2017 Annual Report
to Shareholders
Contents
Letter to Shareholders
Form 10-K
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Our Vision
To be our customers’ #1 provider of
innovative electronics and structures solutions.
Our Values
Honesty, Professionalism, Respect, Trust and Teamwork.
Company Profile
Ducommun Incorporated delivers innovative value-added
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.
To My Fellow Shareholders:
I began my tenure leading Ducommun in early 2017, and since that
time have started working on a new path of transformation for
our company. Charles L. Ducommun, who founded the business
in 1849, moved from selling watches and clocks in the early days
to supplying goods for the California Gold Rush and again today
we move forward in that spirit. I am absolutely committed to
driving change and developing the team and our products to
ensure we are adding tremendous value to our customers and
making a positive impact to the aerospace and defense industries.
Stephen G. Oswald
PreSident and CeO
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During 2017, we sharpened our focus to build on the
and defense industries with proven, proprietary
Ducommun foundation of high value solutions, which
technology for more than 35 years. We believe
today includes proprietary processes and products
proprietary products in aerospace and defense
that our customers have come to expect from us.
offer the opportunity for margin expansion and a
To continue our success as a unique solutions provider,
stronger product portfolio.
we have also made some significant changes.
In November, we initiated a companywide
restructuring plan to realign our organization to
support future growth. We consolidated from six
To advance our offering of proprietary
business units to three areas of focus—the Electronics
products, we acquired LS Holdings
Systems Group, the Structural Systems Group and the
Company, LLC, the holding company
of Lightning Diversion Systems
Engineered Products Group. Our leaner structure will
improve operating efficiencies, reduce overhead
costs, cultivate better communication and strengthen
(LDS) in the third quarter. LDS is a
our customer service performance. Beginning in 2019,
world leader in lightning protection
systems for aircraft, serving the
aerospace and defense industries
we expect the restructuring to save approximately
$14 million in costs annually. In the coming year, we
will assess our asset utilization and manufacturing
footprint to maximize efficiencies and best serve
with proven, proprietary technology
our customers.
for more than 35 years.
We are also developing more proprietary processes
like our titanium forming technology, where we’ve made
significant investments to support current and future
To advance our offering of proprietary products,
growth with Airbus, Boeing, Gulfstream and Spirit.
we acquired LS Holdings Company, LLC, the holding
company of Lightning Diversion Systems (LDS) in
We are nearly complete with a $25 million expansion to
the third quarter. LDS is a world leader in lightning
our performance center in Parsons, Kansas, adding
protection systems for aircraft, serving the aerospace
approximately 60,000 square feet in capacity to the
As we look ahead to 2018,
Ducommun will benefit from
strong end use markets,
a burgeoning commercial
aerospace industry, which is
expected to grow 4 to 6 percent
in 2018, and an uptick in defense
spending that includes major
platforms we serve.
facility along with additional equipment. Now at
FInAnCIAL HIGHLIGHTS
approximately 170,000 square feet total, the facility is
ready to support production ramp-ups in the coming
years from major wins and for Airbus commercial
aircraft in particular.
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At the Paris Air Show in June, we introduced a
proprietary foam composite technology, which is ideal
for such applications as aircraft engine nacelles, aircraft
doors, flight control surfaces and other contoured
parts. We put a focused team in place to expand the
footprint of this proprietary technology on commercial
aircraft and are optimistic about future growth as our
customers experience outstanding results that they
Ducommun reported net revenue of $558.2 million in
2017, up slightly from $550.6 million in 2016. While our
industrial business was off slightly and commercial sales
fell to $240.7 million from $256.6 million last year, largely
reflecting the timing of deliveries as platforms changed,
our military and space business grew to $259.6 million
from $228.9 million, reflecting nice growth across our
electronics applications. Our backlog grew to record
levels—up over $85 million from the start of 2017—
primarily reflecting significant commercial aircraft
orders. This underscores our confidence in top line
performance for 2018 and beyond. Additional details
regarding our revenue and backlog are shown in the
specifically need—lighter weight, streamlined and
charts on the following page.
lower cost aerospace structures.
As we look ahead to 2018, Ducommun will benefit from
strong end use markets, a burgeoning commercial
aerospace industry, which is expected to grow 4 to
Overall operating margins
6 percent in 2018, and an uptick in defense spending
should climb in 2018, net of
that includes major platforms we serve. Specifically,
we serve commercial aerospace platforms such as the
Airbus A320, A330 and A350, as well as on Boeing
aircraft such as the 737, 777 and 787. In general, we
anticipate defense spending for fixed wing, rotary
aircraft and missile systems that we support to increase
with the current administration. We ended 2017 with
our highest backlog in history at $726.5 million.
restructuring charges, by enacting
the restructuring measures
discussed to enhance manufacturing
efficiencies and improve asset
utilization across the Company.
