at the convenience of the customer (as well as for
default). In the event of termination for convenience, the customer generally is required to pay the costs we have incurred and
certain other fees through the date of termination. Larger, long-term government subcontracts may have provisions for
milestone payments, progress payments or cash advances for purchase of inventory.
Our marketing efforts primarily consist of developing strong, long-term relationships with our customers, which provide the
basis for future sales. These close relationships allow us to gain a better insight into each customer’s business needs, identify
ways to provide greater value to the customer, and allow us to be designed in early in various products and/or high volume
products.
SEASONALITY
The timing of our revenue is governed by the purchasing patterns of our customers, and, as a result, we may not generate
revenue equally during the year. However, no material portion of our business is considered to be seasonal.
MAJOR CUSTOMERS
We currently generate the majority of our revenues from the aerospace and defense industries. As a result, we have significant
sales to certain customers. Boeing and Raytheon each were approximately ten percent or greater of our 2014 net revenues.
Sales to our top ten customers, including Boeing and Raytheon, were approximately 59% of our 2014 net revenues. Net sales
by major customer for 2014 and 2013 were as follows:
2014 Net Sales by Major Customer
2013 Net Sales by Major Customer
Raytheon:
9%
Boeing:
20%
Next Top Eight Customers:
30%
All Other Customers:
41%
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Raytheon:
10%
Boeing:
18%
Next Top Eight Customers:
29%
All Other Customers:
43%
Net sales to our customers, except the U.S. Government, are diversified over a number of different military and space,
commercial aerospace, natural resources, industrial, medical and other products. For additional information on sales to major
customers, see Note 15 to our consolidated financial statements included in Part IV, Item 15(a) of this Form 10-K.
RESEARCH AND DEVELOPMENT
We perform concurrent engineering with our customers and product development activities under our self-funded programs as
well as under contracts with others. Concurrent engineering and product development activities are performed for commercial,
military and space applications. Further, we perform high-technology systems engineering and analysis, principally under
customer-funded contracts, with a focus on sensors system simulation, engineering and integration activities.
RAW MATERIALS AND COMPONENTS
Raw materials and components used in the manufacturing of our products include aluminum, titanium, steel and carbon fibers,
as well as a wide variety of electronic interconnect and circuit card assemblies and components. These raw materials are
generally available from a number of suppliers and are generally in adequate supply. However, from time to time, we have
experienced increases in lead times for and limited availability of, aluminum, titanium and certain other raw materials and/or
components. Moreover, certain components, supplies and raw materials for our operations are purchased from single source
suppliers and occasionally, directed by our customers. In such instances, we strive to develop alternative sources and design
modifications to minimize the potential for business interruptions.
COMPETITION
The markets we serve are highly competitive, and our products and services are affected by varying degrees of competition. We
compete worldwide with domestic and international companies in most markets. These companies may have competitive
advantages as a result of greater financial resources, economies of scale and bundled products and services that we do not offer.
Additional information related to competition is discussed in “Risk Factors” contained within Part I, Item 1A of this Form 10-
K. Our ability to compete depends principally upon the breadth of our technical capabilities, the quality of our goods and
services, competitive pricing, product performance, design and engineering capabilities, new product innovation, the ability to
solve specific customer problems, and customer relationships.
PATENTS AND LICENSES
We have several patents, but we do not believe that our operations are dependent upon any single patent or group of patents. In
general, we rely on technical superiority, continual product improvement, exclusive product features, superior lead time, on-
time delivery performance, quality, and customer relationships to maintain our competitive advantage.
BACKLOG
Backlog is subject to delivery delays or program cancellations, which are beyond our control. Backlog is affected by timing
differences in the placement of customer orders and tends to be concentrated in several programs to a greater extent than our
net sales. As a result, trends in our overall level of backlog may not be indicative of trends in our future sales. Backlog was
approximately $559.3 million at December 31, 2014, compared to approximately $620.0 million at December 31, 2013. The
decrease in backlog was primarily in the defense technologies end-use markets. Approximately $447.4 million of total backlog
is expected to be delivered during 2015.
ENVIRONMENTAL MATTERS
Our business, operations and facilities are subject to numerous stringent federal, state and local environmental laws and
regulations issued by government agencies, including the Environmental Protection Agency (“EPA”). Among other matters,
these regulatory authorities impose requirements that regulate the emission, discharge, generation, management, transport and
disposal of hazardous materials, pollutants and contaminants. These regulations govern public and private response actions to
hazardous or regulated substances that threaten to release, or have been released to the environment, and they require us to
obtain and maintain licenses and permits in connection with our operations. We may also be required to investigate and
remediate the effects of the release or disposal of materials at sites associated with past and present operations. Additionally,
this extensive regulatory framework imposes significant compliance burdens and risks on us. We anticipate that capital
expenditures will continue to be required for the foreseeable future to upgrade and maintain our environmental compliance
efforts, however, we do not expect such expenditures to be material in 2015 and the foreseeable future.
DAS has been directed by California environmental agencies to investigate and take corrective action for groundwater
contamination at its facilities located in Adelanto (a.k.a. El Mirage) and Monrovia, California. Based on currently available
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information, we have accrued approximately $1.5 million for our estimated liabilities related to these sites. For further
information, see Note 14 in the accompanying notes to consolidated financial statements included in Part IV, Item 15(a) of this
Form 10-K. In addition, see “Risk Factors” contained within Part I, Item 1A of this Form 10-K for certain risks related to
environmental matters.
EMPLOYEES
As of December 31, 2014, we employed approximately 3,150 people, of which approximately 378 are subject to collective
bargaining agreements expiring on July 1, 2015 and January 1, 2016. We believe our relations with our employees are good.
See “Risk Factors” contained within Part I, Item 1A of this Form 10-K for additional information regarding certain risks related
to our employees.
AVAILABLE INFORMATION
General information about us can be obtained from our website address at www.ducommun.com. Our Annual Reports on Form
10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments (including restatements) to those
reports, if any, are available free of charge on our website as soon as reasonably practicable after they are filed with or
furnished to the Securities and Exchange Commission (the “SEC”). Information included in our website is not incorporated by
reference in this Annual Report on Form 10-K. The SEC also maintains a website at www.sec.gov that contains reports, proxy
statements and other information regarding SEC registrants, including our company.
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ITEM 1A. RISK FACTORS
Our business, financial condition, results of operations and cash flows may be affected by known and unknown risks,
uncertainties and other factors. We have summarized below the significant, known material risks to our business. Additional
risk factors not currently known to us or that we currently believe are immaterial may also impair our business, financial
condition, results of operations and cash flows. Any of these risks, uncertainties and other factors could cause our future
financial results to differ materially from recent financial results or from currently anticipated future financial results. The risk
factors below should be considered together with the information included elsewhere in this Annual Report on Form 10-K
(“Form 10-K”) as well as other required filings by us to the SEC.
RISKS RELATED TO OUR CAPITAL STRUCTURE
Our indebtedness could limit our financing options, adversely affect our financial condition, and prevent us from
fulfilling our debt obligations.
At December 31, 2014, we had approximately $290.0 million of outstanding long-term debt, consisting primarily of $200.0
million of senior unsecured notes (the “Notes”) and approximately $90.0 million under our senior secured term loan (the “Term
Loan”). As as a result, we currently have a relatively higher level of indebtedness than industry participants. The debt was the
direct result of our LaBarge Acquisition.
In 2012, we began steps to reduce our debt by making approximately $25.0 million of voluntary principal prepayments on the
Term Loan. In 2013, we paid an additional approximately $30.0 million of voluntary principal prepayments on our Term Loan.
In 2014, we paid another approximately $42.6 million of additional voluntary principal prepayments. We believe that these
prepayments will help facilitate our plans to refinance in 2015. Our ability to complete a debt refinancing in 2015 may be
limited, as discussed below in this risk factor. We may have to undertake alternative financing plans, such as selling assets;
reducing or delaying scheduled expansions and/or capital investments; or seeking various forms of capital. Our ability to
complete alternative financing plans may be affected by circumstances and economic events outside of our control. We cannot
ensure that we would be able to refinance our debt or enter into alternative financing plans in adequate amounts on
commercially reasonable terms, terms acceptable to us or at all, or that such plans guarantee that we would be able to meet our
debt obligations.
Our high level of debt could:
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limit our ability to obtain additional financing to fund future working capital, capital expenditures,
investments or acquisitions or other general corporate requirements;
require a substantial portion of our cash flows to be dedicated to debt service payments instead of other
purposes, thereby reducing the amount of cash flows available for working capital, capital expenditures,
investments or acquisitions or other general corporate purposes;
increase our vulnerability to adverse changes in general economic, industry and competitive conditions;
place us at a disadvantage compared to other, less leveraged competitors;
expose us to the risk of increased borrowing costs and higher interest rates as borrowings under our
Credit Facilities bear interest at variable rates, which could further adversely impact our cash flows;
limit our flexibility to plan for and react to changes in our business and the industry in which we
compete;
restrict us from making strategic acquisitions or causing us to make non-strategic divestitures;
expose us to risk of rating agency downgrades and unfavorable changes in the global credit markets;
make it more difficult for us to satisfy our obligations with respect to the Notes and our other debt and
maintain financial ratios as discussed below; and
prevent us from raising the funds necessary to repurchase all Notes tendered to us upon the occurrence of
certain changes of control, which failure to repurchase would constitute an event of default under the
indenture governing the Notes.
The occurrence of any one of these events could have an adverse effect on our business, financial condition, results of
operations and ability to satisfy our obligations in respect of our outstanding debt.
We require a considerable amount of cash to service our indebtedness.
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Our ability to make payments on and to refinance our debt and to fund planned capital expenditures and working capital needs,
will depend upon our ability to generate significant cash in the future. Our ability to generate cash is subject to economic,
financial, competitive, legislative, regulatory and other factors that may be beyond our control.
The $200.0 million Notes bear interest of 9.75% per annum, payable semi-annually. At December 31, 2014, the outstanding
balance on the Term Loan was approximately $90.0 million with an interest rate of 4.75%, consisting of a London Interbank
Offered Rate (“LIBOR”) interest rate floor of 1.00%, plus a margin of 3.75%, with interest paid quarterly. In 2013, we
successfully repriced our Term Loan by 0.75%, resulting in the current lower rate. Should interest rates increase above the
interest rate floor of 1.00%, our debt service cost will increase. Any inability to generate sufficient cash flow could have a
material adverse effect on our financial condition or results of operations.
While we expect to meet all of our financial obligations, we cannot ensure you that our business will generate sufficient cash
flow from operations in an amount sufficient to enable us to pay our debt or to fund our other liquidity needs. In conjunction
with the issuance of the Term Loan in 2011, we obtained a $60.0 million Revolving Credit Facility (“Revolving Credit
Facility”), (collectively the “Credit Facilities”). We cannot ensure that future borrowings will be available under the Revolving
Credit Facility, in an amount sufficient to enable us to pay our debt or fund our other liquidity needs, if at all.
We require a considerable amount of cash to fund our anticipated voluntary principal prepayments on our Term Loan.
Our ability to continue to reduce our Term Loan through voluntary principal prepayments will be a contributing factor to our
ability to refinance our debt in 2015. Our ability to make such prepayments will depend upon our ability to generate significant
cash in the future. We cannot ensure that our business will generate sufficient cash flow from operations to fund any such
prepayments.
The covenants in the credit agreement to our Credit Facilities and the indenture governing the Notes impose restrictions
that may limit our operating and financial flexibility and may limit our ability to make payments on the Notes.
In the event that a certain minimum amount is borrowed and outstanding under our Revolving Credit Facility, for so long as
any such amount is outstanding, we will be required to comply with a leverage covenant, as defined in the credit agreement.
Furthermore, our consolidated earnings before interest, taxes and depreciation and amortization (“EBITDA”), as defined by the
credit agreement to our Credit Facilities, as of the end of any fiscal quarter on a trailing four-quarter basis, is not permitted to
be less than $50.0 million. The leverage covenant decreases over the term of the Revolving Credit Facility, which will require
us to generate either increasing cash flows or increasing EBITDA in the future. For example, in October 2013, we completed an
amendment to the credit agreement to our Credit Facilities which partially mitigated the impact of the leverage covenant by
increasing the leverage ratio by 0.75 for all future periods. We believe the voluntary prepayments on the Term Loan will help
reduce our leverage, as defined in the credit agreement.
At December 31, 2014, no amounts were outstanding under the Revolving Credit Facility which would have required us to
comply with the leverage covenant. However, we would have been in compliance with such leverage covenant. At
December 31, 2014, we were in compliance with the EBITDA covenant. There is no assurance that we will continue to be in
compliance with the leverage covenant or the EBITDA covenant in future periods.
Our credit agreement to the Credit Facilities and the indenture governing the Notes contain a number of significant restrictions
and covenants that limit our ability, among other things, to incur additional indebtedness, to create liens, to make certain
payments, investments and capital expenditures, to pay dividends, to engage in transactions with affiliates, to sell certain assets
or enter into mergers.
These covenants could materially and adversely affect our ability to finance our future operations or capital needs.
Furthermore, they may restrict our ability to expand, pursue our business strategies and otherwise conduct our business. Our
ability to comply with these covenants may be affected by circumstances and events beyond our control, such as prevailing
economic conditions and changes in regulations, and we cannot ensure that we will be able to comply with such covenants.
These restrictions also limit our ability to obtain future financings to withstand a future downturn in our business or the
economy in general. In addition, complying with these covenants may also cause us to take actions that are not favorable to
holders of the Notes and may make it more difficult for us to successfully execute our business strategy and compete against
companies that are not subject to such restrictions.
A breach of any covenant in credit agreement to the Credit Facilities or the agreements and indentures governing any other
indebtedness that we may have outstanding from time to time, including the indenture governing the Notes, would result in a
default under that agreement or indenture after any applicable grace periods. A default, if not waived, could result in
acceleration of the debt outstanding under the agreement and in a default with respect to, and an acceleration of, the debt
outstanding under other debt agreements. If that occurs, we may not be able to make all of the required payments or borrow
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sufficient funds to refinance such debt. A default could permit our lenders to foreclose on any of our assets securing such debt.
Even if new financing were available at that time, it may not be on terms or amounts that are acceptable to us or terms as
favorable as our current agreements. If our debt is in default for any reason, our business, results of operations and financial
condition could be materially and adversely affected.
We may not be able to make the change of control offer required by the indenture governing the Notes.
We may be unable to purchase the Notes upon a change of control, as defined in the indenture governing the Notes. Upon a
change of control, we will be required to offer to purchase all of the Notes then outstanding for cash at 101% of the principal
amount plus accrued and unpaid interest, if any, on the date of purchase on the Notes. If a change of control were to occur, we
may not have sufficient funds to pay the change of control purchase price and we may be required to secure third-party
financing to do so. However, we may not be able to obtain such financing on commercially reasonable terms, on terms
acceptable to us or at all.
A change of control under the indenture governing the Notes may also result in an event of default under our Credit Facilities
which may cause the acceleration of indebtedness outstanding thereunder, in which case, proceeds of collateral pledged to
secure borrowings thereunder would be used to repay such borrowings before we repay the Notes. In addition, our future
indebtedness may also contain restrictions on our ability to repurchase the Notes upon certain events, including transactions
that could constitute a change of control under the indenture governing the Notes. Our failure to repurchase the Notes upon a
change of control would constitute an event of default under the indenture governing the Notes and would have a material
adverse effect on our financial condition.
The typical trading volume of our common stock may affect an investor’s ability to sell significant stock holdings in the
future without negatively impacting stock price.
The level of trading activity may vary daily and typically represents only a small percentage of outstanding shares. As a result,
a stockholder who sells a significant amount of shares in a short period of time could negatively affect our share price.
Our amount of debt may require us to raise additional capital to fund operations.
We may sell additional shares of common stock or other equity securities to raise capital in the future, which could dilute the
value of an investor’s holdings.
RISKS RELATED TO OUR BUSINESS
Our end-use markets are cyclical.
We sell our products into aerospace, defense, and industrial end-use markets, which are cyclical and have experienced periodic
declines. Our sales are, therefore, unpredictable and tend to fluctuate based on a number of factors, including global economic
conditions, geopolitical developments and conditions, and other developments affecting our end-use markets and the customers
served. Consequently, results of operations in any period should not be considered indicative of the operating results that may
be experienced in any future period.
We depend upon a selected base of industries and customers, which subjects us to unique risks which may adversely
affect us.
We currently generate a majority of our revenue from customers in the aerospace and defense industry. Our business depends,
in part, on the level of new military and commercial aircraft orders. As a result, we have significant sales to certain customers.
Sales to the Boeing Company comprise the majority of our commercial aerospace end-use market. A significant portion of our
net sales in our military and space end-use markets are made under subcontracts with OEMs, under their prime contracts with
the U. S. Government. We had significant sales to Raytheon Company in 2014 in our defense technologies end-use market.
Our customers may experience delays in the launch of new products, labor strikes, diminished liquidity or credit unavailability,
weak demand for their products, or other difficulties in their business. In addition, sequestration is causing additional
uncertainty in the placement of orders.
Our sales to our top ten customers, which represented approximately 59% of our total 2014 net revenues, were diversified over
a number of different military and space, commercial aerospace, natural resources, industrial, medical and other products. Any
significant change in production rates by these customers would have a material effect on our results of operations and cash
flows. There is no assurance that our current significant customers will continue to buy products from us at current levels, and
that we will retain any or all of our existing customers, or that we will be able to form new relationships with customers upon
the loss of one or more of our existing customers. This risk may be further complicated by pricing pressures, intense
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competition prevalent in our industry and other factors. A significant reduction in sales to any of our major customers, the loss
of a major customer, or a default on a major customer on accounts receivable could have a material adverse impact on our
financial results.
In addition, we generally make sales under purchase orders and contracts that are subject to cancellation, modification or
rescheduling. Changes in the economic environment and the financial condition of the industries we serve could result in
customer cancellation of contractual orders or requests for rescheduling. Some of our contracts have specific provisions relating
to schedule and performance, and failure to deliver in accordance with such provisions could result in cancellations,
modifications, rescheduling and/or penalties, in some cases at the customers’ convenience and without prior notice. While we
have normally recovered our direct and indirect costs, such cancellations, modifications, or rescheduling that cannot be
replaced in a timely fashion, could have a material adverse effect on our financial results.
A significant portion of our business depends upon U.S. Government defense spending.
We derive a significant portion of our business from customers whose principal sales are to the U.S. Government and from
direct sales by us to the U.S. Government. Accordingly, the success of our business depends upon government spending
generally or for specific departments or agencies in particular. Such spending, among other factors, is subject to the
uncertainties of governmental appropriations and national defense policies and priorities, constraints of the budgetary process,
timing and potential changes in these policies and priorities, and the adoption of new laws or regulations or changes to existing
laws or regulations.
These and other factors could cause the government and government agencies, or prime contractors that use us as a
subcontractor, to reduce their purchases under existing contracts, to exercise their rights to terminate contracts at-will or to
abstain from exercising options to renew contracts, any of which could have a material adverse effect on our business, financial
condition and results of operations.
Further, certain U.S. Government programs in which we participate may extend for several years; however, these programs are
typically funded annually. Changes in the government’s strategy and priorities may affect our existing programs and future
opportunities. Our government contracts and related orders with the U.S. Government are subject to cancellation, or delay, if
appropriations for subsequent performance periods are not made. The termination of funding for existing or new U.S.
Government programs, or delays in payment, could have a material adverse effect on our financial results. Although we are not
yet able to determine how sequestration will impact specific programs and contracts related to us, we expect the reduced U.S.
Department of Defense (“U.S. DoD”) budgeted spending that began in fiscal 2014 will continue to result in lower or delayed
awards on some of our programs. Reductions, cancellations or delays impacting existing contracts or programs could have a
material effect on our financial results.
We are subject to extensive regulation and audit by the Defense Contract Audit Agency.
The accuracy and appropriateness of certain costs and expenses used to substantiate our direct and indirect costs for the U.S.
Government contracts are subject to extensive regulation and audit by the Defense Contract Audit Agency, an arm of the U.S.
DoD. Such audits and reviews could result in adjustments to our contract costs and profitability. However, we cannot ensure the
outcome of any future audits and adjustments may be required to reduce net sales or profits upon completion and final
negotiation of audits. If any audit or review were to uncover inaccurate costs or improper activities, we could be subject to
penalties and sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension
or prohibition from conducting future business with the U.S. Government. Any such outcome could have a material adverse
effect on our financial results.
Contracts with some of our customers, including Federal government contracts, contain provisions which give our
customers a variety of rights that are unfavorable to us and the OEMs to whom we provide products and services,
including the ability to terminate a contract at any time for convenience.
Contracts with some of our customers, including Federal government contracts, contain provisions and are subject to laws and
regulations that provide rights and remedies not typically found in commercial contracts. These provisions may allow our
customers to:
•
•
terminate existing contracts, in whole or in part, for convenience, as well as for default, or if funds for
contract performance for any subsequent year become unavailable;
suspend or debar us from doing business with the federal government or with a governmental agency;
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•
•
•
prohibit future procurement awards with a particular agency as a result of a finding of an organizational
conflict of interest based upon prior related work performed for the agency that would give a contractor an
unfair advantage over competing contractors;
claim rights in products and systems produced by us; and
control or prohibit the export of the products and related services we offer.
If the U.S. Government terminates a contract for convenience, the counterparty with whom we have contracted on a
subcontract may terminate its contract with us. As a result of any such termination, whether on a direct government contract or
subcontract, we may recover only our incurred or committed costs, settlement expenses and profit on work completed prior to
the termination. If the U.S. Government terminates a direct contract with us for default, we may not even recover those
amounts and instead may be liable for excess costs incurred by the U.S. Government in procuring undelivered items and
services from another source. Contracts with foreign governments generally contain similar provisions relating to termination
at the convenience of the customer.
In addition, the U.S. Government is typically required to open all programs to competitive bidding and, therefore, may not
automatically renew any of its prime contracts. If one or more of our government prime or subcontracts is terminated or
cancelled, our failure to replace sales generated from such contracts would result in lower sales and have an adverse effect on
our business, results of operations and financial condition.
Further consolidation in the aerospace industry could adversely affect our business and financial results.
The aerospace and defense industry is experiencing significant consolidation, including our customers, competitors and
suppliers. Consolidation among our customers may result in delays in the award of new contracts and losses of existing
business. Consolidation among our competitors may result in larger competitors with greater resources and market share, which
could adversely affect our ability to compete successfully. Consolidation among our suppliers may result in fewer sources of
supply and increased cost to us.
We rely on our suppliers to meet the quality or delivery expectations of our customers.
Our ability to deliver our products and services on schedule is dependent upon a variety of factors, including execution of
internal performance plans, availability of raw materials, internal and supplier produced parts and structures, conversion of raw
materials into parts and assemblies, and performance of suppliers and others.
We rely on numerous third-party suppliers for raw materials and a large proportion of the components used in our production
process. Certain of these raw materials and components are available only from single sources or a limited number of suppliers,
or similarly, customers’ specifications may require us to obtain raw materials and/or components from a single source or certain
suppliers. Many of our suppliers are small companies with limited financial resources and manufacturing capabilities. We do
not currently have the ability to manufacture these components ourselves. These and other factors, including the loss of a
critical supplier or raw materials and/or component shortages, could cause disruptions or cost inefficiencies in our operations
compared to our competitors that have greater direct purchasing power, which could have a material adverse effect on our
financial results.
We use estimates when bidding on fixed-price contracts. Changes in our estimates could adversely affect our financial
results.
We enter into contracts providing for a firm, fixed-price for the sale of some of our products regardless of the production costs
incurred by us. In many cases, we make multi-year firm, fixed-price commitments to our customers, without assurance that our
anticipated production costs will be achieved. Contract bidding and accounting require judgment relative to assessing risks,
estimating contract net sales and costs, including estimating cost increases over time and efficiencies to be gained, and making
assumptions for supplier sourcing and quality, manufacturing scheduling and technical issues over the life of the contract. Such
assumptions can be particularly difficult to estimate for contracts with new customers. Our failure to accurately estimate these
costs can result in reduced profits or incurred losses. Because of the significance of the judgments and estimates involved, it is
possible that materially different amounts could be obtained if different assumptions were used or if the underlying
circumstances were to change. Therefore, any changes in our underlying assumptions, circumstances or estimates could have a
material adverse effect on our financial results. For example, in the fourth quarter of 2013, we recorded a charge in the DAS
segment for the estimated cost to complete of approximately $5.2 million, consisting of $3.9 million for the Embraer Legacy
450/500 aircraft contracts, and $1.3 million for the Boeing 777 wing tip contract. The charges resulted from difficulties in
achieving previously anticipated cost reductions, including delays in transferring work to our lower-cost Guaymas, Mexico
facility. The charge for the Embraer Legacy 450/500 contracts also reflects estimated cost overruns for customer driven
changes on both the development and production phases of the contracts. See “Revenue Recognition” and “Provision for
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Estimated Losses on Contracts” in Part II, Item 7, Management’s Discussion and Analysis—Critical Accounting Policies, of
this Annual Report on Form 10-K for further information.
As we move up the value chain to become a Tier 2 supplier, enhanced design, product development, manufacturing,
supply chain project management and other skills will be required.
We may encounter difficulties as we execute our growth strategy to move up the value chain to become a Tier 2 supplier of
more complex, value-added assemblies. Difficulties we may encounter include, but are not limited to, the need for enhanced
and expanded product design skills, enhanced ability to control and influence our suppliers, enhanced quality control systems
and infrastructure, enhanced large-scale project management skills, and expanded industry certifications. Assuming incremental
project design responsibilities would require us to assume additional risk in developing cost estimates and could expose us to
increased risk of losses. There can be no assurance that we will be successful in obtaining the enhanced skills required to be a
Tier 2 supplier or that our customers will outsource such functions to us.
Risks associated with operating and conducting our business outside the United States could adversely impact us.
We have facilities in Thailand and Mexico and also derive a portion of our net sales from direct foreign sales. Further, our
customers may derive portions of their sales to non-U.S. customers. As a result, we are subject to the risks of conducting and
operating our business internationally, including:
•
•
•
•
•
political instability;
economic and geopolitical developments and conditions;
compliance with a variety of international laws, as well as U.S. laws affecting the activities of U.S.
companies conducting business abroad, including, but not limited to, the Foreign Corrupt Practices Act;
imposition of taxes, export controls, tariffs, embargoes and other trade restrictions; and
difficulties repatriating funds or restrictions on cash transfers.
While the impact of these factors is difficult to predict, any one or more of these factors could have a material adverse effect on
our financial results.
Goodwill and/or other assets could be impaired in the future, which could result in substantial charges.
Goodwill is tested for impairment on an annual basis during our fourth quarter or more frequently if events or circumstances
occur which could indicate potential impairment. We also test intangible assets with indefinite life periods for potential
impairment annually and on an interim basis if there are indicators of potential impairment. We evaluate amortizable intangible
assets, fixed assets, and production cost of contracts for impairment if there are indicators of a potential impairment. In
assessing the recoverability of goodwill, management is required to make certain critical estimates and assumptions. These
estimates and assumptions include projected sales levels, including addition of new customers, programs or platforms and
increased content on existing programs or platforms, improvements in manufacturing efficiency, and reductions in operating
costs. Due to many variables inherent in the estimation of a business’s fair value and the relative size of our recorded goodwill,
differences in estimates and assumptions may have a material effect on the results of our impairment analysis. If any of these or
other estimates and assumptions are not realized in the future, or if market multiples decline, we may be required to record an
impairment charge for goodwill in addition to the pre-tax impairment charge of approximately $54.3 million recorded in 2011.
Impairment charges may be incurred against other intangible assets or long-term assets if asset utilization declines, customer
demand declines or other circumstances indicate that the asset carrying value may not be recoverable. For example, in the
fourth quarter of 2013 we recorded a pre-tax asset impairment charge of $7.0 million to production cost of contracts for the
Embraer Legacy 450/500 and Boeing 777 wing tip contracts. Our production cost of contracts as of December 31, 2014 was
approximately $11.7 million or 1.6% of total assets. Our goodwill and other intangible assets as of December 31, 2014 were
approximately $312.7 million, or 42% of total assets. See “Goodwill and Indefinite-Lived Intangible Assets” and “Production
Cost of Contracts” in Part II, Item 7, Management’s Discussion and Analysis—Critical Accounting Policies, of this Annual
Report on Form 10-K for further information.
OTHER RISKS
Our operations are subject to numerous extensive, complex, costly and evolving laws, regulations and restrictions, and
failure to comply with these laws, regulations and restrictions could subject us to penalties and sanctions that could
harm our business.
Prime contracts with various agencies of the U.S. Government, and subcontracts with other prime contractors, are subject to
numerous laws and regulations which affect how we do business with our customers and may impose added costs on our
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business. As a result, our contracts and operations are subject to numerous, extensive, complex, costly and evolving laws,
regulation and restrictions, principally by the U.S. Government or their agencies. These laws, regulation and restrictions govern
items including, but not limited to, the formation, administration and performance of U.S. Government contracts, disclosure of
cost and pricing data, civil penalties for violations or false claims to the U.S. Government for payment, define reimbursable
costs, establish ethical standards for the procurement process and control the import and export of defense articles and services.
Noncompliance could expose us to liability for penalties, including termination of our U.S. Government contracts and
subcontracts, disqualification from bidding on future U.S. Government contracts and subcontracts, suspension or debarment
from U.S. Government contracting and various other fines and penalties. Noncompliance found by any one agency could result
in fines, penalties, debarment or suspension from receiving additional contracts with all U.S. Government agencies. Given our
dependence on U.S. Government business, suspension or debarment could have a material adverse effect on our financial
results.
