2015 Annual Report
to Shareholders
Contents
Letter to Shareholders
Form 10-K
01
05
Our Vision
To be our customers’ #1 provider of
innovative electronics and structures solutions.
Ducommun is guided on its journey to growth by the
Ducommun Way, our internal operating methodology for
executing successfully, solving problems effectively and
finding better ways of serving our customers through a
combined focus on operational excellence, organizational
development and profitable growth. The Ducommun Way
is defining our path for providing the innovative solutions
and services our customers require while finding new and
untapped ways of growing.
Company Profile
Ducommun Incorporated delivers innovative manufacturing solutions
to customers in the aerospace, defense and industrial markets.
Founded in 1849, the company specializes in two core areas—Electronic
Systems and Structural Systems—to produce complex products and
components for commercial aircraft platforms, mission-critical military
and space programs, and sophisticated industrial applications.
For more information, visit www.ducommun.com.
Fellow Shareholders:
Fiscal 2015 was a year during which Ducommun
faced a number of challenges across its end
markets but took decisive action to position the
Company for stronger results going forward.
We successfully reset our cost structure by pursuing
within the Company’s military and space end markets,
supply chain initiatives, reducing headcount 12 percent
due to lower defense spending and a shift in program
over the past five quarters, and closing or consolidating
priorities, partially offset by 3 percent higher sales
certain facilities. We also refinanced our debt and
within the Company’s commercial aerospace markets.
reduced interest expense substantially. We generated
In addition, non-aerospace and defense (“non-A&D”)
approximately $34 million of cash from operations,
revenue decreased 4 percent primarily due to economic
excluding nearly $15 million used to refinance our debt,
factors impacting the oil and gas markets.
and reduced total indebtedness to $245 million from
$290 million at the beginning of the year.
Since the end of 2015, we’ve laid the groundwork to
further streamline our product portfolio and improve
Ducommun’s long-term financial performance.
We announced the sale of our Pittsburgh and Miltec
operations early in 2016—neither core to our business—
allowing us to sharpen our strategic focus, provide for
additional debt reduction, and leave us in a stronger
position to invest in the key aerospace, defense and
other high-technology markets we serve.
The measures we’ve taken
are meant to increase
Ducommun’s asset utilization
while concurrently reducing
the volatility inherent in such
industries as the energy sector.
So, we’re doing what we said we would do—enacting
Ducommun posted a net loss for the year of
strategic decisions and cost reduction initiatives
($73.3) million, or ($6.63) per share, compared with
that position the Company for improved results
net income of $19.9 million, or $1.79 per share, in
going forward. The measures we’ve taken are meant
2014. The decrease was primarily due to the negative
to increase Ducommun’s asset utilization while
impact of a $57.2 million non-cash goodwill impairment
concurrently reducing the volatility inherent in such
charge, a $32.9 million non-cash charge related to
industries as the energy sector. We will continue to
the impairment of the LaBarge trade name (which we
assess our portfolio for further refinement and believe
have discontinued using as we go to market as One
that strong commercial aerospace demand, along with
Ducommun), and $39.5 million of lower gross profit
greater stability across our military platforms, should
mainly due to reduced revenue. The year’s results
lead to higher results in 2016 and beyond.
also were impacted by a $14.7 million loss on the
Financial Highlights
Ducommun’s net revenue for 2015 was $666 million,
extinguishment of debt when the Company refinanced
to save on long term interest costs; in 2015, Ducommun
benefited from $9.4 million of lower interest expense
down from $742 million in 2014. The lower revenue
and, due to its loss before taxes, also had $39.7 million
was primarily due to a 21 percent decline in sales
of lower income taxes.
Ducommun Incorporated 2015 Annual Report
01
The Company posted an operating loss for 2015
LaBarge Technologies (“DLT”) segment has been
of $75.3 million, compared to operating income of
renamed the Electronic Systems segment, and the
$51.8 million in 2014. Adjusted EBITDA for 2015 was
Ducommun AeroStructures (“DAS”) unit has been
$49.5 million, or 7.4 percent of revenue, compared to
renamed the Structural Systems segment. We believe
$87.1 million, or 11.7 percent of revenue, in 2014.
these changes better reflect the core competencies of
our Company and our go-to-market growth strategy.
Please see our consolidated financial statements
and accompanying notes included in this report for
a detailed review of our performance metrics.
Business Overview
Our vision remains to be the premier provider of
structural and electronic solutions to the core aerospace
and defense markets as well as certain high technology
industrial segments. We’ve recently made several
strategic moves to strengthen our position within these
core markets. First, the Company closed its Houston
facility in the fourth quarter of 2015; this operation
exclusively served the volatile energy market, where
we’ve seen a tremendous decline in revenue tied to oil
prices and other economic factors. Then, in early 2016,
In 2015, Ducommun again saw
an overall strengthening of its
commercial aerospace operations
and outlook. Within this market
segment, total revenue last year
rose to just under $250 million
—its highest level ever.
we announced the sale of our Pittsburgh operation,
In 2015, Ducommun again saw an overall strengthening
which served the heavy industrial and energy markets,
of its commercial aerospace operations and outlook.
and our Miltec business, which focused on government
Within this market segment, total revenue last year
services and is unrelated to any of the Company’s other
rose to just under $250 million—its highest level ever.
operations. In aggregate, the Pittsburgh, Miltec, and
The growth was driven primarily by large fixed wing
Houston businesses had revenue of approximately
aircraft, where revenue expanded 5 percent to a record
$80 million in 2015. Excluding them, the Company
$144 million. But our performance last year is only part
anticipates that the composition of its total revenue in
of the story. More importantly, we ended the year with
2016 will shift to approximately 90 percent aerospace
a record backlog of just under $270 million across the
and defense and 10 percent industrial.
commercial aerospace sector, up from $230 million at
In line with these moves to focus on our core markets—
and diversification that is expected to drive higher
which will continue in 2016—we also renamed our
growth in the years to come. And, the number of new
operating segments. Given that we will no longer use
applications won in 2015 cements our position on
the LaBarge trade name going forward, the Ducommun
some of the best aircraft in the industry. Our largest
the close of 2014. The story here is one of strength
02
commercial platform is the Boeing 737, and Boeing’s
plan to increase 737 MAX output to 57 a month by
2019 represents a tremendous growth opportunity
for Ducommun.
Douglas L. Groves
Vice President,
Chief Financial Officer and Treasurer
We continue to work on expanding our business with
Doug Groves was named chief financial officer
Airbus and are optimistic about additional content
for Ducommun Incorporated effective January 1,
on the A320neo and A350 as well as other platforms
2016. He succeeded Joseph P. Bellino who retired
going forward. We also made substantial headway in
at the end of 2015 as part of a planned succession
winning new content with engine suppliers and other
of the Company’s financial leadership. Doug joined
OEMs last year, leveraging our proprietary composite
Ducommun in January 2013 and served as chief
technology and titanium structural applications.
accounting officer prior to his promotion. He has
So, overall, while we continue our drive to improve
more than 25 years of management experience
operational efficiency, our commercial aerospace
in finance, accounting, audit, and information
outlook is brighter than ever.
technology within a global manufacturing
environment. He joined Ducommun from Beckman
Within our military and space markets, revenue fell 21
Coulter, Inc., where he served as corporate vice
percent to $288 million in 2015 versus 2014, reflecting
president and chief information officer after
lower defense spending, a change in program priorities,
holding a series of progressively responsible
and delayed procurements. This decline was greater
finance and accounting management positions,
than we anticipated at the beginning of the year. In
including vice president of finance for the North
fact, virtually no military platform saw growth in 2015,
American operations. Doug earned an MBA
as lower spending impacted fixed wing programs
from the University of Southern California and a
and helicopters alike—across both segments of our
bachelor’s degree from California State University
Company. Our F-15 and F/A-18 radar rack shipments
at Long Beach.
dropped sharply, as did electronic and structural sales
for the Apache and BLACK HAWK helicopters, although
the latter program remained our largest military
platform with roughly $42 million in revenue. Our goal
last year was to rapidly streamline our processes to
keep pace with the lower overhead absorption at our
Management Changes
With the close of 2015 came the implementation of
facilities—reducing headcount and working capital, as
a financial executive succession plan. Joe Bellino,
well as consolidating wherever possible. Going forward,
who served as chief financial officer, retired and was
we see much greater stability here than last year, but
succeeded by Doug Groves, previously chief accounting
Ducommun is dedicated to rightsizing our operations
officer. During his seven years with Ducommun, Joe was
for lower overall levels of defense spending.
a tremendous asset to the Company. He was influential
Ducommun Incorporated 2015 Annual Report
03
in the completion of two acquisitions and three debt
even stronger, more flexible balance sheet this year.
re-financings, which have been critical to strengthening
We’ll also strive to reduce working capital, increase
our overall financial position. Doug has been a great
asset utilization, and expand margins as we review
asset already and we are pleased to have a person of
our operations and product portfolio for additional
his acumen and intellect on board as his breadth and
efforts to focus the Company and drive increased
depth of experience will enhance our performance
shareholder value.
improvement plans and ensure a continued focus
on a strong balance sheet going forward.
The bottom line is that we have positioned Ducommun
for stronger growth and improved bottom-line results
During the first quarter of 2016, Joel Benkie retired
going forward. With our commercial aerospace programs
from his position as president and chief operating
on track for continued expansion—and stability across
officer. Joel was instrumental in many changes at
our defense markets—we believe the Company is in
Ducommun and deserves credit for redesigning the way
excellent shape to take advantage of the numerous
we run our businesses and think strategically about
opportunities across existing and new customers
operational excellence and capacity utilization. I will be
alike. We are a focused, unique provider of cutting-
handling his responsibilities for the time being.
edge aerospace technologies with strong customer
I personally want to thank Joe and Joel for their
team dedicated to executing on our growth initiatives.
relationships and a reorganized business development
contributions to Ducommun. We wish them both all
the best going forward.
Outlook
While last year was a year of transition—exemplified by
I would like to thank our Board of Directors, our
employees and our suppliers for their unwavering
support as we moved the Company to a more solid
growth position during this past year. I would also like
lower debt, a stronger balance sheet, cost-cutting, and a
to thank our shareholders for their continued interest
strategic assessment of our businesses—we view 2016 as
in Ducommun. We believe the Company is stronger and
one of action and growth. We’ve already taken decisive
more focused than at any previous time to serve our
steps to shed non-core or underperforming assets and
customers, our employees, and our stockholders.
will look to consolidate other operations as well. The
Company is focused on providing unique, value-added
electronic and structural solutions for the aerospace,
defense and other high technology markets, and we
Best regards,
will continue to benefit from the strong commercial
aerospace cycle and increasing build rates going forward.
We’ve paid down debt and will continue to do so based
Chairman and Chief Executive Officer
on our solid cash flow projections, leaving us with an
March 14, 2016
Anthony J. Reardon
04
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________________
FORM 10-K
_________________________________________________________
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2015
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 x
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 x
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 x 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 x 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. x
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.
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Large accelerated filer
Non-accelerated filer
¨
¨
Accelerated filer
x
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 x
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 July 4, 2015 was approximately $272 million.
The number of shares of common stock outstanding on March 3, 2016 was 11,097,587.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference:
(a) Proxy Statement for the 2016 Annual Meeting of Shareholders (the “2016 Proxy Statement”), incorporated partially in Part III hereof.
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DUCOMMUN INCORPORATED AND SUBSIDIARIES
PART I
Page
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
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
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosures
Controls and Procedures
Other Information
PART III
Directors, Executive Officers and Corporate Governance
Executive Compensation
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
Item 15.
Exhibits and Financial Statement Schedules
Signatures
PART IV
3
4
10
19
20
20
20
21
23
24
44
44
44
44
46
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48
49
86
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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:
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 additional goodwill and other asset impairments;
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.
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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 segments: Electronic Systems and Structural Systems. 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
In the fourth quarter of 2015, we renamed our operating segments to Electronic Systems (“ES”) and Structural Systems (“SS”). ES
was formerly known as Ducommun LaBarge Technologies (“DLT”) and SS was formerly known as Ducommun AeroStructures
(“DAS”). There were no regrouping of revenues or expenses as a result of the operating segments name change. We operate through
two primary strategic businesses ES and SS, each of which is a reportable segment. The results of operations among our operating
segments vary due to differences in competitors, customers, extent of proprietary deliverables and performance. ES 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. ES’s product offerings primarily range from prototype development to
complex assemblies as discussed in more detail below. SS designs, engineers and manufactures large, complex contoured aerospace
structural components and assemblies and supplies composite and metal bonded structures and assemblies. SS’s products are primarily
used on commercial aircraft, military fixed-wing aircraft and military and commercial rotary-wing aircraft.
Electronic Systems
ES 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. ES 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, ES 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.
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ES 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.
Structural Systems
SS 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, SS 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, SS 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 revenues from these markets represent approximately 81%
of our total net revenues in 2015. 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 (“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. Revenues
from the commercial aerospace end-use market represented approximately 38% of our total net revenues for 2015.
Global economic activity and global trade, which are the primary drivers for air travel, continues to grow below the long-term
average, however, passenger traffic continued to grow more than 5%, as it has every year since 2010, and accelerated to more than 6%
in 2015. While growth was strong across all major world regions, there continues to be significant variation between regions and
airline business models. Airlines operating in the Middle East and Asia Pacific regions as well as low-cost-carriers globally are
currently leading passenger growth.
In addition, airline financial performance also plays a role in the demand for new capacity. Airlines continue to focus on increasing
revenue through alliances, partnerships, new marketing initiatives, and effective leveraging of ancillary services and related revenues.
Airlines are also relentlessly focusing on reducing costs by renewing fleets to leverage more efficient airplanes and in 2015, benefited
significantly from lower fuel costs. As a result, 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”).
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.
The long-term outlook for the industry continues to remain positive due to the fundamental drivers of air travel growth: economic
growth and the increasing propensity to travel due to increased trade, globalization, and improved airline services driven by
liberalization of air traffic rights between countries. Boeing’s 20 year forecast projections in their 2015 Annual Report on Form 10-K
filed with the SEC estimate a long-term average growth rate of approximately 5% per year for passenger traffic and approximately 4%
per year for cargo traffic. This is based on long term global economic growth projections of approximately 3% average annual gross
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domestic product (“GDP”) growth, and factoring in increased utilization of the worldwide airplane fleet and requirements to replace
older airplanes. 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
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. Revenues from the military and space
end-use market in 2015 represented approximately 43% of our total net revenues during 2015.
The enactment of The Bipartisan Budget Act of 2015 in November 2015 established overall defense spending levels for fiscal year
(“FY”) 2016 and FY 2017. However, uncertainty remains as it relates to levels of defense spending for FY 2018 and beyond,
including the risk of future sequestration cuts. In addition, significant uncertainty also continues related to program-level
appropriations for the U.S. Department of Defense (“U.S. DoD”) within the overall budgetary framework described above.
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 result in reductions, cancellations and/or delays of existing
contracts or programs. Any of these events could have a material effect on the results of our operations, financial position and/or cash
flows.
In addition to the risks described above, if Congress is unable to pass appropriations bills in a timely manner, a government shutdown
could result which may impact above and beyond those resulting from budget cuts, sequestration or program-level appropriations. For
example, requirements to furlough employees in the U.S. DoD or other government agencies could result in payment delays, impair
our ability to perform work on existing contracts, and/or negatively impact future orders. For additional information related to our
revenues 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 (“non-A&D”) 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. Revenues from the non-A&D
end-use markets were approximately 19% of our total net revenues during 2015. Going forward, we will rename the non-A&D end-
use markets as the industrial end-use markets.
We believe our business in these markets has stabilized and we are well positioned for these markets.
SALES AND MARKETING
Our commercial revenues 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, revenues from 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 revenues from 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.
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Our sales into the industrial, natural resources, and medical and other commercial markets are customer focused in the various markets
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.
and driven primarily by their capital spending and manufacturing outsourcing demands.