We posted earnings of $20.1 million, or $1.74 per diluted
Please see our management discussion and analysis,
share, in 2017 compared to $25.3 million, or $2.24 per
financial statements and accompanying notes in our
diluted share, in the prior year, primarily reflecting
Form 10-K included in this annual report for a detailed
$8.7 million higher restructuring charges taken this
review of our financial performance.
past year along with the fact that, in 2016, we booked a
$17.6 million pre-tax gain on divestitures. We also had
LOOkInG AHeAD
a tax benefit in 2017 due to Congress enacting the Tax
As I think back to when I first came to Ducommun just
Cuts and Jobs Act in December 2017, and we expect to
over a year ago, I told investors that I’d take time fully
see lower tax rates going forward. Overall operating
assessing the Company’s strengths and weaknesses
margins should climb in 2018, net of restructuring
and then actively work to build this business into a
charges, by enacting the restructuring measures
higher-performing organization. During 2017, we laid
discussed to enhance manufacturing efficiencies and
out plans to do that and I’m pleased to say we’re on
improve asset utilization across the Company. We also
track with our various initiatives to enhance margins and
anticipate that margins should benefit with the ramp
accelerate growth. The first phase of our restructuring
up of new programs at our Parsons performance center
plan is complete, but we have a great deal more in store
and the associated increased operating leverage.
for 2018 that will position us to be a much stronger
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2017 REVENUES
OF $558.2 MILLION
TOTAL BACKLOG AT
DECEMBER 31, 2017 OF $726.5 MILLION
10%
43%
47%
4%
38%
58%
COMMERCIAL AEROSPACE
MILITARY AND SPACE
INDUSTRIAL
company. At the same time, we’re advancing our
industries. I look forward to sharing more highlights
innovative technology applications and winning new
of our progress in 2018 and also want to thank you
business with Boeing, Airbus, Gulfstream and Raytheon.
for your support.
We’ll continue to invest in the business and look at
Finally, I would like to thank our employees for all
opportunistic acquisitions as appropriate. We see
the efforts and results in 2017 as we begin this
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numerous ways to improve top line growth even while
transformation and I look forward to an exciting
focusing on enhancing profitability and long-term
future ahead!
asset utilization. We want to build Ducommun into an
enterprise where all parts of the business are running
Best regards,
efficiently and operating at their optimum potential—
be it Electronics or Structures applications, on defense
as well as commercial platforms. We’re clearly moving
in the right direction to be a balanced, nimble,
Stephen G. Oswald
recognized leader within the aerospace and defense
President and Chief Executive Officer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________________
FORM 10-K
_________________________________________________________
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
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)
200 Sandpointe Avenue, Suite 700, Santa Ana, California
(Address of principal executive offices)
95-0693330
(I.R.S. Employer
Identification No.)
92707-5759
(Zip code)
Registrant’s telephone number, including area code: (657) 335-3665
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $.01 par value per share
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
_________________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is
not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a
smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”
and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange
Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes
No
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the
price of which the common equity was last sold, or the average bid and asked price of such common equity, as of the last
business day of the registrant’s most recently completed second fiscal quarter ended July 1, 2017 was $357 million.
The number of shares of common stock outstanding on February 14, 2018 was 11,340,653.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference:
(a) Proxy Statement for the 2018 Annual Meeting of Shareholders (the “2018 Proxy Statement”), incorporated
partially in Part III hereof.
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.
Forward-Looking Statements and Risk Factors
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Item 16.
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosures
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
PART III
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedules
PART IV
Form 10-K Summary
Signatures
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FORWARD-LOOKING STATEMENTS AND RISK FACTORS
This Annual Report on Form 10-K (“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 restructuring activities, completed acquisitions,
future acquisitions and dispositions and expected business opportunities that may be available to us.
Although we believe that the expectations reflected in the forward-looking statements are based on reasonable assumptions,
these forward-looking statements are subject to numerous factors, risks and uncertainties that could cause actual outcomes
and results to be materially different from those projected. We cannot guarantee future results, performance or achievements.
Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking
statements. All written and oral forward-looking statements made in connection with this Form 10-K that are attributable to
us or persons acting on our behalf are expressly qualified in their entirety by “Risk Factors” contained within Part I, Item 1A
of this Form 10-K and other cautionary statements included herein. We are under no duty to update any of the forward-
looking statements after the date of this Form 10-K to conform such statements to actual results or to changes in our
expectations.