In addition, the U.S. Government may revise its procurement practices or adopt new contract rules and regulations, at any time,
including increased usage of fixed-price contracts and procurement reform. Such changes could impair our ability to obtain
new contracts or subcontracts or renew contracts or subcontracts under which we currently perform when those contracts are
put up for recompetition. Any new contracting methods could be costly or administratively difficult for us to implement and
could adversely affect our future net sales.
In addition, our international operations subject us to numerous U.S. and foreign laws and regulations, including, without
limitation, regulations relating to import-export control, technology transfer restrictions, repatriation of earnings, exchange
controls, the Foreign Corrupt Practices Act and the anti-boycott provisions of the U.S. Export Administration Act. Changes in
regulations or political environments may affect our ability to conduct business in foreign markets including investment,
procurement and repatriation of earnings. Failure by us or our sales representatives or consultants to comply with these laws
and regulations could result in certain liabilities and could possibly result in suspension or debarment from government
contracts or suspension of our export privileges, which could have a material adverse effect on our financial results.
Customer pricing pressures could reduce the demand and/or price for our products and services.
All the markets we serve are highly competitive and price sensitive. We compete worldwide with a number of domestic and
international companies that have substantially greater manufacturing, purchasing, marketing and financial resources than we
do. Many of our customers have the in-house capability to fulfill their manufacturing requirements. Our larger competitors may
be able to vie more effectively for very large-scale contracts than we can by providing different or greater capabilities or
benefits such as technical qualifications, past performance on large-scale contracts, geographic presence, price and availability
of key professional personnel. If we are unable to successfully compete for new business, our net sales growth and operating
margins may decline.
Several of our major customers have completed extensive cost containment efforts and we expect continued pricing pressures
in 2015 and beyond. Competitive pricing pressures may have an adverse effect on our financial condition and operating results.
Further, there can be no assurance that competition from existing or potential competitors in other segments of our business
will not have a material adverse effect on our financial results. If we do not continue to compete effectively and win contracts,
our future business, financial condition, results of operations and our ability to meet our financial obligations may be materially
compromised.
Our products and processes are subject to risks of obsolescence as a result of changes in technology and evolving
industry and regulatory standards.
The future success of our business depends in large part upon our and our customers’ ability to maintain and enhance
technological capabilities, develop and market manufacturing services that meet changing customer needs and successfully
anticipate or respond to technological advances in manufacturing processes on a cost-effective and timely basis, while meeting
evolving industry and regulatory standards. To address these risks, we invest in product design and development, and undertake
capital expenditures. There can be no guarantee that our product design and development efforts will be successful, or that
funds required to be invested in product design and development or incurred as capital expenditures will not increase materially
in the future.
Environmental liabilities could adversely affect our financial results.
We are subject to various U.S. and foreign environmental laws and regulations, including those relating to the use, storage,
transport, discharge and disposal of hazardous chemicals and materials used and emissions generated during our manufacturing
process. We do not carry insurance for these potential environmental liabilities. Any failure by us to comply with present or
future regulations could subject us to future liabilities or the suspension of production, which could have a material adverse
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effect on our financial results. Moreover, some environmental laws relating to contaminated sites can impose joint and several
liability retroactively regardless of fault or the legality of the activities giving rise to the contamination. Compliance with
existing or future environmental laws and regulations may require extensive capital expenditures, increase our cost or impact
our production capabilities. Even if such expenditures are made, there can be no assurance that we will be able to comply. We
have been directed to investigate and take corrective action for groundwater contamination at certain sites. Our ultimate
liability for such matters will depend upon a number of factors. See Note 14 to our consolidated financial statements included
in Part IV, Item 15(a) of this Annual Report on Form 10-K for further information.
Cyber security attacks, internal system or service failures may adversely impact our business and operations.
Any system or service disruptions, including those caused by projects to improve our information technology systems, if not
anticipated and appropriately mitigated, could disrupt our business and impair our ability to effectively provide products and
related services to our customers and could have a material adverse effect on our business. We could also be subject to systems
failures, including network, software or hardware failures, whether caused by us, third-party service providers, intruders or
hackers, computer viruses, natural disasters, power shortages or terrorist attacks. Cyber security threats are evolving and
include, but are not limited to, malicious software, unauthorized attempts to gain access to sensitive, confidential or otherwise
protected information related to us or our products, customers or suppliers, or other acts that could lead to disruptions in our
business. Any such failures could cause loss of data and interruptions or delays in our business, cause us to incur remediation
costs, subject us to claims and damage our reputation. In addition, the failure or disruption of our communications or utilities
could cause us to interrupt or suspend our operations or otherwise adversely affect our business. Our property and business
interruption insurance may be inadequate to compensate us for all losses that may occur as a result of any system or operational
failure or disruption which would adversely affect our business, results of operations and financial condition.
We may not have the ability to renew facilities leases on terms favorable to us and relocation of operations presents
risks due to business interruption.
Certain of our manufacturing facilities and offices are leased and have lease terms that expire between 2015 and 2020. The
majority of these leases provide renewal options at the fair market rental rate at the time of renewal, which, if renewed, could
be significantly higher than our current rental rates. We may be unable to offset these cost increases by charging more for our
products and services. Furthermore, continued economic conditions may continue to negatively impact and create greater
pressure in the commercial real estate market, causing higher incidences of landlord default and/or lender foreclosure of
properties, including properties occupied by us. While we maintain certain non-disturbance rights in most cases, it is not certain
that such rights will in all cases be upheld and our continued right of occupancy in such instances is potentially jeopardized. An
occurrence of any of these events could have a material adverse effect on our financial results.
Additionally, if we choose to move any of our operations, those operations will be subject to additional relocation costs and
associated risks of business interruption.
The occurrence of litigation in which we could be named as a defendant is unpredictable.
From time to time, we and our subsidiaries are involved in various legal and other proceedings that are incidental to the
conduct of our business. While we believe no current proceedings, if adversely determined, could have a material adverse effect
on our financial results, no assurances can be given. Any such claims may divert financial and management resources that
would otherwise be used to benefit our operations and could have a material adverse effect on our financial results.
Product liability claims in excess of insurance could adversely affect our financial results and financial condition.
We face potential liability for personal injury or death as a result of the failure of products designed or manufactured by us.
Although we currently maintain product liability insurance (including aircraft product liability insurance), any material product
liability not covered by insurance could have a material adverse effect on our financial condition, results of operations and cash
flows.
Damage or destruction of our facilities caused by storms, earthquake or other causes could adversely affect our
financial results and financial condition.
We have operations located in regions of the U.S. that may be exposed to damaging storms, earthquakes and other natural
disasters. Although we maintain standard property casualty insurance covering our properties and may be able to recover costs
associated with certain natural disasters through insurance, we do not carry any earthquake insurance because of the cost of
such insurance. Many of our properties are located in Southern California, an area subject to earthquake activity. Our California
facilities generated approximately $251.8 million in net sales during 2014. Even if covered by insurance, any significant
damage or destruction of our facilities due to storms, earthquakes or other natural disasters could result in our inability to meet
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customer delivery schedules and may result in the loss of customers and significant additional costs to us. Thus, any significant
damage or destruction of our properties could have a material adverse effect on our business, financial condition or results of
operations.
We are dependent upon our ability to attract and retain key personnel.
Our success depends in part upon our ability to attract and retain key engineering, technical and managerial personnel, at both
the executive and plant level. We face competition for management, engineering and technical personnel from other companies
and organizations. The loss of members of our senior management group, or key engineering and technical personnel, could
negatively impact our ability to grow and remain competitive in the future and could have a material adverse effect on our
financial results.
Labor disruptions by our employees could adversely affect our business.
As of December 31, 2014, we employed approximately 3,150 people. Two of our operating units are parties to collective
bargaining agreements, covering 159 full time hourly employees and 219 employees, and will expire July 1, 2015 and January
1, 2016, respectively. Although we have not experienced any material labor-related work stoppage and consider our relations
with our employees to be good, labor stoppages may occur in the future. If the unionized workers were to engage in a strike or
other work stoppage, if we are unable to negotiate acceptable collective bargaining agreements with the unions or if other
employees were to become unionized, we could experience a significant disruption of our operations, higher ongoing labor
costs and possible loss of customer contracts, which could have an adverse effect on our business and results of operations.
We have identified material weaknesses in our internal control over financial reporting which could, if not remediated,
adversely impact the reliability of our financial reports, cause us to submit our financial reports in an untimely fashion,
result in material misstatements in our financial statements and cause current and potential stockholders to lose
confidence in our financial reporting, which in turn could adversely affect the trading price of our common stock.
We have concluded that there are material weaknesses in our internal control over financial reporting as 1) the process to
communicate, educate, and measure our employees’ understanding of ethical standards and code of conduct across the
company was not maintained, 2) the structure, authority, and responsibilities to ensure the objectives of internal control over
financial reporting were adequately achieved was not maintained, 3) the design of our internal controls did not include a review
of the accuracy of labor distribution to various departments and 4) the process to reconcile and review our income tax accounts
was not adequate. These material weaknesses resulted in material misstatements of our historical financial statements, which
necessitated a restatement of our consolidated financial statements as of December 31, 2013 and for the years ended December
31, 2013 and 2012 and our unaudited quarterly financial information for the first three quarters in the year ended December 31,
2014 and for each of the quarters in the year ended December 31, 2013 to correct for errors in the contract forward loss reserve,
cost of goods sold, deferred income taxes, goodwill, goodwill impairment, additional-paid-in-capital and income tax expense,
as applicable, in each reporting period. Additionally, these material weaknesses could result in a material misstatement of
account balances or disclosures that would result in a misstatement to the annual or interim consolidated financial statements
that would not be prevented or detected. Thus, management has determined that our disclosure controls and procedures and
internal control over financial reporting were not effective as of December 31, 2014.
Under standards established by the Public Company Accounting Oversight Board (“PCAOB”), a material weakness is a
deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility
that a material misstatement of our annual or interim financial statements will not be prevented or detected and corrected on a
timely basis. The existence of this issue could adversely affect us, our reputation or investor perceptions of us. We have and
will continue to take additional measures to remediate the underlying causes of the material weaknesses noted above. As we
continue to evaluate and work to remediate the material weaknesses, we may determine to take additional measures to address
the control deficiencies. Also, see Item 9A in Part II of this Form 10-K. We expect to incur additional costs remediating these
material weaknesses.
Although we plan to complete this remediation process as quickly as possible, we cannot at this time estimate how long it will
take, and our measures may not prove to be successful in remediating these material weaknesses. If our remedial measures are
insufficient to address the material weaknesses, or if additional material weaknesses or significant deficiencies in our internal
control over financial reporting are discovered or occur in the future, our consolidated financial statements may contain
material misstatements and we could be required to restate our financial results. In addition, if we are unable to successfully
remediate these material weaknesses and if we are unable to produce accurate and timely financial statements, our stock price
may be adversely affected and we may be unable to maintain compliance with applicable stock exchange listing requirements
and debt covenant requirements.
20
The restatement of our consolidated financial statements and possible related events, should they occur, may consume
our time and resources and may have an adverse effect on our business and stock price.
As discussed in Note 2 to our consolidated financial statements included in Part IV, Item 15(a) of this Form 10-K, we have
restated in this Form 10-K our consolidated financial statements to correct errors in prior periods primarily related to (i) a long-
term contract (“Contract”) following the discovery of misconduct by employees in the recording of direct labor costs to the
Contract from 2009 through the third quarter 2014 which resulted in the identification of a forward loss provision that should
have been recorded in 2009 and the impact on subsequent periods of adjustments to the forward loss provision based on
information available at the time; and (ii) the year end reconciliation of income taxes payable and deferred tax balances
identified errors primarily in 2013, 2012, and 2011.
As with all corporate controls, we cannot be certain that the measures we have taken, and are taking, to remedy the errors since
they were discovered will ensure that no errors occur in the future. Further, the restatement may affect investor confidence in
the accuracy of our financial reporting and disclosures, may raise reputational issues for our business and may negatively
impact our stock price.
Although we have now completed the restatement, we cannot guarantee that we will not receive regulatory inquiries or be
subject to litigation regarding our restated financial statements or related matters. Were any such future regulatory inquiries or
litigation to occur, regardless of the outcome, such actions would likely consume internal resources and result in additional
legal and consulting costs.
Enacted and proposed changes in securities laws and regulations have increased our costs and may continue to increase
our costs in the future.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), enacted in July 2010, expands
federal regulation of corporate governance matters. While some provisions of the Dodd-Frank Act are effective upon
enactment, others will be implemented upon the SEC’s adoption of related rules and regulations. The scope and timing of the
adoption of such rules and regulations is uncertain and accordingly, the cost of compliance with the Dodd-Frank Act is also
uncertain.
The Dodd-Frank Act contains provisions to improve transparency and accountability concerning the supply of certain minerals
originating from the Democratic Republic of Congo and adjoining countries that are believed to be benefiting armed groups
(“Conflict Minerals”). The provision does not prevent companies from using conflict minerals; however the SEC mandates due
diligence, disclosure and reporting requirements for companies which manufacture products that include components
containing such conflict minerals in a Form SD (“Form SD”). These due diligence, disclosure and initial reporting requirements
applied to our activities in calendar year 2013 and our first annual filing was completed by the June 2, 2014 due date. These
regulations and disclosures in our Form SDs could result in our customers’ request to not use Conflict Minerals in our products
they purchase from us. The number of suppliers who provide conflict-free minerals may be limited and thus, decrease the
availability and increase the prices of components free of such Conflict Minerals used in our products. In addition, the
compliance process will be both time-consuming and costly. Since our supply chain is complex, we may not be able to
sufficiently verify the origins of the relevant minerals used in our products through our due diligence procedures, which may
harm our reputation with our customers and other stakeholders. In addition, we may be unable to satisfy customers who require
that all components included in our products be conflict-free, which could place us at a competitive disadvantage.
Our efforts to comply with the Dodd-Frank Act and other evolving laws, regulations and standards are likely to result in
increased general and administrative expenses and a diversion of management time and attention from revenue generating
activities to compliance activities. Further, compliance with new and existing laws, rules, regulations and standards may make
it more difficult and expensive for us to maintain director and officer liability insurance, and we may be required to accept
reduced coverage or incur substantially higher costs to obtain coverage.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
21
ITEM 2. PROPERTIES
We occupy approximately 33 owned or leased facilities, totaling over 2.2 million square feet of manufacturing area and office
space. At December 31, 2014, facilities which were in excess of 50,000 square feet each were occupied as follows:
Location
Carson, California
Monrovia, California
Coxsackie, New York
Pittsburgh, Pennsylvania
Parsons, Kansas
Carson, California
Phoenix, Arizona
Joplin, Missouri
Appleton, Wisconsin
Orange, California
Adelanto, California
Huntsville, Arkansas
Iuka, Mississippi
Carson, California
Coxsackie, New York
Joplin, Missouri
Tulsa, Oklahoma
Huntsville, Alabama
Berryville, Arkansas
Segment
Ducommun AeroStructures
Ducommun AeroStructures
Ducommun AeroStructures
Ducommun LaBarge Technologies
Ducommun AeroStructures
Ducommun LaBarge Technologies
Ducommun LaBarge Technologies
Ducommun LaBarge Technologies
Ducommun LaBarge Technologies
Ducommun AeroStructures
Ducommun AeroStructures
Ducommun LaBarge Technologies
Ducommun LaBarge Technologies
Ducommun AeroStructures
Ducommun AeroStructures
Ducommun LaBarge Technologies
Ducommun LaBarge Technologies
Ducommun LaBarge Technologies
Ducommun LaBarge Technologies
Square
Feet
286,000
274,000
168,000
136,000
120,000
117,000
100,000
92,000
77,000
76,000
74,000
69,000
66,000
65,000
65,000
55,000
55,000
52,000
52,000
Expiration
of Lease
Owned
Owned
Owned
2017
Owned
2016
2017
Owned
Owned
Owned
Owned
2020
2016
2019
2015
2016
Owned
2017
Owned
Management believes these properties are adequate to meet our current requirements, are in good condition and are suitable for
their present use.
ITEM 3. LEGAL PROCEEDINGS
See Note 14 to our consolidated financial statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K for a
description of our legal proceedings.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
22
PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is listed on the New York Stock Exchange under the symbol DCO. As of December 31, 2014, we had
approximately 207 holders of record of our common stock. We have not paid any dividends since the first quarter of 2011 and
we do not expect to pay dividends for the foreseeable future. See “Available Liquidity” in Part II, Item 7, Management’s
Discussion and Analysis—Liquidity and Capital Resources—Available Liquidity, of this Annual Report on Form 10-K for
further discussion on dividend restrictions under our Credit Facility. The following table sets forth the high and low closing
prices per share of our common stock as reported on the New York Stock Exchange for the fiscal periods indicated:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Years Ended December 31,
2014
2013
High
Low
High
Low
$
$
$
$
31.35
27.74
32.00
29.54
$
$
$
$
22.80
22.45
22.60
23.52
$
$
$
$
22.60
26.71
29.37
30.98
$
$
$
$
14.32
17.79
20.40
24.17
See “Part III, Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS” for information relating to shares to be issued under equity
compensation plans.
Issuer Purchases of Equity Securities
In 2011, we terminated our stock repurchase program.
23
Table of Contents
Performance Graph
The following graph compares the yearly percentage change in our cumulative total shareholder return with the cumulative
total return of the Russell 2000 Index and the Spade Defense Index for the periods indicated, assuming the reinvestment of any
dividends. The graph is not necessarily indicative of future price performance:
Comparison of 5 Year Cumulative Total Return
Assumes Initial Investment of $100
December 2014
250.00
200.00
150.00
100.00
50.00
0.00
2009
2010
2011
2012
2013
2014
Ducommun Inc.
Russell 2000 Index
Spade Defense Index
2009
100.00
100.00
100.00
2010
118.36
126.81
109.62
2011
69.54
121.52
106.61
2012
88.19
141.42
123.99
2013
162.58
196.32
183.84
2014
137.87
205.93
205.47
24
ITEM 6. SELECTED FINANCIAL DATA
We have restated the selected financial data presented in this report as of and for each of the years ended December 31, 2013,
2012, 2011, and 2010 to reflect adjustments to our previously issued consolidated financial statements as more fully described
in Note 2 to our consolidated financial statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K (“Form
10-K”).
The following selected consolidated financial data should be read in conjunction with Part II, Item 7 and Part IV, Item 15(a) of
this Form 10-K:
Net Revenues
Gross Profit as a Percentage of Net Revenues
Income Before (Loss) Taxes
Income Tax Expense (Benefit)
Net Income (Loss)
Per Common Share
Basic earnings (loss) per share
Diluted earnings (loss) per share
Dividends per share (i)
Working Capital
Total Assets
Long-Term Debt, Including Current Portion
Total Shareholders’ Equity
(In thousands, except per share amounts)
Years Ended December 31,
2014
2013(a)(b)
2012(c)
2011(d)(e)(f)(g)
2010(h)
$
742,045
As Restated
736,650
$
As Restated
747,037
$
As Restated
580,914
$
As Restated
408,406
$
18.9%
26,240
6,373
19,867
$
16.9%
9,385
(1,993)
11,378
$
19.3%
24,124
6,501
17,623
$
18.2%
(53,798)
(4,877)
(48,921)
1.82
1.79
$
$
— $
$
$
$
$
217,670
747,599
290,052
256,570
1.06
1.05
$
$
— $
$
$
$
$
225,323
762,645
332,702
234,271
1.67
1.66
$
$
— $
$
$
$
$
219,774
777,275
365,744
215,217
(4.64)
(4.64)
0.07
218,665
805,823
392,240
195,640
19.1%
21,978
3,976
18,002
1.72
1.70
0.30
84,550
347,419
3,280
248,512
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
(a) The results for 2013 include an approximate $14.1 million in charges related to the Embraer Legacy 450/500 and Boeing
777 wing tip contracts and was comprised of approximately $7.0 million of asset impairment charges for production cost
of contracts; approximately $5.2 million of forward loss reserves and approximately $1.9 million of inventory write-offs.
(b) See Note 2 to our consolidated financial statements included in Part IV, Item 15(a) of this Form 10-K.
(c) See Note 2 to our consolidated financial statements included in Part IV, Item 15(a) of this Form 10-K.
(d) In June 2011, we acquired LaBarge Inc., which is now a part of our DLT operating segment. The acquisition was
accounted for as a business combination.
(e) The results for 2011 include a goodwill impairment charge of approximately $54.3 million resulting from our annual
impairment testing. The 2011 results also include approximately $2.4 million of inventory step-up adjustments in cost of
sales and approximately $16.1 million of merger-related transaction expenses.
(f) The results for 2011 also included the correction of errors in prior periods primarily related to a long-term contract
following the discovery of misconduct by employees in the recording of direct labor costs to the contract from 2009
through the third quarter 2014 which resulted in the identification of a forward loss provision that should have been
recorded in 2009 and then the subsequent adjustment of adjustments to the forward loss provision based on information
available at the time (“Forward Loss Adjustments”). As a result of the Forward Loss Adjustments, cost of goods sold
decreased approximately $0.3 million in 2011.
(g) The results for 2011 additionally included the correction of errors as a result of the year end reconciliation of income taxes
payable and deferred tax balances (“Tax Adjustments”). The Tax Adjustments resulted in a reduction to the carrying value
of goodwill totaling approximately $4.0 million due to a calculation error in the original purchase price allocation and
subsequent performance of step 2 of our annual goodwill impairment analysis related to deferred income taxes and thus, 1)
reduced deferred income taxes by approximately $2.7 million and 2) generated a pre-tax goodwill impairment charge of
approximately $1.4 million. Further, the Tax Adjustments in 2011 reduced deferred tax assets by approximately $1.6
million that were established as a result of shared-based compensation expenses recorded previously and should have been
reduced as the tax deductions were utilized.
(h) The results for 2010 included Forward Loss Adjustments and as a result, cost of goods sold increased approximately $1.3
million. In addition, the adjustments related to the years prior to 2010 are reflected in the beginning retained earnings for
2010. The cumulative impact of these adjustments decreased retained earnings by approximately $3.9 million, net of tax, at
the beginning of 2010.
(i) We suspended payments of dividends after the first quarter of 2011.
25
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Restatement of Previously Issued Financial Statements
We have restated our consolidated financial statements as of December 31, 2013, and for the years ended December 31, 2013
and 2012 and our unaudited quarterly financial information for the first three quarters in the year ended December 31, 2014 and
for each of the quarters in the year ended December 31, 2013, to correct errors in prior periods primarily related to (i) a long-
term contract (“Contract”) following the discovery of misconduct by employees in the recording of direct labor costs to the
Contract from 2009 through the third quarter 2014 which resulted in the identification of a forward loss provision that should
have been recorded in 2009 and the impact on subsequent periods of adjustments to the forward loss provision based on
information available at the time (“Forward Loss Adjustments”); and (ii) the year end reconciliation of income taxes payable
and deferred tax balances identified errors primarily in 2013, 2012, and 2011 (“Tax Adjustments”). The misconduct and its
related financial impact were concealed from our senior management, internal auditors, and external auditors.
The Forward Loss Adjustments were based on certain assumptions and estimates. To determine the loss on the Contract, we
estimated the number of units we would have expected to ship over the life of the Contract at inception of the Contract using
external market industry data for fiscal years 2009, 2010, 2011, 2012, and 2013. We used data obtained directly from the
customer for 2014 and 2015. The total estimated costs at any given point in time would typically include actual historical costs
up to that time plus the estimated cost to produce units to be delivered. In addition, the estimated total cost for the life of the
Contract includes certain inefficiencies on labor, material, and overhead costs during the initial start-up period. However, as we
progress along the learning curve, the direct labor hours and overhead rates are expected to decrease as we gain technical
knowhow and efficiency in producing the product. As a result of the misconduct by the employees in the recording of direct
labor hours to the Contract, the historical actual direct labor hours charged to the Contract were inaccurate. As a result, we
estimated the costs to complete future units at the end of each period based on an estimate of the direct labor hours chargeable
to the Contract, including consideration of anticipated learning curve efficiencies that would decrease the direct labor hours
over the remaining term of the Contract. Further, we used the actual direct labor hours incurred by the employees assigned to
the Contract as a basis for projecting future hours, less an estimate of the time not allocable to the Contract. Using this model,
we calculated the Forward Loss Adjustments from the inception of the Contract in 2009 through the expected life of the
Contract. As a result of the Forward Loss Adjustments, cost of goods sold increased (decreased) approximately $6.7 million in
2009, $1.3 million in 2010, $(0.3) million in 2011, $(2.2) million in 2012, $(0.9) million in 2013, and $(0.8) million in the nine
months ended September 27, 2014.
The Tax Adjustments were necessary as a result of certain calculation errors. The Tax Adjustments resulted in a net decrease to
income tax expense of approximately $0.9 million in 2013 and zero in 2012. The Tax Adjustments in 2011 resulted in a
reduction to the carrying value of goodwill totaling approximately $4.0 million due to a calculation error in the original
purchase price allocation and subsequent performance of step 2 of our annual goodwill impairment analysis related to deferred
income taxes and thus, (i) reduced deferred income taxes by approximately $2.7 million and (ii) generated a pre-tax goodwill
impairment charge of approximately $1.4 million. Further, the Tax Adjustments in 2011 reduced deferred tax assets by
approximately $1.6 million that were established as a result of shared-based compensation expenses recorded previously and
should have been reduced as the tax deductions were utilized. Moreover, the restated amounts include previously identified and
disclosed immaterial adjustments. The amounts in this Item 7 of this Annual Report on Form 10-K are reflective of the
restatement which includes previously identified and disclosed immaterial adjustments. See Note 2 to our consolidated
financial statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K for additional information.
See Part II, Item 9A of this Annual Report on Form 10-K for information regarding our controls and procedures.
Overview
Ducommun Incorporated (“Ducommun,” “the Company,” “we,” “us” or “our”) is a leading global provider of engineering and
manufacturing services for high-performance products and high-cost-of failure applications used primarily in the aerospace,
defense, industrial, natural resources, medical and other industries. We differentiate ourselves as a full-service solution-based
provider, offering a wide range of value-added products and services in our primary businesses of electronics, structures and
integrated solutions. We operate through two primary business units: Ducommun LaBarge Technologies (“DLT”) and
Ducommun AeroStructures (“DAS”).
During 2014, we made significant progress in our plan to de-lever the balance sheet, reduce interest expense and further our
ability to refinance our debt in 2015. While 2014 saw growth in our commercial aerospace and industrial revenue, it was
26
partially offset by the continued weakness in defense revenue. Revenue and backlog for our commercial aerospace business
remains strong, reflecting increased build rates.
Highlights for the year ended December 31, 2014 were as follows:
•
•
•
•
2014 net revenues were approximately $742.0 million
Net income was approximately $19.9 million, or $1.79 per diluted share
Cash generated from operating activities was approximately $53.4 million
We made voluntary principal prepayments in aggregate of approximately $42.6 million on the term loan
For the year ended December 31, 2014, EBITDA and Adjusted EBITDA was approximately $83.3 million. See Non-GAAP
Financial Measures below for certain information regarding EBITDA and Adjusted EBITDA, including reconciliations of
EBITDA and Adjusted EBITDA to net income.
Non-GAAP Financial Measures
When viewed with our financial results prepared in accordance with accounting principles generally accepted in the United
States of America (“GAAP”) and accompanying reconciliations, we believe EBITDA and Adjusted EBITDA provide additional
useful information to clarify and enhance the understanding of the factors and trends affecting our past performance and future
prospects. We define these measures, explain how they are calculated and provide reconciliations of these measures to the most
comparable GAAP measure in the tables below. EBITDA, Adjusted EBITDA and the related financial ratios, as presented in
this Annual Report on Form 10-K (“Form 10-K”), are supplemental measures of our performance that are not required by, or
presented in accordance with, GAAP. They are not a measurement of our financial performance under GAAP and should not be
considered as alternatives to net income or any other performance measures derived in accordance with GAAP, or as an
alternative to net cash provided by operating activities as measures of our liquidity. The presentation of these measures should
not be interpreted to mean that our future results will be unaffected by unusual or nonrecurring items.
We use EBITDA and Adjusted EBITDA non-GAAP operating performance measures internally as complementary financial
measures to evaluate the performance and trends of our businesses. We present EBITDA, Adjusted EBITDA and the related
financial ratios, as applicable, because we believe that measures such as these provide useful information with respect to our
ability to meet our future debt service, capital expenditures, working capital requirements and overall operating performance.
EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation or as
substitutes for analysis of our results as reported under GAAP. Some of these limitations are:
•
•
•
•
•
•
•
They do not reflect our cash expenditures, future requirements for capital expenditures or contractual
commitments;
They do not reflect changes in, or cash requirements for, our working capital needs;
They do not reflect the significant interest expense or the cash requirements necessary to service interest or
principal payments on our debt;
Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will
often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash
requirements for such replacements;
They are not adjusted for all non-cash income or expense items that are reflected in our statements of cash
flows;
They do not reflect the impact on earnings of charges resulting from matters unrelated to our ongoing
operations; and
Other companies in our industry may calculate EBITDA and Adjusted EBITDA differently from us, limiting
their usefulness as comparative measures.
Because of these limitations, EBITDA, Adjusted EBITDA and the related financial ratios should not be considered as measures
of discretionary cash available to us to invest in the growth of our business or as a measure of cash that will be available to us
to meet our obligations. You should compensate for these limitations by relying primarily on our GAAP results and using
EBITDA and Adjusted EBITDA only as supplemental information. See our consolidated financial statements contained in this
Form 10-K.