Our sales into the industrial, natural resources, and medical and other commercial markets are customer focused in the various markets
We continue to broaden and diversify our customer base in the end-use markets we serve by providing innovative product and service
We continue to broaden and diversify our customer base in the end-use markets we serve by providing innovative product and service
and driven primarily by their capital spending and manufacturing outsourcing demands.
solutions through drawing on our core competencies, experience and technical expertise. Net revenues related to military and space
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-A&D end-use markets in 2015 and 2014 were as
(defense technologies and defense structures), commercial aerospace, and non-A&D end-use markets in 2015 and 2014 were as
We continue to broaden and diversify our customer base in the end-use markets we serve by providing innovative product and service
follows:
follows:
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-A&D end-use markets in 2015 and 2014 were as
follows:
2015 Net Sales of $666.0 Million
2014 Net Sales of $742.0 Million
Military and space
(defense technologies): 32%
Commercial aerospace: 38%
Military and space
(defense structures): 11%
Non-aerospace and
defense: 19%
Military and space
(defense technologies): 32%
Commercial aerospace: 33%
Military and space
(defense structures): 17%
Non-aerospace and
defense: 18%
Many of our contracts are fixed price contracts subject to termination at the convenience of the customer (as well as for default). In the
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
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
through the date of termination. Larger, long-term government subcontracts may have provisions for milestone payments, progress
Many of our contracts are fixed price contracts subject to termination at the convenience of the customer (as well as for default). In the
payments or cash advances for purchase of inventory.
payments or cash advances for purchase of inventory.
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
Our marketing efforts primarily consist of developing strong, long-term relationships with our customers, which provide the basis for
Our marketing efforts primarily consist of developing strong, long-term relationships with our customers, which provide the basis for
payments or cash advances for purchase of inventory.
future sales. These close relationships allow us to gain a better insight into each customer’s business needs, identify ways to provide
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.
greater value to the customer, and allow us to be designed in early in various products and/or high volume products.
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
SEASONALITY
SEASONALITY
greater value to the customer, and allow us to be designed in early in various products and/or high volume products.
The timing of our revenue is governed by the purchasing patterns of our customers, and, as a result, we may not generate revenue
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.
equally during the year. However, no material portion of our business is considered to be seasonal.
SEASONALITY
The timing of our revenue is governed by the purchasing patterns of our customers, and, as a result, we may not generate revenue
MAJOR CUSTOMERS
MAJOR CUSTOMERS
equally during the year. However, no material portion of our business is considered to be seasonal.
We currently generate the majority of our revenues from the aerospace and defense industries. As a result, we have significant
We currently generate the majority of our revenues from the aerospace and defense industries. As a result, we have significant
revenues from certain customers. Boeing and Raytheon each were approximately ten percent or greater of our 2015 net revenues.
revenues from certain customers. Boeing and Raytheon each were approximately ten percent or greater of our 2015 net revenues.
MAJOR CUSTOMERS
Revenues from our top ten customers, including Boeing and Raytheon, were approximately 56% of total net revenues during 2015.
Revenues from our top ten customers, including Boeing and Raytheon, were approximately 56% of total net revenues during 2015.
We currently generate the majority of our revenues from the aerospace and defense industries. As a result, we have significant
Net revenues by major customer for 2015 and 2014 were as follows:
Net revenues by major customer for 2015 and 2014 were as follows:
revenues from certain customers. Boeing and Raytheon each were approximately ten percent or greater of our 2015 net revenues.
Revenues from our top ten customers, including Boeing and Raytheon, were approximately 56% of total net revenues during 2015.
Net revenues by major customer for 2015 and 2014 were as follows:
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2015 Net Sales by Major Customer
2014 Net Sales by Major Customer
Raytheon:
9%
Boeing:
16%
Next Top Eight Customers:
31%
All Other Customers:
44%
Raytheon:
9%
Boeing:
20%
Next Top Eight Customers:
30%
All Other Customers:
41%
Net revenues from 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 revenues from major
customers, see Note 17 to our consolidated financial statements included in Part IV, Item 15(a) of this Form 10-K.
Net revenues from 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 revenues from major
customers, see Note 17 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
RESEARCH AND DEVELOPMENT
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
We perform concurrent engineering with our customers and product development activities under our self-funded programs as well as
contracts, with a focus on sensors system simulation, engineering and integration activities.
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
RAW MATERIALS AND COMPONENTS
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
Raw materials and components used in the manufacturing of our products include aluminum, titanium, steel and carbon fibers, as well
times for and limited availability of, aluminum, titanium and certain other raw materials and/or components. Moreover, certain
as a wide variety of electronic interconnect and circuit card assemblies and components. These raw materials are generally available
components, supplies and raw materials for our operations are purchased from single source suppliers and occasionally, directed by
from a number of suppliers and are generally in adequate supply. However, from time to time, we have experienced increases in lead
our customers. In such instances, we strive to develop alternative sources and design modifications to minimize the potential for
times for and limited availability of, aluminum, titanium and certain other raw materials and/or components. Moreover, certain
business interruptions.
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
COMPETITION
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
The markets we serve are highly competitive, and our products and services are affected by varying degrees of competition. We
information related to competition is discussed in “Risk Factors” contained within Part I, Item 1A of this Form 10-K. Our ability to
compete worldwide with domestic and international companies in most markets. These companies may have competitive advantages
compete depends principally upon the breadth of our technical capabilities, the quality of our goods and services, competitive pricing,
as a result of greater financial resources, economies of scale and bundled products and services that we do not offer. Additional
product performance, design and engineering capabilities, new product innovation, the ability to solve specific customer needs, and
information related to competition is discussed in “Risk Factors” contained within Part I, Item 1A of this Form 10-K. Our ability to
customer relationships.
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 needs, 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
PATENTS AND LICENSES
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.
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
BACKLOG
differences in the placement of customer orders and tends to be concentrated in certain programs and customers. As a result, trends in
our overall level of backlog may not be indicative of trends in our future revenues. Backlog was approximately $545.8 million at
Backlog is subject to delivery delays or program cancellations, which are beyond our control. Backlog is affected by timing
December 31, 2015, compared to approximately $559.3 million at December 31, 2014. The decrease in backlog was primarily in the
differences in the placement of customer orders and tends to be concentrated in certain programs and customers. As a result, trends in
military and space end-use markets. Approximately $436.6 million of total backlog is expected to be delivered during 2016.
our overall level of backlog may not be indicative of trends in our future revenues. Backlog was approximately $545.8 million at
December 31, 2015, compared to approximately $559.3 million at December 31, 2014. The decrease in backlog was primarily in the
military and space end-use markets. Approximately $436.6 million of total backlog is expected to be delivered during 2016.
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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 2016 and
the foreseeable future.
SS 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 information, we have
accrued approximately $1.5 million for our estimated liabilities related to these sites. For further information, see Note 16 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, 2015, we employed approximately 2,900 people, of which approximately 350 are subject to collective bargaining
agreements expiring on July 1, 2018 and January 5, 2018. 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 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.
In July 2015, we completed the refinancing of our existing debt by entering into a new credit facility to replace the existing credit
facilities. The new credit facility consists of a $275.0 million senior secured term loan, which matures on June 26, 2020 (“New Term
Loan”), and a $200.0 million senior secured revolving credit facility (“New Revolving Credit Facility”), which matures on June 26,
2020 (collectively, the “New Credit Facilities”).
At December 31, 2015, we had approximately $245.0 million of outstanding long-term debt under the New Term Loan. 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.
Our ability to complete a debt refinancing in the future 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:
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 approximately one half of our borrowings under
our New 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; and
make it more difficult for us to satisfy our obligations with respect to the New Credit Facilities and our other debt.
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.
Our ability to make payments on and to refinance our debt in the future 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.
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The New Credit Facilities bear interest, at our option, at a rate equal to either (i) the Eurodollar Rate (defined as a London Interbank
Offered Rate [“LIBOR”]) plus an applicable margin ranging from 1.50% to 2.75% per year or (ii) the Base Rate (defined as the
highest of [a] Federal Funds Rate plus 0.50%, [b] Bank of America’s prime rate, and [c] the Eurodollar Rate plus 1.00%) plus an
applicable margin ranging from 0.50% to 1.75% per year, in each case based upon the consolidated total net adjusted leverage ratio,
typically payable quarterly. In October 2015, we entered into interest rate cap hedges designated as cash flow hedges, with maturity
dates of June 2020 and notional value in aggregate, totaling approximately $135.0 million. At December 31, 2015, the outstanding
balance on the New Credit Facilities was approximately $245.0 million with an interest rate of approximately 3.07%. Should interest
rates increase significantly, even though approximately $135.0 million of our debt was hedged, 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.
We require a considerable amount of cash to fund our anticipated voluntary principal prepayments on our New Credit
Facilities.
Our ability to continue to reduce the debt outstanding under our New Credit Facilities through voluntary principal prepayments will be
a contributing factor to our ability to meet the leverage ratio covenant and keeping our interest rate towards the lower end of the
interest rate range as defined in the New Credit Facilities. 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 New Credit Facilities impose restrictions that may limit our operating and
financial flexibility.
We are required to comply with a leverage covenant as defined in the credit agreement to the New Credit Facilities. The leverage
covenant is defined as Consolidated Funded Indebtedness less unrestricted cash and cash equivalents in excess of $10.0 million,
divided by consolidated earnings before interest, taxes and depreciation and amortization (“EBITDA”). The leverage covenant
decreases over the term of the New Credit Facilities, which will require us to lower our outstanding debt or increase our EBITDA in
the future. We believe the voluntary prepayments on the New Credit Facilities will help reduce our leverage, as defined in the credit
agreement.
At December 31, 2015, we were in compliance with the leverage covenant under the New Credit Facility. However, there is no
assurance that we will continue to be in compliance with the leverage covenant in future periods.
Our credit agreement to the New Credit Facilities contains 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, 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.
A breach of any covenant in credit agreement to the New Credit Facilities would result in a default under the New Credit Facilities
agreement. A default, if not waived, could result in acceleration of the debt outstanding under the agreement. 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.
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.
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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 2015 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 and a shift in government spending
priorities are causing additional uncertainty in the placement of orders.
Our sales to our top ten customers, which represented approximately 56% of our total 2015 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 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 of
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, the levels of U.S. Department of Defense (“U.S. DoD”) spending in future periods are difficult to predict and are subject to
significant risks. Certain U.S. Government programs in which we participate may extend for several years; however,
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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. We have already experienced significant
budgetary delays and constraints that have resulted in reduced spending levels, and additional reductions may occur. In August 2011,
the Budget Control Act (“The Act”) established limits on U.S. Government discretionary spending, including a reduction of defense
spending by approximately $490.0 billion between the 2012 and 2021 U.S. Government fiscal years (“FY”). The Act also provided
that the defense budget would face “sequestration” cuts of up to an additional $500.0 billion during that same period to the extent that
discretionary spending limits are exceeded. The impact of sequestration cuts has been reduced for FY 2016 and FY 2017, after the
enactment of The Bipartisan Budget Act of 2015 in November 2015. However, long-term uncertainty remains as it relates to overall
levels of defense spending and it is likely that the U.S. Government discretionary spending levels will continue to be subject to
significant pressure, including the risk of future sequestration cuts.
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;
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.
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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 third quarter of 2015, we recorded a charge in the SS segment related to a regional jet program for estimated cost
overruns of approximately $10.0 million. See “Revenue Recognition” and “Provision for 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.
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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. Our annual goodwill impairment testing in the fourth quarter of 2015 indicated the
carrying value exceeding the fair value of the SS reporting unit as a result of the lowered revenue outlook in our military and space
end-use markets due to the decrease in U.S. government defense spending and thus, requiring us to perform Step Two of the goodwill
impairment test. Based on the Step Two test, we impaired the entire goodwill for the SS reporting unit of approximately $57.2 million.
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
discussion.
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. In performing our annual impairment test in the fourth quarter of 2015, we concluded the fair value
of the indefinite-lived trade name to be zero as a result of divesting businesses in ES and our discontinuation of the use of the trade
name. Thus, we recorded an impairment of approximate $32.9 million, which was the remaining carrying value of the trade name. 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
discussion.
In addition, 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 additional impairment
charge for goodwill.
Further, additional 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.
Our production cost of contracts as of December 31, 2015 was approximately $10.3 million or 2% of total assets. Our goodwill and
other intangible assets as of December 31, 2015 were approximately $193.2 million, or 34% 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, and 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.
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 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.
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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 2016
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 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 16 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
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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 2016 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 $213.2 million in net sales during 2015. 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 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.
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Labor disruptions by our employees could adversely affect our business.
As of December 31, 2015, we employed approximately 2,900 people. Two of our operating units are parties to collective bargaining
agreements, covering approximately 130 full time hourly employees in one of those operating units and approximately 220 full time
hourly and salary employees in the other operating unit, and will expire July 1, 2018 and January 5, 2018, 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 a material weakness 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.
In connection with the audit of our consolidated financial statements as of and for the year ended December 31, 2015, we have
concluded that there is a material weakness in our internal control over financial reporting. The material weakness was originally
identified in the year ended December 31, 2014, and relates to ineffective monitoring controls over the accuracy and appropriate
classification of reported labor hours associated with contracts accounted for under the percentage-of-completion method using the
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 used in our estimates to identify and record contract
forward loss reserves. This material weakness 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, 2015.
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 weakness noted above. As we continue to evaluate and work to
remediate the material weakness, 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 this material weakness.
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 this material weakness. If our remedial measures are insufficient to
address the material weakness, 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 this material weakness 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.
Future restatements 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.
In 2014, our Annual Report on Form 10-K included the restatement of 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 to remedy the errors since they were discovered
will ensure that no errors will occur in the future. Further, the future restatements, if any, 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 the restatement was completed in the 2014 Annual Report on Form 10-K that was filed in the prior year, we cannot
guarantee that we will not receive regulatory inquiries or be subject to litigation regarding our restated financial statements or
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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 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.
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ITEM 2. PROPERTIES
We occupy approximately 32 owned or leased facilities, totaling over 2.2 million square feet of manufacturing area and office space.
At December 31, 2015, 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
Joplin, Missouri
Tulsa, Oklahoma
Huntsville, Alabama
Berryville, Arkansas
Segment
Structural Systems
Structural Systems
Structural Systems
Electronic Systems
Structural Systems
Electronic Systems
Electronic Systems
Electronic Systems
Electronic Systems
Structural Systems
Structural Systems
Electronic Systems
Electronic Systems
Structural Systems
Electronic Systems
Electronic Systems
Electronic Systems
Electronic Systems
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
55,000
55,000
52,000
52,000
Expiration
of Lease
Owned
Owned
Owned
2017
Owned
2016
2017
2016
Owned
Owned
Owned
2020
2016
2019
Owned
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.
Subsequent to our year ended December 31, 2015 we entered into agreements with separate buyers and sold our Pittsburgh,
Pennsylvania operation on January 22, 2016 and our Huntsville, Alabama and Iuka, Mississippi (collectively, “Miltec”) operations
that are expected to be completed by the end of the second fiscal quarter of 2016.
ITEM 3. LEGAL PROCEEDINGS
See Note 16 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.
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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, 2015, we had
approximately 194 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,
2015
2014
High
Low
High
Low
$
$
$
$
27.00
33.22
26.12
23.28
$
$
$
$
24.09
23.07
19.14
14.96
$
$
$
$
31.35
27.74
32.00
29.54
$
$
$
$
22.80
22.45
22.60
23.52
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.