The information in this Form 10-K is not a complete description of our business. There can be no assurance that other factors
will not affect the accuracy of these forward-looking statements or that our actual results will not differ materially from the
results anticipated in such forward-looking statements. While it is impossible to identify all such factors, factors that could
cause actual results to differ materially from those estimated by us include, but are not limited to, those factors or conditions
described under Risk Factors contained within Part I, Item 1A of this Form 10-K and the following:
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our ability to manage and otherwise comply with our covenants with respect to our outstanding indebtedness;
our ability to service our indebtedness;
our acquisitions, business combinations, joint ventures, divestitures, or restructuring activities may entail certain
operational and financial risks;
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 Two supplier of higher-level assemblies;
our ability to manage the risks associated with international operations and sales;
possible 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;
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the risk of environmental liabilities; and
litigation with respect to us.
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 and defense (“A&D”), industrial, medical and other industries (collectively, “Industrial”). 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 September 2017, we acquired all the outstanding interests of Lightning Diversion Systems, LLC (the “LDS
Acquisition”), a worldwide leader in lightning protection systems serving the aerospace and defense industries for $60.0
million (net of cash acquired), funded by drawing down on our revolving credit facility. The LDS Acquisition is part of our
strategy to enhance revenue growth by focusing on advanced proprietary technology on various aerospace and defense
platforms.
PRODUCTS AND SERVICES
Business Segment Information
We operate through two primary strategic businesses Electronic Systems and Structural Systems, 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. Electronic Systems designs, engineers and manufactures high-
reliability electronic and electromechanical products used in worldwide technology-driven markets including A&D and
Industrial end-use markets. Electronic Systems’ product offerings primarily range from prototype development to complex
assemblies as discussed in more detail below. Structural Systems designs, engineers and manufactures large, complex
contoured aerostructure components and assemblies and supplies composite and metal bonded structures and assemblies.
Structural Systems’ products are primarily used on commercial aircraft, military fixed-wing aircraft and military and
commercial rotary-wing aircraft.
Electronic Systems
Electronic Systems has multiple major product offerings in electronics manufacturing for diverse, high-reliability
applications: complex cable assemblies and interconnect systems, printed circuit board assemblies, higher-level electronic,
electromechanical, and mechanical components and assemblies, and lightning diversion systems. Components, assemblies,
and lightning diversion products are provided principally for domestic and foreign commercial and military fixed-wing
aircraft, military and commercial rotary-wing aircraft and space programs. Further, we provide select industrial high-
reliability applications for the industrial automation 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, lightning diversion strips, surge suppressors, conformal shields and other high-
level complex assemblies. Electronic Systems utilizes a highly-integrated production process, including manufacturing,
engineering, fabrication, machining, assembly, electronic integration, and related processes. Engineering, technical and
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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, Electronic Systems 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.
Electronic Systems also provides engineering expertise for aerospace system design, development, integration, and testing.
We leverage the knowledge base, capabilities, talent, and technologies of this focused capability into direct support of our
customers.
Structural Systems
Structural Systems 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, Structural Systems
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, Structural Systems 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 represented 90% of
our total net revenues in 2017. These markets are serviced by suppliers which are stratified, from the lowest value provided to
the highest, into four tiers: Tier Three, Tier Two, Tier One 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 revenues
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 revenues is earned from subcontracts with the Primes. Tier Three
suppliers principally provide components or detailed parts. Tier Two 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 Three
suppliers. Tier One suppliers manufacture aircraft sections and purchase assemblies. We currently compete primarily with
Tier Two and Tier Three suppliers. Our business growth strategy is to differentiate ourselves from competitors by providing
more complex assemblies to our customers as a Tier Two 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 43% of our total net revenues for 2017.
Global economic growth, a primary driver for air travel, has returned to the long-term annual average of approximately three
percent. Passenger traffic in 2017 is estimated to grow by more than seven percent, exceeding the long-term trend of
approximately five percent. While growth was strong across all major world regions, there continues to be variation between
regions and airline business models. Airlines operating in the Asia Pacific regions and Europe, as well as low-cost-carriers
globally, are currently leading the growth in passenger traffic.
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 focusing on reducing costs and renewing fleets to leverage more efficient airplanes.
Net profits in 2017 are expected to approximate $35 billion, consistent with 2016.
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.
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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. The Boeing Company’s (“Boeing”) 20 year forecast
projections in their 2017 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”)
projects a long-term average growth rate of almost five percent per year for passenger traffic and more than four percent for
cargo traffic. This is based on long-term global economic growth projections of almost three percent average annual gross
domestic product (“GDP”) growth, Boeing projects a $6 trillion market for more than 41,000 new airplanes over the next 20
years. 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 2017 represented 47% of our total net revenues during 2017.
In November 2017, Congress passed the National Defense Authorization Act for fiscal year 2018 (“FY2018”), which
authorizes a U.S. Department of Defense (“U.S. DoD”) budget topline higher than the administration’s budget request from
May. While the appropriations process for FY2018 remains incomplete, both the House and Senate appropriations
committees have also produced bills that increase the U.S. DoD budget topline above the administration’s request. On
February 9, 2018, Congress passed a fifth Continuing Resolution that maintains current funding levels through March 23,
2018 and includes increases to the Budget Control Act caps for defense and non-defense spending for FY2018 and FY2019.