27
However, in spite of the above limitations, we believe that EBITDA and Adjusted EBITDA are useful to an investor in
evaluating our results of operations because these measures:
•
•
•
Are widely used by investors to measure a company’s operating performance without regard to items
excluded from the calculation of such terms, which can vary substantially from company to company
depending upon accounting methods and book value of assets, capital structure and the method by which
assets were acquired, among other factors;
Help investors to evaluate and compare the results of our operations from period to period by removing the
effect of our capital structure from our operating performance; and
Are used by our management team for various other purposes in presentations to our Board of Directors as a
basis for strategic planning and forecasting.
The following financial items have been added back to our net income when calculating EBITDA and Adjusted EBITDA:
•
•
•
•
•
•
Amortization expense may be useful to investors because it represents the estimated attrition of our acquired
customer base and the diminishing value of product rights;
Depreciation may be useful to investors because it generally represents the wear and tear on our property and
equipment used in our operations;
Asset impairments (including Goodwill) may be useful to our investors because it generally represents a
decline in value in our assets used in our operations;
Merger–related expenses may be useful to investors for determining current cash flow;
Interest expense may be useful to investors for determining current cash flow; and
Income tax expense may be useful to investors because it represents the taxes which may be payable for the
period and the change in deferred taxes during the period, and may reduce cash flow available for use in our
business.
Reconciliations of net income to EBITDA and Adjusted EBITDA and the presentation of Adjusted EBITDA as a percentage of
net sales were as follows:
Net income
Depreciation and amortization
Interest expense
Income tax expense (benefit)
EBITDA
Asset impairment (1)
Merger-related expenses (2)
Adjusted EBITDA
% of net revenues
(In thousands)
Years Ended December 31,
2014
2013
2012
As Restated
As Restated
$
$
19,867
29,024
28,077
6,373
83,341
—
—
—
83,341
$
$
11,378
30,926
29,918
(1,993)
70,229
6,975
—
6,975
77,204
$
$
17,623
29,413
32,798
6,501
86,335
—
702
702
87,037
11.2%
10.5%
11.7%
(1) 2013 includes asset impairment charges for production of contracts for the Embraer Legacy 450/500 contracts and
Boeing 777 wing tip contract.
(2) 2012 include merger-related transaction costs and change-in-control provision for certain LaBarge key executives and
employees arising in connection with the LaBarge Acquisition.
Adjusted EBITDA increased in 2014 compared to 2013 primarily due to fourth quarter 2013 charges of approximately $14.1
million for the Embraer Legacy 450/500 and Boeing 777 wing tip contracts.
Adjusted EBITDA decreased in 2013 over 2012 primarily due to decreased net sales, mainly in non-aerospace and defense end-
use markets, fourth quarter charges of approximately $14.1 million for the Embraer Legacy 450/500 and Boeing 777 wing tip
contracts, and higher inventory reserve charges.
28
RESULTS OF OPERATIONS
2014 Compared to 2013
The following table sets forth net revenues, selected financial data, the effective tax rate and diluted earnings per share:
Net Revenues
Cost of Sales
Gross Profit
Selling, General and Administrative Expenses
Operating Income
Interest Expense
Other Income
Income Before Taxes
Income Tax Expense (Benefit)
Net Income
Effective Tax Rate (Benefit)
Diluted Earnings Per Share
nm = not meaningful
(in thousands, except per share data)
Years Ended December 31,
2014
%
of Net Revenues
742,045
601,713
140,332
88,565
51,767
(28,077)
2,550
26,240
6,373
19,867
100.0 % $
81.1 %
18.9 %
11.9 %
7.0 %
(3.8)%
0.3 %
3.5 %
nm
2.7 % $
2013
As Restated
736,650
612,498
124,152
84,849
39,303
(29,918)
—
9,385
(1,993)
11,378
24.3%
1.79
nm
nm $
(21.2)%
1.05
%
of Net Revenues
As Restated
100.0 %
83.1 %
16.9 %
11.5 %
5.3 %
(4.1)%
— %
1.3 %
nm
1.5 %
nm
nm
$
$
$
29
Net Revenues by End-Use Market and Operating Segment
Net revenues by end-use market and operating segment during 2014 and 2013, respectively, were as follows:
Consolidated Ducommun
Military and space
Defense technologies
Defense structures
Commercial aerospace
Natural resources
Industrial
Medical and other
Total
DAS
Military and space (defense structures)
Commercial aerospace
Total
DLT
Military and space (defense technologies)
Commercial aerospace
Natural resources
Industrial
Medical and other
Total
(In thousands)
Years Ended December 31,
% of Net Sales
Change
2014
2013
2014
2013
$
$
$
$
$
$
(18,983) $
(12,797)
28,889
6,096
(3,975)
6,165
5,395
$
241,583
124,298
242,143
45,220
42,661
46,140
742,045
(12,797) $
17,521
4,724
$
124,298
195,658
319,956
(18,983) $
11,368
6,096
(3,975)
6,165
671
$
241,583
46,485
45,220
42,661
46,140
422,089
$
$
$
$
$
$
260,566
137,095
213,254
39,124
46,636
39,975
736,650
137,095
178,137
315,232
260,566
35,117
39,124
46,636
39,975
421,418
32%
17%
33%
6%
6%
6%
100%
39%
61%
100%
57%
11%
11%
10%
11%
100%
35%
19%
29%
5%
6%
6%
100%
43%
57%
100%
62%
8%
9%
11%
10%
100%
Net revenues for 2014 were approximately $742.0 million compared to approximately $736.7 million for 2013. The net
revenue increase reflects an approximate 14% increase in revenue in the commercial aerospace end-use markets and an
approximate 7% increase in revenue in the non-aerospace and defense end-use markets, partially offset by an approximate 8%
decrease in revenue in the military and space end-use markets.
Net Revenues by Major Customers
A significant portion of our net revenues are from our top ten customers as follows:
Boeing
Raytheon
Top ten customers
Years Ended December 31,
2014
2013
20%
9%
59%
18%
10%
57%
The revenues from Boeing and Raytheon are diversified over a number of commercial, military and space programs and were
made by both operating segments.
Gross Profit
Gross profit margin and dollars increased in 2014 primarily due to reversal of forward loss reserve as a result of a settlement
with a customer, a favorable product mix, an approximately $0.8 million workers’ compensation audit refund related to prior
30
years, combined with charges in the prior year of approximately $14.1 million in the DAS operating segment, partially offset
by an increase in accrued compensation and benefit costs.
Selling, General and Administrative Expenses (“SG&A”)
SG&A expenses increased in 2014 primarily due to to higher accrued compensation and benefit costs that was partially offset
by lower non-recurring professional fees and the prior year included an approximate $0.5 million charge related to our debt
repricing transaction.
Interest Expense
Interest expense decreased in 2014 primarily due to lower outstanding debt balances and interest rate reduction as a result of
repricing our term loan towards the end of the first quarter of 2013. See Note 7 to our consolidated financial statements
included in Part IV, Item 15(a) of this Annual Report on Form 10-K for further information on our long-term debt.
Income Tax Expense
We recorded income tax expense of approximately $6.4 million (an effective tax rate of 24.3%) in 2014, compared to an
income tax benefit of approximately $2.0 million (an effective tax benefit rate of 21.2%) in 2013.
Our effective tax rate of approximately 24.3% for 2014 was lower than the federal statutory rate of 35.0% primarily due to the
benefit of the federal qualified domestic production activities deduction and the federal research and development tax credit.
These benefits were approximately $0.6 million and $2.4 million, respectively. Our effective tax benefit rate of approximately
21.2% in 2013 was lower than the federal statutory rate of 35.0% primarily due to the benefit of the federal qualified domestic
production activities deduction and the federal research and development tax credit. These benefits were approximately $0.8
million and $4.5 million, respectively. The approximately $4.5 million benefit included approximately $2.0 million of 2012
federal research and development tax credit benefit recognized in the first quarter of 2013. The 2012 benefit was recognized in
2013 as a result of the American Taxpayer Relief Act of 2012 (the “Act”). The Act extended the federal research and
development tax credit for the years 2013 and 2012.
Net Income and Earnings per Diluted Share
Net income and earnings per diluted share for 2014 were approximately $19.9 million, or $1.79 per diluted share, compared to
approximately $11.4 million, or $1.05 per diluted share, for 2013. Net income for 2014 increased primarily due to higher gross
profit, insurance recoveries related to property and equipment, lower interest expense combined with charges of approximately
$14.1 million recorded in the prior year related to the Embraer Legacy 450/500 and Boeing 777 wing tip contracts, partially
offset by higher income tax expense.
31
Business Segment Performance
We report our financial performance based upon the two reportable operating segments: DAS and DLT. The results of
operations differ between our reportable operating segments due to differences in competitors, customers, extent of proprietary
deliverables and performance. The following table summarizes our business segment performance for 2014 and 2013:
Net Revenues
DAS
DLT
Total Net Revenues
Segment Operating Income
DAS (2)
DLT (3)
Corporate General and Administrative Expenses (1)(3)
Total Operating Income
EBITDA
DAS
Operating Income (2)
Other Income (4)
Depreciation and Amortization
DLT
Operating Income (3)
Depreciation and Amortization
Corporate General and Administrative Expenses (1)(3)
Operating Loss
Depreciation and Amortization
EBITDA
Adjusted EBITDA
Asset impairments (2)
Adjusted EBITDA
Capital Expenditures
DAS
DLT
Corporate Administration
Total Capital Expenditures
%
Change
(In thousands)
Years Ended December 31,
%
of Net Sales
%
of Net Sales
2014
2013
2014
2013
As Restated
As Restated
1.5% $ 319,956
$ 315,232
0.2%
422,089
421,418
43.1 %
56.9 %
42.8 %
57.2 %
0.7% $ 742,045
$ 736,650
100.0 %
100.0 %
$
34,949
$
19,008
34,599
69,548
(17,781)
51,767
$
37,030
56,038
(16,735)
39,303
$
10.9 %
8.2 %
(2.4)%
7.0 %
6.0 %
8.8 %
(2.3)%
5.3 %
$
34,949
$
19,008
2,550
10,959
48,458
34,599
17,928
52,527
—
12,406
31,414
37,030
18,346
55,376
(17,781)
137
(17,644)
83,341
$
(16,735)
174
(16,561)
70,229
— $
6,975
$
$
$
$
15.1 %
10.0 %
12.4 %
13.1 %
11.2 %
9.5 %
$
$
83,341
12,742
5,782
30
77,204
11.2 %
10.5 %
8,287
5,000
116
$
18,554
$
13,403
(1) Includes costs not allocated to either the DLT or DAS operating segments.
(2) 2013 includes approximately $14.1 million in charges related to fourth quarter asset impairment charges of $5.7 million
on the Embraer Legacy 450/500 contracts and $1.3 million on the Boeing 777 wing tip contract which are added back
to adjusted EBITDA; forward loss reserves of $3.9 million on the Embraer Legacy 450/500 contracts and $1.3 million
on the Boeing 777 wing tip contract; and inventory write-offs of $1.9 million on the Embraer Legacy 450/500 contracts.
32
(3) 2013 includes approximately $1.2 million of workers’ compensation insurance expenses included in gross profit and not
allocated to the operating segments.
(4) Insurance recoveries related to property and equipment included as other income.
Ducommun AeroStructures
DAS’s net revenues in 2014 increased approximately 1% primarily due to an approximate 10% increase in commercial
aerospace revenue that was partially offset by an approximate 9% decrease in military and space revenue.
The DAS segment operating income and EBITDA increased in 2014 primarily due to a reversal of forward loss reserve as a
result of a settlement with a customer, a $0.8 million workers’ compensation audit refund related to prior years, combined with
the prior year included charges of approximately $14.1 million related to the Embraer Legacy 450/500 contracts and Boeing
777 wing tip contracts, partially offset by higher freight costs and higher accrued compensation and benefit costs. The DAS
EBITDA included approximately $2.6 million of insurance recoveries related to property and equipment that was recorded as
other income and none in 2013.
Ducommun LaBarge Technologies
DLT’s net revenues in 2014 increased slightly compared to 2013 reflecting an approximate 32% increase in commercial
aerospace revenue, approximate 7% increase in non-aerospace and defense (“Non A&D”) markets revenue, partially offset by
an approximate 7% decrease in defense technologies revenue.
DLT’s segment operating income and EBITDA decreased in 2014 primarily due to higher accrued compensation and benefit
costs that was partially offset by favorable product mix.
Corporate General and Administrative (“CG&A”)
CG&A expenses increased in 2014 primarily due to higher accrued compensation and benefit costs and the prior year included
an approximate $0.5 million charge related to our debt repricing transaction.
Backlog
Backlog is subject to delivery delays or program cancellations, which are beyond our control. Backlog is affected by timing
differences in the placement of customer orders and tends to be concentrated in several programs to a greater extent than our
net sales. Backlog in non-aerospace and defense markets tends to be of a shorter duration and is generally fulfilled within a 3-
month period. As a result of these factors, trends in our overall level of backlog may not be indicative of trends in our future net
sales.
Backlog was approximately $559.3 million at December 31, 2014, compared to approximately $620.0 million at December 31,
2013, as shown in more detail below. The decrease in backlog was primarily in the defense technologies end-use markets.
Approximately $447.4 million of total backlog is expected to be delivered during 2015. The following table summarizes our
backlog for 2014 and 2013:
33
Consolidated Ducommun
Military and space
Defense technologies
Defense structures
Commercial aerospace
Natural resources
Industrial
Medical and other
Total
DAS
Military and space (defense structures)
Commercial aerospace
Total
DLT
Military and space (defense technologies)
Commercial aerospace
Natural resources
Industrial
Medical and other
Total
Change
2014
2013
(In thousands)
December 31,
$
$
$
$
$
$
(32,436) $
(42,944)
1,181
(293)
10,715
3,064
(60,713) $
(42,944) $
(6,123)
(49,067) $
(32,436) $
7,304
(293)
10,715
3,064
(11,646) $
185,017
74,789
232,384
22,512
24,331
20,247
559,280
74,789
199,407
274,196
185,017
32,977
22,512
24,331
20,247
285,084
$
$
$
$
$
$
217,453
117,733
231,203
22,805
13,616
17,183
619,993
117,733
205,530
323,263
217,453
25,673
22,805
13,616
17,183
296,730
34
2013 Compared to 2012
The following table sets forth net revenues, selected financial data, the effective tax rate and diluted earnings per share:
(in thousands, except per share data)
Years Ended December 31,
%
of Net Sales
2013
As Restated
100.0% $
83.1%
16.9%
11.5%
5.3%
4.1%
1.3%
nm
1.5% $
2012
As Restated
747,037
603,060
143,977
87,055
56,922
32,798
24,124
6,501
17,623
2013
As Restated
736,650
612,498
124,152
84,849
39,303
29,918
9,385
(1,993)
11,378
(21.2)%
1.05
nm
nm $
26.9%
1.66
$
$
$
%
of Net Sales
2012
As Restated
100.0%
80.7%
19.3%
11.7%
7.6%
4.4%
3.2%
nm
2.4%
nm
nm
Net Revenues
Cost of Sales
Gross Profit
Selling, General and Administrative Expenses
Operating Income
Interest Expense
Income Before Taxes
Income Tax (Benefit) Expense
Net Income
Effective Tax (Benefit) Rate
Diluted Earnings Per Share
nm = not meaningful
35
Net Revenues by End-Use Market and Operating Segment
Net revenues by end-use market and operating segment during 2013 and 2012, respectively, were as follows:
Consolidated Ducommun
Military and space
Defense technologies
Defense structures
Commercial aerospace
Natural resources
Industrial
Medical and other
Total
DAS
Military and space (defense structures)
Commercial aerospace
Total
DLT
Military and space (defense technologies)
Commercial aerospace
Natural resources
Industrial
Medical and other
Total
(In thousands)
Years Ended December 31,
% of Net Sales
Change
2013
2012
2013
2012
$
$
$
$
$
$
$
19,580
(2,340)
9,427
(19,348)
(15,759)
(1,947)
(10,387) $
260,566
137,095
213,254
39,124
46,636
39,975
736,650
(2,340) $
7,590
5,250
$
137,095
178,137
315,232
$
19,580
1,837
(19,348)
(15,759)
(1,947)
(15,637) $
260,566
35,117
39,124
46,636
39,975
421,418
$
$
$
$
$
$
240,986
139,435
203,827
58,472
62,395
41,922
747,037
139,435
170,547
309,982
240,986
33,280
58,472
62,395
41,922
437,055
35%
19%
29%
5%
6%
6%
100%
43%
57%
100%
62%
8%
9%
11%
10%
100%
32%
19%
27%
8%
8%
6%
100%
45%
55%
100%
55%
8%
13%
14%
10%
100%
Net revenues for 2013 reflected the growth in the aerospace and defense end-use markets, which were more than offset by
lower revenues in the non-aerospace and defense end-use markets.
Net Revenues by Major Customers
A significant portion of our net revenues are from our top ten customers as follows:
Boeing
Raytheon
Top ten customers
Years Ended December 31,
2013
2012
18%
10%
57%
17%
7%
55%
Net revenues decreased approximately $10.4 million, or 1%, to approximately $736.7 million for the fiscal year ended
December 31, 2013 from approximately $747.0 million for the fiscal year ended December 31, 2012. The lower net revenues
was primarily the result of lower revenues in the Non-A&D markets that was partially offset by higher revenues in commercial
aerospace and defense technologies.
Gross Profit
Gross profit decreased in 2013 primarily due to lower net revenues and fourth quarter charges of approximately $14.1 million
in the DAS operating segment. The fourth quarter charges were comprised of asset impairment charges on production costs of
contracts of approximately $5.7 million on the Embraer Legacy 450/500 contracts and approximately $1.3 million on the
36
Boeing 777 wing tip contract; forward loss reserves of approximately $3.9 million on the Embraer Legacy 450/500 contracts
and approximately $1.3 million on the Boeing 777 wing tip contract; and inventory reserves of approximately $1.9 million on
the Embraer Legacy 450/500 contracts.
Gross profit margins as a percentage of net sales decreased in 2013 primarily due to unfavorable product mix, the impact of
lower net sales in the non-aerospace and defense end-use markets and the charges discussed above.
Selling, General and Administrative Expenses
SG&A expenses decreased in 2013 primarily due to lower accrued compensation and benefits costs and partially offset by a
charge of $0.6 million of expenses due to a workers’ compensation insurance payroll audit and $0.5 million of expenses related
to the debt repricing, as discussed in Interest Expense below, and increased professional fees.
Interest Expense
Interest expense decreased in 2013 primarily due to lower outstanding debt balances during the year as a result of our voluntary
prepayments and a lower interest rate on the Term Loan beginning in April 2013 as a result of our debt repricing. See Note 7 to
our consolidated financial statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K for further
information.
Income Tax Expense
We recorded an income tax benefit of approximately $2.0 million (an effective tax benefit rate of 21.2%) in 2013, compared to
an income tax expense of approximately $6.5 million (an effective tax rate of 26.9%) in 2012.
Our effective tax benefit rate of approximately 21.2% in 2013 was lower than the federal statutory rate of 35.0% primarily due
to the benefit of the federal qualified domestic production activities deduction and the federal research and development tax
credit. These benefits were approximately $0.8 million and $4.5 million, respectively. The approximately $4.5 million benefit
included approximately $2.0 million of 2012 federal research and development tax credit benefit recognized in the first quarter
of 2013. The 2012 benefit was recognized in 2013 as a result of the American Taxpayer Relief Act of 2012 (the “Act”). The Act
extended the federal research and development tax credit for the years 2013 and 2012.
Our effective tax rate of approximately 26.9% in 2012 was lower than the federal statutory rate of 35.0% primarily due to the
benefit of the federal qualified domestic production activities deduction and the revaluation of net deferred tax liabilities as a
result of a lower blended state tax rate. These benefits were approximately $0.7 million and $1.4 million, respectively. The
change in blended state tax rate was primarily due to California's new income tax apportionment legislation. The legislation
requires most multistate businesses to use a single sales factor method for apportioning income to California beginning January
1, 2013.
Net Income and Earnings per Diluted Share
Net income and earnings per diluted share for 2013 was approximately $11.4 million, or $1.05 per diluted share, compared to
approximately $17.6 million, or $1.66 per diluted share, for 2012. Net income for 2013 decreased primarily due to lower gross
margin as a result of charges of approximately $14.1 million on the Embraer Legacy 450/500 and Boeing 777 wing tip
contracts and lower gross margins in the non-aerospace and defense end-use markets, partially offset by lower SG&A expenses,
and lower interest and income tax expense. Diluted earnings per share for 2013 included a federal research and development
tax credit benefit of approximately $2.0 million while 2012 included no such benefit.
37
Business Segment Performance
We report our financial performance based upon the two reportable operating segments; DAS and DLT. The results of
operations differ between our reportable operating segments due to differences in competitors, customers, extent of proprietary
deliverables and performance. The following table summarizes our business segment performance for 2013 and 2012:
Net Revenues
DAS
DLT
Total Net Revenues
Segment Operating Income
DAS(2)
DLT(3)
Corporate General and Administrative Expenses (1)(3)(4)
Total Operating Income
EBITDA
DAS
Operating Income (2)
Depreciation and Amortization
DLT
Operating Income (3)
Depreciation and Amortization
Corporate General and Administrative Expenses (1)(3)(4)
Operating Loss
Depreciation and Amortization
EBITDA
Adjusted EBITDA
Asset impairments(2)
Merger-related expenses(3)
Adjusted EBITDA
Capital Expenditures
DAS
DLT
Corporate Administration
Total Capital Expenditures
%
Change
(In thousands)
Years Ended December 31,
%
of Net Sales
%
of Net Sales
2013
2012
2013
2012
As Restated
As Restated
As Restated
As Restated
1.7 % $ 315,232
$ 309,982
(3.6)%
421,418
437,055
42.8 %
57.2 %
41.5 %
58.5 %
(1.4)% $ 736,650
$ 747,037
100.0 %
100.0 %
$
19,008
$
30,586
37,030
56,038
(16,735)
39,303
$
41,013
71,599
(14,677)
56,922
$
6.0 %
8.8 %
(2.3)%
5.3 %
9.9 %
9.4 %
(2.0)%
7.6 %
$
19,008
$
30,586
12,406
31,414
37,030
18,346
55,376
(16,735)
174
(16,561)
70,229
6,975
—
6,975
77,204
8,287
5,000
116
$
$
$
$
$
$
$
$
10.0 %
13.2 %
13.1 %
13.7 %
9.5 %
11.6 %
10,313
40,899
41,013
18,934
59,947
(14,677)
166
(14,511)
86,335
—
702
702
87,037
10.5 %
11.7 %
7,950
7,809
54
$
13,403
$
15,813
(1) Includes costs not allocated to either the DLT or DAS operating segments.
(2) 2013 includes approximately $14.1 million in charges related to fourth quarter asset impairment charges of
approximately $5.7 million on the Embraer Legacy 450/500 contracts and approximately $1.3 million on the Boeing
777 wing tip contract which are added back to adjusted EBITDA; forward loss reserves of approximately $3.9 million
on the Embraer Legacy 450/500 contracts and approximately $1.3 million on the Boeing 777 wing tip contract; and
inventory write-offs of approximately $1.9 million on the Embraer Legacy 450/500 contracts.
38
(3) 2012 includes merger-related expenses of approximately $0.3 million in Corporate General and Administrative
Expenses and approximately $0.4 million in DLT resulting from a change in control provision for certain key
executives and employees arising in connection with the LaBarge Acquisition.
(4) 2013 and 2012 include workers’ compensation insurance expenses included in gross profit and not allocated to the
operating segments of approximately $1.2 million and approximately $0.6 million, respectively.
Ducommun AeroStructures
DAS’s net sales in 2013 increased approximately 2% reflecting an approximate 5% increase in commercial aerospace revenue,
partially offset by an approximate 2% decrease in military and space (defense structures) revenue.
The DAS segment operating income and EBITDA decreased in 2013, primarily due to the fourth quarter charges of
approximately $14.1 million related to the Embraer Legacy 450/500 contracts and Boeing 777 wing tip contracts which was
partially off set by increased sales volume and lower accrued compensation and benefit costs.
Ducommun LaBarge Technologies
DLT’s net sales in 2013 decreased approximately 4% reflecting an approximate 23% decrease in non-aerospace and defense
revenue, partially offset by an approximate 8% increase in defense technologies and an approximate 6% increase in commercial
aerospace revenue.
DLT’s segment operating income and EBITDA decreased in 2013 primarily due to lower operating margins from reduced
revenues that was partially offset by lower accrued compensation and benefit costs.
Corporate General and Administrative
CG&A expenses increased in 2013 primarily due to an approximate $0.6 million related to a workers’ compensation insurance
payroll audit and an approximate $0.5 million related to our debt repricing transaction and increased professional fees, partially
offset by lower accrued compensation and benefits costs.
LIQUIDITY AND CAPITAL RESOURCES
Available Liquidity
Total debt, the weighted-average interest rate, cash and cash equivalents and available credit facilities were as follows:
Total debt, including long-term portion
Weighted-average interest rate on debt
Term Loan interest rate
Cash and cash equivalents
Unused Revolving Credit Facility
(In millions)
December 31,
2014
2013
290.1
8.20%
4.75%
45.6
58.5
$
$
$
332.7
7.76%
4.75%
48.8
58.4
$
$
$
We made voluntary principal prepayments totaling approximately $42.6 million on our Term Loan during 2014. We expect to
continue to make voluntarily prepayments during 2015 and we expect to refinance the Term Loan in 2015, market conditions
permitting, funded by cash generated from operations.
In March 2013, we executed an amendment to our Credit Facilities which completed a repricing of our Term Loan and
Revolving Credit Facility. The repricing reduced the interest rate spread on the Term Loan and Revolving Credit Facility by 50
basis points and the interest rate floor by 25 basis points under the LIBOR rate or the Alternate Base Rate. The LIBOR rate has
a floor of 1.00% plus 3.75%. The Alternate Base Rate has a floor of 2.00% plus 2.75%. The Alternate Base Rate is the greater
of the (a) Prime rate and (b) Federal Funds rate plus 0.5%. Our Term Loan matures on June 28, 2017, and our $60.0 million
Revolving Credit Facility matures on June 28, 2016.
The Revolving Credit Facility and Term Loan covenants require EBITDA of more than $50.0 million and a maximum leverage
ratio under certain circumstances, as well as annual limitations on capital expenditures and limitations on future disposition of
39
property, investments, acquisitions, repurchase of stock, dividends, and outside indebtedness. At December 31, 2014, we were
in compliance with all covenants. In addition, capital expenditures for 2014 were approximately $18.6 million, which was
below the maximum amount allowed under the Credit Facility of $30.0 million for the year. Also, at December 31, 2014, there
were no amounts outstanding that would have triggered the leverage covenant. Further, the leverage covenant becomes more
restrictive in future periods and will require us to continue to reduce our debt or increase EBITDA.
In October 2013, we executed an amendment to our Credit Facilities which increased the maximum leverage ratio, as defined,
by 0.75 basis points in all future periods. We believe the voluntary prepayments on the Term Loan will help reduce our
leverage, as defined in the credit agreement.
The Notes bear interest of 9.75% per annum, payable semi-annually on January 15 and July 15 of each year. The Notes become
callable on July 15, 2015 at a premium of 4.875% and mature on July 15, 2018, at which time the entire principal amount will
be due.
The failure to file our 2014 Annual Report on Form 10-K by March 31, 2015 has resulted in defaults, but not an event of
default, under our Credit Facilities and our Notes. The defaults on our Credit Facilities and our Notes are deemed cured with
the filing of this Annual Report on Form 10-K.
We expect to spend a total of approximately $15.0 million for capital expenditures in 2015 financed by cash generated from
operations, which will be lower than 2014, principally to support new contract awards at DAS and DLT. As part of our strategic
plan to become a Tier 2 supplier, additional up-front investment in tooling will be required for newer programs which have
higher engineering content and higher levels of complexity in assemblies.
We believe the ongoing aerospace and defense subcontractor consolidation makes acquisitions an increasingly important
component of our future growth. We will continue to make prudent acquisitions and capital expenditures for manufacturing
equipment and facilities to support long-term contracts for commercial and military aircraft and defense programs. In addition,
we will continue to invest to grow our non-aerospace and defense end-use markets.
We continue to depend on operating cash flow and the availability of our Revolving Credit Facility to provide short-term
liquidity. Cash generated from operations and bank borrowing capacity is expected to provide sufficient liquidity to meet our
obligations during the next twelve months.
Cash Flow Summary
2014 Compared to 2013 (As Restated)
Net cash generated by operating activities during 2014 increased to approximately $53.4 million compared to approximately $46.0
million during 2013 primarily due to higher net income.
Net cash used in investing activities during 2014 was approximately $15.5 million compared to approximately $12.3 million
during 2013 primarily due to higher capital expenditures, principally to support new contract awards at DAS and DLT, partially
offset by insurance recoveries related to property and equipment.
Net cash used in financing activities during 2014 was approximately $41.2 million compared to approximately $31.4 million
during 2013 primarily due to voluntary principal prepayments on our Term Loan of approximately $42.6 million during 2014
compared to approximately $30.0 million during 2013. In addition, 2013 included a final payment of approximately $3.0 million
on a promissory note related to a prior acquisition.
2013 (As Restated) Compared to 2012 (As Restated)
Net cash provided by operating activities in 2013 compared to 2012 reflects lower net income, partially off-set by better working
capital management, primarily in inventory and accounts receivable. The improvements in working capital management were off-
set by payments in accrued compensation from 2012 and timing differences related to other current assets.
Net cash used in investing activities of approximately $12.3 million and approximately $15.8 million in 2013 and 2012, respectively,
included capital expenditures, principally to support new contract awards at DAS and DLT.
Net cash used in financing activities during 2013 and 2012 included $31.4 million and $26.7 million, respectively, of voluntary
principal prepayments on our Term Loan, partially offset by cash from stock option exercises in 2013. In addition, 2013 included
a final payment of $3.0 million on a promissory note related to a prior year acquisition.