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Performance Graph
Performance Graph
The following graph compares the yearly percentage change in our cumulative total shareholder return with the cumulative total return
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
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:
graph is not necessarily indicative of future price performance:
Comparison of 5 Year Cumulative Total Return
Comparison of 5 Year Cumulative Total Return
Assumes Initial Investment of $100
Assumes Initial Investment of $100
December 2015
December 2015
250.00
250.00
200.00
200.00
150.00
100.00
50.00
0.00
150.00
100.00
50.00
0.00
2010
2010
2011
2012
2013
2014
2015
2011
Ducommun Inc. Russell 2000 Index Spade Defense Index
2012
2013
2014
2015
Ducommun Inc. Russell 2000 Index Spade Defense Index
22
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ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction with Part II, Item 7 and Part IV, Item 15(a) of this
Annual Report on Form 10-K (“Form 10-K”):
(In thousands, except per share amounts)
Years Ended December 31,
Net Revenues
Gross Profit as a Percentage of Net
Revenues
(Loss) Income Before Taxes
Income Tax (Benefit) Expense
Net (Loss) Income
Per Common Share
Basic (loss) earnings per share
Diluted (loss) earnings per share
Dividends per share (f)
$
$
$
$
2015(a)(b)
$
666,011
$
2014
742,045
15.1 %
18.9%
(106,590)
(33,308)
(73,282)
$
26,240
6,373
19,867
(6.63)
$
(6.63)
$
1.82
1.79
2013(c)
736,650
16.9%
9,385
(1,993)
11,378
1.06
1.05
$
$
$
$
$
$
$
$
2012
747,037
2011(d)(e)
$
580,914
19.3 %
18.2 %
24,124
6,501
17,623
1.67
1.66
$
$
$
(53,798)
(4,877)
(48,921)
(4.64)
(4.64)
— $
—
$
—
$
—
$
0.07
Working Capital
Total Assets
Long-Term Debt, Including Current
Portion
Total Shareholders’ Equity
$
$
$
180,624
561,420
245,026
$
187,331
$
$
$
$
217,670
747,599
290,052
256,570
$
$
$
$
225,323
762,645
332,702
$
$
$
219,774
777,275
365,744
234,271
$
215,217
$
$
$
$
218,665
805,823
392,240
195,640
(a) The results for 2015 included a goodwill impairment charge in our SS operating segment and an indefinite-lived trade name
intangible asset impairment charge in our ES operating segment of approximately $57.2 million and $32.9 million, respectively,
resulting from our annual impairment testing.
(b) The results for 2015 included a loss on extinguishment of debt of approximately $14.7 million related to the retirement of the
$200.0 million senior unsecured notes and existing credit facility.
(c) The results for 2013 included 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.
(d) In June 2011, we acquired LaBarge Inc., which is now a part of our ES operating segment. The acquisition was accounted for as a
business combination.
(e) The results for 2011 included 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) We suspended payments of dividends after the first quarter of 2011.
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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 segments: Electronic Systems and Structural Systems, each of which is a reportable segment. In
the fourth quarter of 2015, we renamed our operating segments as Electronic Systems (“ES”) and Structural Systems (“SS”). ES was
formerly known as Ducommun LaBarge Technologies (“DLT”) and SS was formerly known as Ducommun AeroStructures (“DAS”).
There were no regrouping of revenues or expenses as a result of the operating segments name change.
Portfolio Repositioning Activities
• The Houston facility was closed in the fourth quarter as a result of the significant decline in the oil and gas market. Revenue
for 2015 was approximately $10 million.
•
In the first quarter of 2016, the Pittsburgh operation was sold as part of our overall strategy to streamline operations,
including consolidating our footprint. Revenue for 2015 was approximately $42 million. The Miltec operation was also being
sold as part of our overall strategy to streamline operations. Revenue for 2015 was approximately $28 million.
In aggregate, these businesses had 2015 revenue of approximately $80.0 million and are part of our Electronic Systems operating
segment. Following these actions, we anticipate that the composition of our total revenue in 2016 will shift to 90% aerospace and
defense and 10% industrial.
Recap of the year ended December 31, 2015:
Net revenues were approximately $666.0 million
Net loss was approximately $73.3 million, or $6.63 per share, which includes approximately $90.2 million, pre-tax, in
goodwill and intangible charges
Adjusted EBITDA was approximately $49.5 million
Cash flow from operating activities was approximately $23.7 million
We made voluntary principal prepayments on our term loan in aggregate totaling approximately $45.0 million
See Non-GAAP Financial Measures below for certain information regarding adjusted EBITDA, including reconciliation of adjusted
EBITDA to net (loss) 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 adjusted EBITDA provides 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. 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 adjusted EBITDA non-GAAP operating performance measures internally as complementary financial measures to evaluate
the performance and trends of our businesses. We present 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.
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Adjusted EBITDA has limitations as an analytical tool, and you should not consider it 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 adjusted EBITDA does 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 adjusted EBITDA differently from us, limiting their usefulness as
comparative measures.
Because of these limitations, 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 adjusted EBITDA only as
supplemental information. See our consolidated financial statements contained in this Form 10-K.
However, in spite of the above limitations, we believe that adjusted EBITDA is 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 adjusted EBITDA:
Interest expense may be useful to investors for determining current cash flow;
Debt extinguishment may be useful to investors for determining current cash flow;
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;
Depreciation may be useful to investors because it generally represents the wear and tear on our property and equipment used
in our operations;
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;
Stock-based compensation may be useful to our investors for determining current cash flow;
Asset impairments (including Goodwill and intangible assets) may be useful to our investors because it generally represents a
decline in value in our assets used in our operations; and
Restructuring charges may be useful to our investors in evaluating our core operating performance.
Reconciliations of net (loss) income to adjusted EBITDA and the presentation of adjusted EBITDA as a percentage of net sales were
as follows:
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Net (loss) income
Interest expense
Loss on extinguishment of debt
Income tax (benefit) expense
Depreciation
Amortization
Stock-based compensation expense
Goodwill impairment (1)
Intangible asset impairment (2)
Restructuring charges
Asset impairment (3)
Adjusted EBITDA
% of net revenues
(In thousands)
Years Ended December 31,
2015
2014
2013
$
$
(73,282)
18,709
14,720
(33,308)
15,707
11,139
3,495
57,243
32,937
2,125
—
49,485
$
$
$
19,867
28,077
—
6,373
15,277
13,747
3,725
—
—
—
—
$
87,066
11,378
29,918
—
(1,993)
15,547
15,379
2,438
—
—
—
6,975
79,642
7.4%
11.7%
10.8%
(1) 2015 includes goodwill impairment related to the SS operating segment.
(2) 2015 includes intangible asset impairment related to the ES operating segment.
(3) 2013 includes asset impairment charges for the Embraer Legacy 450/500 contracts and Boeing 777 wing tip contract.
Adjusted EBITDA decreased in 2015 compared to 2014 primarily due to a net loss as a result of lower net revenues and lower gross
margin.
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 which for the year, net to approximately $7.0 million.
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RESULTS OF OPERATIONS
2015 Compared to 2014
The following table sets forth net revenues, selected financial data, the effective tax (benefit) rate and diluted earnings per share:
Net Revenues
Cost of Sales
Gross Profit
Selling, General and Administrative Expenses
Goodwill Impairment
Intangible Asset Impairment
Operating (Loss) Income
Interest Expense
Loss on Extinguishment of Debt
Other Income, Net
(Loss) Income Before Taxes
Income Tax (Benefit) Expense
Net (Loss) Income
Effective Tax (Benefit) Rate
Diluted (Loss) Earnings Per Share
nm = not meaningful
$
$
$
$
(in thousands, except per share data)
Years Ended December 31,
%
of Net Revenues
100.0%
84.9%
15.1%
12.9 %
8.6 %
4.9 %
(11.3)%
(2.8)%
(2.2)%
0.3 %
(16.0)%
nm
(11.0)%
2014
742,045
601,713
140,332
88,565
—
—
51,767
(28,077 )
—
2,550
26,240
6,373
19,867
$
%
of Net Revenues
100.0%
81.1%
18.9%
11.9%
— %
— %
7.0%
(3.8)%
— %
0.3 %
3.5 %
nm
2.7 %
2015
666,011
565,219
100,792
85,921
57,243
32,937
(75,309)
(18,709)
(14,720)
2,148
(106,590)
(33,308)
(73,282)
(31.2)%
(6.63)
nm
nm
$
24.3 %
1.79
nm
nm
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Net Revenues by End-Use Market and Operating Segment
Net revenues by end-use market and operating segment during 2015 and 2014, respectively, were as follows:
(In thousands)
Years Ended December 31,
% of Net Sales
Change
2015
2014
2015
2014
Consolidated Ducommun
Military and space
Defense technologies
Defense structures
Commercial aerospace
Natural resources
Industrial
Medical and other
Total
$
(29,046) $
(49,204)
7,158
(9,881)
3,626
1,313
$
(76,034) $
212,537
75,094
249,301
35,339
46,287
47,453
666,011
$
$
241,583
124,298
242,143
45,220
42,661
46,140
742,045
SS
Military and space (defense structures)
Commercial aerospace
Total
$
(49,204) $
2,567
$
(46,637) $
75,094
198,225
273,319
$
$
124,298
195,658
319,956
32%
11%
38%
5%
7%
7%
100%
27%
73%
100%
32%
17%
33%
6%
6%
6%
100%
39%
61%
100%
ES
Military and space (defense technologies)
$
(29,046) $
212,537
$
241,583
54%
57%
Commercial aerospace
Natural resources
Industrial
Medical and other
4,591
(9,881)
3,626
1,313
Total
$
(29,397) $
51,076
35,339
46,287
47,453
392,692
46,485
45,220
42,661
46,140
422,089
$
13%
9%
12%
12%
100%
11%
11%
10%
11%
100%
Net revenues for 2015 were approximately $666.0 million compared to approximately $742.0 million for 2014. The year-over-year
decrease was due to the following:
• Approximately 21% lower revenues in our military and space end-use markets mainly due to a decrease in U.S.
government defense spending and shifting spending priorities, which impacted our fixed-wing and helicopter
platforms and pushed out scheduled deliveries of these products to customers;
• Approximately 4% lower revenues from non-aerospace and defense (“non-A&D”) end-use markets; and
• Partially offset by an approximate 3% increase in revenues in commercial aerospace 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,
2015
2014
16%
9%
56%
20%
9%
59%
The revenues from Boeing and Raytheon are diversified over a number of commercial, military and space programs and were made by
both operating segments.
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Gross Profit
Gross profit consists of net revenues less cost of sales. Cost of sales includes the cost of production of finished products and other
expenses related to inventory management, manufacturing quality, and order fulfillment. Gross profit margin decreased to
approximately 15% in 2015 compared to approximately 19% in 2014 primarily due to higher cost of sales relative to net revenues
primarily the result of an approximate $14.0 million attributable to lower manufacturing volume and an approximate $10.6 million of
higher forward loss reserves related to a regional jet program. Another factor contributing to the reduction in gross profit include an
approximate $7.8 million due to unfavorable product mix. The difference in the results was also impacted by a 2014 nonrecurring
reversal of an approximate $3.4 million forward loss reserve related to a customer settlement.
Selling, General and Administrative Expenses (“SG&A”)
SG&A expenses decreased in 2015 primarily due to to lower accrued compensation and benefit costs of approximately $2.9 million
and lower discretionary expenses as a result of the cost savings initiatives we have implemented, partially offset by higher professional
service fees of approximately $1.9 million and restructuring charges related to severance and benefits and early termination of leases
of approximately $2.1 million.
Goodwill Impairment
In 2015, the non-cash charge from the impairment of the entire goodwill in the SS reporting unit was the result of the annual
impairment test during the fourth quarter of 2015 that indicated the carrying value exceeded the fair value. The decrease in fair value
was due to the lowered revenue outlook in our military and space end-use markets caused by the decrease in U.S. government defense
spending. Therefore, requiring us to perform Step Two of the goodwill impairment test. Based on the Step Two test, we impaired the
entire goodwill for the SS reporting unit of approximately $57.2 million. No such impairment was required in 2014.
Intangible Asset Impairment
In 2015, the non-cash charge from the impairment of an intangible asset in ES was due to divesting businesses in ES and discontinued
use of the indefinite-lived trade name intangible asset going forward of approximately $32.9 million. No such impairment was
required in 2014.
Interest Expense
Interest expense decreased in 2015 compared to 2014 primarily due to lower outstanding debt balance and lower interest rate on our
outstanding debt as a result of completing the refinancing of our debt in July 2015. See Note 9 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.
Loss on Extinguishment of Debt and Other Income
Loss on extinguishment of debt for 2015 was made up of the call premium to retire the existing $200.0 million senior unsecured notes
in July 2015 of approximately $9.8 million, the write off of the unamortized debt issuance costs associated with the existing $200.0
million senior unsecured notes of approximately $2.1 million, the write off of the unamortized debt issuance costs associated with the
existing senior secured term loan and existing senior secured revolving credit facility of approximately $2.8 million when the existing
senior secured term loan was paid off with both debt instruments being replaced with the New Credit Facilities. See Note 9 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.
Other income decreased in 2015 compared to 2014 primarily due to lower insurance recoveries related to property and equipment of
approximately $1.1 million.
Income Tax (Benefit) Expense
We recorded income tax benefit of approximately $33.3 million (an effective tax benefit rate of 31%) in 2015, compared to an income
tax expense of approximately $6.4 million (an effective tax rate of 24%) in 2014. The change in effective tax rate in 2015 compared to
2014 was primarily due to the pre-tax loss in 2015, which can be carried back to reduce income taxes paid in 2014 and 2013 or carried
forward. This was partially offset by the tax impact of the goodwill impairment of approximately $7.2 million and a reduction in
Internal Revenue Code (“IRC”) Section 199 deduction for qualified domestic production activities of approximately $1.1 million.
Our effective tax benefit rate of approximately 31% for 2015 includes a research and development (“R&D”) benefit of approximately
$2.6 million in 2015 compared to a benefit of approximately $2.4 million in 2014. The benefit recorded in 2015 was due to the
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President of the United States signing into law on December 18, 2015, the Protecting Americans from Tax Hikes Act (“PATH”),
which permanently extends the research and development credit.
Net (Loss) Income and (Loss) Earnings per Diluted Share
Net loss and loss per share for 2015 were approximately $(73.3) million, or $(6.63) per share, compared to approximately $19.9
million, or $1.79 per diluted share, for 2014. The net loss in 2015 was primarily the result of an approximate $57.2 non-cash goodwill
impairment charge in the SS segment and an approximate $39.5 million of lower gross profit mainly due to lower revenues. Other
factors contributing to the reduction in net income from the prior year include an approximate $32.9 million non-cash charge related to
the impairment of the indefinite-lived trade name in the ES segment and an approximate $14.7 million loss on extinguishment of debt.
These items were partially offset by lower 2015 income tax expense of approximately $39.7 million and lower interest expense of
approximately $9.4 million.
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Business Segment Performance
We report our financial performance based upon the two reportable operating segments: SS and ES. 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 2015 and 2014:
Net Revenues
SS
ES
Total Net Revenues
Segment Operating (Loss) Income
SS
ES
Corporate General and Administrative
Expenses (1)
%
Change
(In thousands)
Years Ended December 31,
%
of Net Sales
%
of Net Sales
2015
2014
2015
2014
(14.6)% $ 273,319
(7.0)%
392,692
(10.2)% $ 666,011
$ (53,010)
(4,472)
(57,482)
(17,827)
$ 319,956
422,089
$ 742,045
$
34,949
34,599
69,548
(17,781)
41.0 %
59.0 %
100.0 %
(19.4)%
(1.1)%
43.1 %
56.9 %
100.0 %
10.9 %
8.2 %
(2.7)%
(2.4)%
Total Operating (Loss) Income
$ (75,309)
$
51,767
(11.3)%
7.0 %
Adjusted EBITDA
SS
Operating (Loss) Income (2)(3)
Other Income (4)
Depreciation and Amortization
Goodwill Impairment
Restructuring Charges
ES
Operating (Loss) Income (3)(5)
Other Income
Depreciation and Amortization
Intangible Asset Impairment
Restructuring Charges
Corporate General and Administrative
Expenses (1)
Operating Loss
Other Expense
Depreciation and Amortization
Stock-Based Compensation Expense
Adjusted EBITDA
Capital Expenditures
SS
ES
Corporate Administration
Total Capital Expenditures
$ (53,010)
1,510
9,417
57,243
1,294
16,454
(4,472)
712
17,267
32,937
831
47,275
(17,827)
(74)
162
3,495
(14,244)
49,485
11,559
4,419
10
15,988
$
$
$
$
34,949
2,550
10,959
—
—
48,458
6.0 %
15.1 %
34,599
—
17,928
—
—
52,527
12.0 %
12.4 %
(17,781)
—
137
3,725
(13,919)
87,066
12,742
5,782
30
18,554
$
$
$
7.4 %
11.7 %
(1) Includes costs not allocated to either the SS or ES operating segments.
(2) Goodwill impairment related to SS operating segment.
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(3) Includes restructuring charges for severance and benefits and loss on early exit from leases of approximately $0.8 million and
$1.3 million recorded in the ES and SS operating segments, respectively.