However, the Budget Control Act continues to mandate limits on U.S. government discretionary spending and remains in
effect. As a result, continued budget uncertainty and the risk of future sequestration cuts will remain unless Congress acts to
repeal or suspend this law.
Funding timeliness also remains a risk. If Congress is unable to pass appropriations bills or an omnibus spending bill before
the expiration of the current Continuing Resolution, a government shutdown could result which may have impacts above and
beyond those resulting from budget cuts, sequestration impacts or program-level appropriations. For example, requirements
to furlough employees in the U.S. DoD, the Department of Transportation, or other government agencies could result in
payment delays, impair our ability to perform work on existing contracts, and/or negatively impact future orders.
In addition, there continues to be uncertainty with respect to program-level appropriations for the U.S. DoD and other
government agencies, including the National Aeronautics and Space Administration (“NASA”), within the overall budgetary
framework described above. Future budget cuts or investment priority changes could result in reductions, cancellations and/
or delays of existing contracts or programs. Any of these impacts could have a material effect on the results of our operations,
financial position, and/or cash flows. 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”).
INDUSTRIAL END-USE MARKETS OVERVIEW
Our industrial, medical and other (collectively, “Industrial”) end-use markets 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 and general economic conditions. Our products are used in heavy industrial manufacturing systems
and certain medical applications. Revenues from the Industrial end-use markets were 10% of our total net revenues during
2017.
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’
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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. Our defense business is diversified among a number
of military manufacturers and programs. In the space sector, we continue to support various unmanned launch vehicle and
satellite programs.
Our sales into the Industrial end-use markets are customer focused in the various markets and driven primarily by their
capital spending and manufacturing outsourcing demands.
We continue to broaden and diversify our customer base in the end-use markets we serve by providing innovative product
and service solutions through drawing on our core competencies, experience and technical expertise. Net revenues related to
military and space (defense technologies and defense structures), commercial aerospace, and Industrial end-use markets in
2017 and 2016 were as follows:
2017 Net Revenues of $558.2 Million
2016 Net Revenues of $550.6 Million
Commercial Aerospace: 43%
Commercial Aerospace: 47%
10%
10%
37%
43%
Military and Space
(defense electronics): 37%
Military and Space
(defense structures): 10%
Industrial: 10%
12%
9%
32%
47%
Military and Space
(defense electronics): 32%
Military and Space
(defense structures): 9%
Industrial: 12%
Many of our contracts are fixed price contracts subject to termination at the convenience of the customer (as well as for
default). In the event of termination for convenience, the customer generally is required to pay the costs we have incurred and
certain other fees through the date of termination. Larger, long-term government subcontracts may have provisions for
milestone payments, progress payments or cash advances for purchase of inventory.
Our marketing efforts primarily consist of developing strong, long-term relationships with our customers, which provide the
basis for future sales. These close relationships allow us to gain a better insight into each customer’s business needs, identify
ways to provide greater value to the customer, and allow us to be designed in early in various products and/or high volume
products.
SEASONALITY
The timing of our revenues is governed by the purchasing patterns of our customers, and, as a result, we may not generate
revenues equally during the year. However, no material portion of our business is considered to be seasonal.
MAJOR CUSTOMERS
We currently generate the majority of our revenues from the aerospace and defense industries. As a result, we have significant
revenues from certain customers. Boeing and Raytheon Company (“Raytheon”) were each greater than 10 percent and
Lockheed Martin Corporation (“Lockheed Martin”), Spirit AeroSystems Holdings, Inc. (“Spirit”), and United Technologies
Corporation (“United Technologies”) each were greater than five percent of our 2017 net revenues. Revenues from our top
ten customers, including Boeing, Raytheon, Lockheed Martin, Spirit, and United Technologies, were 62% of total net
revenues during 2017. Net revenues by major customer for 2017 and 2016 were as follows:
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2017 Net Revenues by Major Customer
2016 Net Revenues by Major Customer
16%
5%
14%
8%
5%
38%
14%
Boeing: 16%
Lockheed: 5%
Raytheon: 14%
Spirit: 8%
United Technologies: 5%
Next Top Five Customers: 14%
All Other Customers: 38%
41%
17%
6%
9%
8%
14%
5%
Boeing: 17%
Lockheed: 6%
Raytheon: 9%
Spirit: 8%
United Technologies: 5%
Next Top Five Customers: 14%
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, industrial, medical and other products. For additional information on revenues from major customers,
see Note 18 to our consolidated financial statements included in Part IV, Item 15(a) of this Form 10-K.
RESEARCH AND DEVELOPMENT
We perform concurrent engineering with our customers and product development activities under our self-funded programs,
as well as under contracts with others. Concurrent engineering and product development activities are performed for
commercial, military and space applications.