Contractual Obligations
A summary of our contractual obligations at December 31, 2014 was as follows (in thousands):
40
Total
Less Than
1 Year
1-3 Years
3-5 Years
More Than
5 Years
Payments Due by Period
Long-term debt, including current portion
$
290,052
$
26
$
90,026
$
200,000
$
Future interest on notes payable and long-
term debt
Operating leases
Pension liability
Total(1)
88,841
16,027
17,869
23,834
6,217
1,563
45,507
7,695
3,216
19,500
1,872
3,480
$
412,789
$
31,640
$
146,444
$
224,852
$
—
—
243
9,610
9,853
(1) As of December 31, 2014, we recorded approximately $2.8 million in long-term liabilities related to uncertain tax
positions. We are not able to reasonably estimate the timing of the long-term payments, or the amount by which our
liability may increase or decrease over time, therefore, the liability or uncertain tax positions has not been included in the
contractual obligations table.
We have estimated that the fair value of our indemnification obligations as insignificant based upon our history with such
obligations and insurance coverage and have included no such obligation in the table above.
Our ultimate liability with respect to groundwater contamination at certain DAS facilities will depend upon a number of
factors, including changes in existing laws and regulations, the design and cost of construction, operation and maintenance
activities, and the allocation of liability among potentially responsible parties. The above table does not include obligations
related to these matters. See Note 14 to our consolidated financial statements included in Part IV, Item 15(a) of this Annual
Report on Form 10-K for discussion of our environmental liabilities.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements consist of operating leases and indemnities.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are those accounting policies that can have a significant impact on the presentation of our financial
condition and results of operations and that require the use of subjective estimates based upon past experience and
management’s judgment. Because of the uncertainty inherent in such estimates, actual results may differ from these estimates.
Below are those policies applied in preparing our financial statements that management believes are the most dependent on the
application of estimates and assumptions. See Note 1 to our consolidated financial statements included in Part IV, Item 15(a) of
this Annual Report on Form 10-K for additional accounting policies.
Revenue Recognition
Except as described below, we recognize revenue, including revenue from products sold under long-term contracts, when
persuasive evidence of an arrangement exists, the price is fixed or determinable, collection is reasonably assured and delivery
of products has occurred or services have been rendered.
We have a significant number of contracts for which net sales are accounted for under the percentage-of-completion method
using the units of delivery as the measure of completion. The percentage-of-completion method requires the use of assumptions
and estimates related to the contract value, the total cost at completion, and measurement of progress toward completion. These
contracts are primarily fixed-price contracts that vary widely in terms of size, length of performance period and expected gross
profit margins.
We also recognize revenue on the sale of services (including prototype products) based on the type of contract: time and
materials, cost-plus reimbursement and firm-fixed price. Revenue is recognized (i) on time and materials contracts as time is
spent at hourly rates, which are negotiated with customers, plus the cost of any allowable materials and out-of-pocket expenses,
(ii) on cost-plus reimbursement contracts based on direct and indirect costs incurred plus a negotiated profit calculated as a
percentage of cost, a fixed amount or a performance-based award fee, and (iii) on fixed-price contracts on the percentage-of-
completion method measured by the percentage of costs incurred to estimated total costs. Revenue from services was less than
10% of net sales for the periods presented.
Provision for Estimated Losses on Contracts
41
We record provisions for total anticipated losses on contracts considering total estimated costs to complete the contract
compared to total anticipated revenues in the period in which such losses are identified. The provisions for estimated losses on
contracts require management to make certain estimates and assumptions, including those with respect to the future revenue
under a contract and the future cost to complete the contract. Management’s estimate of the future cost to complete a contract
may include assumptions as to improvements in manufacturing efficiency and reductions in operating and material costs. If any
of these or other assumptions and estimates do not materialize in the future, we may be required to record additional provisions
for estimated losses on contracts.
Production Cost of Contracts
Production cost of contracts includes tooling and other special-purpose machinery necessary to build parts as specified in a
contract, and non-recurring production costs such as design and engineering costs. Production costs of contracts are recorded
to cost of goods sold using the units of delivery method. We review long-lived assets within production costs of contracts for
impairment on an annual basis (in the fourth quarter for us) or when events or changes in circumstances indicate that the
carrying value of our long-lived assets may not be recoverable. An impairment charge is recognized when the carrying value of
an asset exceeds the projected undiscounted future cash flows expected from its use and disposal.
Goodwill and Indefinite-Lived Intangible Asset
Our business acquisitions have resulted in the recognition of goodwill. Goodwill is not amortized but is subject to annual
impairment tests (in the fourth quarter for us) and between annual tests, if events indicate it is more likely than not that the fair
value of a reporting unit is less than its carrying value.
A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may
include deterioration in general economic conditions, negative developments in equity and credit markets, adverse changes in
the markets in which we operate, increases in costs that have a negative effect on earnings and cash flows, or a trend of
negative or declining cash flows over multiple periods, among others.
Goodwill is allocated at the reporting unit level, which is defined as an operating segment or one level below an operating
segment. We have three internal reporting units; DAS, DLT and Miltec. Miltec is part of the DLT operating segment. The
application of the goodwill impairment test requires significant judgment, including the identification of the reporting units,
and the determination of both the carrying value and the fair value of the reporting units. The carrying value of each reporting
unit is determined by assigning the assets and liabilities, including existing goodwill, to those reporting units. The
determination of the fair value of each reporting unit requires significant judgment, including our estimation of future cash
flows, which is dependent upon internal forecasts, estimation of the long-term rate of growth of our businesses, estimation of
the useful lives of the assets which will generate the cash flows, determination of our weighted-average cost of capital and
other factors. In determining the appropriate discount rate, we considered the weighted-average cost of capital for each
reporting unit which, among other factors, considers the cost of common equity capital and the marginal cost of debt of market
participants.
The estimates and assumptions used to calculate the fair value of a reporting unit may change from period to period based upon
actual operating results, market conditions and our view of the future trends. The estimates and assumptions used to determine
whether impairment exists and determine the amount of such impairment, if any, are subject to a high degree of uncertainty.
The estimated fair value of a reporting unit would change materially if different assumptions and estimates were used.
We initially perform an assessment of qualitative factors to determine if it is necessary to perform the two-step goodwill
impairment test. We test goodwill for impairment using the two-step method if, based on our assessment of the qualitative
factors, we determined that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, or if
we decide to bypass the qualitative assessment. When performing the two-step impairment test, we use a combination of an
income approach, which estimates fair value of the reporting unit based upon future discounted cash flows, and a market
approach, which estimates fair value using market multiples for transactions in a set of comparable companies. If the carrying
value of the reporting unit exceeds its fair value, we then perform the second step of the impairment test to measure the amount
of the impairment loss, if any. The second step requires fair valuation of all the reporting unit’s assets and liabilities in a manner
similar to a purchase price allocation, with any residual fair value being allocated to goodwill. This residual fair value of
goodwill is then compared to the carrying value to determine impairment. An impairment charge will be recognized when the
estimated fair value of a reporting unit, including goodwill, is less than its carrying value.
We conducted our annual goodwill impairment test in the fourth quarter of 2014 and determined our goodwill was not
impaired. For 2014, the DAS, DLT and Miltec internal reporting units had recorded goodwill of approximately $57.2 million,
42
$92.0 million, and $8.4 million, respectively, and their fair value exceeded their carrying value by approximately 44%, 36%
and 44%, respectively.
We review our indefinite-lived intangible asset for impairment on an annual basis (in the fourth quarter for us) or when events
or changes in circumstances indicate that more likely than not the fair value of our indefinite-lived intangible asset is less than
its carrying value. We compare the fair value of the indefinite-lived intangible asset with its carrying value if the qualitative
factors indicate it is more likely than not that the fair value of the asset is less than its carrying value or if we decide to bypass
the qualitative assessment. Impairment indicators include, but are not limited to, cost factors, financial performance, adverse
legal or regulatory developments, industry and market conditions and general economic conditions. If the carrying amount of
the indefinite-lived intangible asset exceeds its fair value, we would recognize an impairment loss in the amount of such excess.
We conducted our annual impairment test during the fourth quarter of 2014 based on assessing the qualitative factors and
concluded the indefinite-lived intangible asset was not impaired.
Other Intangible Assets
We amortize purchased other intangible assets with finite lives over the estimated economic lives of the assets, ranging from
three to eighteen years generally using the straight-line method. The value of other intangibles acquired through business
combinations has been estimated using present value techniques which involve estimates of future cash flows. Actual results
could vary, potentially resulting in impairment charges.
Accounting for Stock-Based Compensation
We use the Black-Scholes-Merton (“Black-Scholes”) valuation model in determining stock-based compensation expense for
our options, net of an estimated forfeiture rate, on a straight-line basis over the requisite service period of the award. The stock
options typically vest over four years and the estimated the forfeiture rate is based on historical experience. The Black-Scholes
valuation model requires assumptions and judgments using inputs such as stock price volatility, risk-free interest rates, and
expected options terms. As a result, our estimates could differ from actual results.
For performance and restricted stock units, we calculate compensation expense, net of an estimated forfeiture rate, on a straight
line basis over the requisite service/performance period of the awards. The performance stock units vest based on a three-year
performance cycle. The restricted stock units, vest over various periods of time ranging from one to three years. We estimate
the forfeiture rate based on our historical experience.
Inventories
Inventories are stated at the lower of cost or market, cost being determined on a first-in, first-out basis. Market value for raw
materials is based on replacement costs and is based on net realizable value for other inventory classifications. Inventoried
costs include raw materials, outside processing, direct labor and allocated overhead, adjusted for any abnormal amounts of idle
facility expense, freight, handling costs and wasted materials (spoilage) incurred. Costs under long-term contracts are
accumulated into, and removed from, inventory on the same basis as other contracts. We assess the inventory carrying value
and reduce it, if necessary, to its net realizable value based on customer orders on hand, and internal demand forecasts using
management’s best estimates given information currently available. Our customer demand can fluctuate significantly caused by
factors beyond our control. We maintain an allowance for potentially excess and obsolete inventories and inventories that are
carried at costs that are higher than their estimated net realizable values. If market conditions are less favorable than our
projections, such as an unanticipated decline in demand and not meeting expectations, inventory write-downs may be required.
We net advances from customers related to inventory purchases against inventories in the consolidated balance sheets.
Environmental Liabilities
Environmental liabilities are recorded when environmental assessments and/or remedial efforts are probable and costs can be
reasonably estimated. Generally, the timing of these accruals coincides with the completion of a feasibility study or our
commitment to a formal plan of action. Further, we review and update our environmental accruals as circumstances change
and/or additional information is obtained that reasonably could be expected to have a meaningful effect on the outcome of a
matter or the estimated cost thereof.
Recent Accounting Pronouncements
See Note 1 to our consolidated financial statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K for a
description of recent accounting pronouncements.
43
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our main market risk exposure relates to changes in U.S. interest rates on our outstanding long-term debt. At December 31,
2014, we had borrowings of approximately $90.0 million under our Term Loan which bears interest, at our option, at a rate
equal to either an alternate base rate or an adjusted LIBOR rate for a one-, two-, three-, or six-month interest period chosen by
us, plus an applicable margin percentage. This LIBOR rate has a floor of 1.00%, and a margin of 3.75%. A hypothetical 10%
increase or decrease in the interest rate would have an immaterial impact on our financial condition and results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data together with the report thereon of PricewaterhouseCoopers LLP included in
Part IV, Item 15(a) 1 and 2 of this Annual Report on Form 10-K and are included herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (“Exchange Act”)) are designed to provide reasonable assurance that information required to be disclosed in reports
we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in
the rules and forms of the SEC and that such information is accumulated and communicated to our management, including the
CEO and CFO, as appropriate to allow timely decisions regarding required disclosures.
Under the supervision and with the participation of our management, including the chief executive officer and the chief
financial officer, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this Form 10-K. Based on this evaluation, as of the end of the period covered
by this Form 10-K, the Company’s chief executive officer and chief financial officer concluded that our disclosure controls and
procedures were not effective as of December 31, 2014 because of the material weaknesses in internal control over financial
reporting described below. In light of the material weaknesses described below, management performed additional analysis and
other post-closing procedures, including substantial work performed during the restatement process and our internal review
that identified adjustments resulting in the restatement to our previously issued financial statements to ensure our consolidated
financial statements are prepared in accordance with generally accepted accounting principles. Accordingly, management has
concluded that the Company's consolidated financial statements included in this Annual Report on Form 10-K fairly present in
all material respects our financial condition, results of operations and cash flows for the periods presented therein.
Management's Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over the financial
reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The
Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made
only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could
have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
44
Management of the Company has assessed the effectiveness of the Company’s internal control over financial reporting as of
December 31, 2014. In making this assessment, management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO") Internal Control-Integrated Framework (2013).
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that
there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not
be prevented or detected on a timely basis. In connection with management’s assessment of our internal control over financial
reporting, management has identified control deficiencies that constituted material weaknesses in our internal control over
financial reporting as of December 31, 2014, as described below.
(1) We did not maintain an effective control environment as we did not effectively implement a process to communicate,
educate, and measure our employees understanding of ethical standards and code of conduct across the Company. Additionally,
we did not maintain an effective program to encourage employees to proactively communicate concerns related to questionable
or unethical behaviors and activities. While we had implemented an anonymous hotline, we did not sufficiently communicate
the availability and purpose of the hotline.
(2) Additionally, we did not maintain an effective control environment as we did not effectively establish the structure,
authority, and responsibilities to ensure the objectives of internal control over financial reporting were adequately achieved.
Specifically, we did not properly assign and limit authority and responsibilities of certain management and supervisory
personnel.
These material weaknesses contributed to the following control deficiency which is also considered to be a material weakness.
(3) We did not design and maintain effective monitoring controls over the accuracy and appropriate classification of
reported labor hours associated with contracts accounted for under the percentage-of-completion method using units
of delivery. Specifically, we did not maintain proper segregation of duties and monitoring controls over the accuracy
and appropriate classification of underlying direct and indirect labor hour data that were subject to the misconduct
relating to improper recording of direct labor hours and which were used in our estimates to identify and record
contract forward loss reserves.
(4) We did not design and maintain effective controls related to the quarterly and annual accounting and disclosures for income
taxes, including maintaining an appropriate level of technical expertise related to income taxes. Specifically, we did not design
and maintain effective controls related to the preparation, analysis and review of the income tax provision and significant
income tax balance sheet accounts required to assess the appropriateness of balances at period-end. Additionally, we did not
maintain effective controls to identify and accumulate all required supporting information to determine the completeness and
accuracy of income tax amounts reported within the consolidated financial statements and disclosures.
These material weaknesses resulted in material misstatements of our historical financial statements, which necessitated a
restatement of our consolidated financial statements as of December 31, 2013 and for the years ended December 31, 2013 and
2012 and our unaudited quarterly financial information for the first three quarters in the year ended December 31, 2014 and for
each of the quarters in the year ended December 31, 2013 to correct for errors in the contract forward loss reserve, cost of
goods sold, deferred income taxes, goodwill, goodwill impairment, additional-paid-in-capital and income tax expense, as
applicable, in each reporting period. Additionally, these material weaknesses could result in a material misstatement of account
balances or disclosures that would result in a misstatement to the annual or interim consolidated financial statements that would
not be prevented or detected.
Because of the material weaknesses described above, management concluded that the Company did not maintain effective
internal control over financial reporting as of December 31, 2014, based on criteria in Internal Control- Integrated Framework
issued by the COSO (2013).
PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited the effectiveness of our internal
control over financial reporting as stated in the report which appears in Part IV, Item 15(a) of this Annual Report on Form 10-K.
Management’s Remediation Plan
45
We are committed to remediating the control deficiencies that constitute the material weaknesses described above by implementing
changes to our internal control over financial reporting. Our Chief Financial Officer is responsible for implementing changes and
improvements in the internal control over financial reporting and for remediating the control deficiencies that gave rise to the
material weaknesses. We are currently evaluating the impact of the material weaknesses and have taken or are in the process of
taking the following actions:
Actions taken:
• We have taken appropriate disciplinary actions for those employees involved in the misconduct relating to improper
recording of direct labor costs to a long-term contract including termination of employees. Additionally, certain other
organizational changes have been implemented.
Actions to be taken or in process:
• We have begun the implementation of additional on-going oversight, training and communication programs to reinforce
our ethical standards and code of conduct across the Company.
• We have plans to enhance the availability of our hotline by more clearly defining its purpose, and plan to develop on-
going companywide training programs on the purpose and availability of the hotline.
• We have redesigned our internal controls over the accounting for contract loss reserves, including an on-going review of
the related labor distributions to estimate the anticipated costs used in the forward loss reserve analysis.
• We plan to augment our tax department with additional resources and professionals.
• We plan to engage third party tax advisors to assist with our methodology of estimating and reconciling tax entries.
• We plan to implement new controls and improving existing controls over income tax accounts, including controls over
the reconciliation of current and deferred tax asset and liability accounts.
However, we have not completed all of the corrective processes, procedures and related evaluation or remediation that we believe
are necessary. As we continue to evaluate and work to remediate the material weaknesses, we may determine to take additional
measures to address the control deficiencies.
Until the remediation steps set forth above, including the efforts to implement the necessary control activities we identify, are
fully implemented and concluded to be operating effectively, the material weaknesses described above will continue to exist.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934) that materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting during the quarter ended December 31, 2014.
ITEM 9B. OTHER INFORMATION
None.
46
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors of the Registrant
The information under the caption “Election of Directors” in the 2015 Proxy Statement is incorporated herein by reference.
Executive Officers of the Registrant
The information under the caption “Executive Officers of the Registrant” in the 2015 Proxy Statement is incorporated herein by
reference.
Audit Committee and Audit Committee Financial Expert
The information under the caption “Committees of the Board of Directors” relating to the Audit Committee of the Board of
Directors in the 2015 Proxy Statement is incorporated herein by reference.
Compliance with Section 16(a) of the Exchange Act
The information under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in the 2015 Proxy Statement is
incorporated herein by reference.
Code of Ethics
The information under the caption “Code of Ethics” in the 2015 Proxy Statement is incorporated herein by reference.
Changes to Procedures to Recommend Nominees
There have been no material changes to the procedures by which security holders may recommend nominees to the Company’s
Board of Directors since the date of the Company’s last proxy statement.
ITEM 11. EXECUTIVE COMPENSATION
The information under the captions “Compensation of Executive Officers,” “Compensation of Directors,” “Compensation
Committee Interlocks and Insider Participation” and “Compensation Committee Report” in the 2015 Proxy Statement is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information under the caption “Security Ownership of Certain Beneficial Owners and Management” in the 2015 Proxy
Statement is incorporated herein by reference.
Securities Authorized for Issuance under Equity Compensation Plan Plans
The following table provides information about our compensation plans under which equity securities are authorized for
issuance:
Equity Compensation Plans
Approved by security holders (1)
Not approved by security holders
Total
Number of Securities
to be Issued Upon
Exercise of
Outstanding
Options,
Warrants and Rights
(a)
Weighted-Average
Exercise Price of
Outstanding
Options,
Warrants and Rights
(b)
Number of Securities
Remaining
Available for
Future Issuance
Under Equity
Compensation Plans
(Excluding Securities
Reflected
in Column
(a)(c)(2)
$
903,078
—
903,078
19.02
—
23,998
—
23,998
47
(1) The number of securities to be issued consists of 611,977 for stock options, 122,943 for restricted stock units and
168,158 for performance stock units at target. The weighted average exercise price applies only to the stock options.
(2) Awards are not restricted to any specified form or structure and may include, without limitation, sales or bonuses of
stock, restricted stock, stock options, reload stock options, stock purchase warrants, other rights to acquire stock,
securities convertible into or redeemable for stock, stock appreciation rights, limited stock appreciation rights, phantom
stock, dividend equivalents, performance units or performance shares, and an award may consist of one such security or
benefit, or two or more of them in tandem or in alternative.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information under the caption “Election of Directors” in the 2015 Proxy Statement is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information under the caption “Principal Accountant Fees and Services” contained in the 2015 Proxy Statement is
incorporated herein by reference.
48
Table of Contents
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
1. Financial Statements
PART IV
The following consolidated financial statements of Ducommun Incorporated and subsidiaries, are incorporated by
reference in Item 8 of this report.
Page
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets - December 31, 2014 and 2013 (As Restated)
Consolidated Income Statements - Years Ended December 31, 2014, 2013 (As Restated) and 2012
(As Restated)
Consolidated Statements of Comprehensive Income - Years Ended December 31, 2014, 2013 (As
Restated) and 2012 (As Restated)
Consolidated Statements of Changes in Shareholders’ Equity - Years Ended December 31, 2014,
2013 (As Restated) and 2012 (As Restated)
Consolidated Statements of Cash Flows - Years Ended December 31, 2014, 2013 (As Restated) and
2012 (As Restated)
Notes to Consolidated Financial Statements
Supplemental Quarterly Financial Data (Unaudited) (As Restated)
2. Financial Statement Schedule
The following schedule for the years ended December 31, 2014, 2013 and 2012 is filed herewith:
Schedule II - Valuation and Qualifying Accounts (As Restated)
All other schedules have been omitted because they are not applicable, not required, or the
information has been otherwise supplied in the financial statements or notes thereto.
3. Exhibits
See Item 15(b) for a list of exhibits.
Signatures
50
52
53
54
55
56
57
97
—
—
—
49
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Ducommun Incorporated:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of
comprehensive income , of changes in shareholders’ equity and of cash flows present fairly, in all material respects, the
financial position of Ducommun Incorporated and its subsidiaries at December 31, 2014 and 2013, and the results of their
operations and their cash flows for each of the three years in the period ended December 31, 2014 in conformity with
accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement
schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company did not
maintain, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria
established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) because material weaknesses in internal control over financial reporting existed as of that date
related to the following:
i)
iv)
An ineffective control environment, due to i) not effectively implementing a process to communicate, educate,
and measure our employees’ understanding of ethical standards and code of conduct across the Company, as well
as ii) not effectively establishing structure, authority, and responsibilities to ensure the objectives of internal
control over financial reporting were adequately achieved. These material weaknesses contributed to a material
weakness related to (iii) not designing and maintaining effective monitoring controls over the accuracy and
appropriate classification of reported labor hours associated with contracts accounted for under the percentage-of-
completion method using units of delivery.
Ineffective controls related to the quarterly and annual accounting and disclosures for income taxes, including
maintaining an appropriate level of technical expertise related to income taxes.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that
there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented
or detected on a timely basis. The material weaknesses referred to above are described in Management's Report on Internal
Control Over Financial Reporting appearing under Item 9A. We considered these material weaknesses in determining the
nature, timing, and extent of audit tests applied in our audit of the 2014 consolidated financial statements, and our opinion
regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those
consolidated financial statements. The Company's management is responsible for these financial statements, for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial
reporting included in management's report referred to above. Our responsibility is to express opinions on these financial
statements and on the Company's internal control over financial reporting based on our integrated audits. We conducted our
audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of
material misstatement and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining
an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included
performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a
reasonable basis for our opinions.
As discussed in Note 2 to the consolidated financial statements, the Company has restated its 2013 and 2012 financial
statements to correct for errors.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
50
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
April 9, 2015
51
Ducommun Incorporated and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share and per share data)
Assets
Current Assets
Cash and cash equivalents
Accounts receivable (less allowance for doubtful accounts of $252 and $489 at
December 31, 2014 and December 31, 2013, respectively)
Inventories
Production cost of contracts
Deferred income taxes
Other current assets
Total Current Assets
Property and Equipment, Net
Goodwill
Intangibles, Net
Other Assets
Total Assets
Liabilities and Shareholders’ Equity
Current Liabilities
Current portion of long-term debt
Accounts payable
Accrued liabilities
Total Current Liabilities
Long-Term Debt, Less Current Portion
Deferred Income Taxes
Other Long-Term Liabilities
Total Liabilities
Commitments and Contingencies (Notes 11, 14)
Shareholders’ Equity
Common stock - $0.01 par value; 35,000,000 shares authorized; 10,952,268 and
10,960,054 shares issued at December 31, 2014 and December 31, 2013,
respectively
Treasury stock, at cost; zero and 143,300 shares at December 31, 2014 and
December 31, 2013, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total Shareholders’ Equity
Total Liabilities and Shareholders’ Equity
December 31,
2014
2013
As Restated
$
45,627
$
48,814
91,060
142,842
11,727
13,783
23,702
328,741
99,068
157,569
155,104
7,117
747,599
26
58,979
52,066
111,071
290,026
69,448
20,484
491,029
$
$
91,909
140,507
11,599
12,669
28,083
333,581
96,090
157,569
165,465
9,940
762,645
25
58,111
50,122
108,258
332,677
67,989
19,450
528,374
110
110
—
72,206
190,905
(6,651)
256,570
747,599
$
(1,924)
68,909
171,038
(3,862)
234,271
762,645
$
$
$
See accompanying notes to consolidated financial statements.
52
Ducommun Incorporated and Subsidiaries
Consolidated Income Statements
(In thousands, except per share amounts)
Net Revenues
Cost of Sales
Gross Profit
Selling, General and Administrative Expenses
Operating Income
Interest Expense
Other Income
Income Before Taxes
Income Tax Expense (Benefit)
Net Income
Earnings Per Share
Basic earnings per share
Diluted earnings per share
Weighted-Average Number of Shares Outstanding
Basic
Diluted
Years Ended December 31,
2014
2013
2012
As Restated
As Restated
$
$
$
$
$
$
$
$
742,045
601,713
140,332
88,565
51,767
(28,077)
2,550
26,240
6,373
19,867
1.82
1.79
10,897
11,126
$
$
$
$
736,650
612,498
124,152
84,849
39,303
(29,918)
—
9,385
(1,993)
11,378
1.06
1.05
10,695
10,852
747,037
603,060
143,977
87,055
56,922
(32,798)
—
24,124
6,501
17,623
1.67
1.66
10,580
10,628
See accompanying notes to consolidated financial statements.
53
Ducommun Incorporated and Subsidiaries
Consolidated Statements of Comprehensive Income
(In thousands)
Net Income
Pension Adjustments
Years Ended December 31,
2014
2013
2012
As Restated
As Restated
$
19,867
$
11,378
$
17,623
Amortization of actuarial loss included in net income, net of tax
benefit of $156, $408 and $427 for 2014, 2013 and 2012,
respectively
Actuarial gain (loss) arising during the period, net of tax expense
(benefit) of $(1,810), $1,737 and $(300) for 2014, 2013 and
2012, respectively
Other Comprehensive (Loss) Income
Comprehensive Income
263
685
720
(3,052)
(2,789)
17,078
$
2,921
3,606
$
14,984
$
(863)
(143)
17,480
See accompanying notes to consolidated financial statements.
54
Balance at December 31,
2011
Net income
Other comprehensive loss,
net of tax
Stock options exercised
Stock repurchased related
to the exercise of stock
options
Stock-based compensation
Income tax benefit related
to exercise of stock options
and vesting of stock awards
Balance at December 31,
2012
Net income
Other comprehensive
income, net of tax
Stock options exercised
Stock repurchased related
to the exercise of stock
options
Stock-based compensation
Tax shortfall for exercise of
stock options and vesting of
stock awards
Balance at December 31,
2013
Net income
Other comprehensive loss,
net of tax
Stock options exercised
Stock repurchased related
to the exercise of stock
options
Stock awards vested
Stock-based compensation
Income tax benefit related
to exercise of stock options
and vesting of stock awards
Retirement of treasury
stock
Balance at December 31,
2014
Ducommun Incorporated and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
(In thousands, except share data)
Shares
Outstanding
Common
Stock
Treasury
Stock
Additional
Paid-In
Capital
Retained
Earnings
As Restated
As Restated
Accumulated
Other
Comprehensive
Loss
Total
Shareholders’
Equity
As Restated
10,540,563
$
107
$ (1,924) $
62,745
$ 142,037
$
(7,325) $ 195,640
—
—
69,498
(15,296)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(186)
1,959
324
17,623
—
17,623
—
—
—
—
—
(143)
—
—
—
—
(143)
—
(186)
1,959
324
10,594,765
$
107
$ (1,924) $
64,842
$ 159,660
$
(7,468) $ 215,217
—
—
487,163
(265,174)
—
—
—
—
5
(2)
—
—
—
—
—
—
—
—
—
—
8,770
(6,805)
2,438
(336)
11,378
—
11,378
—
—
—
—
—
3,606
—
3,606
8,775
—
—
—
(6,807)
2,438
(336)
10,816,754
$
110
$ (1,924) $
68,909
$ 171,038
$
(3,862) $ 234,271
—
—
117,149
(34,597)
52,962
—
—
—
—
—
1
(1)
1
—
—
—
—
—
—
—
—
—
—
—
2,275
(919)
(1)
3,725
140
(1)
1,924
(1,923)
19,867
—
19,867
—
—
—
—
—
—
—
(2,789)
—
(2,789)
2,276
—
—
—
—
—
(920)
—
3,725
140
—
10,952,268
$
110
$
— $
72,206
$ 190,905
$
(6,651) $ 256,570
See accompanying notes to consolidated financial statements.