(4) Insurance recoveries related to property and equipment included as other income.
(5) Intangible asset impairment related to ES operating segment.
Structural Systems
SS’s net revenues in 2015 decreased approximately 15% compared to 2014 primarily due to an approximate 40% decrease in military
and space revenue mainly due to the decrease in U.S. government defense spending and shifting spending priorities which impacted
scheduled deliveries on our fixed-wing and helicopter platforms, partially offset by an approximate 1% increase in commercial
aerospace revenue.
SS’s operating income decreased in 2015 compared to 2014 primarily as a result of an approximate $57.2 million non-cash goodwill
impairment charge and higher forward loss reserves related to a regional jet program of approximately $10.6 million. Other factors
contributing to the reduction in operating income from the prior year include an approximate $8.0 million due to lower manufacturing
volume and an approximate $7.3 million due to unfavorable product mix. The difference in the results was also impacted by a 2014
nonrecurring reversal of an approximate $3.4 million forward loss reserve related to a customer settlement. An additional factor
contributing to the reduction in operating income from the prior year include an approximate $1.3 million of higher costs associated
with moving into a new facility.
Adjusted EBITDA was approximately $16.5 million or 6% of revenue for 2015, compared to approximately $48.5 million or 15% of
revenue for 2014.
Electronic Systems
ES’s net revenues in 2015 decreased approximately 7% compared to 2014 primarily due to an approximate 12% decrease in military
and space revenue mainly due to the decrease in U.S. government defense spending and shifting spending priorities which impacted
scheduled deliveries on our fixed-wing and helicopter platforms and an approximate 4% decrease in non-A&D markets revenues,
partially offset by an approximate 10% increase in commercial aerospace revenue.
ES’s segment operating income decreased in 2015 compared to 2014 primarily due to a non-cash charge of approximately $32.9
million from the impairment of an indefinite-lived trade name intangible asset and an approximate $6.0 million from lower
manufacturing volume.
Adjusted EBITDA was approximately $47.3 million or 12% of revenue for 2015, compared to approximately $52.5 million or 12% of
revenue for 2014.
Corporate General and Administrative (“CG&A”)
CG&A expenses was essentially flat in 2015 compared to 2014 primarily due to approximately $1.0 million of higher professional
service fees, partially offset by an approximate $0.7 million of lower accrued compensation and benefit costs and lower discretionary
expenses as a result of the cost savings initiatives we have implemented.
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-A&D end-use 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 $545.8 million at December 31, 2015, compared to approximately $559.3 million at December 31, 2014,
as shown in more detail below. The decrease in backlog was primarily in the defense technologies end-use markets. Approximately
$436.6 million of total backlog is expected to be delivered during 2016. The following table summarizes our backlog for 2015 and
2014:
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Consolidated Ducommun (1)
Military and space
Defense technologies
Defense structures
Commercial aerospace
Natural resources
Industrial
Medical and other
Total
SS
Military and space (defense structures)
Commercial aerospace
Total
ES (1)
Military and space (defense technologies)
Commercial aerospace
Natural resources
Industrial
Medical and other
Total
Change
2015
2014
(In thousands)
December 31,
$
$
$
$
$
(16,456) $
(15,968)
36,809
(14,019)
(6,892)
3,056
$
168,561
58,821
269,193
8,493
17,439
23,303
185,017
74,789
232,384
22,512
24,331
20,247
(13,470) $
545,810
$
559,280
(15,968) $
24,629
8,661
$
58,821 $
224,036
282,857 $
(16,456) $
12,180
168,561
45,157
$
(14,019)
(6,892)
3,056
8,493
17,439
23,303
74,789
199,407
274,196
185,017
32,977
22,512
24,331
20,247
$
(22,131) $
262,953
$
285,084
(1) 2015 backlog includes an aggregate total of approximately $16.1 million related to our Pittsburgh, Pennsylvania operation that
was sold on January 22, 2016 and our Miltec operation that we expect to complete the sale by the end of the second fiscal
quarter of 2016.
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2014 Compared to 2013
The following table sets forth net revenues, selected financial data, the effective tax (benefit) rate and diluted earnings per share:
(in thousands, except per share data)
Years Ended December 31,
2014
742,045
601,713
140,332
88,565
51,767
(28,077)
2,550
26,240
6,373
19,867
%
of Net Sales 2014
100.0 %
81.1 %
18.9 %
11.9 %
7.0 %
(3.8)%
0.3 %
3.5 %
nm
2.7 %
24.3%
1.79
nm
nm
$
$
$
$
$
$
$
$
2013
736,650
612,498
124,152
84,849
39,303
(29,918)
—
9,385
(1,993)
11,378
%
of Net Sales 2013
100.0 %
83.1 %
16.9 %
11.5 %
5.3 %
(4.1)%
— %
1.3 %
nm
1.5 %
(21.2)%
1.05
nm
nm
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 (Benefit) Rate
Diluted Earnings Per Share
nm = not meaningful
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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
SS
Military and space (defense structures)
Commercial aerospace
Total
ES
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
$
$
260,566
137,095
213,254
39,124
46,636
39,975
736,650
(12,797) $
17,521
4,724
$
124,298
195,658
319,956
$
$
137,095
178,137
315,232
32%
17%
33%
6%
6%
6%
100%
39%
61%
100%
35%
19%
29%
5%
6%
6%
100%
43%
57%
100%
$
(18,983) $
241,583
$
260,566
57%
62%
11,368
6,096
(3,975)
6,165
671
$
46,485
45,220
42,661
46,140
422,089
$
35,117
39,124
46,636
39,975
421,418
$
11%
11%
10%
11%
100%
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-A&D 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 years,
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combined with charges in the prior year of approximately $14.1 million in the SS operating segment, partially offset by an increase in
accrued compensation and benefit costs.
Selling, General and Administrative Expenses
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 9 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 (Benefit)
We recorded income tax expense of approximately $6.4 million (an effective tax rate of 24%) in 2014, compared to an income tax
benefit of approximately $2.0 million (an effective tax benefit rate of 21%) in 2013.
Our effective tax rate of approximately 24% for 2014 was lower than the federal statutory rate of 35% 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% in 2013 was lower than
the federal statutory rate of 35% 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.
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Business Segment Performance
We report our financial performance based upon the two reportable operating segments; SS and ES. 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
SS
ES
Total Net Revenues
Segment Operating Income
SS(2)
ES(3)
Corporate General and Administrative
Expenses (1)(3)
%
Change
(In thousands)
Years Ended December 31,
%
of Net Sales
%
of Net Sales
2014
2013
2014
2013
1.5% $ 319,956
0.2%
422,089
0.7% $ 742,045
$
34,949
34,599
69,548
(17,781)
$ 315,232
421,418
$ 736,650
$
19,008
37,030
56,038
(16,735)
43.1 %
56.9 %
100.0 %
10.9 %
8.2 %
42.8 %
57.2 %
100.0 %
6.0 %
8.8 %
(2.4 )%
(2.3)%
Total Operating Income
$
51,767
$
39,303
7.0 %
5.3 %
EBITDA
SS
Operating Income (2)
Other Income (4)
Depreciation and Amortization
ES
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
SS
ES
Corporate Administration
Total Capital Expenditures
$
34,949
2,550
10,959
48,458
34,599
17,928
52,527
$
19,008
—
12,406
31,414
37,030
18,346
55,376
(17,781)
137
(17,644)
83,341
$
(16,735)
174
(16,561)
70,229
$
15.1 %
10.0 %
12.4 %
13.1 %
11.2 %
9.5 %
$
$
—
83,341
$
$
6,975
77,204
11.2 %
10.5 %
$
$
12,742
5,782
30
18,554
$
$
8,287
5,000
116
13,403
(1) Includes costs not allocated to either the SS or ES 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.
(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.
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Structural Systems
SS’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 SS 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 SS EBITDA included approximately $2.6
million of insurance recoveries related to property and equipment that was recorded as other income and none in 2013.
Electronic Systems
ES’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.
ES’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.
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,
2015
2014
245.0
$
3.07%
3.07%
5.5
$
198.5
$
290.1
8.20%
4.75%
45.6
58.5
$
$
$
In June 2015, we completed a new credit facility to replace the Existing Credit Facilities. The new credit facility consists of a $275.0
million senior secured term loan, which matures on June 26, 2020 (“New Term Loan”), and a $200.0 million senior secured revolving
credit facility (“New Revolving Credit Facility”), which matures on June 26, 2020 (collectively, the “New Credit Facilities”). The
New Credit Facilities bear interest, at our option, at a rate equal to either (i) the Eurodollar Rate (defined as LIBOR) plus an applicable
margin ranging from 1.50% to 2.75% per year or (ii) the Base Rate (defined as the highest of [a] Federal Funds Rate plus 0.50%, [b]
Bank of America’s prime rate, and [c] the Eurodollar Rate plus 1.00%) plus an applicable margin ranging from 0.50% to 1.75% per
year, in each case based upon the consolidated total net adjusted leverage ratio. The undrawn portions of the commitments of the New
Credit Facilities are subject to a commitment fee ranging from 0.175% to 0.300%, based upon the consolidated total net adjusted
leverage ratio.
Further, we are required to make mandatory prepayments of amounts outstanding under the New Term Loan. The mandatory
prepayments will be made quarterly, equal to 5.0% per year of the original aggregate principal amount during the first two years and
increase to 7.5% per year during the third year, and increase to 10.0% per year during the fourth year and fifth years, with the
remaining balance payable on June 26, 2020. The loans under the New Revolving Credit Facility are due on June 26, 2020. As of
December 31, 2015, we were in compliance with all covenants required under the New Credit Facilities.
We have been making voluntary principal prepayments on a quarterly basis on our senior secured term loan and in conjunction with
the closing of the New Credit Facilities in June 2015, we drew down approximately $65.0 million on the New Revolving Credit
Facility and used those proceeds along with current cash on hand to extinguish the existing senior secured term loan of
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approximately $80.0 million. We expensed the unamortized debt issuance costs related to the existing senior secured term loan of
approximately $2.8 million as part of extinguishing the existing senior secured term loan during 2015. We also incurred approximately
$4.8 million of debt issuance costs related to the New Credit Facilities and those costs are capitalized and being amortized over the
five year life of the New Credit Facilities.
In addition, we retired all of the $200.0 million senior unsecured notes (“Existing Notes”) in July 2015. We drew down on the New
Term Loan in the amount of $275.0 million. Along with the call notice amount and paying the call premium of approximately $9.8
million, we also paid down the $65.0 million drawn on the New Revolving Credit Facility in the previous quarter. We expensed the
call premium of approximately $9.8 million and debt issuance costs related to the Existing Notes of approximately $2.1 million upon
extinguishing the Existing Notes during 2015.
Further, we made voluntary principal prepayments of approximately $30.0 million under the New Term Loan during 2015.
Subsequent to our year ended December 31, 2015, we entered into an agreement to sell our operation located in Pittsburgh,
Pennsylvania, which is part of our ES operating segment, for a preliminary sales price of approximately $38.5 million in cash, subject
to finalization of the working capital amount. We divested this facility as part of our overall strategy to streamline operations, which
includes consolidating our footprint. We completed the sale on January 22, 2016. As a result, our future cash flows will be impacted.
Also subsequent to our year ended December 31, 2015, we entered into an agreement to sell our Miltec operation, which is part of our
ES operating segment, for a preliminary sales price of approximately $14.6 million in cash, subject to post-closing adjustments. We
divested this facility as part of our overall strategy to streamline operations, which includes consolidating our footprint. We expect to
complete the sale by the end of the second fiscal quarter of 2016. As a result, our future cash flows will be impacted.
We expect to spend a total of approximately $18.0 million for capital expenditures in 2016 financed by cash generated from
operations, which will be higher than 2015, principally to support new contract awards at SS and ES. 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.
We continue to depend on operating cash flow and the availability of our New 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
2015 Compared to 2014
Net cash generated by operating activities during 2015 decreased to approximately $23.7 million compared to approximately $53.4
million during 2014 primarily due to lower net income that was partially offset by improved working capital management.
Net cash used in investing activities during 2015 was approximately $13.5 million compared to approximately $15.5 million during
2014 primarily due to lower capital expenditures that was partially offset by lower insurance recoveries related to property and
equipment.
Net cash used in financing activities during 2015 was approximately $50.4 million compared to approximately $41.2 million during
2014 primarily due to voluntary principal prepayments on our existing and new term loans of approximately $45.0 million, call
premium paid to redeem the $200.0 million Existing Notes of approximately $9.8 million, that was partially offset by proceeds from
the New Term Loan net of redemption of the $200.0 million Existing Notes and repayment of the New Revolving Credit Facility of
approximately $65.0 million.
2014 Compared to 2013
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 SS and ES, partially offset by
insurance recoveries related to property and equipment.
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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.
Contractual Obligations
A summary of our contractual obligations at December 31, 2015 was as follows (in thousands):
Long-term debt, including current portion
$
Future interest on notes payable and long-
term debt
Operating leases
Pension liability
Total(1)
$
Less Than
1 Year
Payments Due by Period
1-3 Years
3-5 Years
More Than
5 Years
26
$
31,875
$
213,125
$
6,755
5,169
1,565
13,515
$
13,508
3,893
3,267
52,543
$
9,023
678
3,484
226,310
$
—
—
—
9,581
9,581
Total
245,026
29,286
9,740
17,897
301,949
$
$
(1)
As of December 31, 2015, we recorded approximately $3.0 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 SS 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 16 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 we recognize revenue under the contract method of accounting and record
revenues and cost of sales on each contract in accordance with the percentage-of-completion method of accounting, using the units-of-
delivery method. Under the units-of-delivery method, revenue is recognized based upon the number of units delivered during a period
and the costs are recognized based on the actual costs allocable to the delivered units. Costs allocable to undelivered units are reported
on the balance sheet as inventory. This method is used in circumstances in which a company produces units of a basic product under
production-type contracts in a continuous or sequential production process to buyers’ specifications. These contracts are primarily
fixed-price contracts that vary widely in terms of size, length of performance period, and expected gross profit margins.
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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 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 (which we perform during the fourth quarter) 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 (which we perform during the fourth quarter) 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; SS, ES and Miltec. Miltec is part of the ES 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.
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The second step compares the implied fair value of goodwill with the carrying amount of that goodwill. The implied fair value of
goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. The implied fair value of
the reporting unit’s goodwill is calculated by creating a hypothetical purchase price allocation as if the reporting unit had just been
acquired. This balance sheet contains all assets and liabilities recorded at fair value (including any intangible assets that may not have
any corresponding carrying value on our balance sheet). The implied value of the reporting unit’s goodwill is calculated by subtracting
the fair value of the net assets from the fair value of the reporting unit. If the carrying amount of goodwill exceeds the implied fair
value of that goodwill, an impairment loss is recognized in an amount equal to that excess.
We perform our annual goodwill impairment test during the fourth quarter each year. The carrying amounts of goodwill at the date of
the most recent annual impairment test for the SS, ES, and Miltec internal reporting units was approximately $57.2 million, $92.0
million, and $8.4 million, respectively. As of the date of our 2015 annual goodwill impairment test, the fair value of the ES and Miltec
internal reporting units exceeded their carrying value by approximately 42% and 18%, respectively, and thus, goodwill was not
deemed impaired. However, the fair value of the SS reporting unit was less than the carrying amount as a result of the lowered
revenue outlook in our military and space end-use markets due to the decrease in U.S. government defense spending. As a result, the
second step (“Step Two”) of the goodwill impairment test was performed for the SS reporting unit. The implied fair value of goodwill
was determined by allocating the fair value of the tangible and intangible assets and liabilities in a manner similar to a purchase price
allocation. The implied fair value of goodwill is then compared to the goodwill’s carrying value to determine if a goodwill impairment
exists. As a result of the Step Two test, we recorded a goodwill impairment of approximately $57.2 million which reduced the SS
goodwill balance to zero as of December 31, 2015.