RAW MATERIALS AND COMPONENTS
Raw materials and components used in the manufacturing of our products include aluminum, titanium, steel and carbon
fibers, as well as a wide variety of electronic interconnect and circuit card assemblies and components. These raw materials
are generally available from a number of suppliers and are generally in adequate supply. However, from time to time, we
have experienced increases in lead times for and limited availability of, aluminum, titanium and certain other raw materials
and/or components. Moreover, certain components, supplies and raw materials for our operations are purchased from single
source suppliers and occasionally, directed by our customers. In such instances, we strive to develop alternative sources and
design modifications to minimize the potential for business interruptions.
COMPETITION
The markets we serve are highly competitive, and our products and services are affected by varying degrees of competition.
We compete worldwide with domestic and international companies in most markets. These companies may have competitive
advantages as a result of greater financial resources, economies of scale and bundled products and services that we do not
offer. Additional information related to competition is discussed in Risk Factors contained within Part I, Item 1A of this Form
10-K. Our ability to compete depends principally upon the breadth of our technical capabilities, the quality of our goods and
services, competitive pricing, product performance, design and engineering capabilities, new product innovation, the ability
to solve specific customer 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 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
We define backlog as customer placed purchase orders (“POs”) and long-term agreements (“LTAs”) with firm fixed price and
firm delivery dates of 24 months or less. 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
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 $726.5 million at December 31, 2017, compared to $641.3 million at December 31, 2016. The
increase in backlog was primarily in the commercial aerospace and military and space end-use markets. $544.0 million of
total backlog is expected to be delivered during 2018.
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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 2018 and the foreseeable future.
Structural Systems 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 $1.5 million for our estimated liabilities related to these sites. For further
information, see Note 17 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, 2017, we employed 2,600 people, of which 360 are subject to collective bargaining agreements expiring
in June 2018 and January 2019. 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 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.
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. This credit facility consists of a $275.0 million senior secured term loan, which matures on June 26, 2020
(“Term Loan”), and a $200.0 million senior secured revolving credit facility (“Revolving Credit Facility”), which matures on
June 26, 2020 (collectively, the “Credit Facilities”).
At December 31, 2017, we had a total of $218.1 million of outstanding long-term debt which was comprised of $160.0
million under the Term Loan and $58.1 million under the Revolving Credit Facility. The total long-term debt was primarily
9
the result of our acquisitions, LaBarge Inc. in 2011 and LDS in September 2017. There are no further required payments
under the Credit Facilities until June 2020.
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 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 40% of our
borrowings under our Credit Facilities bear interest at variable rates, which could further adversely impact our
cash flows;
limit our flexibility to plan for and react to changes in our business and the industry in which we compete;
restrict us from making strategic acquisitions or causing us to make non-strategic divestitures;
expose us to risk of unfavorable changes in the global credit markets; and
make it more difficult for us to satisfy our obligations with respect to the 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 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.
The 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 $135.0 million. At
December 31, 2017, the outstanding balance on the Credit Facilities was $218.1 million with an average interest rate of
3.73%. Should interest rates increase significantly, even though $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 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 Credit
Facilities.
Our ability to continue to reduce the debt outstanding under our 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
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end of the interest rate range as defined in the 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 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 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 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 Credit Facilities will help reduce our leverage, as
defined in the credit agreement.
At December 31, 2017, we were in compliance with the leverage covenant under the 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 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 Credit Facilities would result in a default under the 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.
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 revenues 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
11
customers. Sales to the Boeing Company and Spirit AeroSystems Holdings, Inc. 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 Lockheed
Martin Corporation, Raytheon Company, and United Technologies Corporation in 2017 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 have caused and may continue to cause additional uncertainty in the placement of orders.
Our sales to our top ten customers, which represented 62% of our total 2017 net revenues, were diversified over a number of
different aerospace and defense and Industrial 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, or 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
impacted by numerous factors such as the political environment, U.S. foreign policy, macroeconomic conditions and the
ability of the U.S. Government to enact relevant legislation such as the authorization and appropriations bills. The Budget
Control Act (“2011 Act”) established limits on U.S. government discretionary spending, including a reduction of defense
spending between the 2012 and 2021 U.S. Government fiscal years. Accordingly, long-term uncertainty remains with respect
to overall levels of defense spending and it is likely that U.S. Government discretionary spending levels will continue to be
subject to pressure.
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
12
or prohibition from conducting future business with the U.S. Government. Any such outcome could have a material adverse
effect on our financial results.
We are subject to a number of procurement laws and regulations. Our business and our reputation could be adversely
affected if we fail to comply with these laws.
We must comply with and are affected by laws and regulations relating to the award, administration and performance of U.S.