55
Ducommun Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Years Ended December 31,
2014
2013
2012
As Restated
As Restated
$
19,867
$
11,378
$
17,623
Cash Flows from Operating Activities
Net Income
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and amortization
Asset impairments
Stock-based compensation expense
Deferred income taxes
Excess tax benefits from stock-based compensation
(Recovery of) provision for doubtful accounts
Other
Changes in Assets and Liabilities:
Accounts receivable
Inventories
Production cost of contracts
Other assets
Accounts payable
Accrued and other liabilities
Net Cash Provided by Operating Activities
Cash Flows from Investing Activities
Purchases of property and equipment
Proceeds from sales of assets
Insurance recoveries related to property and equipment
Net Cash Used in Investing Activities
Cash Flows from Financing Activities
Repayment of term loan and other debt
Debt issue cost paid
Excess tax benefits from stock-based compensation
Net proceeds from issuance of common stock under stock plans
Net Cash Used in Financing Activities
Net (Decrease) Increase in Cash and Cash Equivalents
Cash and Cash Equivalents at Beginning of Year
Cash and Cash Equivalents at End of Year
Supplemental Disclosures of Cash Flow Information
Interest paid
Taxes paid
Non-cash activities:
Purchases of property and equipment not paid
$
$
$
$
29,024
—
3,725
345
(140)
(237)
(5,713)
1,086
(2,335)
(3,513)
4,800
410
6,103
53,422
(18,096)
91
2,550
(15,455)
(42,650)
—
140
1,356
(41,154)
(3,187)
48,814
45,627
25,105
3,476
1,458
$
$
$
$
30,926
6,975
2,438
(1,551)
—
(77)
5,337
5,468
6,962
(5,101)
(12,173)
4,533
(9,153)
45,962
(12,403)
139
—
(12,264)
(33,024)
(365)
—
1,968
(31,421)
2,277
46,537
48,814
27,614
7,835
1,000
$
$
$
$
29,413
—
1,959
1,098
—
78
181
(1,204)
5,870
(1,324)
6,829
(8,097)
(4,892)
47,534
(15,813)
31
—
(15,782)
(26,478)
—
—
(186)
(26,664)
5,088
41,449
46,537
31,505
1,953
—
See accompanying notes to consolidated financial statements.
56
DUCOMMUN INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Description of Business
We are a leading global provider of engineering and manufacturing services for high-performance products and high-cost-of
failure applications used primarily in the aerospace, defense industrial, natural resources, medical and other industries. Our
subsidiaries are organized into two strategic businesses; Ducommun LaBarge Technologies (“DLT”) and Ducommun
AeroStructures (“DAS”), each of which is a reportable operating segment. DLT designs, engineers and manufactures high-
reliability products used in worldwide technology-driven markets including aerospace and defense, natural resources, industrial
and medical and other end-use markets. DLT’s product offerings range from prototype development to complex assemblies.
DAS designs, engineers and manufactures large, complex contoured aerospace structural components and assemblies and
supplies composite and metal bonded structures and assemblies. DAS’s products are used on commercial aircraft, military
fixed-wing aircraft and military and commercial rotary-wing aircraft. All reportable operating segments follow the same
accounting principles.
Basis of Presentation
The consolidated financial statements include the accounts of Ducommun Incorporated and its subsidiaries (“Ducommun,” the
“Company,” “we,” “us” or “our”), after eliminating intercompany balances and transactions.
Our fiscal quarters end on the Saturday closest to the end of March, June and September for the first three fiscal quarters of
each year, and ends on December 31 for our fourth fiscal quarter.
In the opinion of management, all adjustments, consisting of recurring accruals, have been made that are necessary to fairly
state our consolidated financial position, results of operations, comprehensive income (loss) and cash flows in accordance with
accounting principles generally accepted in the United States of America (“GAAP”).
Use of Estimates
Certain amounts and disclosures included in the consolidated financial statements required management to make estimates and
judgments that affect the amounts of assets, liabilities (including forward loss reserves), revenues and expenses, and related
disclosures of contingent assets and liabilities. These estimates are based on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results
could differ from these estimates.
Reclassifications
Certain prior period amounts have been reclassified to conform to current year’s presentation.
Restatement of Previously Issued Consolidated Financial Statements
We have restated our consolidated financial statements as of December 31, 2013, and for the years ended December 31, 2013
and 2012 and our unaudited quarterly financial information for the first three quarters in the year ended December 31, 2014 and
for each of the quarters in the year ended December 31, 2013, to correct errors in prior periods primarily related to (i) a long-
term contract following the discovery of misconduct by employees in the recording of direct labor costs to the contract from
2009 through the third quarter 2014 which resulted in the identification of a forward loss provision that should have been
recorded in 2009 and the impact on subsequent periods of adjustments to the forward loss provision based on information
available at the time; and (ii) the year end reconciliation of income taxes payable and deferred tax balances identified errors
primarily in 2013, 2012, and 2011. In addition, the restated amounts include previously identified and disclosed immaterial
adjustments. See Note 2 for additional information.
Cash Equivalents
Our cash accounts are not reduced for checks written until the checks are presented for payment and paid by our bank. Cash
equivalents consist of highly liquid instruments purchased with original maturities of three months or less. These assets are
valued at cost, which approximates fair value, which we classify as Level 1. See Fair Value below.
57
Revenue Recognition
Except as described below, we recognize revenue, including revenue from products sold under long-term contracts, when
persuasive evidence of an arrangement exists, the price is fixed or determinable, collection is reasonably assured and delivery
of products has occurred or services have been rendered.
We have a significant number of contracts for which net revenues are accounted for under the percentage-of-completion
method using the units of delivery as the measure of completion. The percentage-of-completion method requires the use of
assumptions and estimates related to the contract value, the total cost at completion, and measurement of progress toward
completion. These contracts are primarily fixed-price contracts that vary widely in terms of size, length of performance period
and expected gross profit margins.
We also recognize revenue on the sale of services (including prototype products) based on the type of contract: time and
materials, cost-plus reimbursement and firm-fixed price. Revenue is recognized (i) on time and materials contracts as time is
spent at hourly rates, which are negotiated with customers, plus the cost of any allowable materials and out-of-pocket expenses,
(ii) on cost-plus reimbursement contracts based on direct and indirect costs incurred plus a negotiated profit calculated as a
percentage of cost, a fixed amount or a performance-based award fee, and (iii) on fixed-price contracts on the percentage-of-
completion method measured by the percentage of costs incurred to estimated total costs.
Provision for Estimated Losses on Contracts
We record provisions for the total anticipated losses on contracts considering total estimated costs to complete the contract
compared to total anticipated revenues in the period in which such losses are identified. The provisions for estimated losses on
contracts require management to make certain estimates and assumptions, including those with respect to the future revenue
under a contract and the future cost to complete the contract. Management's estimate of the future cost to complete a contract
may include assumptions as to improvements in manufacturing efficiency, reductions in operating and material costs, and our
ability to resolve claims and assertions with our customers. If any of these or other assumptions and estimates do not
materialize in the future, we maybe required to record additional provisions for estimated losses on contracts.
In the fourth quarter of 2013, we recorded a charge in the DAS segment for the estimated cost to complete of $5.2 million,
consisting of $3.9 million for the Embraer Legacy 450/500 aircraft contracts, and $1.3 million for the Boeing 777 wing tip
contract. The charges result from difficulties in achieving previously anticipated cost reductions, including delays in
transferring work to our lower-cost Guaymas, Mexico facility. The charge for the Embraer Legacy 450/500 contracts also
reflects estimated cost overruns for customer driven changes on both the development and production phases of the contracts,
for which we have asserted claims with Embraer. Recognition of additional losses in future periods continues to be a risk and
will depend upon numerous factors, including our sales forecast, our ability to achieve forecasted cost reductions and our
ability to resolve claims and assertions with our customers. The $5.2 million charge was recorded as part of cost of goods sold
in the Company’s results of operations. The charge increased accrued liabilities by $4.2 million and other long-term liabilities
by $1.0 million on our balance sheet.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for estimated losses from the inability of customers to make required
payments. The allowance for doubtful accounts is evaluated periodically based on the aging of accounts receivable, the
financial condition of customers and their payment history, historical write-off experience and other assumptions, such as
current assessment of economic conditions.
Inventories
Inventories are stated at the lower of cost or market, cost being determined on a first-in, first-out basis. Market value for raw
materials is based on replacement costs, and is based on net realizable value for other inventory classifications. Inventoried
costs include raw materials, outside processing, direct labor and allocated overhead, adjusted for any abnormal amounts of idle
facility expense, freight, handling costs, and wasted materials (spoilage) incurred. Costs under long-term contracts are
accumulated into, and removed from, inventory on the same basis as other contracts. We assess the inventory carrying value
and reduce it, if necessary, to its net realizable value based on customer orders on hand, and internal demand forecasts using
management’s best estimates given information currently available. We maintain an allowance for potentially excess and
obsolete inventories and inventories that are carried at costs that are higher than their estimated net realizable values. In the
fourth quarter of 2013, we recorded a charge of approximately $1.9 million in the DAS segment for the Embraer Legacy
450/500 aircraft contracts. The charge result from difficulties in achieving previously anticipated cost reductions, and estimated
cost overruns driven by customer changes for both the development and production phases of the contracts.
58
We net advances from customers related to inventory purchases against inventories in the consolidated balance sheets.
Production Cost of Contracts
Production cost of contracts includes non-recurring production costs, such as design and engineering costs, and tooling and
other special-purpose machinery necessary to build parts as specified in a contract. Production costs of contracts are recorded
to cost of goods sold using the units of delivery method. We review long-lived assets within production costs of contracts for
impairment on an annual basis (in the fourth quarter for us) or when events or changes in circumstances indicate that the
carrying value of our long-lived assets may not be recoverable. An impairment charge is recognized when the carrying value of
an asset exceeds the projected undiscounted future cash flows expected from its use and disposal. In the fourth quarter of 2013,
we recorded an impairment charge in the DAS segment on production costs of contracts of $7.0 million, consisting of $5.7
million for the Embraer Legacy 450/500 aircraft contracts, and $1.3 million for the Boeing 777 wing tip contract. The
impairment charge reflects a determination that the production cost of contracts for the Boeing 777 wing tip contract and the
Embraer Legacy 450/500 contracts are not recoverable since these contracts are estimated to be unprofitable during their
remaining terms. The impairment charge represents the entire remaining balance of production cost of contracts for these
contracts. The $7.0 million charge was recorded as part of cost of goods sold in the Company’s results of operations and a
reduction in production cost of contracts on the Company’s balance sheet. As of December 31, 2014 and 2013, production costs
of contracts were approximately $11.7 million and $11.6 million, respectively.
Property and Equipment and Depreciation
Property and equipment, including assets recorded under capital leases, are recorded at cost. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives of the related assets, or the lease term if shorter for
leasehold improvements. Repairs and maintenance are charged to expense as incurred. We evaluate long-lived assets for
recoverability considering undiscounted cash flows, when significant changes in conditions occur, and recognize impairment
losses if any, based upon the fair value of the assets.
Fair Value
Assets and liabilities that are measured, recorded or disclosed at fair value on a recurring basis are categorized using the fair
value hierarchy. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value.
Level 1, the highest level, refers to the values determined based on quoted prices in active markets for identical assets. Level 2
refers to fair values estimated using significant observable inputs. Level 3, the lowest level, includes fair values estimated using
significant unobservable inputs.
Goodwill and Indefinite-Lived Intangible Asset
Goodwill is tested for impairment utilizing a two-step method. In the first step, we determine the fair value of the reporting unit
using expected future discounted cash flows and market valuation approaches considering comparable Company revenue and
Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) multiples. If the carrying value of the reporting
unit exceeds its fair value, we then perform the second step of the impairment test to measure the amount of the impairment
loss, if any. The second step requires fair valuation of all the reporting unit’s assets and liabilities in a manner similar to a
purchase price allocation, with any residual fair value being allocated to goodwill. This residual fair value of goodwill is then
compared to its carrying value to determine impairment. An impairment charge will be recognized only when the estimated fair
value of a reporting unit, including goodwill, is less than its carrying value.
We review our indefinite-lived intangible asset for impairment on an annual basis or when events or changes in circumstances
indicate that the carrying value of our intangible asset may not be recoverable. We may first assess qualitative factors to
determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining
whether it is necessary to perform the quantitative impairment test. Impairment indicators include, but are not limited to, cost
factors, financial performance, adverse legal or regulatory developments, industry and market conditions and general economic
conditions. If the carrying amount of the indefinite-lived intangible asset exceeds its fair value, we would recognize an
impairment loss in the amount of such excess.
Income Taxes
Deferred tax assets and liabilities are recognized, using enacted tax rates, for the expected future tax consequences of temporary
differences between the book and tax bases of recorded assets and liabilities, operating losses and tax credit carryforwards.
Deferred tax assets are evaluated quarterly and are reduced by a valuation allowance if it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
59
Tax positions taken or expected to be taken in a tax return are recognized when it is more-likely-than-not to be sustained upon
examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50%
likely of being realized upon ultimate settlement.
Litigation and Commitments
In the normal course of business, we are defendants in certain litigation, claims and inquiries, including matters relating to
environmental laws. In addition, we make various commitments and incur contingent liabilities. Management’s estimates
regarding contingent liabilities could differ from actual results.
Environmental Liabilities
Environmental liabilities are recorded when environmental assessments and/or remedial efforts are probable and costs can be
reasonably estimated. Generally, the timing of these accruals coincides with the completion of a feasibility study or our
commitment to a formal plan of action. Further, we review and update our environmental accruals as circumstances change
and/or additional information is obtained that reasonably could be expected to have a meaningful effect on the outcome of a
matter or the estimated cost thereof.
Accounting for Stock-Based Compensation
We measure and recognize compensation expense for share-based payment transactions to our employees and non-employees
at their estimated fair value. The expense is measured at the grant date, based on the calculated fair value of the share-based
award, and is recognized over the requisite service period (generally the vesting period of the equity award). The fair value
stock options are determined using the Black-Scholes valuation model, which requires assumptions and judgments regarding
stock price volatility, risk-free interest rates, expected options terms, and options that are expected to be forfeited. The fair
value of unvested stock awards is determined based on the closing price of the underlying common stock on the date of grant.
Management’s estimates could differ from actual results.
Other Intangible Assets
We amortize purchased other intangible assets with finite lives over the estimated economic lives of the assets, ranging from
three to eighteen years generally using the straight-line method. The value of other intangibles acquired through business
combinations has been estimated using present value techniques which involve estimates of future cash flows. We evaluate
other intangible assets for recoverability considering undiscounted cash flows, when significant changes in conditions occur,
and recognizes impairment losses, if any, based upon the estimated fair value of the assets.
Earnings Per Share
Basic earnings per share are computed by dividing income available to common shareholders by the weighted-average number
of common shares outstanding in each period. Diluted earnings per share are computed by dividing income available to
common shareholders plus income associated with dilutive securities by the weighted-average number of common shares
outstanding, plus any potential dilutive shares that could be issued if exercised or converted into common stock in each period.
The net earnings and weighted-average number of common shares outstanding used to compute earnings per share were as
follows:
Net income
Weighted-average number of common shares outstanding
Basic weighted-average common shares outstanding
Dilutive potential common shares
Diluted weighted-average common shares outstanding
Earnings per share
Basic
Diluted
60
(In thousands, except per share data)
Years Ended December 31,
2014
2013
2012
As Restated
As Restated
$
19,867
$
11,378
$
17,623
10,897
229
11,126
10,695
157
10,852
$
$
1.82
1.79
$
$
1.06
1.05
$
$
10,580
48
10,628
1.67
1.66
Potentially dilutive stock options and stock units to purchase common stock, as shown below, were excluded from the
computation of diluted earnings per share because their inclusion would have been anti-dilutive. However, these shares may be
potentially dilutive common shares in the future.
Stock options and stock units
Accumulated Other Comprehensive Loss
(In thousands)
Years Ended December 31,
2014
2013
2012
218
410
983
Accumulated other comprehensive loss, as reflected in the consolidated balance sheets under the equity section, was composed
of cumulative pension and retirement liability adjustments, net of tax.
Recent Accounting Pronouncements
New Accounting Guidance Adopted in 2014
In July 2013, the FASB issued Accounting Standards Update 2013-11, “Income Taxes (Topic 740)” (“ASU 2013-11”), which
required the netting of unrecognized tax benefits against a deferred tax asset for a loss or other carryforward that would apply
in settlement of the uncertain tax positions. This guidance was effective for fiscal years beginning after December 15, 2013,
which is our fiscal year 2014, with early adoption permitted. The adoption of this standard at the beginning of our fiscal year
2014 reduced deferred tax assets by approximately $0.7 million.
In February 2013, the FASB issued ASU 2013-04, “Liabilities (Topic 405)” (“ASU 2013-04”), which provided guidance for the
recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements for which the
total amount of the obligation is fixed at the reporting date, except for obligations addressed within existing guidance in GAAP.
The new guidance was effective for us beginning January 1, 2014. Early adoption was permitted. The adoption of this standard
at the beginning of our fiscal year 2014 did not have a material impact on our consolidated financial statements.
Recently Issued Accounting Standards
In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40):
Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”), which defines
management’s responsibility to evaluate whether there is substantial doubt about a company’s ability to continue as a going
concern. ASU 2014-15 also provide principles and definitions that are intended to reduce diversity in the timing and content of
disclosures in the financial statement footnotes. The new guidance is effective for annual periods ending after December 15,
2016, which will be our year ending December 31, 2016, and interim periods beginning after December 15, 2016, which will
be our interim period beginning January 1, 2017. Early adoption is permitted. We are evaluating the impact of this standard but
currently do not anticipate it will have a significant impact on our consolidated financial statements.
In June 2014, the FASB issued ASU 2014-12, “Compensation - Stock Compensation (Topic 718): Accounting for Share-Based
Payments When the Terms of an Award Provide that a Performance Target Could be Achieved after the Requisite Service
Period” (“ASU 2014-12”), which requires that a performance target that affects vesting, and that could be achieved after the
requisite service period, be treated as a performance condition. Thus, the performance target should not be reflected in
estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in
the period in which it becomes probable that the performance target will be achieved and should represent the compensation
cost attributable to the period(s) for which the requisite service has already been rendered. The new guidance is effective for us
beginning January 1, 2016. Early adoption is permitted. We currently do not anticipate the adoption of this standard will have a
material impact on our consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”), which
outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers
and supersedes most current revenue recognition guidance, including industry-specific guidance. This new revenue recognition
model provides a five-step analysis in determining when and how revenue is recognized. It requires entities to exercise
judgment when considering the terms of the contract(s) which include (i) identifying the contract(s) with the customer, (ii)
identifying the separate performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the
transaction price to the separate performance obligations, and (v) recognizing revenue when each performance obligation is
satisfied. Thus, it depicts the transfer of promised goods or services to customers in an amount that reflects the consideration an
61
entity expects to receive in exchange for those goods or services. Companies have the option of applying the provisions of ASU
2014-09 either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially
applying this guidance recognized at the date of initial application. Early adoption is not permitted. The new guidance is
effective for us beginning January 1, 2017. We are currently evaluating the method and impact that adopting this new
accounting standard will have on our consolidated financial statements.
Note 2. Restatement
We have restated our consolidated financial statements as of December 31, 2013, and for the years ended December 31, 2013
and 2012 and our unaudited quarterly financial information for the first three quarters in the year ended December 31, 2014 and
for each of the quarters in the year ended December 31, 2013, to correct errors in prior periods primarily related to (i) a long-
term contract (“Contract”) following the discovery of misconduct by employees in the recording of direct labor costs to the
Contract from 2009 through the third quarter 2014 which resulted in the identification of a forward loss provision that should
have been recorded in 2009 and the impact on subsequent periods of adjustments to the forward loss provision based on
information available at the time (“Forward Loss Adjustments”); and (ii) the year end reconciliation of income taxes payable
and deferred tax balances identified errors primarily in 2013, 2012, and 2011 (“Tax Adjustments”). The misconduct and its
related financial impact were concealed from our senior management, internal auditors, and external auditors.
The Forward Loss Adjustments were based on certain assumptions and estimates. To determine the loss on the Contract, we
estimated the number of units we would have expected to ship over the life of the Contract at inception of the Contract using
external market industry data for fiscal years 2009, 2010, 2011, 2012, and 2013. We used data obtained directly from the
customer for 2014 and 2015. The total estimated costs at any given point in time would typically include actual historical costs
up to that time plus the estimated cost to produce units to be delivered. In addition, the estimated total cost for the life of the
Contract includes certain inefficiencies on labor, material, and overhead costs during the initial start-up period. However, as we
progress along the learning curve, the direct labor hours and overhead rates are expected to decrease as we gain technical
knowhow and efficiency in producing the product. As a result of the misconduct by the employees in the recording of direct
labor hours to the Contract, the historical actual direct labor hours charged to the Contract were inaccurate. As a result, we
estimated the costs to complete future units at the end of each period based on an estimate of the direct labor hours chargeable
to the Contract, including consideration of anticipated learning curve efficiencies that would decrease the direct labor hours
over the remaining term of the Contract. Further, we used the actual direct labor hours incurred by the employees assigned to
the Contract as a basis for projecting future hours, less an estimate of the time not allocable to the Contract. Using this model,
we calculated the Forward Loss Adjustments from the inception of the Contract in 2009 through the expected life of the
Contract. As a result of the Forward Loss Adjustments, cost of goods sold increased (decreased) approximately $6.7 million in
2009, $1.3 million in 2010, $(0.3) million in 2011, $(2.2) million in 2012, $(0.9) million in 2013, and $(0.8) million in the nine
months ended September 27, 2014.
The Tax Adjustments were necessary as a result of certain calculation errors. The Tax Adjustments resulted in a net decrease to
income tax expense of approximately $0.9 million in 2013 and zero in 2012. The Tax Adjustments in 2011 resulted in a
reduction to the carrying value of goodwill totaling approximately $4.0 million due to a calculation error in the original
purchase price allocation and subsequent performance of step 2 of our annual goodwill impairment analysis related to deferred
income taxes and thus, (i) reduced deferred income taxes by approximately $2.7 million and (ii) generated a pre-tax goodwill
impairment charge of approximately $1.4 million. Further, the Tax Adjustments in 2011 reduced deferred tax assets by
approximately $1.6 million that were established as a result of shared-based compensation expenses recorded previously and
should have been reduced as the tax deductions were utilized. Moreover, the restated amounts include previously identified and
disclosed immaterial adjustments.
We evaluated the cumulative impact of these items on prior periods in accordance with the guidance in ASC 250-10,
Accounting Changes and Error Corrections, relating to SEC Staff Accounting Bulletin No. 99, Materiality (“SAB 99”) and
SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements (“SAB 108”), and we concluded these errors were in the aggregate material to the prior reporting periods, and
therefore, restatement of previously filed financial statements was necessary to our previously issued 2013, 2012, 2011, and
2010 financial statements.
The adjustments related to the years prior to 2012 are reflected in the beginning retained earnings for 2012. The cumulative
impact of these adjustments decreased retained earnings by approximately $7.0 million, net of tax, at the beginning of 2012.