We review our indefinite-lived intangible asset for impairment on an annual basis (which we perform during the fourth quarter) 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 performed our annual indefinite-lived intangible asset impairment test during the fourth quarter of each year. The carrying value
of the trade-name indefinite-lived intangible asset as of the date of the 2015 impairment test was approximately $32.9 million. In
performing our annual impairment test in the fourth quarter of 2015, we concluded the fair value of the indefinite-lived trade name to
be zero as a result of divesting businesses in ES and our discontinuation of the use of the trade name. Thus, we recorded an
impairment of approximate $32.9 million, which was the remaining carrying value of the trade name.
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,
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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.
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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, 2015, we
had borrowings of approximately $245.0 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 margin of 2.75%. 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 Chief Executive
Officer and Chief Financial Officer, 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, 2015 because of the material weakness in internal control over financial reporting described below. In
light of the material weakness described below, 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 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.
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Management of the Company has assessed the effectiveness of the Company’s internal control over financial reporting as of
December 31, 2015. 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 a material weakness in our internal control over financial reporting as of December
31, 2015. 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 monitoring controls over the accuracy and appropriate classification of underlying direct and indirect labor
hour data which were used in our estimates to identify and record contract forward loss reserves. This material weakness 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 and cost of goods sold in each reporting period. Additionally, this material
weakness could result in a material misstatement of aforementioned 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 weakness described above, management concluded that the Company did not maintain effective internal
control over financial reporting as of December 31, 2015, based on criteria in Internal Control- Integrated Framework (2013) issued
by the COSO .
The effectiveness of our internal control over financial reporting as of December 31, 2015 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
Management’s Remediation Activities
We are committed to remediating the control deficiencies that constitute the material weakness 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
weakness.
Action to be taken or in process:
• Design and implement our internal controls over the on-going review of the related labor distributions used in our estimates
of anticipated costs used in the forward loss reserve analysis; we are also still in the process of testing certain of these
processes and procedures.
While significant progress has been made to enhance our internal control over financial reporting relating to the material weakness,
additional time will be required to assess and ensure the sustainability of these processes and procedures. We expect to complete the
planned remedial actions during 2016, however, we cannot make any assurances that such actions will be completed during 2016.
Until the remediation steps set forth above are fully implemented and concluded to be operating effectively, the material weakness
described above will continue to exist.
Remediation of Prior Year Material Weaknesses
We previously identified and disclosed in our 2014 Annual Report on Form 10-K (“Form 10-K”) as well as in our Quarterly Report on
Form 10-Q (“Form 10-Q”) for each interim period in fiscal 2015, material weaknesses in our internal control over financial reporting
regarding the following:
• 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.
• 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.
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• 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.
Throughout 2015, we implemented changes to our processes to improve our internal control over financial reporting. The following
steps have been taken to remediate the conditions leading to the above material weaknesses:
• We completed the implementation of additional on-going oversight, training and communication programs to reinforce our
ethical standards and code of conduct across the Company.
• We enhanced the availability of our hotline by more clearly defining its purpose and ensuring all employees are educated and
made aware of that purpose.
• We engaged third party tax advisors to assist with our methodology of estimating and reconciling tax entries.
• We implemented new controls and improved existing controls over income tax accounts, including controls over the
reconciliation of current and deferred tax asset and liability accounts.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934) that have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting during the quarter ended December 31, 2015.
ITEM 9B. OTHER INFORMATION
None.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors of the Registrant
The information under the caption “Election of Directors” in the 2016 Proxy Statement is incorporated herein by reference.
Executive Officers of the Registrant
The information under the caption “Executive Officers of the Registrant” in the 2016 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 2016 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 2016 Proxy Statement is
incorporated herein by reference.
Code of Ethics
The information under the caption “Code of Ethics” in the 2016 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 2016 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 2016 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
Weighted-Average
Exercise Price of
Outstanding
Options,
Warrants and Rights
(b)
$
20.08
—
Number of Securities
Remaining
Available for
Future Issuance
Under Equity
Compensation Plans
(Excluding Securities
Reflected
in Column
(a)(c)(2)
683,453
—
683,453
Number of Securities
to be Issued Upon
Exercise of
Outstanding
Options,
Warrants and Rights
(a)
772,179
—
772,179
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(1) The number of securities to be issued consists of 483,491 for stock options, 155,191 for restricted stock units and 133,497 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 2016 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 2016 Proxy Statement is incorporated
herein by reference.
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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.
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets - December 31, 2015 and 2014
Consolidated Statements of Operations - Years Ended December 31, 2015, 2014, and 2013
Consolidated Statements of Comprehensive (Loss) Income - Years Ended December 31, 2015, 2014,
and 2013
Consolidated Statements of Changes in Shareholders’ Equity - Years Ended December 31, 2015,
2014, and 2013
Consolidated Statements of Cash Flows - Years Ended December 31, 2015, 2014, and 2013
Notes to Consolidated Financial Statements
Supplemental Quarterly Financial Data (Unaudited)
2. Financial Statement Schedule
The following schedule for the years ended December 31, 2015, 2014 and 2013 is filed herewith:
Schedule II - Valuation and Qualifying Accounts
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.
Page
50
51
52
53
54
55
56
82
3. Exhibits
See Item 15(b) for a list of exhibits.
Signatures
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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 operations, of comprehensive
(loss) 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, 2015 and 2014, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 2015 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, 2015, based on criteria established in Internal Control - Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) because a material weakness in
internal control over financial reporting existed as of that date as the Company 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.
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 weakness referred to above is described in Management’s Report on Internal Control Over Financial
Reporting appearing under Item 9A. We considered this material weakness in determining the nature, timing, and extent of audit tests
applied in our audit of the 2015 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 and financial statement schedule, 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, on the financial
statement schedule, 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 1 to the consolidated financial statements, the Company changed the manner in which it accounts for deferred
income taxes in 2015.
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.
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
March 14, 2016
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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 $359 and $252 at
December 31, 2015 and December 31, 2014, respectively)
Inventories
Production cost of contracts
Deferred income taxes
Other current assets
Assets held for sale
Total Current Assets
Property and Equipment, net of accumulated depreciation of $128,533 and $128,457 at
December 31, 2015 and December 31, 2014, respectively
Goodwill
Intangibles, Net
Other Assets
Total Assets
Liabilities and Shareholders’ Equity
Current Liabilities
Current portion of long-term debt
Accounts payable
Accrued liabilities
Liabilities held for sale
Total Current Liabilities
Long-Term Debt, Less Current Portion
Deferred Income Taxes
Other Long-Term Liabilities
Total Liabilities
December 31,
2015
2014
$
$
5,454
77,089
115,404
10,290
—
14,358
41,636
264,231
96,551
82,554
110,621
7,463
561,420
26
40,343
36,458
6,780
83,607
245,000
26,528
18,954
374,089
$
$
$
$
45,627
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
Commitments and Contingencies (Notes 13, 16)
Shareholders’ Equity
Common stock - $0.01 par value; 35,000,000 shares authorized; 11,084,318 and
10,952,268 shares issued at December 31, 2015 and December 31, 2014,
respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total Shareholders’ Equity
Total Liabilities and Shareholders’ Equity
$
See accompanying notes to consolidated financial statements.
111
110
75,200
117,623
(5,603)
187,331
561,420
$
72,206
190,905
(6,651)
256,570
747,599
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Ducommun Incorporated and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share amounts)
Net Revenues
Cost of Sales
Gross Profit
Selling, General and Administrative Expenses
Goodwill Impairment
Intangible Asset Impairment
Operating (Loss) Income
Interest Expense
Loss on Extinguishment of Debt
Other Income, Net
(Loss) Income Before Taxes
Income Tax (Benefit) Expense
Net (Loss) Income
(Loss) Earnings Per Share
Basic (loss) earnings per share
Diluted (loss) earnings per share
Weighted-Average Number of Shares Outstanding
Basic
Diluted
See accompanying notes to consolidated financial statements.
Years Ended December 31,
2015
2014
2013
$
$
$
$
$
666,011
565,219
100,792
85,921
57,243
32,937
(75,309)
(18,709)
(14,720)
2,148
(106,590)
(33,308)
(73,282) $
(6.63) $
(6.63) $
11,047
11,047
$
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
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Ducommun Incorporated and Subsidiaries
Consolidated Statements of Comprehensive (Loss) Income
(In thousands)
Net (Loss) Income
Other comprehensive income (loss), net of tax:
Pension Adjustments:
Amortization of actuarial (loss) gain included in net income, net of
tax (expense) benefit of $(330), $156 and $408 for 2015, 2014 and
2013, respectively
Actuarial gain (loss) arising during the period, net of tax expense
(benefit) of $966, $(1,810), and $1,737 for 2015, 2014 and 2013,
respectively
Years Ended December 31,
2015
2014
2013
$
(73,282) $
19,867
$
11,378
(557)
263
685
1,605
(3,052)
2,921
Other Comprehensive Income (Loss)
Comprehensive (Loss) Income
1,048
(72,234) $
(2,789)
17,078
$
3,606
14,984
$
See accompanying notes to consolidated financial statements.
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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
Accumulated
Other
Comprehensive
Loss
Total
Shareholders’
Equity
10,594,765
$ 107
$
(1,924)
$ 64,842
$ 159,660
$
(7,468)
$ 215,217
—
11,378
—
11,378
—
—
487,163
(265,174)
—
—
—
5
(2 )
—
—
—
—
—
8,770
—
(6,805)
—
2,438
—
—
—
—
3,606
—
—
—
—
3,606
8,775
(6,807)
2,438
(336)
—
—
—
(336)
—
10,816,754
$ 110 $
(1,924)
$ 68,909
—
$ 171,038
$
(3,862)
19,867
—
$ 234,271
19,867
—
—
—
117,149
(34,597)
52,962
—
—
—
—
—
1
(1 )
1
—
—
(1 )
—
—
—
2,275
—
—
(919)
(1)
—
3,725
—
140
1,924
(1,923)
—
—
—
—
—
—
—
(2,789)
(2,789)
—
—
—
—
—
—
2,276
(920)
—
3,725
140
—
10,952,268
$ 110 $
—
—
167,523
(137,194)
101,721
—
—
—
1
(1 )
1
—
— $ 72,206
—
—
$ 190,905
$
(6,651)
$ 256,570
(73,282)
—
(73,282)
—
—
—
3,083
—
—
(4,209)
(1)
—
3,495
—
—
—
—
—
1,048
—
—
—
—
1,048
3,084
(4,210)
—
3,495
—
—
—
626
—
—
626
11,084,318
$ 111
$
—
$ 75,200
$ 117,623
$
(5,603)
$ 187,331
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
Excess tax expense
from share-based
compensation
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
Excess tax benefits
from share-based
compensation
Retirement of
treasury stock
Balance at
December 31, 2014
Net loss
Other comprehensive
income, net of tax
Stock options
exercised
Stock repurchased
related to the
exercise of stock
options
Stock awards vested
Stock-based
compensation
Excess tax benefits
from share-based
compensation
Balance at
December 31, 2015
See accompanying notes to consolidated financial statements.
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Ducommun Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Years Ended December 31,
2015
2014
2013
$
(73,282) $
19,867
$
11,378
Cash Flows from Operating Activities
Net (Loss) Income
Adjustments to Reconcile Net (Loss) Income to
Net Cash Provided by Operating Activities:
Depreciation and amortization
Goodwill impairment
Intangible asset impairment
Asset impairments
Stock-based compensation expense
Deferred income taxes
Excess tax benefits from stock-based compensation
Provision for (recovery of) doubtful accounts
Noncash loss on extinguishment of debt
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 sale of assets
Insurance recoveries related to property and equipment
Net Cash Used in Investing Activities
Cash Flows from Financing Activities
Borrowings from senior secured revolving credit facility
Repayment of senior secured revolving credit facility
Borrowings from term loan
Repayments of senior unsecured notes and term loans
Repayments of other debt
Debt issuance costs
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 yet paid
See accompanying notes to consolidated financial statements.
55
$
$
$
$
26,846
57,243
32,937
—
3,495
(30,707)
(626)
132
4,970
5,628
4,444
20,985
330
5,884
(13,978)
(20,623)
23,678
(15,891)
904
1,510
(13,477)
65,000
(65,000)
275,000
(320,000)
(26)
(4,848)
626
(1,126)
(50,374)
(40,173)
45,627
5,454
26,501
1,150
$
$
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
1,549
$
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
88795_Docummun10K.indd 56
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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 primary businesses: Electronic Systems segment and Structural Systems segment, each of which is a reportable
operating segment. In the fourth quarter of 2015, we renamed our operating segments to Electronic Systems (“ES”) and Structural
Systems (“SS”). ES was formerly known as Ducommun LaBarge Technologies (“DLT”) and SS was formerly known as Ducommun
AeroStructures (“DAS”). There were no regrouping of revenues or expenses as a result of the operating segments name change. ES
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. ES’s product offerings range from prototype
development to complex assemblies. SS designs, engineers and manufactures large, complex contoured aerospace structural
components and assemblies and supplies composite and metal bonded structures and assemblies. SS’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 amount 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.
Fair Value
We measure certain assets and liabilities at fair value based on the exchange price that would be received for an asset or paid to
transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in a orderly transaction between
market participants. See Note 3 for further information.
Cash Equivalents
Cash equivalents consist of highly liquid instruments purchased with original maturities of three months or less. Our cash accounts are
not reduced for checks written until the checks are presented for payment and paid by our bank. These assets are valued at cost, which
approximates fair value, which we classify as Level 1. See Fair Value above.
Derivative Instruments
We recognize derivative instruments on our consolidated balance sheets at their fair value. On the date that we enter into a derivative
contract, we designate the derivative instrument as a fair value hedge, a cash flow hedge, a hedge of a net investment in a foreign
operation, or a derivative instrument that will not be accounted for using hedge accounting methods. As of December 31, 2015, all of
our derivative instruments were designated as cash flow hedges. We did not enter into any derivative contracts in 2014.
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We record changes in the fair value of a derivative instrument that is highly effective and that is designated and qualifies as a cash
flow hedge in other comprehensive income (loss), net of tax until our earnings are affected by the variability of cash flows of the
underlying hedge. We record any hedge ineffectiveness and amounts excluded from effectiveness testing in current period earnings
within interest expense. We report changes in the fair values of derivative instruments that are not designated or do not qualify for
hedge accounting in current period earnings. We classify cash flows from derivative instruments on the consolidated statements of
cash flows in the same category as the item being hedged or on a basis consistent with the nature of the instrument.
When we determine that a derivative instrument is not highly effective as a hedge, we discontinue hedge accounting prospectively. In
all situations in which we discontinue hedge accounting and the derivative instrument remains outstanding, we will carry the
derivative instrument at its fair value on our consolidated balance sheets and recognize subsequent changes in its fair value in our
current period earnings.
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 SS for the Embraer Legacy 450/500 aircraft contracts. The charge resulted 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.
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 (which we perform during the fourth quarter) 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 SS 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 our results of
operations and a reduction in production cost of contracts on our balance sheet. As of December 31, 2015 and 2014, production costs
of contracts were approximately $10.3 million and $11.7 million, respectively.
Assets Held For Sale
In the fourth quarter of 2015, we made the decision to sell our Huntsville, Alabama and Iuka, Mississippi (collectively, “Miltec”)
operations and our Pittsburgh, Pennsylvania operation, both of which are part of our ES operating segment, and as a result, we met the
criteria for assets held for sale. However, the proposed sale of these two operations does not represent a strategic shift in our business
and thus, were included in the ongoing operating results in the consolidated statements of operations for all periods presented.
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Subsequent to our year ended December 31, 2015, we entered into an agreement to sell our operation located in Pittsburgh,
Pennsylvania for a preliminary sales price of approximately $38.5 million in cash, subject to finalization of the working capital
amount. We divested this facility as part of our overall strategy to streamline operations, which includes consolidating our footprint.
We completed the sale on January 22, 2016.
Also subsequent to our year ended December 31, 2015, we entered into an agreement to sell our Miltec operation for a preliminary
sales price of approximately $14.6 million in cash, subject to post-closing adjustments. We divested this facility as part of our overall
strategy to streamline operations, which includes consolidating our footprint. We expect to complete the sale by the end of the second
fiscal quarter of 2016.