Government contracts. Government contract laws and regulations affect how we do business with our customers and impose
certain risks and costs on our business. A violation of specific laws and regulations, by us, our employees, others working on
our behalf, a supplier or a venture partner, could harm our reputation and result in the imposition of fines and penalties, the
termination of our contracts, suspension or debarment from bidding on or being awarded contracts, loss of our ability to
export products or services and civil or criminal investigations or proceedings.
In some instances, these laws and regulations impose terms or rights that are different from those typically found in
commercial transactions. For example, the U.S. Government may terminate any of our government contracts and
subcontracts either at its convenience or for default based on our performance. Upon termination for convenience of a fixed-
price type contract, we normally are entitled to receive the purchase price for delivered items, reimbursement for allowable
costs for work-in-process and an allowance for profit on the contract or adjustment for loss if completion of performance
would have resulted in a loss.
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:
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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;
terminate existing contracts if we are suspended or debarred 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.
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
canceled, 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 awarding of new contracts and losses of existing
business. Consolidation among our competitors may result in larger competitors with greater resources and market share,
which could adversely affect our ability to compete successfully. Consolidation among our suppliers may result in fewer
sources of supply and increased cost to us.
13
Our growth strategy includes evaluating selected acquisitions, which entails certain risks to our business and financial
performance.
We have historically achieved a portion of our growth through acquisitions and expect to evaluate selected future acquisitions
as part of our strategy for growth. Any acquisition of another business entails risks and it is possible that we will not realize
the expected benefits from an acquisition or that an acquisition will adversely affect our existing operations. Acquisitions
entail certain risks, including:
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difficulty in integrating the operations and personnel of the acquired company within our existing operations or
in maintaining uniform standards;
loss of key employees or customers of the acquired company;
the failure to achieve anticipated synergies;
unrecorded liabilities of acquired companies that we fail to discover during our due diligence investigations or
that are not subject to indemnification or reimbursement by the seller; and
management and other personnel having their time and resources diverted to evaluate, negotiate and integrate
acquisitions.
We may not be successful in achieving expected operating efficiencies and sustaining or improving operating expense
reductions, and may experience business disruptions associated with restructuring, facility consolidations,
realignment, cost reduction, and other strategic initiatives.
Over the past year, we have implemented a number of restructuring, realignment, and cost reduction initiatives, including
facility consolidations, organizational realignments, and reductions in our workforce. While we have realized some
efficiencies from these actions, we may not realize the benefits of these initiatives to the extent we anticipated. Further, such
benefits may be realized later than expected, and the ongoing difficulties in implementing these measures may be greater than
anticipated, which could cause us to incur additional costs or result in business disruptions. In addition, if these measures are
not successful or sustainable, we may have to undertake additional realignment and cost reduction efforts, which could result
in significant additional charges. Moreover, if our restructuring and realignment efforts prove ineffective, our ability to
achieve our other strategic and business plan goals may be adversely affected.
We rely on our suppliers to meet the quality and delivery expectations of our customers.
Our ability to deliver our products and services on schedule and to satisfy specific quality levels 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. Due to 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
14
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 Structural Systems segment related to a regional jet program for estimated cost overruns of $10.0 million. See
“Provision for Estimated Losses on Contracts” in Note 1 to our consolidated financial statements included in Part IV,
Item 15(a) of this Form 10-K for further information.
As we move up the value chain to become a Tier Two 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 Two 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 Two 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 manufacturing facilities in Thailand and Mexico and also derive a portion of our net revenues from direct foreign
sales. Further, our customers may derive portions of their revenues from non-U.S. customers. As a result, we are subject to
the risks of conducting and operating our business internationally, including:
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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;
difficulties repatriating funds or restrictions on cash transfers; and
potential for new tariffs imposed on imports by the new U.S. administration.
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. For example, our annual goodwill impairment testing in the fourth quarter
of 2015 indicated the Structural Systems reporting unit’s carrying value exceeded its fair value as a result of the lowered
revenues and cash flows 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 Structural Systems reporting unit of $57.2 million in 2015.
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. For example, 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 Electronic Systems
and our discontinuation of the use of the trade name. Thus, we recorded an impairment of $32.9 million, which was the
remaining carrying value of the trade name.
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 the 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
15
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, 2017 was $11.2 million or 2% of total assets. Our goodwill and other
intangible assets as of December 31, 2017 were $232.1 million, or 41% of total assets. See “Goodwill and Indefinite-Lived
Intangible Assets” and “Production Cost of Contracts” in Note 8 of our consolidated financial statements included in Part IV,
Item 15(a) of this 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 to our
business. As a result, our contracts and operations are subject to numerous, extensive, complex, costly and evolving laws,
regulations and restrictions, principally by the U.S. Government or their agencies. These laws, regulations and restrictions
govern items including, but not limited to, the formation, administration and performance of U.S. Government contracts,
disclosure of cost and pricing data, civil penalties for violations or false claims to the U.S. Government for payment, define
reimbursable costs, establish ethical standards for the procurement process and control the import and export of defense
articles and services.