The account balances labeled “As Reported” in the following tables for the years ended December 31, 2013 and 2012 represent
the previously reported audited balances in our Annual Report on Form 10-K (“Form 10-K”) for the year ended December 31,
62
2013. Certain prior period amounts have been reclassified to conform to current year’s presentation. The effects of these prior
period errors on the consolidated financial statements are as follows (in thousands, except per share data):
Consolidated Balance Sheet:
Assets
Current Assets
Cash and cash equivalents
Accounts receivable (less allowance for doubtful accounts of $489 at
December 31, 2013)
Inventories
Production cost of contracts
Deferred income taxes
Other current assets
Total Current Assets
Property and Equipment, Net
Goodwill
Intangibles, Net
Other Assets
Total Assets
Liabilities and Shareholders’ Equity
Current Liabilities
Current portion of long-term debt
Accounts payable
Accrued liabilities
Total Current Liabilities
Long-Term Debt, Less Current Portion
Deferred Income Taxes
Other Long-Term Liabilities
Total Liabilities
Commitments and Contingencies
Shareholders’ Equity
Common stock - $0.01 par value; 35,000,000 shares authorized;
10,960,054 shares issued at December 31, 2013
Treasury stock, at cost; 143,300 shares at December 31, 2013
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total Shareholders’ Equity
Total Liabilities and Shareholders’ Equity
December 31, 2013
As Reported
Adjustments
As Restated
$
48,814
$
— $
48,814
91,909
140,507
11,599
10,850
27,085
330,764
96,090
161,940
165,465
9,940
764,199
25
58,111
45,453
103,589
332,677
68,489
19,750
524,505
$
$
—
—
—
1,819
998
2,817
—
(4,371)
—
—
(1,554) $
— $
—
4,669
4,669
—
(500)
(300)
3,869
91,909
140,507
11,599
12,669
28,083
333,581
96,090
157,569
165,465
9,940
762,645
25
58,111
50,122
108,258
332,677
67,989
19,450
528,374
110
(1,924)
70,542
174,828
(3,862)
239,694
764,199
$
—
—
(1,633)
(3,790)
—
(5,423)
(1,554) $
110
(1,924)
68,909
171,038
(3,862)
234,271
762,645
$
$
$
63
Consolidated Statement of Income:
Net Revenues
Cost of Sales
Gross Profit
Selling, General and Administrative Expenses
Operating Income
Interest Expense
Income Before Taxes
Income Tax Benefit
Net Income
Earnings Per Share
Basic earnings per share
Diluted earnings per share
Weighted-Average Number of Shares Outstanding
Basic
Diluted
Consolidated Statement of Income:
Net Revenues
Cost of Sales
Gross Profit
Selling, General and Administrative Expenses
Operating Income
Interest Expense
Income Before Taxes
Income Tax Expense
Net Income
Earnings Per Share
Basic earnings per share
Diluted earnings per share
Weighted-Average Number of Shares Outstanding
Basic
Diluted
$
$
$
$
$
$
$
$
Year Ended December 31, 2013
As Reported
Adjustments
As Restated
$
$
$
$
736,650
614,233
122,417
84,849
37,568
(29,918)
7,650
(1,693)
9,343
0.87
0.86
10,695
10,852
— $
(1,735)
1,735
—
1,735
—
1,735
(300)
2,035
0.19
0.19
—
—
$
$
$
736,650
612,498
124,152
84,849
39,303
(29,918)
9,385
(1,993)
11,378
1.06
1.05
10,695
10,852
Year Ended December 31, 2012
As Reported
Adjustments
As Restated
$
$
$
$
747,037
605,585
141,452
86,639
54,813
(32,798)
22,015
5,578
16,437
1.55
1.55
10,580
10,628
— $
(2,525)
2,525
416
2,109
—
2,109
923
1,186
0.11
0.11
—
—
$
$
$
747,037
603,060
143,977
87,055
56,922
(32,798)
24,124
6,501
17,623
1.67
1.66
10,580
10,628
Consolidated Statement of Comprehensive Income:
Net Income
Pension Adjustments
Year Ended December 31, 2013
As Reported
Adjustments
As Restated
$
9,343
$
2,035
$
11,378
Amortization of actuarial loss included in net income, net of tax
benefit of $408 for 2013
Actuarial gain arising during the period, net of tax expense of
$1,737 for 2013
Other Comprehensive Income
Comprehensive Income
685
2,921
3,606
—
—
—
$
12,949
$
2,035
$
685
2,921
3,606
14,984
64
Consolidated Statement of Comprehensive Income:
Net Income
Pension Adjustments
Year Ended December 31, 2012
As Reported
Adjustments
As Restated
$
16,437
$
1,186
$
17,623
Amortization of actuarial loss included in net income, net of tax
benefit of $427 for 2012
Actuarial loss arising during the period, net of tax benefit of $300
for 2012
Other Comprehensive Loss
Comprehensive Income
720
(863)
(143)
16,294
$
—
—
—
$
1,186
$
720
(863)
(143)
17,480
65
Year Ended December 31, 2013
As Reported
Adjustments
As Restated
$
9,343
$
2,035
$
11,378
30,926
6,975
2,438
(2,242)
(77)
6,223
5,468
7,811
(5,101)
(11,192)
4,533
(9,143)
45,962
(12,403)
139
(12,264)
(33,024)
(365)
1,968
(31,421)
2,277
46,537
48,814
27,614
7,835
1,000
$
$
$
$
—
—
—
691
—
(886)
—
(849)
—
(981)
—
(10)
—
—
—
—
—
—
—
—
—
—
— $
— $
— $
30,926
6,975
2,438
(1,551)
(77)
5,337
5,468
6,962
(5,101)
(12,173)
4,533
(9,153)
45,962
(12,403)
139
(12,264)
(33,024)
(365)
1,968
(31,421)
2,277
46,537
48,814
27,614
7,835
— $
1,000
Consolidated Cash Flow Statement:
Cash Flows from Operating Activities
Net Income
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and amortization
Asset impairments
Stock-based compensation expense
Deferred income taxes
Recovery of doubtful accounts
Other
Changes in Assets and Liabilities:
Accounts receivable
Inventories
Production cost of contracts
Other assets
Accounts payable
Accrued and other liabilities
Net Cash Provided by Operating Activities
Cash Flows from Investing Activities
Purchases of property and equipment
Proceeds from sales of assets
Net Cash Used in Investing Activities
Cash Flows from Financing Activities
Repayment of term loan and other debt
Debt issue cost paid
Net proceeds from issuance of common stock under stock plans
Net Cash Used in Financing Activities
Net Increase in Cash and Cash Equivalents
Cash and Cash Equivalents at Beginning of Year
Cash and Cash Equivalents at End of Year
Supplemental Disclosures of Cash Flow Information
Interest paid
Taxes paid
Non-cash activities:
Purchases of property and equipment not paid
$
$
$
$
66
Year Ended December 31, 2012
As Reported
Adjustments
As Restated
$
16,437
$
1,186
$
17,623
29,413
1,959
(142)
78
2,391
(1,204)
6,185
(1,324)
6,846
(8,097)
(5,008)
47,534
(15,813)
31
(15,782)
(26,478)
(186)
(26,664)
5,088
41,449
46,537
31,505
1,953
$
$
$
—
—
1,240
—
(2,210)
—
(315)
—
(17)
—
116
—
—
—
—
—
—
—
—
—
— $
— $
— $
29,413
1,959
1,098
78
181
(1,204)
5,870
(1,324)
6,829
(8,097)
(4,892)
47,534
(15,813)
31
(15,782)
(26,478)
(186)
(26,664)
5,088
41,449
46,537
31,505
1,953
Consolidated Cash Flow Statement:
Cash Flows from Operating Activities
Net Income
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and amortization
Stock-based compensation expense
Deferred income taxes
Provision for doubtful accounts
Other
Changes in Assets and Liabilities:
Accounts receivable
Inventories
Production cost of contracts
Other assets
Accounts payable
Accrued and other liabilities
Net Cash Provided by Operating Activities
Cash Flows from Investing Activities
Purchases of property and equipment
Proceeds from sales of assets
Net Cash Used in Investing Activities
Cash Flows from Financing Activities
Repayment of term loan and other debt
Net proceeds from issuance of common stock under stock plans
Net Cash Used in Financing Activities
Net Increase in Cash and Cash Equivalents
Cash and Cash Equivalents at Beginning of Year
Cash and Cash Equivalents at End of Year
Supplemental Disclosures of Cash Flow Information
Interest paid
Taxes paid
$
$
$
67
The following tables present the unaudited condensed consolidated quarterly financial data for the first three quarters in the
years ended December 31, 2014 and 2013 (in thousands, except per share data):
Unaudited Condensed Consolidated Balance Sheets:
Assets
Current Assets
Cash and cash equivalents
Accounts receivable (less allowance for
doubtful accounts of $275 and $254 at
September 27, 2014 and June 28, 2014,
respectively)
Inventories
Production cost of contracts
Deferred income taxes
Other current assets
Total Current Assets
Property and Equipment, Net
Goodwill
Intangibles, Net
Other Assets
Total Assets
Liabilities and Shareholders’ Equity
Current Liabilities
Current portion of long-term debt
Accounts payable
Accrued liabilities
Total Current Liabilities
Long-Term Debt, Less Current Portion
Deferred Income Taxes
Other Long-Term Liabilities
Total Liabilities
Commitments and Contingencies
Shareholders’ Equity
Common stock - $0.01 par value; 35,000,000
shares authorized; 10,945,806 and
10,892,133 shares issued at September 27,
2014 and June 28, 2014, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total Shareholders’ Equity
Total Liabilities and Shareholders’ Equity
September 27, 2014
June 28, 2014
As Reported Adjustments As Restated
As Reported Adjustments
As Restated
$ 40,852
$
— $ 40,852
$ 43,751
$
— $ 43,751
104,396
145,468
10,375
13,664
20,444
335,199
93,181
161,940
157,694
7,657
$ 755,671
$
26
55,083
42,916
98,025
310,157
73,078
16,858
498,118
— 104,396
— 145,468
10,375
—
15,185
1,521
21,930
1,486
338,206
3,007
93,181
—
(4,371)
157,569
— 157,694
7,657
—
$ (1,364) $ 754,307
$
— $
—
3,871
3,871
26
55,083
46,787
101,896
— 310,157
72,578
16,558
501,189
(500)
(300)
3,071
105,209
142,201
11,023
11,513
20,602
334,299
94,070
161,940
160,285
8,660
$ 759,254
$
26
53,749
47,973
101,748
317,664
69,747
17,456
506,615
— 105,209
— 142,201
11,023
—
12,929
1,416
21,600
998
336,713
2,414
94,070
—
(4,371)
157,569
— 160,285
8,660
—
$ (1,957) $ 757,297
$
— $
—
3,589
3,589
26
53,749
51,562
105,337
— 317,664
69,247
17,156
509,404
(500)
(300)
2,789
109
72,563
188,551
(3,670)
257,553
$ 755,671
—
(1,633)
(2,802)
—
(4,435)
109
70,930
185,749
(3,670)
253,118
$ (1,364) $ 754,307
109
70,337
185,929
(3,736)
252,639
$ 759,254
—
(1,633)
(3,113)
—
(4,746)
109
68,704
182,816
(3,736)
247,893
$ (1,957) $ 757,297
68
Unaudited Condensed Consolidated Balance Sheet:
Assets
Current Assets
Cash and cash equivalents
Accounts receivable (less allowance for doubtful accounts of $427 at
March 29, 2014)
Inventories
Production cost of contracts
Deferred income taxes
Other current assets
Total Current Assets
Property and Equipment, Net
Goodwill
Intangibles, Net
Other Assets
Total Assets
Liabilities and Shareholders’ Equity
Current Liabilities
Current portion of long-term debt
Accounts payable
Accrued liabilities
Total Current Liabilities
Long-Term Debt, Less Current Portion
Deferred Income Taxes
Other Long-Term Liabilities
Total Liabilities
Commitments and Contingencies
Shareholders’ Equity
Common stock - $0.01 par value; 35,000,000 shares authorized;
10,999,632 shares issued at March 29, 2014
Treasury stock, at cost; 143,300 shares at March 29, 2014
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total Shareholders’ Equity
Total Liabilities and Shareholders’ Equity
March 29, 2014
As Reported
Adjustments
As Restated
$
29,415
$
— $
29,415
100,570
148,895
10,479
13,836
21,664
324,859
94,168
161,940
162,875
9,320
753,162
25
53,973
39,628
93,626
325,171
70,556
18,922
508,275
$
$
—
—
—
1,504
998
2,502
—
(4,371)
—
—
(1,869) $
— $
—
3,824
3,824
—
(500)
(300)
3,024
100,570
148,895
10,479
15,340
22,662
327,361
94,168
157,569
162,875
9,320
751,293
25
53,973
43,452
97,450
325,171
70,056
18,622
511,299
110
(1,924)
71,037
179,457
(3,793)
244,887
753,162
$
—
—
(1,633)
(3,260)
—
(4,893)
(1,869) $
110
(1,924)
69,404
176,197
(3,793)
239,994
751,293
$
$
$
69
Unaudited Condensed Consolidated Statements of
Income:
Net Revenues
Cost of Sales
Gross Profit
Selling, General and Administrative Expenses
Operating Income
Interest Expense
Other Income
Income Before Taxes
Income Tax Expense
Net Income
Earnings Per Share
Basic earnings per share
Diluted earnings per share
Weighted-Average Number of Shares
Outstanding
Three Months Ended September 27, 2014
Nine Months Ended September 27, 2014
As Reported Adjustments As Restated
As Reported Adjustments
As Restated
$ 188,164
154,770
33,394
23,050
10,344
(6,975)
1,600
4,969
2,347
2,622
$
$
$
0.24
0.24
$
$
$
$
— $ 188,164
155,052
282
(282)
33,112
23,050
—
(282)
10,062
(6,975)
—
1,600
—
(282)
4,687
(593)
1,754
2,933
311
$
$ 554,433
448,526
105,907
65,005
40,902
(21,094)
1,600
21,408
7,685
$ 13,723
0.03
0.03
$
$
0.27
0.26
$
$
1.26
1.23
$
$
$
$
— $ 554,433
447,728
106,705
65,005
41,700
(21,094)
1,600
22,206
7,495
$ 14,711
(798)
798
—
798
—
—
798
(190)
988
0.09
0.09
$
$
1.35
1.31
Basic
Diluted
10,921
11,150
—
—
10,921
11,150
10,902
11,202
—
—
10,902
11,202
Unaudited Condensed Consolidated Statements of
Income:
As Reported Adjustments As Restated
As Reported Adjustments
As Restated
Three Months Ended June 28, 2014
Six Months Ended June 28, 2014
Net Revenues
Cost of Sales
Gross Profit
Selling, General and Administrative Expenses
Operating Income
Interest Expense
Income Before Taxes
Income Tax Expense
Net Income
Earnings Per Share
Basic earnings per share
Diluted earnings per share
Weighted-Average Number of Shares
Outstanding
$ 186,516
149,073
37,443
20,868
16,575
(6,994)
9,581
3,109
6,472
$
$
$
0.60
0.59
$
$
$
$
— $ 186,516
148,838
37,678
20,868
16,810
(6,994)
9,816
3,197
6,619
(235)
235
—
235
—
235
88
147
$
$ 366,269
293,756
72,513
41,955
30,558
(14,119)
16,439
5,338
$ 11,101
0.01
0.01
$
$
0.61
0.60
$
$
1.02
1.00
$
$
$
$
— $ 366,269
292,676
73,593
41,955
31,638
(14,119)
17,519
5,741
$ 11,778
(1,080)
1,080
—
1,080
—
1,080
403
677
0.06
0.06
$
$
1.08
1.06
Basic
Diluted
10,871
11,045
—
—
10,871
11,045
10,864
11,122
—
—
10,864
11,122
70
Unaudited Condensed Consolidated Statement of Income:
Net Revenues
Cost of Sales
Gross Profit
Selling, General and Administrative Expenses
Operating Income
Interest Expense
Income Before Taxes
Income Tax Expense
Net Income
Earnings Per Share
Basic earnings per share
Diluted earnings per share
Weighted-Average Number of Shares Outstanding
Basic
Diluted
Unaudited Condensed Consolidated Statements of
Comprehensive Income:
Net Income
Pension Adjustments
Amortization of actuarial loss and prior
service costs, net of tax benefit of
approximately $40 and $124 for the three
months and nine months ended September
27, 2014, respectively
Other Comprehensive Loss
Comprehensive Income
Unaudited Condensed Consolidated Statements of
Comprehensive Income:
Net Income
Pension Adjustments
Amortization of actuarial loss and prior
service costs, net of tax benefit of
approximately $48 and $84 for the three
months and six months ended June 28, 2014,
respectively
Other Comprehensive Loss
Comprehensive Income
Three Months Ended March 29, 2014
$
As Reported Adjustments
$ 179,753
144,683
35,070
21,087
13,983
(7,125)
6,858
2,229
4,629
(845)
845
—
845
—
845
315
530
As Restated
— $ 179,753
143,838
35,915
21,087
14,828
(7,125)
7,703
2,544
5,159
$
$
$
$
$
0.43
0.42
$
$
0.05
0.05
$
$
0.48
0.46
10,844
11,107
—
—
10,844
11,107
Three Months Ended September 27, 2014
Nine Months Ended September 27, 2014
As Reported Adjustments As Restated
As Reported Adjustments
As Restated
$
2,622
$
311
$
2,933
$ 13,723
$
988
$ 14,711
(66)
(66)
—
—
$
2,556
$
311
$
(66)
(66)
2,867
(192)
(192)
$ 13,531
$
—
—
988
(192)
(192)
$ 14,519
Three Months Ended June 28, 2014
Six Months Ended June 28, 2014
As Reported Adjustments As Restated
As Reported Adjustments
As Restated
$
6,472
$
147
$
6,619
$ 11,101
$
677
$ 11,778
(57)
(57)
—
—
$
6,415
$
147
$
(57)
(57)
6,562
(126)
(126)
$ 10,975
$
—
—
677
(126)
(126)
$ 11,652
71
Unaudited Condensed Consolidated Statement of Comprehensive Income:
Net Income
Pension Adjustments
Amortization of actuarial loss included in net income, net of tax benefit of $36 for
the three months ended March 29, 2014
Other Comprehensive Loss
Comprehensive Income
Three Months Ended March 29, 2014
As Reported Adjustments
As Restated
$
4,629
$
530
$
5,159
(69)
(69)
4,560
$
—
—
$
530
$
(69)
(69)
5,090
72
Unaudited Condensed Consolidated Cash Flow
Statements:
Cash Flows from Operating Activities
Net Income
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and amortization
Stock-based compensation expense
Deferred income taxes
Recovery of doubtful accounts
Other
Changes in Assets and Liabilities:
Accounts receivable
Inventories
Production cost of contracts
Other assets
Accounts payable
Accrued and other liabilities
Net Cash Provided by Operating
Activities
Cash Flows from Investing Activities
Purchases of property and equipment
Proceeds from sales of assets
Insurance recoveries related to property
and equipment
Net Cash Used in Investing
Activities
Cash Flows from Financing Activities
Repayment of term loan and other debt
Net proceeds from issuance of common
stock under stock plans
Net Cash Used in Financing
Activities
Net Decrease in Cash and Cash Equivalents
Cash and Cash Equivalents at Beginning of Year
Cash and Cash Equivalents at End of Year
Supplemental Disclosures of Cash Flow
Information
Interest paid
Taxes paid
Non-cash activities:
Nine Months Ended September 27, 2014
Six Months Ended June 28, 2014
As Reported Adjustments As Restated
As Reported Adjustments
As Restated
$ 13,723
$
988
$ 14,711
$ 11,101
$
677
$ 11,778
21,829
2,520
1,775
(214)
649
(12,273)
(4,961)
(1,408)
7,121
(2,447)
(5,400)
20,914
(9,329)
83
1,600
(7,646)
(22,519)
1,289
(21,230)
(7,962)
48,814
$ 40,852
$ 24,090
3,410
$
$
$
$
—
—
298
—
(798)
—
—
—
(488)
—
—
—
—
—
—
—
—
—
21,829
2,520
2,073
(214)
(149)
(12,273)
(4,961)
(1,408)
6,633
(2,447)
(5,400)
15,125
1,288
595
(235)
1,111
(13,066)
(1,694)
(1,734)
6,563
(4,363)
835
20,914
15,526
(9,329)
83
(5,997)
51
1,600
—
(7,646)
(5,946)
(22,519)
(15,012)
1,289
369
—
—
403
—
(1,080)
—
—
—
—
—
—
—
—
—
—
—
—
—
15,125
1,288
998
(235)
31
(13,066)
(1,694)
(1,734)
6,563
(4,363)
835
15,526
(5,997)
51
—
(5,946)
(15,012)
369
—
(21,230)
(7,962)
—
—
48,814
— $ 40,852
(14,643)
(5,063)
48,814
$ 43,751
— $ 24,090
3,410
— $
$
$
1,440
3,249
—
(14,643)
(5,063)
—
—
48,814
— $ 43,751
— $
— $
1,440
3,249
$
$
$
Purchases of property and equipment not
paid
$
418
$
— $
418
$
722
$
— $
722
73
Unaudited Condensed Consolidated Cash Flow Statement:
Cash Flows from Operating Activities
Net Income
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and amortization
Stock-based compensation expense
Deferred income taxes
Recovery of doubtful accounts
Other
Changes in Assets and Liabilities:
Accounts receivable
Inventories
Production cost of contracts
Other assets
Accounts payable
Accrued and other liabilities
Net Cash Used in Operating Activities
Cash Flows from Investing Activities
Purchases of property and equipment
Proceeds from sales of assets
Net Cash Used in Investing Activities
Cash Flows from Financing Activities
Repayment of term loan and other debt
Net proceeds from issuance of common stock under stock plans
Net Cash Used in Financing Activities
Net Decrease in Cash and Cash Equivalents
Cash and Cash Equivalents at Beginning of Year
Cash and Cash Equivalents at End of Year
Supplemental Disclosures of Cash Flow Information
Interest paid
Taxes paid
Non-cash activities:
Purchases of property and equipment not paid
Three Months Ended March 29, 2014
As Reported Adjustments
As Restated
$
4,629
$
530
$
5,159
7,426
364
(919)
(62)
88
(8,599)
(8,388)
513
5,440
(4,138)
(6,067)
(9,713)
(2,192)
5
(2,187)
—
—
315
—
(845)
—
—
—
—
—
—
—
—
—
—
7,426
364
(604)
(62)
(757)
(8,599)
(8,388)
513
5,440
(4,138)
(6,067)
(9,713)
(2,192)
5
(2,187)
(7,506)
7
(7,499)
(19,399)
48,814
$ 29,415
$ 11,397
58
$
$
182
$
$
$
$
(7,506)
—
—
7
(7,499)
—
(19,399)
—
48,814
—
— $ 29,415
— $ 11,397
58
— $
— $
182
74
Unaudited Condensed Consolidated Balance Sheets:
Assets
Current Assets
Cash and cash equivalents
Accounts receivable (less allowance for
doubtful accounts of $425 and $532 at
September 28, 2013 and June 29, 2013,
respectively)
Inventories
Production cost of contracts
Deferred income taxes
Other current assets
Total Current Assets
Property and Equipment, Net
Goodwill
Intangibles, Net
Other Assets
Total Assets
Liabilities and Shareholders’ Equity
Current Liabilities
Current portion of long-term debt
Accounts payable
Accrued liabilities
Total Current Liabilities
Long-Term Debt, Less Current Portion
Deferred Income Taxes
Other Long-Term Liabilities
Total Liabilities
Commitments and Contingencies
Shareholders’ Equity
Common stock - $0.01 par value;
35,000,000 shares authorized; 10,923,469
and 10,822,180 shares issued at September
28, 2013 and June 29, 2013, respectively
Treasury stock, at cost; 143,300 shares at
both September 28, 2013 and June 29, 2013
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total Shareholders’ Equity
Total Liabilities and Shareholders’ Equity
September 28, 2013
June 29, 2013
As
Reported
Adjustments As Restated
As Reported Adjustments
As Restated
$ 32,597
$
— $ 32,597
$ 33,510
$
— $ 33,510
92,637
148,524
19,926
7,110
23,505
324,299
93,840
161,940
168,188
11,779
$ 760,046
$
3,029
49,668
39,320
92,017
340,184
64,504
22,097
518,802
—
92,637
— 148,524
19,926
—
8,711
1,601
24,971
1,466
327,366
3,067
93,840
—
(4,371)
157,569
— 168,188
11,779
—
$ (1,304) $ 758,742
$
— $
—
4,300
4,300
3,029
49,668
43,620
96,317
— 340,184
63,883
21,797
522,181
(621)
(300)
3,379
105,577
148,906
19,049
7,016
18,005
332,063
95,602
161,940
170,911
12,310
$ 772,826
$
3,033
50,864
48,392
102,289
347,690
65,980
22,900
538,859
(1,080)
—
2,136
17
1,073
—
(4,371)
— 105,577
147,826
19,049
9,152
18,022
333,136
95,602
157,569
— 170,911
12,310
—
$ (3,298) $ 769,528
$
— $
—
4,655
4,655
3,033
50,864
53,047
106,944
— 347,690
65,359
22,600
542,593
(621)
(300)
3,734
109
—
109
108
—
108
(1,924)
70,679
179,332
(6,952)
241,244
$ 760,046
—
(1,633)
(3,050)
—
(4,683)
(1,924)
69,046
176,282
(6,952)
236,561
$ (1,304) $ 758,742
(1,924)
68,211
174,696
(7,124)
233,967
$ 772,826
—
(1,633)
(5,399)
—
(7,032)
(1,924)
66,578
169,297
(7,124)
226,935
$ (3,298) $ 769,528
75
Unaudited Condensed Consolidated Balance Sheet:
Assets
Current Assets
Cash and cash equivalents
Accounts receivable (less allowance for doubtful accounts of $409 at
March 30, 2013)
Inventories
Production cost of contracts
Deferred income taxes
Other current assets
Total Current Assets
Property and Equipment, Net
Goodwill
Intangibles, Net
Other Assets
Total Assets
Liabilities and Shareholders’ Equity
Current Liabilities
Current portion of long-term debt
Accounts payable
Accrued liabilities
Total Current Liabilities
Long-Term Debt, Less Current Portion
Deferred Income Taxes
Other Long-Term Liabilities
Total Liabilities
Commitments and Contingencies
Shareholders’ Equity
Common stock - $0.01 par value; 35,000,000 shares authorized;
10,746,950 shares issued at March 30, 2013
Treasury stock, at cost; 143,300 shares at March 30, 2013
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total Shareholders’ Equity
Total Liabilities and Shareholders’ Equity
March 30, 2013
As Reported
Adjustments
As Restated
$
29,994
$
— $
29,994
96,391
149,402
20,193
11,077
12,756
319,813
97,005
161,940
173,633
13,217
765,608
3,038
50,481
40,048
93,567
355,196
66,386
23,239
538,388
$
$
—
(940)
—
2,232
17
1,309
—
(4,371)
—
—
(3,062) $
— $
—
5,053
5,053
—
(621)
(300)
4,132
96,391
148,462
20,193
13,309
12,773
321,122
97,005
157,569
173,633
13,217
762,546
3,038
50,481
45,101
98,620
355,196
65,765
22,939
542,520
107
(1,924)
67,141
169,192
(7,296)
227,220
765,608
$
—
—
(1,633)
(5,561)
—
(7,194)
(3,062) $
107
(1,924)
65,508
163,631
(7,296)
220,026
762,546
$
$
$
76
Unaudited Condensed Consolidated Statements of
Income:
As Reported Adjustments As Restated
As Reported Adjustments
As Restated
Three Months Ended September 28, 2013
Nine Months Ended September 28, 2013
Net Revenues
Cost of Sales
Gross Profit
Selling, General and Administrative Expenses
Operating Income
Interest Expense
Other Income
Income Before Taxes
Income Tax (Benefit) Expense
Net Income
Earnings Per Share:
Basic earnings per share
Diluted earnings per share
Weighted-Average Number of Shares
Outstanding:
$ 181,288
148,984
32,304
20,351
11,953
(7,403)
—
4,550
(86)
4,636
$
$
$
0.43
0.42
$
$
$
$
— $ 181,288
147,549
33,739
20,351
13,388
(7,403)
—
5,985
(1,000)
6,985
(1,435)
1,435
—
1,435
—
—
1,435
(914)
2,349
$
$ 548,675
446,202
102,473
65,175
37,298
(22,668)
—
14,630
783
$ 13,847
0.22
0.22
$
$
0.65
0.64
$
$
1.30
1.28
$
$
$
$
— $ 548,675
444,088
104,587
65,175
39,412
(22,668)
—
16,744
122
$ 16,622
(2,114)
2,114
—
2,114
—
—
2,114
(661)
2,775
0.26
0.26
$
$
1.56
1.54
Basic
Diluted
10,722
10,917
—
—
10,722
10,917
10,657
10,785
—
—
10,657
10,785
Unaudited Condensed Consolidated Statements of
Income:
As Reported Adjustments As Restated
As Reported Adjustments
As Restated
Three Months Ended June 29, 2013
Six Months Ended June 29, 2013
Net Revenues
Cost of Sales
Gross Profit
Selling, General and Administrative Expenses
Operating Income
Interest Expense
Income Before Taxes
Income Tax Expense
Net Income
Earnings Per Share
Basic earnings per share
Diluted earnings per share
Weighted-Average Number of Shares
Outstanding
$ 191,472
154,156
37,316
22,273
15,043
(7,442)
7,601
2,097
5,504
$
$
$
0.52
0.51
$
$
$
$
— $ 191,472
153,898
37,574
22,273
15,301
(7,442)
7,859
2,193
5,666
(258)
258
—
258
—
258
96
162
$
$ 367,387
297,218
70,169
44,824
25,345
(15,265)
10,080
869
9,211
$
0.02
0.02
$
$
0.53
0.53
$
$
0.87
0.86
$
$
$
$
— $ 367,387
296,539
70,848
44,824
26,024
(15,265)
10,759
1,122
9,637
(679)
679
—
679
—
679
253
426
$
0.04
0.04
$
$
0.91
0.90
Basic
Diluted
10,648
10,790
—
—
10,648
10,790
10,624
10,731
—
—
10,624
10,731
77
Unaudited Condensed Consolidated Statement of Income:
Net Revenues
Cost of Sales
Gross Profit
Selling, General and Administrative Expenses
Operating Income
Interest Expense
Income Before Taxes
Income Tax Benefit
Net Income
Earnings Per Share
Basic earnings per share
Diluted earnings per share
Weighted-Average Number of Shares Outstanding
Basic
Diluted
Three Months Ended March 30, 2013
$
As Reported Adjustments
$ 175,915
143,062
32,853
22,551
10,302
(7,823)
2,479
(1,228)
3,707
(421)
421
—
421
—
421
157
264
As Restated
— $ 175,915
142,641
33,274
22,551
10,723
(7,823)
2,900
(1,071)
3,971
$
$
$
$
$
0.35
0.35
$
$
0.02
0.02
$
$
0.37
0.37
10,600
10,670
—
—
10,600
10,670
Unaudited Condensed Consolidated Statements of
Comprehensive Income:
As
Reported
Adjustments As Restated
As Reported Adjustments
As Restated
Three Months Ended September 28, 2013
Nine Months Ended September 28, 2013
Net Income
Pension Adjustments
Amortization of actuarial loss and prior
service costs, net of tax benefit of
approximately $102 and $306 for the three
months and nine months ended September
28, 2013, respectively
Other Comprehensive Loss
Comprehensive Income
$
4,636
$
2,349
$
6,985
$ 13,847
$
2,775
$ 16,622
(172)
(172)
—
—
$
4,464
$
2,349
$
(172)
(172)
6,813
(516)
(516)
$ 13,331
—
—
$
2,775
(516)
(516)
$ 16,106
Unaudited Condensed Consolidated Statements of
Comprehensive Income:
As
Reported
Adjustments As Restated
As Reported Adjustments
As Restated
Three Months Ended June 29, 2013
Six Months Ended June 29, 2013
Net Income
Pension Adjustments
Amortization of actuarial loss and prior
service costs, net of tax benefit of
approximately $102 and $204 for the three
months and six months ended June 29, 2013,
respectively
Other Comprehensive Loss
Comprehensive Income
$
5,504
$
162
$
5,666
$
9,211
$
426
$
9,637
(172)
(172)
—
—
$
5,332
$
162
$
(172)
(172)
5,494
$
(344)
(344)
8,867
—
—
$
426
$
(344)
(344)
9,293
78
Unaudited Condensed Consolidated Statement of Comprehensive Income:
Net Income
Pension Adjustments
Amortization of actuarial loss included in net income, net of tax benefit of $102
for the three months ended March 30, 2013
Other Comprehensive Loss
Comprehensive Income
Three Months Ended March 30, 2013
As Reported Adjustments
As Restated
$
3,707
$
264
$
3,971
(172)
(172)
3,535
$
—
—
$
264
$
(172)
(172)
3,799
Unaudited Condensed Consolidated Cash Flow
Statements:
Cash Flows from Operating Activities
Net Income
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and amortization
Stock-based compensation expense
Deferred income taxes
Recovery of doubtful accounts
Other
Changes in Assets and Liabilities:
Accounts receivable
Inventories
Production cost of contracts
Other assets
Accounts payable
Accrued and other liabilities
Net Cash Provided by Operating
Activities
Cash Flows from Investing Activities
Purchases of property and equipment
Proceeds from sales of assets
Net Cash Used in Investing
Activities
Cash Flows from Financing Activities
Repayment of term loan and other debt
Debt issue cost paid
Net proceeds from issuance of common
stock under stock plans
Net Cash Used in Financing
Activities
Net Decrease in Cash and Cash Equivalents
Cash and Cash Equivalents at Beginning of Year
Cash and Cash Equivalents at End of Year
Supplemental Disclosures of Cash Flow
Information:
Interest paid
Taxes paid
Nine Months Ended September 28, 2013
Six Months Ended June 29, 2013
As
Reported
Adjustments As Restated
As Reported Adjustments
As Restated
$ 13,847
$
2,775
$ 16,622
$
9,211
$
426
$
9,637
—
—
788
—
(1,265)
—
(849)
—
(1,449)
—
—
21,375
1,711
833
(141)
169
4,804
(1,055)
(3,396)
(10,482)
(2,910)
(12,819)
14,173
805
1,615
(34)
809
(8,243)
(588)
(1,843)
(3,473)
(1,714)
(3,775)
—
—
—
—
—
—
—
14,711
6,943
(7,321)
123
(5,253)
111
(7,198)
(5,142)
(22,518)
(181)
(15,012)
(181)
1,246
365
—
(21,453)
(13,940)
—
—
46,537
— $ 32,597
(14,828)
(13,027)
46,537
$ 33,510
— $ 25,640
6,542
— $
$
$
1,951
1,743
—
—
253
—
(910)
—
231
—
—
—
—
—
—
—
—
—
—
—
14,173
805
1,868
(34)
(101)
(8,243)
(357)
(1,843)
(3,473)
(1,714)
(3,775)
6,943
(5,253)
111
(5,142)
(15,012)
(181)
365
—
(14,828)
(13,027)
—
—
46,537
— $ 33,510
— $
— $
1,951
1,743
$
$
$
21,375
1,711
45
(141)
1,434
4,804
(206)
(3,396)
(9,033)
(2,910)
(12,819)
14,711
(7,321)
123
(7,198)
(22,518)
(181)
1,246
(21,453)
(13,940)
46,537
$ 32,597
$ 25,640
6,542
$
$
$
$
79
Unaudited Condensed Consolidated Cash Flow Statement:
Cash Flows from Operating Activities
Net Income
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and amortization
Stock-based compensation expense
Deferred income taxes
Recovery of doubtful accounts
Other
Changes in Assets and Liabilities:
Accounts receivable
Inventories
Production cost of contracts
Other assets
Accounts payable
Accrued and other liabilities
Net Cash Used in Operating Activities
Cash Flows from Investing Activities
Purchases of property and equipment
Proceeds from sales of assets
Net Cash Used in Investing Activities
Cash Flows from Financing Activities
Repayment of term loan and other debt
Debt issue cost paid
Net proceeds from issuance of common stock under stock plans
Net Cash Used in Financing Activities
Net Decrease in Cash and Cash Equivalents
Cash and Cash Equivalents at Beginning of Year
Cash and Cash Equivalents at End of Year
Supplemental Disclosures of Cash Flow Information:
Interest paid
Taxes paid
Three Months Ended March 30, 2013
As Reported Adjustments
As Restated
$
3,707
$
264
$
3,971
7,033
693
(2,040)
(157)
246
1,066
(1,084)
(2,559)
1,456
(2,097)
(12,386)
(6,122)
(2,612)
5
(2,607)
—
—
157
—
(512)
—
91
—
—
—
—
—
—
—
—
7,033
693
(1,883)
(157)
(266)
1,066
(993)
(2,559)
1,456
(2,097)
(12,386)
(6,122)
(2,612)
5
(2,607)
(7,506)
(181)
(127)
(7,814)
(16,543)
46,537
$ 29,994
$ 12,037
563
$
$
$
$
(7,506)
—
(181)
—
(127)
—
(7,814)
—
(16,543)
—
46,537
—
— $ 29,994
— $ 12,037
563
— $
80
Note 3. Inventories
Inventories consisted of the following:
Raw materials and supplies
Work in process
Finished goods
Less progress payments
Total
(In thousands)
December 31,
2014
2013
$
$
77,033
61,458
14,116
152,607
9,765
142,842
$
$
75,985
62,115
11,580
149,680
9,173
140,507
We net advances from customers related to inventory purchases against inventories in the consolidated balance sheets.