The carrying values of the major classes of assets and liabilities related to these assets held for sale were as follows:
Assets
Accounts receivable (less allowance for doubtful accounts of $24)
Inventory
Deferred income taxes
Other current assets
Total current assets
Property and equipment, net of accumulated depreciation of $8,509
Goodwill
Other Intangible Assets
Liabilities
Accounts payable
Accrued liabilities
(In thousands)
December 31,
2015
9,395
6,453
1,246
3,315
20,409
1,941
17,772
1,514
41,636
4,836
1,944
6,780
$
$
$
$
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.
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 the carrying value of goodwill
to determine impairment. An impairment charge will be recognized equal to the excess of the carrying value of goodwill over the
implied fair value of goodwill. As a result of our fourth quarter of 2015 annual goodwill impairment test, we recorded an approximate
$57.2 million of goodwill impairment to the SS goodwill carrying value to decrease its goodwill carrying value to zero as of
December 31, 2015. See Note 7 for further information.
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
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indefinite-lived intangible asset exceeds its fair value, we would recognize an impairment loss in the amount of such excess. In
performing our annual impairment test in the fourth quarter of 2015, we concluded the fair value of the indefinite-lived trade name to
be zero as a result of divesting businesses in ES and our discontinuation of the use of the trade name. Thus, we recorded an
impairment of approximate $32.9 million, which was the remaining carrying value of the trade name. See Note 7 for further
information.
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 recognize impairment losses, if
any, based upon the estimated fair value of the assets.
Accumulated Other Comprehensive Loss
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.
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 we recognize revenue under the contract method of accounting and record
revenues and cost of sales on each contract in accordance with the percentage-of-completion method of accounting, using the units-of-
delivery method. Under the units-of-delivery method, revenue is recognized based upon the number of units delivered during a period
and the costs are recognized based on the actual costs allocable to the delivered units. Costs allocable to undelivered units are reported
on the balance sheet as inventory. This method is used in circumstances in which a company produces units of a basic product under
production-type contracts in a continuous or sequential production process to buyers’ specifications. 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 may be required to record
additional provisions for estimated losses on contracts.
In the third quarter of 2015, we recorded a charge in SS related to estimated cost overruns as a result of a change in the contract
requirements for the remaining contractual period for a regional jet program of approximately $10.0 million. This amount was
recorded as part of cost of goods sold in our results of operations and increased accrued liabilities by approximately $7.6 million and
other long-term liabilities by approximately $2.4 million.
In the fourth quarter of 2013, we recorded a charge in SS 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
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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.
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.
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.
We elected to early adopt ASU 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes” and on a
prospective basis for the year ended December 31, 2015. See “Recent Accounting Pronouncements - New Accounting Guidance
Adopted in 2015” in Note 1 and Note 15 for further information.
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-Merton (“Black-Scholes”) valuation model, which requires assumptions and judgments regarding
stock price volatility, risk-free interest rates, and expected options terms. 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.
(Loss) 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 (loss) earnings and weighted-average number of common shares outstanding used to compute (loss) earnings per share were
as follows:
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Net (loss) income
Weighted-average number of common shares outstanding
Basic weighted-average common shares outstanding
Dilutive potential common shares
Diluted weighted-average common shares outstanding
(Loss) earnings per share
Basic
Diluted
(In thousands, except per share data)
Years Ended December 31,
2015
2014
2013
$
(73,282) $
19,867
$
11,378
11,047
—
11,047
10,897
229
11,126
$
$
(6.63) $
(6.63) $
1.82
1.79
$
$
10,695
157
10,852
1.06
1.05
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
Recent Accounting Pronouncements
New Accounting Guidance Adopted in 2015
(In thousands)
Years Ended December 31,
2015
778
2014
218
2013
410
In November 2015, the FASB issued ASU 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes”
(“ASU 2015-17”), which requires deferred tax assets and liabilities be classified as noncurrent on the balance sheet. This new
guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016. Early
adoption is permitted and may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods
presented. We have elected to early adopt ASU 2015-17 and on a prospective basis for the year ended December 31, 2015. The
adoption of this new guidance had no impact on our results of operations or cash flows for 2015. See Note 15 for further information.
In April 2014, the FASB issued ASU 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment
(Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” (“ASU 2014-08”), which
changed the criteria for reporting discontinued operations. The revised guidance defines a discontinued operation as a disposal of a
component or a group of a components of an entity that represents a strategic shift that has (or will have) a major effect on an entity’s
operations and financial results. It also requires additional disclosures for discontinued operations and new disclosures for individually
material disposals that do not meet the definition of a discontinued operation This new guidance is effective for annual periods, and
interim periods within those annual periods, beginning after December 15, 2014. Early adoption is permitted, but only for disposals
(or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. We
have adopted ASU 2014-08 for the year ended December 31, 2015.
Recently Issued Accounting Standards
In August 2015, the FASB issued ASU 2015-15, “Imputation of Interest (Subtopic 835-30)” (“ASU 2015-15”), which provides
guidance on the presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements. In ASU
2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs,” it requires entities
to present debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt liability
but does not address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. Thus, the
SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the
deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding
borrowings on the line-of-credit arrangement. The new guidance is effective for annual and interim periods within those annual
periods, beginning after December 15, 2015, which is our interim period beginning January 1, 2016. Early adoption is permitted. We
had approximately $4.3 million of debt issuance costs and approximately $245.0 million of total debt as of December 31, 2015, and
thus, we do not believe that adoption of this new guidance will have a significant impact on our consolidated financial statements.
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In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330)” (“ASU 2015-11”), which requires inventory within the scope
of ASU 2015-11 to be measured at the lower of cost and net realizable value. Subsequent measurement is unchanged for inventory
measured using last-in, first-out (“LIFO”) or the retail inventory value. The new guidance is effective for fiscal years beginning after
December 15, 2016, including interim periods within those fiscal years, which will be our interim period beginning January 1, 2017.
Early adoption is permitted as of the beginning of an interim or annual reporting period. 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 2015, the FASB issued ASU 2015-10, “Technical Corrections and Improvements” (“ASU 2015-10”), which covers a wide
range of Topics in the Codification. The amendments in ASU 2015-10 represent changes to make minor corrections or minor
improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a
significant administrative cost on most entities. The amendments in this new guidance that require transition guidance are effective for
annual and interim periods within those annual periods, beginning after December 15, 2015, which is our interim period beginning
January 1, 2016. All other amendments are effective upon issuance of ASU 2015-10. Early adoption is permitted. We do not anticipate
this standard will have a significant impact on our consolidated financial statements.
In April 2015, the FASB issued ASU 2015-05, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40):
Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement” (“ASU 2015-05”), which provides guidance on fees paid
by a customer in a cloud computing arrangement. If a cloud computing arrangement includes a software license, the customer should
account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud
computing arrangement does not include a software license, the customer should account for the arrangement as a service contract.
The new guidance is effective for annual and interim periods within those annual periods, beginning after December 15, 2015, which
is our interim period beginning January 1, 2016. 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 April 2015, the FASB issued ASU 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of
Debt Issuance Costs” (“ASU 2015-03”), which changes the presentation of debt issuance costs in financial statements. Under ASU
2015-03, an entity presents such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset.
Amortization of those costs is reported as interest expense. The new guidance is effective for annual and interim periods within those
annual periods, beginning after December 15, 2015, which is our interim period beginning January 1, 2016. Early adoption is
permitted. We had approximately $4.3 million of debt issuance costs and approximately $245.0 million of total debt as of December
31, 2015, and thus, we do not believe that adoption of this new guidance will have a significant impact on our consolidated financial
statements.
In January 2015, the FASB issued ASU 2015-01, “Income Statement - Extraordinary and Unusual Items (Subtopic 225-20)” (“ASU
2015-01”), which eliminates from U.S. GAAP the concept of extraordinary items. Current guidance requires separate classification,
presentation, and disclosure of extraordinary events and transactions. In addition, an event or transaction is presumed to be an ordinary
and usual activity of the reporting entity unless evidence clearly supports its classification as an extraordinary item. The new guidance
is effective for annual and interim periods within those annual periods, beginning after December 15, 2015, which is our interim
period beginning January 1, 2016. Early adoption is permitted provided it is applied from the beginning of the annual period of
adoption. 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 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
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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 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. In August 2015, the FASB issued ASU 2015-14, “Revenue From Contracts With Customers (Topic 606)” (“ASU 2015-
14”), which defer the effective date of ASU 2014-09 by one year to annual periods beginning after December 15, 2017, including
interim reporting periods within that reporting period. Early adoption is permitted only as of annual reporting periods beginning after
December 15, 2016, including interim reporting periods within that reporting period. The new guidance is effective for us beginning
January 1, 2018 and will provide us additional time to evaluate the method and impact that ASU 2014-09 will have on our
consolidated financial statements.
Note 2. Restructuring Activities
Summary of Restructuring Plans
In September 2015, management approved and commenced implementation of several restructuring actions, including organizational
re-alignments, consolidation and relocation of the New York facilities that was completed by December 2015, closure of the Houston
facility that was completed by December 2015, and closure of the St. Louis facility by April 2016, all of which are part of our overall
strategy to streamline operations.
As of December 31, 2015, we have accrued approximately $0.7 million and $1.2 million for severance and benefits and loss on early
exit from lease and charged to selling, general and administrative expenses in the ES and SS operating segments, respectively, and
expect to record additional accruals totaling approximately $0.1 million for severance and benefits in the first quarter of 2016.
Our restructuring activities for 2015 and 2014 were as follows (in thousands):
December 31, 2014
Balance
Charges
$
$
—
—
—
$
$
987
1,181
2,168
2015
Cash Payments
(221)
—
(221)
$
$
Severance and benefits
Lease termination
Ending balance
Note 3. Fair Value Measurements
December 31, 2015
Change in Estimates
$
$
(44)
—
(44)
$
$
Balance
722
1,181
1,903
Fair value is defined as the price that would be received for an asset or the price that would be paid to transfer a liability (an exit price)
in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. The
accounting standard provides a framework for measuring fair value using a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value. This hierarchy requires us to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. Three levels of inputs that may be used to measure fair value are as follows:
Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets
that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term
of the assets or liabilities; and
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Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or
liabilities.
Our financial instruments consist primarily of cash and cash equivalents and interest rate cap derivatives designated as cash flow
hedging instruments. Assets and liabilities measured at fair value on a recurring basis were as follows (in thousands):
As of December 31, 2015
As of December 31, 2014
Fair Value Measurements Using
Fair Value Measurements Using
Level 1
Level 2
Level 3
Total Balance
Level 1
Level 2
Level 3
Total Balance
$
4,587
$
—
$
—
$
4,587
$ 44,554 $
—
$
—
$ 44,554
—
963
—
963
—
—
—
—
Assets
Money market funds
(1)
Interest rate cap
hedges (2)
Total Assets
$
4,587
$
963
$
— $
5,550
$ 44,554
$
— $
— $ 44,554
(1) Included as cash and cash equivalents.
(2) Interest rate cap hedge premium included as other current assets and other assets.
The fair value of the interest rate cap hedge agreements is determined using pricing models that use observable market inputs as of the
balance sheet date, a Level 2 measurement.
There were no transfers between Level 1, Level 2, or Level 3 financial instruments in either 2015 or 2014.
Note 4. Financial Instruments
Derivative Instruments and Hedging Activities
We periodically enter into cash flow derivative transactions, such as interest rate cap agreements, to hedge exposure to various risks
related to interest rates. We assess the effectiveness of the interest rate cap hedges at inception of the hedge. We recognize all
derivatives at their fair value. For cash flow designated hedges, the effective portion of the changes in fair value of the derivative
contract are recorded in accumulated other comprehensive income (loss), net of taxes, and are recognized in net earnings at the time
earnings are affected by the hedged transaction. Adjustments to record changes in fair values of the derivative contracts that are
attributable to the ineffective portion of the hedges, if any, are recognized in earnings. We present derivative instruments in our
consolidated statements of cash flows’ operating, investing, or financing activities consistent with the cash flows of the hedged item.
The gross notional and recorded fair value of derivative financial instruments in the consolidated balance sheets were as follows:
(In thousands)
December 31, 2015
Gross Notional
Other
Current
Assets
(In thousands)
December 31, 2014
Other Long
Term Assets Gross Notional
Other Current
Assets
Other Long
Term Assets
Derivatives Designated as Hedging
Instruments
Cash Flow Hedges:
Interest rate cap premiums
$ 133,707
$
Total Derivatives
$ 133,707
$
1
1
$
$
962
962
$
$
— $
— $
— $
— $
—
—
Note 5. Inventories
Inventories consisted of the following:
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Raw materials and supplies
Work in process
Finished goods
Less progress payments
Total
(In thousands)
December 31,
2015
2014
61,840 $
49,299
10,073
121,212
5,808
115,404 $
77,033
61,458
14,116
152,607
9,765
142,842
$
$
We net advances from customers related to inventory purchases against inventories in the consolidated balance sheets.
Note 6. 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,
2015
2014
Range of
Estimated
Useful Lives
$
$
15,454
44,313
127,934
24,187
13,196
225,084
128,533
96,551
$
$
15,006
45,636
131,263
25,975
9,645
227,525
128,457
99,068
5 - 40 Years
2 - 20 Years
2 - 10 Years
Depreciation expense was $15.7 million, $15.3 million and $15.6 million, for the years ended December 31, 2015, 2014 and 2013,
respectively.
Note 7. 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, 2015 and 2014 were as follows:
Gross goodwill
Accumulated goodwill impairment
Balance at December 31, 2014
Goodwill impairment
Transfer to assets held for sale
Balance at December 31, 2015
Structural
Systems
(In thousands)
Electronic
Systems
Consolidated
Ducommun
57,243
—
57,243
(57,243)
—
—
$
$
$
182,048
(81,722)
100,326
$
$
—
(17,772)
82,554
$
239,291
(81,722)
157,569
(57,243)
(17,772)
82,554
$
$
$
We perform our annual goodwill impairment test during the fourth quarter each year. The carrying amounts of goodwill at the date of
the most recent annual impairment test for the SS, ES, and Miltec internal reporting units was approximately $57.2 million, $92.0
million, and $8.4 million, respectively. In the fourth quarter of 2015, we met the criteria for assets held for sale for our Pittsburgh,
Pennsylvania operation and Miltec operation (both are part of our ES operating segment). Assets held for sale, other than goodwill, is
tested for impairment prior to the testing of goodwill for impairment. No impairment was noted of these assets held for sale. As of the
date of the 2015 annual goodwill impairment test, the fair value of the ES and Miltec internal reporting units exceeded their carrying
values by approximately 42% and 18%, respectively, and thus, not deemed impaired. However, the fair value of the SS reporting unit
was less than the carrying value as a result of the lowered revenue outlook in our military and space end-use markets due to the
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decrease in U.S. government defense spending. As a result, the second step (“Step Two”) of the goodwill impairment test was
performed for the SS reporting unit. The fair value of goodwill was determined by allocating the fair value of the tangible and
intangible assets and liabilities in a manner similar to a purchase price allocation. As a result of this analysis, we recorded an
approximate $57.2 million of goodwill impairment to the SS goodwill carrying value to decrease its goodwill carrying value to zero as
of December 31, 2015.
We perform our annual indefinite-lived intangible asset impairment test during the fourth quarter of each year. The carrying value of
the trade-name indefinite-lived intangible asset at the date of the most recent impairment test was approximately $32.9 million. In
performing our annual impairment test in the fourth quarter of 2015, we concluded the fair value of the indefinite-lived trade name to
be zero as a result of divesting businesses in ES and our discontinuation of the use of the trade name. Thus, we recorded an
impairment of approximate $32.9 million, which was the remaining carrying value of the trade name.