Noncompliance could expose us to liability for penalties, including termination of our U.S. Government contracts and
subcontracts, disqualification from bidding on future U.S. Government contracts and subcontracts, suspension or debarment
from U.S. Government contracting and various other fines and penalties. Noncompliance found by any one agency could
result in fines, penalties, debarment or suspension from receiving additional contracts with all U.S. Government agencies.
Given our dependence on U.S. Government business, suspension or debarment could have a material adverse effect on our
financial results.
In addition, the U.S. Government may revise its procurement practices or adopt new contract rules and regulations, at any
time, including increased usage of fixed-price contracts and procurement reform. Such changes could impair our ability to
obtain new contracts or subcontracts or renew contracts or subcontracts under which we currently perform when those
contracts are put up for competitive bidding. Any new contracting methods could be costly or administratively difficult for us
to implement and could adversely affect our future net revenues.
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.
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 compete 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 revenues
growth and operating margins may decline.
Several of our major customers have completed extensive cost containment efforts and we expect continued pricing pressures
in 2018 and beyond. Competitive pricing pressures may have an adverse effect on our financial condition and operating
16
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 risk 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
incur related 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 federal, local, 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 17 to
our consolidated financial statements included in Part IV, Item 15(a) of this Form 10-K for further information.
Cyber security attacks, internal system or service failures may adversely impact our business and operations.
Any system or service disruptions, including those caused by projects to improve our information technology systems, if not
anticipated and appropriately mitigated, could disrupt our business and impair our ability to effectively provide products and
related services to our customers and could have a material adverse effect on our business. We could also be subject to
systems failures, including network, software or hardware failures, whether caused by us, third-party service providers,
intruders or hackers, computer viruses, natural disasters, power shortages or terrorist attacks. Cyber security threats are
evolving and include, but are not limited to, malicious software, unauthorized attempts to gain access to sensitive,
confidential or otherwise protected information related to us or our products, customers or suppliers, or other acts that could
lead to disruptions in our business. Any such failures could cause loss of data and interruptions or delays in our business,
cause us to incur remediation costs, subject us to claims and damage our reputation. In addition, the failure or disruption of
our communications or utilities could cause us to interrupt or suspend our operations or otherwise adversely affect our
business. Our property and business interruption insurance may be inadequate to compensate us for all losses that may occur
as a result of any system or operational failure or disruption which would adversely affect our business, results of operations
and financial condition.
We may not have the ability to renew facilities leases on terms favorable to us and relocation of operations presents
risks due to business interruption.
Certain of our manufacturing facilities and offices are leased and have lease terms that expire between 2019 and 2022. 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.
17
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 $185.3 million in net revenues during 2017. 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.
Labor disruptions by our employees could adversely affect our business.
As of December 31, 2017, we employed 2,600 people. Two of our operating facilities are parties to collective bargaining
agreements, covering 140 full time hourly employees in one of those facilities and 220 full time hourly employees in the
other facility, and will expire in June 2018 and January 2019, respectively. Although we have not experienced any material
labor-related work stoppage and consider our relations with our employees to be good, labor stoppages may occur in the
future. If the unionized workers were to engage in a strike or other work stoppage, if we are unable to negotiate acceptable
collective bargaining agreements with the unions or if other employees were to become unionized, we could experience a
significant disruption of our operations, higher ongoing labor costs and possible loss of customer contracts, which could have
an adverse effect on our business and results of operations.
We have identified material weaknesses in the past in our internal controls 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 2016, we concluded that there was a material weakness in our internal control over financial reporting related to the annual
accounting for income taxes. There was an incorrect recording to a deferred tax asset of $1.6 million when this amount
should have decreased our income tax benefit for the year and fourth quarter ended December 31, 2015. We assessed the
materiality of this error and do not believe it is material to any prior interim or annual periods, however, we determined it was
18
appropriate to revise our consolidated financial statements as of and for the year and quarter ended December 31, 2015 in this
Form 10-K. Therefore, we have revised our December 31, 2015 consolidated balance sheet to increase non-current deferred
tax liabilities by $1.6 million and revised our consolidated statement of operations for the year ended December 31, 2015 to
increase our net loss by $1.6 million. We have also revised all related footnote disclosures in these consolidated financial
statements to correct this error. This error had no effect on net cash provided by operating activities on our consolidated cash
flow statement for the year ended December 31, 2015, however, we determined that our internal control over financial
reporting relating to the annual accounting for income taxes was not effective as of December 31, 2016. This material
weakness was remediated as of December 31, 2107.
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.
When a material weakness occurs, we plan to complete the remediation process as quickly as possible. 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 a 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.