Note 4. Property and Equipment, Net
Property and equipment, net consisted of the following:
Land
Buildings and improvements
Machinery and equipment
Furniture and equipment
Construction in progress
Less accumulated depreciation
Total
(In thousands)
December 31,
2014
2013
15,006
45,636
131,263
25,975
9,645
227,525
128,457
99,068
$
$
14,669
44,971
128,344
26,088
9,085
223,157
127,067
96,090
$
$
Range of
Estimated
Useful Lives
5 - 40 Years
2 - 20 Years
2 - 10 Years
Depreciation expense was $15.3 million, $15.6 million and $15.9 million, for the years ended December 31, 2014, 2013 and
2012, respectively.
Note 5. Goodwill and Other Intangible Assets
Goodwill and Indefinite-Lived Intangible Asset
The carrying amounts of goodwill, by operating segment, for the years ended December 31, 2014 and 2013 were as follows:
Gross goodwill
Accumulated goodwill impairment
Balance at December 31, 2013 (As Restated)
Balance at December 31, 2014
Ducommun
AeroStructures
(In thousands)
Ducommun
LaBarge
Technologies
Consolidated
Ducommun
$
$
$
57,243
—
57,243
57,243
$
$
$
182,048
(81,722)
100,326
100,326
$
$
$
239,291
(81,722)
157,569
157,569
We perform our annual goodwill impairment test during the fourth quarter each year. As of the date of the 2014 annual
goodwill impairment test, goodwill was not impaired. The carrying amounts of goodwill at the date of the most recent annual
impairment test for the DAS, DLT, and Miltec internal reporting units was approximately $57.2 million, $92.0 million, and $8.4
million, respectively and the fair value of the DAS, DLT and Miltec internal reporting units exceeded their carrying values by
approximately 44%, 36% and 44%, respectively.
81
We perform our annual indefinite-lived intangible asset impairment test during the fourth quarter of each year. As a result, no
impairment was identified as of December 31, 2014. The trade-name indefinite-lived intangible asset was approximately $32.9
million as of December 31, 2014 and 2013.
Other Intangible Assets
Other intangible assets are related to acquisitions and recorded at fair value at the time of the acquisition. Other intangible
assets with finite lives are amortized on the straight-line method over periods ranging from three to eighteen years. Intangible
assets are as follows:
December 31, 2014
December 31, 2013
(In thousands)
Wtd.
Avg
Life
(Yrs)
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Finite-lived assets
Customer relationships
Trade names
Contract renewal
Technology
Total
18
10
14
15
$
$
164,500
3,400
1,845
400
170,145
$
$
43,715
3,060
1,099
104
47,978
$
$
120,785
340
746
296
122,167
$
$
164,500
3,400
1,845
400
170,145
$
$
33,853
2,720
967
78
37,618
$
$
130,647
680
878
322
132,527
The carrying amount of other intangible assets by operating segment as of December 31, 2014 and 2013 was as follows:
(In thousands)
December 31, 2014
December 31, 2013
Gross
Accumulated
Amortization
Net
Carrying
Value
Gross
Accumulated
Amortization
Net
Carrying
Value
Other intangible assets
Ducommun AeroStructures
$
19,300
$
13,046
$
6,254
$
19,300
$
11,330
$
7,970
Ducommun LaBarge
Technologies
Total
150,845
34,932
115,913
150,845
26,288
124,557
$
170,145
$
47,978
$
122,167
$
170,145
$
37,618
$
132,527
Amortization expense of other intangible assets was approximately $10.4 million, $10.9 million and $11.5 million for the years
ended December 31, 2014, 2013 and 2012, respectively. Future amortization expense by operating segment is expected to be as
follows:
Ducommun
AeroStructures
(In thousands)
Ducommun
LaBarge
Technologies
Consolidated
Ducommun
$
$
1,386
1,123
907
737
591
1,510
6,254
$
$
8,646
8,304
8,306
8,305
8,305
74,047
115,913
$
$
10,032
9,427
9,213
9,042
8,896
75,557
122,167
2015
2016
2017
2018
2019
Thereafter
Note 6. Accrued Liabilities
The components of accrued liabilities consisted of the following:
82
Accrued compensation
Accrued income tax and sales tax
Customer deposits
Interest payable
Provision for forward loss reserves
Other
Total
Note 7. Long-Term Debt
Long-term debt and the current period interest rates were as follows:
Senior unsecured notes (fixed 9.75%)
Senior secured term loan (floating 4.75%)
Promissory note (fixed 5.0%) and other debt (fixed 5.41%)
Total Debt
Less current portion
Total long-term debt
Weighted-average interest rate
Future long-term debt payments at December 31, 2014 were as follows:
2015
2016
2017
2018
2019
Total
$
$
$
$
(In thousands)
December 31,
2014
2013
As Restated
25,352
1,580
1,139
9,439
4,734
9,822
52,066
$
$
19,929
1,451
3,236
8,965
9,494
7,047
50,122
(In thousands)
December 31,
2014
2013
200,000
90,000
52
290,052
26
290,026
$
$
200,000
132,625
77
332,702
25
332,677
8.20%
7.76%
(In thousands)
26
26
90,000
200,000
—
290,052
$
$
In 2014, we made voluntary principal prepayments of approximately $42.6 million on our senior secured term loan as
discussed below. At December 31, 2014, we had approximately $58.5 million of available borrowing capacity, as discussed
below.
Senior Secured Term Loan and Senior Secured Revolving Credit Facility (“Credit Facilities”)
We obtained our senior secured term loan (“Term Loan”), which matures on June 28, 2017, and entered into a $60.0 million
senior secured revolving credit facility (“Revolving Credit Facility”), which matures on June 28, 2016, in connection with the
LaBarge Acquisition. The Credit Facilities provides the option of choosing the London Interbank Offered Rate (“LIBOR” rate),
or the Alternate Base Rate. The LIBOR rate may be for a one-, two-, three- or six-month period chosen by us. The payment of
interest coincides with the LIBOR period we select.
On March 28, 2013, we executed an amendment to our Credit Facilities which completed a repricing of our Term Loan and
Revolving Credit Facility. The repricing reduced the interest rate spread on the Term Loan and Revolving Credit Facility by 50
basis points and the interest rate floor by 25 basis points under the LIBOR rate or the Alternate Base Rate. The LIBOR rate has
83
a floor of 1.00% plus 3.75%. The Alternate Base Rate has a floor of 2.00% plus 2.75%. The Alternate Base Rate is the greater
of the (a) Prime rate and (b) Federal Funds rate plus 0.5%. In connection with this repricing, we recognized approximately $0.5
million of financing and legal costs which were included in selling, general and administrative expenses in the first quarter of
2013.
The Term Loan required quarterly principal payments of $0.5 million beginning on September 30, 2011 and mandatory
prepayment of certain amounts of excess cash flow on an annual basis beginning 2012. In 2012, we made voluntary principal
prepayments of $25.0 million on our Term Loan and eliminated all required quarterly principal payments going forward.
The Credit Facilities are collaterized by substantially all of our assets and contain minimum Earnings before Interest, Taxes,
Depreciation and Amortization (“EBITDA”) and maximum leverage covenants under certain circumstances, as well as annual
limitations on capital expenditures and limitation on future disposition of property, investments, acquisitions, repurchase of
stock, dividends, and outside indebtedness. In the event that a certain minimum amount is borrowed and outstanding under the
Revolving Credit Facility, for so long as any such amount is outstanding, we will be required to comply with a total leverage
ratio. Furthermore, our consolidated EBITDA, as defined by these Credit Facilities, as of the end of any fiscal quarter on a
trailing four-quarter basis is not permitted to be less than $50.0 million. At December 31, 2014, we were in compliance with all
covenants. At December 31, 2014, there were no amounts outstanding that would have triggered the leverage covenant.
However, we would have been in compliance with such leverage covenant.
On October 18, 2013, we executed an amendment to our Credit Facilities which increases the maximum leverage ratio, as
defined, by 0.75 in all future periods.
At December 31, 2014, we had approximately $58.5 million of unused borrowing capacity under the Revolving Credit Facility
after deducting approximately $1.5 million for standby letters of credit. Upon the satisfaction of certain conditions, including
but not limited to, the agreement of lenders to provide such facilities or commitments, we also have the option to add one or
more incremental term loan facilities or increase commitments under our Credit Facility by an aggregate amount of up to $75.0
million.
Senior Unsecured Notes
In connection with the LaBarge Acquisition, we issued $200.0 million of senior unsecured notes (the “Notes”) with interest of
9.75% per annum, payable semi-annually on January 15 and July 15 of each year, beginning in 2012. The Notes become
callable on July 15, 2015 and mature on July 15, 2018, at which time the entire principal amount is due.
Upon a change of control, as defined, we will be required to offer to purchase all of the Notes then outstanding for cash at
101% of the principal amount plus accrued and unpaid interest, if any, on the date of purchase on the Notes. A change of
control under the indenture governing the Notes may also result in an event of default under our Credit Facilities which may
cause the acceleration of indebtedness outstanding thereunder, in which case, proceeds of collateral pledged to secure
borrowings thereunder would be used to repay such borrowings before we repay the Notes.
The Notes were issued by us (“Parent Company”) and guaranteed by all of our subsidiaries, other than one subsidiary
(“Subsidiary Guarantors”) that was considered minor. The Parent Company has no independent assets or operations and the
Subsidiary Guarantors are jointly and severally guarantee, on a senior unsecured basis, the Notes. Therefore, no condensed
consolidating financial information for the Parent Company and its subsidiaries are presented.
Promissory Note
On December 23, 2013, we paid our $3.0 million promissory note issued in connection with the 2008 acquisition of DAS-New
York, according to terms.
Fair Value of Long-Term Debt
The carrying amount of long-term debt approximates fair value, except for the Notes for which the fair value was
approximately $213.0 million. Fair value was estimated using Level 2 inputs, based on the terms of the related debt, recent
transactions and estimates using interest rates currently available to us for debt with similar terms and remaining maturities.
The failure to file our 2014 Annual Report on Form 10-K by March 31, 2015 has resulted in defaults, but not an event of
default, under our Credit Facilities and our Notes. The defaults on our Credit Facilities and our Notes are deemed cured with
the filing of this Annual Report on Form 10-K.
Note 8. Shareholders’ Equity
84
We are authorized to issue five million shares of preferred stock. At December 31, 2014 and 2013, no preferred shares were
issued or outstanding.
Note 9. Stock-Based Compensation
Stock Incentive Compensation Plans
We have two stock incentive plans. The 2007 Stock Incentive Plan (the “2007 Plan”), as amended effective March 20, 2007,
and the 2013 Stock Incentive Plan (the “2013 Plan”), collectively referred to as (the “Stock Incentive Plans”), permits awards
of stock options, restricted stock units, performance stock units and other stock-based awards to our officers, key employees
and non-employee directors on terms determined by the Compensation Committee of the Board of Directors (the
“Committee”). The aggregate number of our shares available for issuance under the 2007 Plan and 2013 Plan are 1,200,000 and
240,000, respectively. Under the 2007 Plan, no more than an aggregate of 400,000 shares are available for issue of stock-based
awards other than stock options and stock appreciation rights. As of December 31, 2014, shares available for future grant under
the 2007 Plan and 2013 Plan are 4,198 and 19,800, respectively. Prior the adoption of the 2007 Plan, we granted stock-based
awards to purchase shares of our common stock to officers, key employees and non-employee directors under certain
predecessor plans. No further awards can be granted under these predecessor plans.
Stock Options
In the years ended December 31, 2014, 2013, and 2012, we granted stock options to our officers, key employees and non-
employee directors of 71,000, 190,500, and 222,100, respectively, with weighted-average grant date fair values of
approximately $12.62, $10.95, and $4.95, respectively. Stock options have been granted with an exercise price equal to the fair
market value of our stock on the date of grant and expire not more than ten years from the date of grant. The stock options vest
over a period of four years after the date of grant. The option price and number of shares are subject to adjustment under certain
dilutive circumstances. If an employee terminates employment, the non-vested portion of the stock options will not vest and all
rights to the non-vested portion will terminate completely.
Stock option activity for the year ended December 31, 2014 were as follows:
Outstanding at January 1, 2014
Granted
Exercised
Expired
Forfeited
Outstanding at December 31, 2014
Exerciseable at December 31, 2014
Number
of Stock
Options
702,001
71,000
(117,149)
(8,387)
(35,488)
611,977
288,412
$
$
$
Weighted-
Average
Exercise
Price Per
Share
Weighted-
Average
Remaining
Contractual
Life (Years)
Aggregate
Intrinsic Value
(in thousands)
18.46
24.90
19.43
22.79
17.44
19.02
18.61
4.2
3.2
$
$
3,834
1,925
Changes in nonvested stock options for the year ended December 31, 2014 were as follows:
Nonvested at January 1, 2014
Granted
Vested
Forfeited
Nonvested at December 31, 2014
Weighted-
Average
Grant
Date Fair
Value
8.24
12.62
7.87
8.14
9.42
Number of
Stock Options
456,251
71,000
(168,198)
(35,488)
323,565
$
$
The aggregate intrinsic value of stock options represents the amount by which the market price of our common stock exceeds
the exercise price of the stock option. The aggregate intrinsic value of stock options exercised for the years ended
85
December 31, 2014, 2013 and 2012 was approximately $1.0 million, $2.6 million, and zero, respectively. Cash received from
stock option exercised for the years ended December 31, 2014, 2013 and 2012 was approximately $2.3 million, $8.8 million,
and zero, respectively, with related tax benefits of $0.4 million, $1.0 million, and zero, respectively. The total stock options
vested and expected to vest in the future are 611,977 shares with a weighted-average exercise price of approximately $19.02
and an aggregate intrinsic value of approximately $3.8 million. These stock options have a weighted-average remaining
contractual term of approximately 4.2 years.
The share-based compensation cost expensed for stock options for the years ended December 31, 2014 , 2013, and 2012
(before tax benefits) was approximately $1.5 million, $1.2 million, and $1.1 million, respectively, and is included in selling,
general and administrative expenses on the consolidated income statements. At December 31, 2014, total unrecognized
compensation cost (before tax benefits) related to stock options of approximately $2.4 million is expected to be recognized over
a weighted-average period of approximately 2.4 years. The weighted-average grant date fair value of stock options granted
during the years ended December 31, 2014, 2013, and 2012 was approximately $12.62, $10.95, and $4.95. The total fair value
of stock options vested during the years ended December 31, 2014, 2013, and 2012 was approximately $1.3 million, $1.1
million, and $1.3 million, respectively.
The assumptions used to compute the fair value of stock option grants under the Stock Incentive Plans for years ended
December 31, 2014, 2013, and 2012 were as follows:
Risk-free interest rate
Expected volatility
Expected dividends
Expected term (in months)
Years Ended December 31,
2014
2013
2012
1.67%
55.27%
—
66
1.44%
53.89%
—
66
0.59%
57.05%
—
66
We apply fair value accounting for stock-based compensation based on the grant date fair value estimated using a Black-
Scholes-Merton (“Black-Scholes”) valuation model. We recognize compensation expense, net of an estimated forfeiture rate,
on a straight-line basis over the requisite service period of the award. We have one award population with an option vesting
term of four years. We estimate the forfeiture rate based on our historic experience, attempting to determine any discernible
activity patterns. The expected life computation is based on historic exercise patterns and post-vesting termination behavior.
The risk-free interest rate for periods within the contractual life of the award is based on the U.S. Treasury yield curve in effect
at the time of grant. The expected volatility is derived from historical volatility of our common stock. We suspended payments
of dividends after the first quarter of 2011.
Restricted Stock Units
We granted restricted stock units (“RSUs”) to certain officers, key employees and non-employee directors of approximately
86,300, 65,550, and 73,900 RSUs during the years ended December 31, 2014, 2013, and 2012, respectively, with weighted-
average grant date fair values (equal to the fair market value of our stock on the date of grant) of approximately $24.74, $18.75,
and $13.18 per share, respectively. RSUs represent a right to receive a share of stock at future vesting dates with no cash
payment required from the holder. The RSUs have a three year vesting term of approximately 33%, 33% and 34% on the first,
second and third anniversaries of the date of grant. If an employee terminates employment, their non-vested portion of the
RSUs will not vest and all rights to the non-vested portion will terminate.
Restricted stock unit activity for the year ended December 31, 2014 was as follows:
Outstanding at January 1, 2014
Granted
Vested
Forfeited
Outstanding at December 31, 2014
Number of
Restricted
Stock Units
Weighted-
Average
Grant
Date Fair
Value
93,358
86,300
(52,115)
(4,600)
122,943
$
$
17.79
24.74
19.51
24.90
21.67
The share-based compensation cost expensed for RSUs for the years ended December 31, 2014 , 2013, and 2012 (before tax
benefits) was approximately $1.3 million, $0.9 million, and $0.7 million respectively, and is included in selling, general and
86
administrative expenses on the consolidated income statements. At December 31, 2014, total unrecognized compensation cost
(before tax benefits) related to RSUs of approximately $1.6 million is expected to be recognized over a weighted average
period of approximately 1.8 years. The total fair value of RSUs vested for the years ended December 31, 2014 , 2013, and 2012
was approximately $1.3 million, $1.1 million, and $0.6 million, respectively. The actual tax benefit realized for tax deductions
from vested RSUs for the years ended December 31, 2014 , 2013, and 2012 was approximately $0.5 million, $0.4 million, and
$0.3 million, respectively.
Performance Stock Units
We granted performance stock awards (“PSUs”) to certain key employees of approximately 67,500, 85,500, and 82,500 PSUs
during the years ended December 31, 2014, 2013, and 2012, respectively, with weighted-average grant date fair values of
approximately $24.90, $16.15, and $13.04 per share, respectively. PSU awards are subject to the attainment of performance
goals established by the Committee, the periods during which performance is to be measured, and all other limitations and
conditions applicable to the awarded shares. Performance goals are based on a pre-established objective formula or standard
that specifies the manner of determining the number of performance stock awards that will be granted if performance goals are
attained. If an employee terminates employment, their non-vested portion of the PSUs will not vest and all rights to the non-
vested portion will terminate.
Performance stock activity for the year ended December 31, 2014 is as follows:
Outstanding at January 1, 2014
Granted
Vested
Forfeited
Outstanding at December 31, 2014
Number of
Performance
Stock Units
Weighted-
Average
Grant
Date Fair
Value
152,972
67,500
(847)
(51,467)
168,158
$
$
15.44
24.90
13.04
16.45
18.94
The share-based compensation cost expensed for PSUs for the years ended December 31, 2014 , 2013, and 2012 (before tax
benefits) was approximately $1.0 million, $0.3 million and $0.6 million, respectively, and is included in selling, general and
administrative expenses on the consolidated income statements. At December 31, 2014, total unrecognized compensation cost
(before tax benefits) related to PSUs of approximately $1.5 million is expected to be recognized over a weighted-average
period of approximately 1.3 years. The total fair value of PSUs vested during the years ended December 31, 2014, 2013, and
2012 was less than or equal to approximately $0.1 million, zero, and $0.1 million, respectively. No tax benefits were realized
for tax deductions from vested PSUs for the years ended December 31, 2014 , 2013, and 2012.
Note 10. Employee Benefit Plans
Supplemental Retirement Plans
We have three unfunded supplemental retirement plans. The first plan was suspended in 1986, but continues to cover certain
former executives. The second plan was suspended in 1997, but continues to cover certain current and retired directors. The
third plan covers certain current and retired employees and further employee contributions to this plan were suspended on
August 5, 2011. The liability for the third plan and interest thereon is included in accrued employee compensation and long-
term liabilities and was approximately $0.3 million and $2.0 million, respectively, at December 31, 2014 and $0.4 million and
$2.0 million, respectively, at December 31, 2013. The accumulated benefit obligations of the other two plans at December 31,
2014 and December 31, 2013 were approximately $0.9 million and $1.1 million, respectively, and are included in accrued
liabilities.
Defined Contribution 401(K) Plans
We sponsor, for all our employees, two 401(k) defined contribution plans.The first plan covers all employees, other than
employees at our Miltec subsidiary, and allows the employees to make annual voluntary contributions not to exceed the lesser
of an amount equal to 25% of their compensation or limits established by the Internal Revenue Code. Under this plan, we
generally provide a match equal to 50% of the employee’s contributions up to the first 6% of compensation, except for union
employees who are not eligible to receive the match. The second plan covers only the employees at our Miltec subsidiary, and
87
in 2013 the provisions of the Miltec plan were changed to be the same as our other plan. Prior to 2013, the Miltec plan allowed
employees to make annual voluntary contributions not to exceed the lesser of an amount equal to 100% of their compensation
or limits established by the Internal Revenue Code. Under this plan, Miltec generally (i) provided a match equal to 100% of the
employee’s contributions up to the first 5% of compensation, (ii) contributions of 3% of an employee’s compensation annually,
and (iii) contributions, at our discretion of 0% to 7% of an employee’s compensation annually. Our provision for matching and
profit sharing contributions for the three years ended December 31, 2014, 2013, and 2012 was approximately $3.3 million, $3.1
million, and $3.8 million, respectively.
Other Plans
We have a defined benefit pension plan covering certain hourly employees of a subsidiary (the “Pension Plan”). Pension plan
benefits are generally determined on the basis of the retiree’s age and length of service. Assets of this defined benefit pension
plan are composed primarily of fixed income and equity securities. We also have a retirement plan covering certain current and
retired employees (the “LaBarge Retirement Plan”).
The components of net periodic pension cost for both plans are as follows:
Service cost
Interest cost
Expected return on plan assets
Amortization of actuarial losses
Net periodic pension cost
(In thousands)
Years Ended December 31,
2014
2013
2012
$
$
693
1,278
(1,400)
419
990
$
$
843
1,160
(1,222)
1,093
1,874
$
$
749
1,167
(1,060)
1,147
2,003
The components of the reclassifications of net actuarial losses from accumulated other comprehensive loss to net income for
2014 were as follows:
Amortization of actuarial loss - total before tax (1)
Tax benefit
Net of tax
(In thousands)
Year Ended
December 31,
2014
$
$
419
(156)
263
(1) The amortization expense is included in the computation of periodic pension cost and is a decrease to net income upon
reclassification from accumulated other comprehensive loss.
The estimated net actuarial loss for both plans that will be amortized from accumulated other comprehensive loss into net
periodic cost during 2015 is approximately $0.9 million.
The obligations and funded status of both plans are as follows:
88
Change in benefit obligation(1)
Beginning benefit obligation (January 1)
Service cost
Interest cost
Actuarial (gain) loss
Benefits paid
Ending benefit obligation (December 31)
Change in plan assets
Beginning fair value of plan assets (January 1)
Return on assets
Employer contribution
Benefits paid
Ending fair value of plan assets (December 31)
Funded status (under funded)
Amounts recognized in the consolidated balance sheet
Current liabilities
Non-current liabilities
Unrecognized loss included in accumulated other comprehensive loss
Beginning unrecognized loss, before tax (January 1)
Amortization
Liability (gain) loss
Asset (gain) loss
Ending unrecognized loss, before tax (December 31)
Tax impact
Unrecognized loss included in accumulated other comprehensive loss, net of tax
Prepaid benefit cost included in other assets
Accrued benefit cost included in other liabilities
(In thousands)
December 31,
2014
2013
$
$
$
$
$
$
$
$
$
$
$
$
28,438
693
1,278
4,117
(1,227)
33,299
$
$
$
18,367
669
1,916
(1,227)
19,725
$
(13,574) $
464
13,110
6,183
(419)
4,117
733
10,614
(3,970)
6,644
1,832
4,795
$
$
$
$
$
$
$
31,142
843
1,160
(3,372)
(1,335)
28,438
14,687
2,509
2,506
(1,335)
18,367
(10,071)
497
9,574
11,934
(1,093)
(3,372)
(1,286)
6,183
(2,321)
3,862
1,135
5,024
(1) Projected benefit obligation equals the accumulated benefit obligation for the plans.
On December 31, 2014, our annual measurement date, the accumulated benefit obligation exceeded the fair value of the plans
assets by approximately $13.6 million. Such excess is referred to as an unfunded accumulated benefit obligation. We recorded
unrecognized loss included in accumulated other comprehensive loss, net of tax at December 31, 2014 and 2013 of
approximately $6.6 million and $3.9 million, respectively, which decreased shareholders’ equity and was included in other
long-term liabilities. This charge to shareholders’ equity represents a net loss not yet recognized as pension expense. This
charge did not affect reported earnings, and would be decreased or be eliminated if either interest rates increase or market
performance and plan returns improve or contributions cause the Pension Plan to return to fully funded status.
Our Pension Plan asset allocations at December 31, 2014 and 2013, by asset category, were as follows:
Equity securities
Cash and equivalents
Debt securities
Total(1)
December 31,
2014
2013
76%
4%
20%
100%
78%
4%
18%
100%
(1) Our overall investment strategy is to achieve an asset allocation within the following ranges to achieve an appropriate
rate of return relative to risk.
89
Cash
Fixed income securities
Equities
0-25%
0-50%
50-95%
Pension Plan assets consist primarily of listed stocks and bonds and do not include any of the Company’s securities. The return
on assets assumption reflects the average rate of return expected on funds invested or to be invested to provide for the benefits
included in the projected benefit obligation. We select the return on asset assumption by considering our current and target asset
allocation. We consider information from various external investment managers, forward-looking information regarding
expected returns by asset class and our own judgment when determining the expected returns.
Cash and other investments
Fixed income securities
Equities(1)
Total
Cash and other investments
Fixed income securities
Equities(1)
Total
(In thousands)
Year Ended December 31, 2014
Level 1
Level 2
Level 3
Total
886
3,896
9,687
14,469
$
$
— $
—
5,257
5,257
$
— $
—
—
— $
886
3,896
14,944
19,726
(In thousands)
Year Ended December 31, 2013
Level 1
Level 2
Level 3
Total
716
3,328
10,674
14,718
$
$
— $
—
3,649
3,649
$
— $
—
—
— $
716
3,328
14,323
18,367
$
$
$
$
(1) Represents mutual funds and commingled accounts which invest primarily in equities, but may also hold fixed income
securities, cash and other investments.
The valuation techniques used to determine fair value are as follows. Commingled funds with publicly quoted prices and active
trading are classified as Level 1 investments. For commingled funds that are not publicly traded and have ongoing subscription
and redemption activity, the fair value of the investment is the net asset value (“NAV”) per share, derived from the underlying
securities’ quoted prices in active markets. These funds are classified as Level 2 investments.
The assumptions used to determine the benefit obligations and expense for our two plans are presented in the tables below. The
expected long-term return on assets, noted below, represents an estimate of long-term returns on investment portfolios
consisting of a mixture of fixed income and equity securities. The estimated cash flows from the plans for all future years are
determined based on the plans’ population at the measurement date. We took the expected benefit payouts from the plans for
each year into the future, and discounted them back to the present using the Wells Fargo yield curve rate for that duration.
The weighted-average assumptions used to determine the net periodic benefit costs under the two plans were as follows:
Discount rate used to determine pension expense
Pension Plan
LaBarge Retirement Plan
Years Ended December 31,
2014
2013
2012
4.75%
4.00%
4.00%
3.10%
4.30%
3.75%
The weighted-average assumptions used to determine the benefit obligations under the two plans were as follows:
90
Discount rate used to determine value of obligations
Pension Plan
LaBarge Retirement Plan
Long-term rate of return - Pension Plan only
2014
December 31,
2013
2012
4.25%
3.70%
7.50%
4.75%
4.00%
8.00%
4.00%
3.10%
8.50%
The following benefit payments under both plans, which reflect expected future service, as appropriate, are expected to be paid:
2015
2016
2017
2018
2019
Thereafter
$
(In thousands)
LaBarge
Retirement
Plan
Pension Plan
$
1,053
1,081
1,126
1,230
1,272
7,408
510
507
502
494
484
2,202
Our funding policy is to contribute cash to our plans so that the minimum contribution requirements established by government
funding and taxing authorities are met. We expect to make contributions of approximately $2.2 million to the plans in 2015.
Note 11. Indemnifications
We have made guarantees and indemnities under which we may be required to make payments to a guaranteed or indemnified
party, in relation to certain transactions, including revenue transactions in the ordinary course of business. In connection with
certain facility leases, we have indemnified our lessors for certain claims arising from the facility or the lease. We indemnify
our directors and officers to the maximum extent permitted under the laws of the State of Delaware.
However, we have a directors and officers insurance policy that may reduce our exposure in certain circumstances and may
enable us to recover a portion of future amounts that may be payable, if any. The duration of the guarantees and indemnities
varies and, in many cases is indefinite but subject to statute of limitations. The majority of guarantees and indemnities do not
provide any limitations of the maximum potential future payments we could be obligated to make. Historically, payments
related to these guarantees and indemnities have been immaterial. We estimate the fair value of our indemnification obligations
as insignificant based on this history and insurance coverage and have, therefore, not recorded any liability for these guarantees
and indemnities in the accompanying consolidated balance sheets.