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, 2015
December 31, 2014
(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 $
159,200
$
49,463
$
109,737
$
164,500
$
43,715
$
120,785
8
14
15
$
—
1,845
400
161,445
$
—
1,230
131
50,824
—
615
269
110,621
$
3,400
1,845
400
170,145 $
3,060
1,099
104
47,978
$
340
746
296
122,167
$
The carrying amount of other intangible assets by operating segment as of December 31, 2015 and 2014 was as follows:
(In thousands)
December 31, 2015
December 31, 2014
Gross
Accumulated
Amortization
Net
Carrying
Value
Gross
Accumulated
Amortization
Net
Carrying
Value
Other intangible assets
Structural Systems
Electronic Systems
Total
$
$
19,300
142,145
161,445
$
$
14,433
36,391
50,824
$
$
4,867
105,754
110,621
$
$
19,300
150,845
170,145
$
$
13,046
34,932
47,978
$
$
6,254
115,913
122,167
Amortization expense of other intangible assets was approximately $10.0 million, $10.4 million and $10.9 million for the years ended
December 31, 2015, 2014 and 2013, respectively. Future amortization expense by operating segment is expected to be as follows:
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2016
2017
2018
2019
2020
Thereafter
Structural
Systems
(In thousands)
Electronic
Systems
Consolidated
Ducommun
1,123
907
737
591
490
1,019
4,867
$
$
7,926
7,927
7,927
7,926
7,883
66,165
105,754
$
$
9,049
8,834
8,664
8,517
8,373
67,184
110,621
$
$
Note 8. Accrued Liabilities
The components of accrued liabilities consisted of the following:
Accrued compensation
Accrued income tax and sales tax
Customer deposits
Interest payable
Provision for forward loss reserves
Other
Total
Note 9. Long-Term Debt
Long-term debt and the current period interest rates were as follows:
New term loan
Senior unsecured notes (fixed 9.75%)
Senior secured term loan (floating 4.75%)
Other debt (fixed 5.41%)
Total Debt
Less current portion
Total long-term debt
Weighted-average interest rate
67
(In thousands)
December 31,
2015
2014
$
$
13,521 $
1,513
1,758
58
11,925
7,683
36,458 $
25,352
1,580
1,139
9,439
4,734
9,822
52,066
(In thousands)
December 31,
2015
2014
$
245,000
$
—
—
26
—
200,000
90,000
52
245,026
290,052
26
$
245,000
$
3.07%
26
290,026
8.20%
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Future long-term debt payments at December 31, 2015 were as follows:
2016
2017
2018
2019
2020
Total
(In thousands)
26
7,812
24,063
27,500
185,625
245,026
$
$
In June 2015, we completed a new credit facility to replace the Existing Credit Facilities. The new credit facility consists of a $275.0
million senior secured term loan, which matures on June 26, 2020 (“New Term Loan”), and a $200.0 million senior secured revolving
credit facility (“New Revolving Credit Facility”), which matures on June 26, 2020 (collectively, the “New Credit Facilities”). The
New Credit Facilities bear interest, at our option, at a rate equal to either (i) the Eurodollar Rate (defined as LIBOR) plus an applicable
margin ranging from 1.50% to 2.75% per year or (ii) the Base Rate (defined as the highest of [a] Federal Funds Rate plus 0.50%, [b]
Bank of America’s prime rate, and [c] the Eurodollar Rate plus 1.00%) plus an applicable margin ranging from 0.50% to 1.75% per
year, in each case based upon the consolidated total net adjusted leverage ratio. The undrawn portions of the commitments of the New
Credit Facilities are subject to a commitment fee ranging from 0.175% to 0.300%, based upon the consolidated total net adjusted
leverage ratio.
Further, we are required to make mandatory prepayments of amounts outstanding under the New Term Loan. The mandatory
prepayments will be made quarterly, equal to 5.0% per year of the original aggregate principal amount during the first two years and
increase to 7.5% per year during the third year, and increase to 10.0% per year during the fourth year and fifth years, with the
remaining balance payable on June 26, 2020. The loans under the New Revolving Credit Facility are due on June 26, 2020. As of
December 31, 2015, we were in compliance with all covenants required under the New Credit Facilities.
We have been making voluntary principal prepayments on a quarterly basis on our senior secured term loan and in conjunction with
the closing of the New Credit Facilities in June 2015, we drew down approximately $65.0 million on the New Revolving Credit
Facility and used those proceeds along with current cash on hand to extinguish the existing senior secured term loan of approximately
$80.0 million. We expensed the unamortized debt issuance costs related to the existing senior secured term loan of approximately $2.8
million as part of extinguishing the existing senior secured term loan during 2015. We also incurred approximately $4.8 million of
debt issuance costs related to the New Credit Facilities and those costs are capitalized and being amortized over the five year life of
the New Credit Facilities.
In addition, we retired all of the $200.0 million senior unsecured notes (“Existing Notes”) in July 2015. We drew down on the New
Term Loan in the amount of $275.0 million. Along with the call notice amount and paying the call premium of approximately $9.8
million, we also paid down the $65.0 million drawn on the New Revolving Credit Facility in the previous quarter. We expensed the
call premium of approximately $9.8 million and debt issuance costs related to the Existing Notes of approximately $2.1 million upon
extinguishing the Existing Notes during 2015.
Further, we made voluntary principal prepayments of approximately $30.0 million under the New Term Loan during 2015.
As of December 31, 2015, we had approximately $198.5 million of unused borrowing capacity under the New Revolving Credit
Facility, after deducting approximately $1.5 million for standby letters of credit.
The Existing Notes were issued by us (“Parent Company”) and guaranteed by all of our subsidiaries, other than one subsidiary that
was considered minor (“Subsidiary Guarantors”). The Subsidiary Guarantors jointly and severally guarantee the Existing Notes and
New Credit Facilities. The Parent Company has no independent assets or operations and therefore, no consolidating financial
information for the Parent Company and its subsidiaries are presented.
In October 2015, we entered into interest rate cap hedges designated as cash flow hedges with maturity dates of June 2020, and in
aggregate, totaling approximately $135.0 million of our debt. We paid a total of approximately $1.0 million in connection with the
interest rate cap hedges. See Note 4 for further discussion.
Note 10. Shareholders’ Equity
We are authorized to issue five million shares of preferred stock. At December 31, 2015 and 2014, no preferred shares were issued or
outstanding.
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Note 11. 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 1,040,000, 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, 2015, shares available for future grant under the 2007 Plan and 2013 Plan are 56,726 and
626,727, 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, 2015, 2014, and 2013, we granted stock options to our officers, key employees and non-employee
directors of 73,000, 71,000, and 190,500, respectively, with weighted-average grant date fair values of approximately $10.63, $12.62,
and $10.95, 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, 2015 were as follows:
Outstanding at January 1, 2015
Granted
Exercised
Expired
Forfeited
Outstanding at December 31, 2015
Exercisable at December 31, 2015
Number
of Stock Options
611,977
73,000
(167,523 )
(13,875 )
(20,088 )
483,491
$
$
Weighted-
Average
Exercise
Price Per Share
19.02
25.51
18.42
18.58
22.29
20.08
251,891
$
18.80
Weighted-Average
Remaining
Contractual Life
(Years)
Aggregate Intrinsic
Value (in
thousands)
4.1 $
3.4 $
689
417
Changes in nonvested stock options for the year ended December 31, 2015 were as follows:
Nonvested at January 1, 2015
Granted
Vested
Forfeited
Nonvested at December 31, 2015
Weighted-
Average
Grant
Date Fair Value
9.42
$
10.63
8.78
10.40
10.03
$
Number of Stock
Options
323,565
73,000
(144,877 )
(20,088 )
231,600
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 December 31, 2015,
2014 and 2013 was approximately $2.3 million, $1.0 million, and $2.6 million, respectively. Cash received from stock option
exercised for the years ended December 31, 2015, 2014 and 2013 was approximately $3.1 million, $2.3 million, and $8.8 million,
respectively, with related tax benefits of $0.9 million, $0.4 million, and $1.0 million, respectively. The total stock options vested and
expected to vest in the future are 483,491 shares with a weighted-average exercise price of approximately $20.08 and an aggregate
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intrinsic value of approximately $0.7 million. These stock options have a weighted-average remaining contractual term of
approximately 4.1 years.
The share-based compensation cost expensed for stock options for the years ended December 31, 2015, 2014, and 2013 (before tax
benefits) was approximately $1.2 million, $1.5 million, and $1.2 million, respectively, and is included in selling, general and
administrative expenses on the consolidated income statements. At December 31, 2015, total unrecognized compensation cost (before
tax benefits) related to stock options of approximately $1.7 million is expected to be recognized over a weighted-average period of
approximately 2.2 years. The weighted-average grant date fair value of stock options granted during the years ended December 31,
2015, 2014, and 2013 was approximately $10.63, $12.62, and $10.95. The total fair value of stock options vested during the years
ended December 31, 2015, 2014, and 2013 was approximately $1.3 million, $1.3 million, and $1.1 million, respectively.
The assumptions used to compute the fair value of stock option grants under the Stock Incentive Plans for years ended December 31,
2015, 2014, and 2013 were as follows:
Risk-free interest rate
Expected volatility
Expected dividends
Expected term (in months)
Years Ended December 31,
2015
2014
2013
1.13%
53.72%
—
47
1.67%
55.27%
—
66
1.44%
53.89%
—
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 108,500,
86,300, and 65,550 RSUs during the years ended December 31, 2015, 2014, and 2013, respectively, with weighted-average grant date
fair values (equal to the fair market value of our stock on the date of grant) of approximately $25.15, $24.74, and $18.75 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, 2015 was as follows:
Outstanding at January 1, 2015
Granted
Vested
Forfeited
Outstanding at December 31, 2015
Number of
Restricted Stock
Units
122,943
108,500
(66,217)
(10,035)
155,191
Weighted-
Average
Grant
Date Fair Value
21.67
25.15
20.81
25.32
24.24
$
$
The share-based compensation cost expensed for RSUs for the years ended December 31, 2015, 2014, and 2013 (before tax benefits)
was approximately $1.8 million, $1.3 million, and $0.9 million respectively, and is included in selling, general and administrative
expenses on the consolidated income statements. At December 31, 2015, total unrecognized compensation cost (before tax benefits)
related to RSUs of approximately $2.3 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, 2015, 2014, and 2013 was approximately $1.8 million,
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$1.3 million, and $1.1 million, respectively. The tax benefit realized from vested RSUs for the years ended December 31, 2015, 2014,
and 2013 was approximately $0.7 million, $0.5 million, and $0.4 million, respectively.
Performance Stock Units
We granted performance stock awards (“PSUs”) to certain key employees of approximately 64,000, 67,500, and 85,500 PSUs during
the years ended December 31, 2015, 2014, and 2013, respectively, with weighted-average grant date fair values of approximately
$25.51, $24.90, and $16.15 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, 2015 is as follows:
Outstanding at January 1, 2015
Granted
Vested
Forfeited
Outstanding at December 31, 2015
Number of
Performance Stock
Units
168,158
64,000
(35,504)
(63,157)
133,497
Weighted-
Average
Grant
Date Fair Value
18.94
25.51
13.04
20.65
22.86
$
$
The share-based compensation cost expensed for PSUs for the years ended December 31, 2015, 2014, and 2013 (before tax benefits)
was approximately $0.5 million, $1.0 million and $0.3 million, respectively, and is included in selling, general and administrative
expenses on the consolidated income statements. At December 31, 2015, total unrecognized compensation cost (before tax benefits)
related to PSUs of approximately $1.4 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, 2015, 2014, and 2013, was approximately $0.9
million, zero, and zero, respectively. The tax benefit realized from PSUs for the years ended December 31, 2015, 2014, and 2013 were
$0.3 million, zero, and zero, respectively.
Note 12. 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
$0.5 million and $1.7 million, respectively, at December 31, 2015 and $0.3 million and $2.0 million, respectively, at December 31,
2014. The accumulated benefit obligations of the other two plans at December 31, 2015 and December 31, 2014 were approximately
$0.9 million and $0.9 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 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, 2015, 2014, and 2013 was approximately $3.2 million, $3.3 million, and $3.1 million, respectively.
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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,
2015
2014
2013
785
1,350
(1,495)
887
1,527
$
$
$
693
1,278
(1,400)
419
990 $
843
1,160
(1,222)
1,093
1,874
$
$
The components of the reclassifications of net actuarial losses from accumulated other comprehensive loss to net income for 2015
were as follows:
Amortization of actuarial loss - total before tax (1)
Tax benefit
Net of tax
(In thousands)
Year Ended December 31,
2015
$
$
887
(330)
557
(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 2016 is approximately $0.8 million.
The obligations and funded status of both plans are as follows:
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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 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
(1) Projected benefit obligation equals the accumulated benefit obligation for the plans.
$
$
$
$
$
$
$
$
$
$
$
(In thousands)
December 31,
2015
2014
$
33,299
785
1,350
(2,599)
(1,325)
31,510
$
19,725
$
(296)
1,829
(1,325)
19,933 $
(11,577) $
527
11,050
$
$
10,614
$
(887)
(2,599)
1,791
8,919
(3,316)
5,603
$
1,984
4,646
$
$
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
On December 31, 2015, our annual measurement date, the accumulated benefit obligation exceeded the fair value of the plans assets
by approximately $11.6 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, 2015 and 2014 of approximately $5.6 million and
$6.6 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, 2015 and 2014, by asset category, were as follows:
Equity securities
Cash and equivalents
Debt securities
Total(1)
December 31,
2015
2014
74%
6%
20%
100%
76%
4%
20%
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.
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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, 2015
Level 1
Level 2
Level 3
Total
$
$
1,149 $
3,986
9,468
14,603 $
— $
—
5,330
5,330
$
— $
—
—
— $
1,149
3,986
14,798
19,933
(In thousands)
Year Ended December 31, 2014
Level 1
Level 2
Level 3
Total
$
$
886
3,896
9,687
14,469
$
$
— $
—
5,256
5,256
$
—
—
—
—
$
$
886
3,896
14,943
19,725
(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,
2015
2014
2013
4.25%
3.70%
4.75%
4.00%
4.00%
3.10%
The weighted-average assumptions used to determine the benefit obligations under the two plans were as follows:
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Discount rate used to determine value of obligations
Pension Plan
LaBarge Retirement Plan
Long-term rate of return - Pension Plan only
December 31,
2015
2014
2013
4.55%
4.00%
7.50%
4.25%
3.70%
7.50%
4.75%
4.00%
8.00%
The following benefit payments under both plans, which reflect expected future service, as appropriate, are expected to be paid:
2016
2017
2018
2019
2020
Thereafter
(In thousands)
LaBarge
Retirement
Plan
Pension Plan
$
$
1,038
1,062
1,172
1,213
1,286
7,442
527
521
512
500
485
2,139
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 $0.9 million to the plans in 2016.
Note 13. 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 14. 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 2015, 2014, and 2013 was
approximately $8.5 million, $7.3 million, and $7.9 million, respectively. Future minimum rental payments under operating leases
having initial or remaining non-cancelable terms in excess of one year at December 31, 2015 were as follows:
2016
2017
2018
2019
2020
Thereafter
Total
$
$
(In thousands)
5,169
2,727
1,166
434
244
—
9,740
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Note 15. Income Taxes
Our pre-tax income attributable to foreign operations were not material. The provision for income tax expense (benefit) consisted of
the following:
Current tax (benefit) expense
Federal
State
Deferred tax (benefit) expense
Federal
State
Income tax (benefit) expense
(In thousands)
Years Ended December 31,
2015
2014
2013
$
$
(1,511) $
(418)
(1,929)
(29,475)
(1,904)
(31,379)
(33,308) $
$
5,258
244
5,502
1,186
(315)
871
6,373
$
(3,806)
432
(3,374)
1,173
208
1,381
(1,993)
The current income tax (benefit) expense excludes excess tax benefits recorded directly to additional paid-in-capital related to share-
based compensation of approximately $0.6 million, $0.1 million, and $(0.3) million for the years ended December 31, 2015, 2014, and
2013, respectively.
Deferred tax (liabilities) assets were comprised of the following:
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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
(In thousands)
December 31,
2015
2014
$
1,363
$
134
4,412
491
2,463
772
7,031
2,703
297
3,299
1,402
5,937
2,165
133
1,595
34,197
(7,477)
26,720
(11,802)
(2,035)
(37,891)
(514)
(682)
—
(52,924)
$
(26,204) $
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)
We have elected to early adopt ASU 2015-17, prospectively, beginning with the annual period ended December 31, 2015, which
requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the
balance sheet. The adoption of this new guidance had no impact on our results of operations or cash flows for 2015.
We have federal and state tax credit carryforwards of approximately $7.9 million and $10.0 million, respectively. A valuation
allowance of approximately $9.1 million has been provided on state tax credit carryforwards that are not expected to be realized under
ASC Subtopic 740-10. If not realized, the federal and state tax credit carryforwards will expire between 2017 and 2035.