Note 12. Leases
We lease certain facilities and equipment for periods ranging from one to ten years. The leases generally are renewable and
provide for the payment of property taxes, insurance and other costs relative to the property. Rental expense in 2014, 2013, and
2012 was approximately $7.3 million, $7.9 million, and $8.2 million, respectively. Future minimum rental payments under
operating leases having initial or remaining non-cancelable terms in excess of one year at December 31, 2014 were as follows:
2015
2016
2017
2018
2019
Thereafter
Total
Note 13. Income Taxes
91
(In thousands)
6,217
5,103
2,592
1,340
532
243
16,027
$
$
Our pre-tax income attributable to foreign operations were not material. The provision for income tax expense (benefit)
consisted of the following:
Current tax expense (benefit)
Federal
State
Deferred tax expense (benefit)
Federal
State
Income tax expense (benefit)
Deferred tax (liabilities) assets were comprised of the following:
Deferred tax assets:
Accrued expenses
Allowance for doubtful accounts
Contract overrun reserves
Deferred compensation
Employment-related accruals
Environmental reserves
Federal tax credit carryforwards
Inventory reserves
Investment in common stock
Pension obligation
State net operating loss carryforwards
State tax credit carryforwards
Stock-based compensation
Workers’ compensation
Other
Total gross deferred tax assets
Valuation allowance
Total gross deferred tax assets, net of valuation allowance
Deferred tax liabilities:
Depreciation
Goodwill
Intangibles
Prepaid insurance
Section 48(a) adjustment
Unbilled receivables
Total gross deferred tax liabilities
Net deferred tax liabilities
92
(In thousands)
Years Ended December 31,
2014
2013
2012
As Restated
As Restated
$
$
5,258
244
5,502
1,186
(315)
871
6,373
$
$
(3,806) $
432
(3,374)
1,173
208
1,381
(1,993) $
2,023
(295)
1,728
5,516
(743)
4,773
6,501
(In thousands)
December 31,
2014
2013
As Restated
$
$
$
1,669
94
1,766
464
5,375
778
2,696
3,873
300
3,959
1,065
5,382
2,082
121
1,072
30,696
(6,882)
23,814
(12,485)
(12,105)
(51,755)
(685)
(1,334)
(1,115)
(79,479)
(55,665) $
428
183
3,920
141
2,982
778
3,758
4,639
300
2,297
995
3,887
1,444
121
1,355
27,228
(4,650)
22,578
(12,396)
(9,200)
(54,227)
(666)
—
(1,409)
(77,898)
(55,320)
We have federal tax credit carryforwards of approximately $2.7 million, which begin to expire in 2033. In addition, we have
recorded benefits for those carryforwards expected to be utilized on tax returns filed in the future. Further, there was an
approximate $1.0 million of federal tax credit carryforwards unrecognized as a result of the application of ASC Subtopic
740-10.
We have state tax credit carryforwards of approximately $8.3 million, which begin to expire in 2017, and state net operating
losses of approximately $26.6 million, which begin to expire in 2015. We have recorded a full valuation allowance on these
carryforwards as they are not expected to be realized. Further, there was an approximate $1.0 million of state tax credit
carryforwards unrecognized as a result of the application of ASC Subtopic 740-10.
We have established a valuation allowance for items that are not expected to provide future tax benefits. We believe it is more
likely than not that we will generate sufficient taxable income to realize the benefit of the remaining deferred tax assets.
The principal reasons for the variation between the expected and effective tax rates were as follows:
Statutory federal income tax rate
State income taxes (net of federal benefit)
Benefit of qualified domestic production activities
(Benefit) expense of research and development tax credits
Increase in valuation allowance
Non deductible book expenses
Changes in deferred tax assets
Remeasurement of deferred taxes for changes in state tax law
Changes in tax reserves
Other
Effective income tax rate (benefit)
2014
35.0%
0.8
(2.3)
(7.3)
—
0.9
—
(2.1)
(0.7)
—
24.3%
Years Ended December 31,
2013
As Restated
35.0%
2.0
(8.9)
(48.9)
0.9
1.8
(1.5)
—
(0.5)
(1.1)
(21.2)%
2012
As Restated
35.0%
3.8
(3.1)
0.6
0.2
0.4
0.3
(5.6)
(5.3)
0.6
26.9%
The deduction for qualified domestic production activities is treated as a “special deduction” which has no effect on deferred
tax assets and liabilities. Instead, the impact of this deduction is reported in our rate reconciliation.
We recorded an income tax expense of approximately $6.4 million (an effective tax rate of 24.3%) in 2014, compared to an
income tax benefit of approximately $2.0 million (an effective tax benefit rate of 21.2%) in 2013. In December 2014, the
federal research and development tax credit was retroactively extended from the beginning of 2014. We recognized total federal
research and development tax credits of approximately $2.4 million in 2014.
The effective tax rate for 2013 included approximately $2.0 million of 2012 federal research and development tax credit
benefits recognized in the first quarter of 2013 as a result of the American Taxpayer Relief Act (the “Act”) of 2012 passed in
January 2013. The Act includes an extension of the federal research and development tax credit for the amounts paid or
incurred after December 31, 2011 and before January 1, 2014. We recognized total federal research and development tax credit
benefits of approximately $4.5 million in 2013.
We record interest and penalty charge, if any, related to uncertain tax positions as a component of tax expense. During the three
years ended December 31, 2014, 2013 and 2012, we recognized approximately zero, zero and $(0.1) million, respectively, in
interest benefit related to uncertain tax positions. We had approximately $0.1 million for payment of interest and penalties
accrued for all three years ended December 31, 2014, 2013, and 2012.
Our total amount of unrecognized tax benefits was approximately $2.8 million, $2.3 million, and $1.4 million at December 31,
2014, 2013, and 2012 respectively. Approximately $1.9 million, if recognized, would affect the annual income tax rate. We do
not reasonably expect significant increases or decreases to our unrecognized tax benefits in the next twelve months.
A reconciliation of the beginning and ending amount of unrecognized tax benefits was as follows:
93
Balance at January 1,
Additions based on tax positions related to the current year
Additions for tax positions for prior years
Reductions for tax positions for prior years
Reduction to unrecognized tax benefits as a result of a lapse of the
applicable statute of limitations
Balance at December 31,
$
$
(In thousands)
Years Ended December 31,
2014
2013
2012
As Restated
As Restated
$
2,297
668
31
(22)
(171)
2,803
$
$
1,356
668
538
—
(265)
2,297
$
2,194
214
68
(300)
(820)
1,356
Federal income tax returns after 2010, California franchise (income) tax returns after 2009 and other state income tax returns
after 2009 are subject to examination.
Note 14. Contingencies
On October 8, 2014, the United States District Court for the District of Kansas (the “District Court”) granted summary
judgment in favor of The Boeing Company (“Boeing”) and Ducommun and dismissed the lawsuit entitled United States of
America ex rel Taylor Smith, Jeannine Prewitt and James Ailes v. The Boeing Company and Ducommun Inc.. The lawsuit was a
qui tam action brought by three former Boeing employees (“Relators”) against Boeing and Ducommun on behalf of the United
States of America for violations of the United States False Claims Act. Relators have appealed the dismissal to the Tenth
Circuit Court of Appeals. The lawsuit alleged that Ducommun sold unapproved parts to Boeing which were installed by Boeing
in aircraft ultimately sold to the United States Government and that Boeing and Ducommun submitted or caused to be
submitted false claims for payment relating to 21 aircraft sold by Boeing to the United States Government. The lawsuit sought
damages in an amount equal to three times the amount of damages the United States Government sustained because of the
defendants’ actions, plus a civil penalty of $10 thousand for each false claim made on or before September 28, 1999, and $11
thousand for each false claim made on or after September 28, 1999, together with attorneys’ fees and costs. The Relators
claimed that the United States Government sustained damages of $1.6 billion (the contract purchase price of 21 aircraft) or,
alternatively, $851 million (the alleged diminished value and increased maintenance cost of the 21 aircraft). After investigating
the allegations, the United States Government declined to intervene in the lawsuit.
DAS has been directed by California environmental agencies to investigate and take corrective action for groundwater
contamination at its facilities located in El Mirage and Monrovia, California. Based on currently available information,
Ducommun has established a reserve for its estimated liability for such investigation and corrective action of approximately
$1.5 million at December 31, 2014, which is reflected in other long-term liabilities on its consolidated balance sheet.
DAS also faces liability as a potentially responsible party for hazardous waste disposed at landfills located in Casmalia and
West Covina, California. DAS and other companies and government entities have entered into consent decrees with respect to
these landfills with the United States Environmental Protection Agency and/or California environmental agencies under which
certain investigation, remediation and maintenance activities are being performed. Based on currently available information,
Ducommun preliminarily estimates that the range of its future liabilities in connection with the landfill located in West Covina,
California is between approximately $0.4 million and $3.1 million. Ducommun has established a reserve for its estimated
liability, in connection with the West Covina landfill of approximately $0.4 million at December 31, 2014, which is reflected in
other long-term liabilities on its consolidated balance sheet. Ducommun’s ultimate liability in connection with these matters
will depend upon a number of factors, including changes in existing laws and regulations, the design and cost of construction,
operation and maintenance activities, and the allocation of liability among potentially responsible parties.
In the normal course of business, Ducommun and its subsidiaries are defendants in certain other litigation, claims and inquiries,
including matters relating to environmental laws. In addition, Ducommun makes various commitments and incurs contingent
liabilities. While it is not feasible to predict the outcome of these matters, Ducommun does not presently expect that any sum it
may be required to pay in connection with these matters would have a material adverse effect on its consolidated financial
position, results of operations or cash flows.
Note 15. Major Customers and Concentrations of Credit Risk
We provide proprietary products and services to the Department of Defense and various United States Government agencies,
and most of the aerospace and aircraft manufacturers who receive contracts directly from the U.S. Government as an original
equipment manufacturer (“prime manufacturers”). In addition, we also service technology-driven markets in the industrial,
94
natural resources and medical and other end-use markets. As a result, we have significant net revenues from certain customers.
Accounts receivable were diversified over a number of different commercial, military and space programs and were made by
both operating segments. Net revenues from our top ten customers, including the Boeing Company (“Boeing”) and Raytheon
Company (“Raytheon”), represented the following percentages of total net sales:
Boeing
Raytheon
Top ten customers
Years Ended December 31,
2014
2013
2012
20%
9%
59%
18%
10%
57%
Boeing and Raytheon represented the following percentages of total accounts receivable:
Boeing
Raytheon
December 31,
2014
2013
12%
10%
17%
7%
55%
12%
8%
In 2014, 2013 and 2012, net revenues from foreign customers on the location of the customer, were approximately $66.7
million, $66.0 million and $52.1 million, respectively. No net revenues from a foreign country were greater than approximately
2% of total net revenues in 2014, 2013, and 2012. We have manufacturing facilities in Thailand and Mexico. Our net revenues,
profitability and identifiable long-lived assets attributable to foreign revenues activity were not material compared to our net
revenues, profitability and identifiable long-lived assets attributable to our domestic operations during 2014, 2013, and 2012.
We are not subject to any significant foreign currency risks as all our sales are made in United States dollars.
Note 16. Business Segment Information
We supply products and services primarily to the aerospace and defense industries. Our subsidiaries are organized into two
strategic businesses, DAS and DLT, each of which is a reportable operating segment.
95
Financial information by reportable operating segment was as follows:
Net Revenues
DAS
DLT
Total Net Revenues
Segment Operating Income (1)
DAS (4)
DLT (2)
Corporate General and Administrative Expenses (1)(2)(3)
Operating Income
Depreciation and Amortization Expenses
DAS
DLT
Corporate Administration
Total Depreciation and Amortization Expenses
Capital Expenditures
DAS
DLT
Corporate Administration
Total Capital Expenditures
(In thousands)
Years Ended December 31,
2014
2013
2012
As Restated
As Restated
$
$
$
$
$
$
$
$
319,956
422,089
742,045
34,949
34,599
69,548
(17,781)
51,767
10,959
17,928
137
29,024
12,742
5,782
30
18,554
$
$
$
$
$
$
$
$
315,232
421,418
736,650
19,008
37,030
56,038
(16,735)
39,303
12,406
18,346
174
30,926
8,287
5,000
116
13,403
$
$
$
$
$
$
$
$
309,982
437,055
747,037
30,586
41,013
71,599
(14,677)
56,922
10,313
18,934
166
29,413
7,950
7,809
54
15,813
(1) Includes cost not allocated to either the DLT or DAS operating segments.
(2) 2012 includes merger-related transaction costs of approximately $0.3 million in Corporate General and Administrative
Expenses related to the LaBarge Acquisition. In addition, 2012 includes approximately $0.4 million in DLT resulting
from a change-in-control provision for certain key executives and employees arising in connection with the LaBarge
Acquisition.
(3) The 2014, 2013 and 2012 periods include approximately zero, $1.2 million and $0.6 million, respectively, of workers'
compensation insurance expenses included in gross profit and not allocated to the operating segments.
(4) The 2013 period includes approximately $14.1 million in charges related to fourth quarter asset impairment charges of
$5.7 million on the Embraer Legacy 450/500 contracts and $1.3 million on the Boeing 777 wing tip contract; forward
loss reserves of $3.9 million on the Embraer Legacy 450/500 contracts and $1.3 million on the Boeing 777 wing tip
contract; and inventory write-offs of $1.9 million on the Embraer Legacy 450/500 contracts.
Segment assets include assets directly identifiable with each segment. Corporate assets include assets not specifically identified
with a business segment, including cash. The following table summarizes our segment assets for 2014 and 2013:
96
Total Assets
DAS
DLT
Corporate Administration
Total Assets
Goodwill and Intangibles
DAS
DLT
Total Goodwill and Intangibles
(In thousands)
December 31,
2014
2013
As Restated
$
$
$
$
245,925
427,719
73,955
747,599
63,497
249,176
312,673
$
$
$
$
241,502
439,853
81,290
762,645
65,213
257,821
323,034
Note 17. Supplemental Quarterly Financial Data (Unaudited)
As discussed in Note 2, we have restated our consolidated financial statements for the years ended December 31, 2013 and
2012 and our unaudited quarterly financial information for the first three quarters in the year ended December 31, 2014 and
each of the quarters in the year ended December 31, 2013 (the “Restated Periods”). The quarterly financial results presented in
the table below reflects the impact of the restatement adjustments of all the Restated Periods.
(In thousands, except per share amounts)
Three Months Ended
2014
Three Months Ended
2013
Dec 31
Sep 27
Jun 28
Mar 29
Dec 31
Sep 28
Jun 29
Mar 30
As Restated
As Restated
As Restated
As Restated
As Restated
As Restated
As Restated
$ 187,612
$ 188,164
$ 186,516
$ 179,753
$ 187,975
$ 181,288
$ 191,472
$ 175,915
33,627
33,112
37,678
35,915
19,565
33,739
37,574
33,274
4,034
4,687
9,816
7,703
(7,359)
5,985
7,859
2,900
Net Revenues
Gross Profit
Income (Loss) Before
Taxes
Income Tax (Benefit)
Expense
Net Income (Loss)
$
5,156
$
2,933
$
6,619
$
(1,122)
1,754
3,197
2,544
5,159
(2,115)
$ (5,244) $
(1,000)
6,985
2,193
$
5,666
$
(1,071)
3,971
Earnings (Loss) Per
Share
Basic earnings
(loss) per share
Diluted earnings
(loss) per share
$
$
0.47
0.46
$
$
0.27
0.26
$
$
0.61
0.60
$
$
0.48
0.46
$
$
(0.49) $
0.65
(0.49) $
0.64
$
$
0.53
0.53
$
$
0.37
0.37
97
DUCOMMUN INCORPORATED AND SUBSIDIARIES
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(in thousands)
SCHEDULE II
Description
2014
Allowance for
Doubtful Accounts
Valuation Allowance on Deferred
Tax Assets
2013
Allowance for
Doubtful Accounts
Valuation Allowance on Deferred
Tax Assets (As Restated)(a)
2012
Allowance for
Doubtful Accounts
Valuation Allowance on Deferred
Tax Assets (As Restated)(a)
$
$
$
Additions
Balance at
Beginning
of Period
Charged to
Costs and
Expenses
Charged to Other
Accounts
Deductions
Balance at End
of Period
489
$
166
$
— $
403
$
252
4,650
2,232
—
—
6,882
566
$
430
$
— $
507
$
489
3,753
999
—
102
4,650
488
$
115
$
— $
37
$
566
2,008
1,815
—
70
3,753
(a) See Note 2 to our consolidated financial statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K.
98
Exhibit
No.
2.1
3.1
3.2
3.3
3.4
4.1
10.2
EXHIBIT INDEX
Description
Agreement and Plan of Merger, dated as of April 3, 2011, among Ducommun Incorporated, DLBMS, Inc. and
LaBarge, Inc. Incorporated by reference to Exhibit 2.1 to Form 8-K filed on April 5, 2011.
Restated Certificate of Incorporation filed with the Delaware Secretary of State on May 29, 1990. Incorporated by
reference to Exhibit 3.1 to Form 10-K for the year ended December 31, 1990.
Certificate of Amendment of Certificate of Incorporation filed with the Delaware Secretary of State on May 27, 1998.
Incorporated by reference to Exhibit 3.2 to Form 10-K for the year ended December 31, 1998.
Bylaws as amended and restated on March 19, 2013. Incorporated by reference to Exhibit 99.1 to Form 8-K dated
March 22, 2013.
Amendment No. 2 to Bylaws dated August 1, 2013. Incorporated by reference to Exhibit 99.2 to Form 8-K dated
August 5, 2013.
Indenture, dated June 28, 2011, between Ducommun Incorporated, certain of its subsidiaries and Wilmington Trust
FSB, as trustee. Incorporated by reference to Exhibit 4.1 to Form 8-K filed on July 1, 2011.
Credit Agreement, dated as of June 28, 2011, among Ducommun Incorporated, certain of its subsidiaries, UBS
Securities LLC and Credit Suisse Securities (USA) LLC as joint lead arrangers, UBS AG, Stamford Branch as issuing
bank, administrative agent and collateral agent, and other lenders party thereto. Incorporated by reference to Exhibit
10.1 to Form 8-K filed on July 1, 2011.
10.3 Amendment No. 1 to Credit Agreement, dated as of March 28, 2013, by and among Ducommun Incorporated, certain
of its subsidiaries, UBS AG, Stamford Branch as administrative agent, collateral agent, swingline bank and issuing
bank and other lenders party thereto. Incorporated by reference to Exhibit 10.1 to Form 8-K dated March 28, 2013.
10.4 Amendment No. 2 to Credit Agreement, dated as of October 18, 2013 by and among Ducommun Incorporated, certain
of its subsidiaries, and UBS AG, Stamford Branch, as administrative agent, collateral agent, swingline bank and
issuing bank, and other lenders party thereto. Incorporated by reference to Exhibit 10.1 to Form 8-K dated October
23, 2013.
* 10.5 2007 Stock Incentive Plan. Incorporated by reference to Appendix B of Definitive Proxy Statement on Schedule 14a,
filed on March 29, 2010.
*10.6
2013 Stock Incentive Plan. Incorporated by reference to Appendix B of Definitive Proxy Statement on Schedule 14a,
filed on March 25, 2013.
*10.7 Form of Nonqualified Stock Option Agreement, for grants to employees under the 2013 Stock Incentive Plan, the
2007 Stock Incentive Plant and the 2001 Stock Incentive Plan. Incorporated by reference to Exhibit 10.8 to Form 10-K
for the year ended December 31, 2003.
**10.10 Form of Performance Stock Unit Agreement for 2012 and 2013. Incorporated by reference to Exhibit 99.1 to Form 8-
K dated March 29, 2012.
*10.11 Form of Restricted Stock Unit Agreement. Incorporated by reference to Exhibit 99.1 to Form 8-K dated May 8, 2007.
*10.12 Form of Directors’ Restricted Stock Unit Agreement. Incorporated by reference to Exhibit 99.1 to Form 8-K dated
May 10, 2010.
99
Exhibit
No.
Description
*10.13 Form of Key Executive Severance Agreement entered with seven current executive officers of Ducommun.
Incorporated by reference to Exhibit 99.1 to Form 8-K dated January 9, 2008. All of the Key Executive Severance
Agreements are identical except for the name of the executive officer, the address for notice, and the date of the
Agreement:
Executive Officer
Kathryn M. Andrus
Joseph P. Bellino
Joel H. Benkie
Douglas L. Groves
James S. Heiser
Anthony J. Reardon
Rosalie F. Rogers
Date of Agreement
February 18, 2014
November 5, 2009
December 13, 2013
February 18, 2014
December 31, 2007
December 31, 2007
November 5, 2009
*10.14 Form of Indemnity Agreement entered with all directors and officers of Ducommun. Incorporated by reference to
Exhibit 10.8 to Form 10-K for the year ended December 31, 1990. All of the Indemnity Agreements are identical
except for the name of the director or officer and the date of the Agreement:
Director/Officer
Kathryn M. Andrus
Richard A. Baldridge
Joseph C. Berenato
Joseph P. Bellino
Joel H. Benkie
Gregory S. Churchill
Robert C. Ducommun
Dean M. Flatt
Douglas L. Groves
Jay L. Haberland
James S. Heiser
Robert D. Paulson
Anthony J. Reardon
Rosalie F. Rogers
Date of Agreement
January 30, 2008
March 19, 2013
November 4, 1991
September 15, 2008
February 12, 2013
March 19, 2013
December 31, 1985
November 5, 2009
February 12, 2013
February 2, 2009
May 6, 1987
March 25, 2003
January 8, 2008
July 24, 2008
*10.15 Ducommun Incorporated 2015 Bonus Plan. Incorporated by reference to Exhibit 99.1 to Form 8-K dated February 3,
2015.
*10.16 Directors’ Deferred Compensation and Retirement Plan, as amended and restated February 2, 2010. Incorporated by
reference to Exhibit 10.15 to Form 10-K for the year ended December 31, 2009.
*10.17 Employment Letter Agreement dated September 5, 2008 between Ducommun Incorporated and Joseph P. Bellino.
Incorporated by reference to Exhibit 99.1 to Form 8-K dated September 18, 2008.
*10.18 Employment Letter Agreement dated May 3, 2012 between Ducommun Incorporated and Joel H. Benkie. Incorporated
by reference to Exhibit 99.1 to Form 8-K dated June 4, 2012.
*10.19 Form of Performance Stock Unit Agreement for 2014 and after. Incorporated by reference to Exhibit 10.19 to Form 8-
K dated April 28, 2014.
11
21
23
31.1
31.2
Reconciliation of the Numerators and Denominators of the Basic and Diluted Earnings Per Share Computations.
Subsidiaries of the registrant.
Consent of Independent Registered Public Accounting Firm.
Certification of Principal Executive Officer.
Certification of Principal Financial Officer.
100
Exhibit
No.
32
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
Description
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
XBRL Instance Document
XBRL Taxonomy Extension Schema
XBRL Taxonomy Extension Calculation Linkbase
XBRL Taxonomy Extension Definition Linkbase
XBRL Taxonomy Extension Label Linkbase
XBRL Taxonomy Extension Presentation Linkbase
101.PRE
___________________
* Indicates an executive compensation plan or arrangement.
101
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: April 9, 2015
DUCOMMUN INCORPORATED
By:
/s/ Anthony J. Reardon
Anthony J. Reardon
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been duly signed below by the
following persons on behalf of the registrant and in the capacities indicated on April 9, 2015.
Signature
/s/ Anthony J. Reardon
Anthony J. Reardon
/s/ Joseph P. Bellino
Joseph P. Bellino
/s/ Douglas L. Groves
Douglas L. Groves
/s/ Richard A. Baldridge
Richard A. Baldridge
/s/ Joseph C. Berenato
Joseph C. Berenato
/s/ Gregory S. Churchill
Gregory S. Churchill
/s/ Robert C. Ducommun
Robert C. Ducommun
/s/ Dean M. Flatt
Dean M. Flatt
/s/ Jay L. Haberland
Jay L. Haberland
/s/ Robert D. Paulson
Robert D. Paulson
Title
Chairman and Chief Executive Officer
(Principal Executive Officer)
Vice President, Treasurer and Chief Financial Officer
(Principal Financial Officer)
Vice President, Controller and Chief Accounting Officer
(Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
102
Following is a list of the subsidiaries of the Company:
SUBSIDIARIES OF THE REGISTRANT
EXHIBIT 21
Name of Subsidiary
Jurisdiction of Incorporation
American Electronics, Inc.
CMP Display Systems, Inc.
Composite Structures, LLC
Ducommun AeroStructures, Inc.
Ducommun AeroStructures Mexico, LLC
Ducommun AeroStructures New York, Inc.
Ducommun LaBarge Technologies, Inc.
Ducommun LaBarge Technologies, Inc.
Ducommun Technologies (Thailand) Ltd.
LaBarge Electronics, Inc.
LaBarge/STC, Inc.
LaBarge Acquisition Company, Inc.
Miltec Corporation
MMDI - 2004 Inc.
California
California
Delaware
Delaware
Delaware
New York
Arizona
Delaware
Thailand
Missouri
Texas
Missouri
Alabama
California
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-188630) and Form
S-8 (Nos. 333-188460, 333-167731, 333-145008, 333-118288, and 333-72556) of Ducommun Incorporated of our report dated
April 9, 2015 relating to the consolidated financial statements, consolidated financial statement schedule and the effectiveness
of internal control over financial reporting, which appears in this Form 10-K.
EXHIBIT 23
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
April 9, 2015
Certification of Principal Executive Officer
Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
EXHIBIT 31.1
I, Anthony J. Reardon, certify that:
1.
I have reviewed this Annual Report of Ducommun Incorporated (the “registrant”) on Form 10-K for the period ended
December 31, 2014;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f), and 15d-15(f) for the registrant and have:
a.
b.
c.
d.
Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
a.
b.
All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: April 9, 2015
/s/ Anthony J. Reardon
Anthony J. Reardon
Chairman and Chief Executive Officer
Certification of Principal Financial Officer
Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
EXHIBIT 31.2
I, Joseph P. Bellino, certify that:
1.
I have reviewed this Annual Report of Ducommun Incorporated (the “registrant”) on Form 10-K for the period ended
December 31, 2014;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f), for the registrant and have:
a.
b.
c.
d.
Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
a.
b.
All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: April 9, 2015
/s/ Joseph P. Bellino
Joseph P. Bellino
Vice President, Treasurer and Chief Financial Officer
Certification Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
EXHIBIT 32
In connection with the Annual Report of Ducommun Incorporated (the “Company”) on Form 10-K for the period ending
December 31, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Anthony J.
Reardon, Chairman and Chief Executive Officer of the Company, certify pursuant to 18 U.S.C. § 1350, as adopted pursuant to
§ 906 of the Sarbanes-Oxley Act of 2002, that to the best of our knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
By:
/s/ Anthony J. Reardon
Anthony J. Reardon
Chairman and Chief Executive Officer
April 9, 2015
In connection with the Annual Report of Ducommun Incorporated (the “Company”) on Form 10-K for the period ending
December 31, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Joseph P.
Bellino, Vice President, Treasurer and Chief Financial Officer of the Company, certify pursuant to 18 U.S.C. § 1350, as adopted
pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to the best of our knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
By:
/s/ Joseph P. Bellino
Joseph P. Bellino
Vice President, Treasurer and Chief Financial Officer
April 9, 2015
The foregoing certification is accompanying the Form 10-K solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
and is not being filed as part of the Form 10-K or as a separate disclosure document.
Corporate Information
Board of directors
Anthony J. Reardon
officers
Anthony J. Reardon
Chairman and Chief Executive Officer,
Chairman and Chief Executive Officer
Ducommun Incorporated
Richard A. Baldridge
President and Chief Operating Officer, ViaSat, Inc.
Joel H. Benkie
President and Chief Operating Officer
Joseph P. Bellino
Joseph C. Berenato
Vice President, Chief Financial Officer and Treasurer
Kathryn M. Andrus
Vice President, Internal Audit
Douglas L. Groves
Vice President, Controller and Chief Accounting Officer
James S. Heiser
Vice President, General Counsel and Secretary
Rose F. Rogers
Vice President, Human Resources
Chairman, President and Chief Executive Officer,
Ducommun Incorporated (Ret.)
Gregory S. Churchill
Executive Vice President,
International and Service Solutions,
Rockwell Collins, Inc. (Ret.)
Robert C. Ducommun
Business Advisor
Dean M. Flatt
President, Defense and Space,
Honeywell International, Inc. (Ret.)
Jay L. Haberland
Vice President, United Technologies Corporation (Ret.)
Robert D. Paulson
Chief Executive Officer, Aerostar Capital LLC
common stock
Ducommun Incorporated common stock is listed on the
Registrar and Transfer Agent
New York Stock Exchange (symbol DCO).
Computershare Shareowner Services LLC
P.O. Box 43006
Providence, RI 02940-3006
800.667.6589 Toll-free
201.680.6578 International shareholders
800.952.9245 TDD for hearing impaired
www.computershare.com/investor
Ducommun on the Web
www.ducommun.com
certifications
The Company has filed the required certifications under Section 302 of the Sarbanes-Oxley Act of 2002 regarding the quality
of our public disclosures as Exhibits 31.1 and 31.2 to our annual report on Form 10-K for the fiscal year ended December 31, 2014.
After the 2015 Annual Meeting of Shareholders, the Company intends to file with the New York Stock Exchange the CEO certification
regarding its compliance with the NYSE’s corporate governance listing standards as required by NYSE Rule 303A.12. Last year, the
Company filed this CEO certification with the NYSE on or about May 13, 2014.
Ducommun Incorporated
23301 Wilmington Avenue
Carson, CA 90745
310.513.7200
www.ducommun.com
2014 ANNUAL REPORT
to Shareholders