We have net operating losses in Alabama and various other states of approximately $30.2 million. The state net operating loss
carryforwards include approximately $27.1 million that is not expected to be realized under ASC Subtopic 740-10 and has been
reduced by a valuation allowance. If not realized, the state net operating loss carryforwarrds will begin to expire in 2016.
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 statutory and effective tax rates were as follows:
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Statutory federal income tax (benefit) rate
State income taxes (net of federal benefit)
Qualified domestic production activities
Research and development tax credits
Goodwill impairment
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 (benefit) rate
Years Ended December 31,
2015
(35.0)%
(1.3)
0.5
(2.9)
6.7
0.6
0.2
0.1
—
0.1
(0.2)
(31.2)%
2014
35.0%
0.9
(2.3)
(11.3)
—
8.5
0.9
(5.0)
(1.9)
(0.7)
0.2
24.3%
2013
35.0%
2.0
(8.9)
(48.9)
—
0.9
1.8
(1.5)
—
(0.5)
(1.1)
(21.2)%
We recorded a goodwill impairment charge related to the SS operating segment in 2015. A portion of this goodwill impairment charge
was nondeductible for tax purposes and was a permanent impact to our income tax provision of approximately $7.2 million.
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. No deduction for qualified domestic
production has been recognized in 2015 due to a taxable loss. The loss has been carried back to 2014 and 2013, reducing the deduction
for qualified domestic production in those years.
On December 18, 2015, the President of the United States signed into law the Protecting Americans from Tax Hikes Act (“PATH”).
The PATH Act permanently extended the research and development credit. As a result, we recognized a benefit of approximately $2.6
million for the U.S. Federal R&D credit in 2015.
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. We had approximately
$0.1 million for payment of interest and penalties accrued for all three years ended December 31, 2015, 2014, and 2012.
Our total amount of unrecognized tax benefits was approximately $3.0 million, $2.8 million, and $2.3 million at December 31, 2015,
2014, and 2012 respectively. Approximately $2.1 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:
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
(In thousands)
Years Ended December 31,
$
2015
2014
2013
$
2,803
702
—
(48)
(494)
$
2,297
668
31
(22)
(171)
1,356
668
538
—
(265)
Balance at December 31,
$
2,963
$
2,803
$
2,297
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Federal income tax returns after 2011, California franchise (income) tax returns after 2010 and other state income tax returns after
2010 are subject to examination.
Note 16. 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 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.
SS 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, 2015,
which is reflected in other long-term liabilities on its consolidated balance sheet.
SS also faces liability as a potentially responsible party for hazardous waste disposed at landfills located in Casmalia and West
Covina, California. SS 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, 2015, 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 17. 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, 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,
2015
2014
2013
16%
9%
56%
20%
9%
59%
18%
10%
57%
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Boeing and Raytheon represented the following percentages of total accounts receivable:
Boeing
Raytheon
December 31,
2015
2014
13%
12%
12%
10%
In 2015, 2014 and 2013, net revenues from foreign customers based on the location of the customer, were approximately $60.2
million, $66.7 million and $66.0 million, respectively. No net revenues from a foreign country were greater than approximately 2% of
total net revenues in 2015, 2014, and 2013. 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 2015, 2014, and 2013. We are not subject to any
significant foreign currency risks as all our sales are made in United States dollars.
Note 18. Business Segment Information
We supply products and services primarily to the aerospace and defense industries. Our subsidiaries are organized into two strategic
businesses, SS and ES, each of which is an operating segment as well as a reportable segment.
Financial information by reportable segment was as follows:
Net Revenues
SS
ES
Total Net Revenues
Segment Operating (Loss) Income (1)
SS (2)(3)
ES (4)
Corporate General and Administrative Expenses (1)(5)
Operating (Loss) Income
Depreciation and Amortization Expenses
SS
ES
Corporate Administration
Total Depreciation and Amortization Expenses
Capital Expenditures
SS
ES
Corporate Administration
Total Capital Expenditures
(In thousands)
Years Ended December 31,
2015
2014
2013
273,319
392,692
666,011
$
$
(53,010) $
(4,472)
(57,482)
(17,827)
(75,309) $
9,417
17,267
162
26,846
11,559
4,419
10
15,988
$
$
$
$
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
$
$
$
$
$
$
$
$
(1) Includes cost not allocated to either the SS or ES operating segments.
(2) The results for 2015 includes approximately $57.2 million of goodwill impairment charge.
(3) The results for 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; 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.
(4) The results for 2015 includes approximately $32.9 million of an intangible asset impairment charge.
(5) The results for 2015, 2014 and 2013 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.
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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 2015 and 2014:
Total Assets
SS
ES
Corporate Administration
Total Assets
Goodwill and Intangibles
SS
ES
Total Goodwill and Intangibles
(In thousands)
December 31,
2015
2014
$
$
$
$
179,134
363,227
19,059
561,420
4,866
207,595
212,461
$
$
$
$
245,925
427,719
73,955
747,599
63,497
249,176
312,673
Subsequent to our year ended December 31, 2015, we entered into an agreement to sell our operation located in Pittsburgh,
Pennsylvania, which is part of our ES operating segment, for a preliminary sales price of approximately $38.5 million in cash, subject
to finalization of the working capital amount. We divested this facility as part of our overall strategy to streamline operations, which
includes consolidating our footprint. We completed the sale on January 22, 2016.
Also subsequent to our year ended December 31, 2015, we entered into an agreement to sell our Miltec operation, which is part of our
ES operating segment, for a preliminary sales price of approximately $14.6 million in cash, subject to post-closing adjustments. We
divested this facility as part of our overall strategy to streamline operations, which includes consolidating our footprint. We expect to
complete the sale by the end of the second fiscal quarter of 2016.
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Note 19. Supplemental Quarterly Financial Data (Unaudited)
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
2015
Three Months Ended
2014
Net Revenues
Gross Profit
(Loss) Income Before
Taxes
Income Tax (Benefit)
Expense
Dec 31
Oct 3
Jul 4
Apr 4
$ 156,576 $ 161,670
20,028
22,796
$ 174,845 $ 172,920
31,207
26,761
(90,170)
(16,447)
3,061
(3,034)
Dec 31
$ 187,612
Sep 27
Jun 29
$ 188,164 $ 186,516
Mar 30
$ 179,753
33,627
4,034
33,112
37,678
4,687
9,816
35,915
7,703
(26,594)
(6,932)
1,279
(1,061)
(1,122)
1,754
3,197
2,544
Net (Loss) Income
$ (63,576) $
(9,515) $
1,782
$
(1,973) $
5,156
$
2,933 $
6,619
$
5,159
(Loss) Earnings Per
Share
Basic (loss)
earnings per share
Diluted (loss)
earnings per share
$
$
(5.74) $
(0.86) $
0.16
$
(0.18 ) $
0.47
$
0.27
$
0.61
(5.74) $
(0.86) $
0.16
$
(0.18 ) $
0.46
$
0.26
$
0.60
$
$
0.48
0.46
In the fourth quarter of 2015, we recorded a goodwill impairment charge in our SS operating segment of approximately $57.2 million.
In addition, we recorded an intangible asset impairment charge in our ES operating segment of approximately $32.9 million related to
the write off an indefinite-lived trade name intangible asset.
In the third quarter of 2015, we recorded loss on extinguishment of debt of approximately $11.9 million which was made up of the call
premium to retire the existing $200.0 million senior unsecured notes in July 2015 of approximately $9.8 million and the write off of
the unamortized debt issuance costs associated with the existing $200.0 million senior unsecured notes of approximately $2.1 million.
In the second quarter of 2015, we recorded loss on extinguishment of debt of approximately $2.8 million which was made up of the
write off of the unamortized debt issuance costs associated with the existing senior secured term loan and existing senior secured
revolving credit facility when the existing senior secured term loan was paid off in June 2015 and both were replaced with the New
Credit Facilities.
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DUCOMMUN INCORPORATED AND SUBSIDIARIES
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2015, 2014, AND 2013
(in thousands)
Additions
Balance at
Beginning
of Period
Charged to
Costs and
Expenses (1)
Charged to Other
Accounts
Deductions
Balance at End
of Period
$
252
$
235
$
—
$
128
$
359
6,882
595
—
—
7,477
$
489
$
166
$
—
$
403
$
252
4,650
2,232
—
—
6,882
$
566
$
430
$
—
$
507
$
489
3,753
999
—
102
4,650
SCHEDULE II
Description
2015
Allowance for
Doubtful Accounts (1)
Valuation Allowance on
Deferred Tax Assets
2014
Allowance for
Doubtful Accounts
Valuation Allowance on
Deferred Tax Assets
2013
Allowance for
Doubtful Accounts
Valuation Allowance on
Deferred Tax Assets
(1)
Includes amount that is part of assets held for sale.
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EXHIBIT INDEX
Exhibit
No. Description
2.1
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.
2.2
2.3
3.1
3.2
3.3
3.4
10.1
*10.2
*10.3
Stock Purchase Agreement dated January 22, 2016, by and among Ducommun Incorporated, Ducommun LaBarge
Technologies, Inc., as Seller, LaBarge Electronics, Inc., and Intervala, LLC, as Buyer. Incorporated by reference to Exhibit
2.1 to Form 8-K dated January 25, 2016.
Stock Purchase Agreement dated February 24, 2016, by and between Ducommun LaBarge Technologies, Inc., as Seller, and
General Atomics, as Buyer. Incorporated by reference to Exhibit 2.1 to Form 8-K dated February 24, 2016.
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.
Credit Agreement, dated as of June 29, 2015, among Ducommun Incorporated, certain of its subsidiaries, Bank of America,
N.A., as administrative agent, swingline lender and issuing bank, and other lenders party thereto. Incorporated by reference to
Exhibit 10.1 to Form 8-K dated June 29, 2015.
2007 Stock Incentive Plan. Incorporated by reference to Appendix B of Definitive Proxy Statement on Schedule 14a, filed on
March 29, 2010.
2013 Stock Incentive Plan (Amended and Restated March 18, 2015). Incorporated by reference to Appendix B of Definitive
Proxy Statement on Schedule 14a, filed on April 22, 2015.
*10.4 Form of Nonqualified Stock Option Agreement, for grants to employees under the 2013 Stock Incentive Plan, the 2007 Stock
Incentive Plan. Incorporated by reference to Exhibit 10.8 to Form 10-K for the year ended December 31, 2003.
*10.5 Form of Performance Stock Unit Agreement for 2013. Incorporated by reference to Exhibit 99.1 to Form 8-K dated March
29, 2012.
*10.6 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.
*10.7 Form of Restricted Stock Unit Agreement. Incorporated by reference to Exhibit 99.1 to Form 8-K dated May 8, 2007.
*10.8 Form of Directors’ Restricted Stock Unit Agreement. Incorporated by reference to Exhibit 99.1 to Form 8-K dated May 10,
2010.
*10.9 Form of Key Executive Severance Agreement entered with five current executive officers of Ducommun. Incorporated by
reference to Exhibit 99.1 to Form 8-K dated January 3, 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
Douglas L. Groves
James S. Heiser
Anthony J. Reardon
Rosalie F. Rogers
Date of Agreement
February 18, 2014
February 18, 2014
December 31, 2007
December 31, 2007
November 5, 2009
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Exhibit
No. Description
*10.10 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
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
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
*10.11 Ducommun Incorporated 2016 Bonus Plan. Incorporated by reference to Exhibit 99.3 to Form 8-K dated March 1, 2016.
*10.12 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.
*10.13 Retirement Letter Agreement dated February 26, 2016 between Ducommun Incorporated and Joel H. Benkie. Incorporated
by reference to Exhibit 99.1 to Form 8-K dated March 1, 2016.
21
Subsidiaries of the registrant.
23
Consent of Independent Registered Public Accounting Firm.
31.1
Certification of Principal Executive Officer.
31.2
Certification of Principal Financial Officer.
32
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema
101.CAL XBRL Taxonomy Extension Calculation Linkbase
101.DEF XBRL Taxonomy Extension Definition Linkbase
101.LAB XBRL Taxonomy Extension Label Linkbase
101.PRE XBRL Taxonomy Extension Presentation Linkbase
___________________
* Indicates an executive compensation plan or arrangement.
85
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\
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.
DUCOMMUN INCORPORATED
Date: March 14, 2016
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 March 14, 2016.
Signature
/s/ Anthony J. Reardon
Anthony J. Reardon
/s/ Douglas L. Groves
Douglas L. Groves
Title
Chairman and Chief Executive Officer
(Principal Executive Officer)
Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer)
/s/ Christopher D. Wampler
Christopher D. Wampler
Vice President, Controller and Chief Accounting Officer
(Principal Accounting Officer)
/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
Director
Director
Director
Director
Director
Director
Director
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Following is a list of the subsidiaries of the Company:
Following is a list of the subsidiaries of the Company:
SUBSIDIARIES OF THE REGISTRANT
SUBSIDIARIES OF THE REGISTRANT
Name of Subsidiary
Name of Subsidiary
American Electronics, Inc.
American Electronics, Inc.
CMP Display Systems, Inc.
CMP Display Systems, Inc.
Composite Structures, LLC
Composite Structures, LLC
Ducommun AeroStructures, Inc.
Ducommun AeroStructures, Inc.
Ducommun AeroStructures Mexico, LLC
Ducommun AeroStructures Mexico, LLC
Ducommun AeroStructures New York, Inc.
Ducommun AeroStructures New York, Inc.
Ducommun LaBarge Technologies, Inc.
Ducommun LaBarge Technologies, Inc.
Ducommun LaBarge Technologies, Inc.
Ducommun LaBarge Technologies, Inc.
Ducommun Technologies (Thailand) Ltd.
Ducommun Technologies (Thailand) Ltd.
LaBarge Electronics, Inc.
LaBarge Electronics, Inc.
LaBarge/STC, Inc.
LaBarge/STC, Inc.
LaBarge Acquisition Company, Inc.
LaBarge Acquisition Company, Inc.
Miltec Corporation
Miltec Corporation
MMDI - 2004 Inc.
MMDI - 2004 Inc.
EXHIBIT 21
EXHIBIT 21
Jurisdiction of Incorporation
Jurisdiction of Incorporation
California
California
California
California
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
New York
New York
Arizona
Arizona
Delaware
Delaware
Thailand
Thailand
Missouri
Missouri
Texas
Texas
Missouri
Missouri
Alabama
Alabama
California
California
87
87
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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 March 14,
2016 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
March 14, 2016
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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, 2015;
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: March 14, 2016
/s/ Anthony J. Reardon
Anthony J. Reardon
Chairman and Chief Executive Officer
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Certification of Principal Financial Officer
Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
EXHIBIT 31.2
I, Douglas L. Groves, certify that:
1. I have reviewed this Annual Report of Ducommun Incorporated (the “registrant”) on Form 10-K for the period ended
December 31, 2015;
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: March 14, 2016
/s/ Douglas L. Groves
Douglas L. Groves
Vice President, Chief Financial Officer and Treasurer
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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, 2015, 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
March 14, 2016
In connection with the Annual Report of Ducommun Incorporated (the “Company”) on Form 10-K for the period ending
December 31, 2015, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Douglas L. Groves,
Vice President, Chief Financial Officer and Treasurer 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/ Douglas L. Groves
Douglas L. Groves
Vice President, Chief Financial Officer and Treasurer
March 14, 2016
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.
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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.
Joseph C. Berenato
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
New York Stock Exchange (symbol DCO).
Douglas L. Groves
Vice President, Chief Financial Officer and Treasurer
Kathryn M. Andrus
Vice President, Internal Audit
James S. Heiser
Vice President, General Counsel and Secretary
Jerry L. Redondo
Vice President, Operational Excellence
Rosalie F. Rogers
Vice President and Chief Human Resources Officer
Christopher D. Wampler
Vice President, Controller and Chief Accounting Officer
Registrar and Transfer Agent
Computershare, Inc.
P.O. Box 30170
College Station, TX 77842
800.522.6645 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, 2015. After the 2016 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 June 12, 2015.
Ducommun Incorporated
23301 Wilmington Avenue
Carson, CA 90745
310.513.7200
www.ducommun.com