Unanticipated changes in our tax provision or exposure to additional income tax liabilities could affect our
profitability.
Significant judgment is required in determining our provision for income taxes. In the ordinary course of our business, there
are transactions and calculations where the ultimate tax determination is uncertain. Furthermore, changes in income tax laws
and regulations, or their interpretation, could result in higher or lower income tax rates assessed or changes in the taxability
of certain sales or the deductibility of certain expenses, thereby affecting our income tax expense and profitability. We
recorded provisional estimates of the impact of the Tax Cuts and Jobs Act (the “2017 Tax Act”) enacted on December 22,
2017 in accordance with SEC Staff Accounting Bulletin No. 118 (“SAB 118”). These estimates are subject to further analysis
and review which may result in material adjustments in 2018. In addition, we are regularly under audit by tax authorities. The
final determination of tax audits and any related litigation could be materially different from our historical income tax
provisions and accruals.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We occupy 29 owned or leased facilities, totaling 2.1 million square feet of manufacturing area and office space. At
December 31, 2017, facilities which were in excess of 50,000 square feet each were occupied as follows:
19
Location
Carson, California
Monrovia, California
Parsons, Kansas
Coxsackie, New York
Carson, California
Phoenix, Arizona
Joplin, Missouri
Adelanto, California
Orange, California
Appleton, Wisconsin
Carson, California
Huntsville, Arkansas
Berryville, Arkansas
Joplin, Missouri
Tulsa, Oklahoma
Orange, California
Segment
Structural Systems
Structural Systems
Structural Systems
Structural Systems
Electronic Systems
Electronic Systems
Electronic Systems
Structural Systems
Structural Systems
Electronic Systems
Structural Systems
Electronic Systems
Electronic Systems
Electronic Systems
Electronic Systems
Structural Systems
Square
Feet
299,000
274,000
176,000
151,000
117,000
100,000
92,000
88,000
80,000
77,000
77,000
69,000
65,000
55,000
55,000
53,000
Expiration
of Lease
Owned
Owned
Owned
Owned
2021
2022
Owned
Owned
Owned
Owned
2019
2020
Owned
2021
Owned
2019
Management believes these properties are adequate to meet our current requirements, are in good condition and are suitable
for their present use.
ITEM 3. LEGAL PROCEEDINGS
See Note 17 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.
20
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, 2017, we had 178
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,
2017
2016
High
Low
High
Low
$
$
$
$
32.18
34.46
32.55
35.02
$
$
$
$
24.35
28.12
26.24
25.81
$
$
$
$
16.98
20.69
24.41
29.46
$
$
$
$
12.89
14.32
19.02
18.80
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
None.
21
Performance Graph
The following graph compares the yearly percentage change in our cumulative total shareholder return with the cumulative
total return of the Russell 2000 Index and the Spade Index for the periods indicated, assuming the reinvestment of any
dividends. The graph is not necessarily indicative of future price performance:
Comparison of 5 Year Cumulative Total Return
Assumes Initial Investment of $100
December 2017
300.00
250.00
200.00
150.00
100.00
50.00
0.00
2012
2013
2014
2015
2016
2017
Ducommun Inc.
Russell 2000 Index
Spade Defense Index
22
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”):
Net Revenues
Gross Profit as a Percentage of Net Revenues
Income (Loss) Before Taxes
Income Tax (Benefit) Expense
Net Income (Loss)
Per Common Share
Basic earnings (loss) per share
Diluted earnings (loss) per share
Working Capital
Total Assets (h)
Long-Term Debt, Including Current Portion (h)
Total Shareholders’ Equity
(In thousands, except per share amounts)
Years Ended December 31,
2017(a)(b)(c)
558,183
$
18.4%
7,609
(12,468)
20,077
1.78
1.74
140,778
566,753
216,055
235,583
$
$
$
$
$
$
$
2016(d)
550,642
2015(e)(f)
666,011
$
19.3%
38,113
12,852
25,261
2.27
2.24
139,635
515,429
166,899
212,103
15.1%
(106,590)
(31,711)
(74,879)
(6.78)
(6.78)
179,655
557,081
240,687
185,734
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2014
742,045
18.9%
26,240
6,373
19,867
1.82
1.79
217,670
747,599
290,052
256,570
$
$
$
$
$
$
$
$
2013(g)
736,650
16.9%
9,385
(1,993)
11,378
1.06
1.05
225,323
762,645
332,702
234,271
(a) The results for 2017 included LDS’ results of operations since the date of acquisition of September 2017.
(b) The results for 2017 included the adoption of the Tax Cuts and Jobs Act and as a result, we recorded a provisional
deferred income tax benefit of $13.0 million related to the re-measurement for the year ended December 31, 2017. 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.
(c) The results for 2017 included restructuring charges of $8.8 million. See Note 3 to our consolidated financial statements
included in Part IV, Item 15(a) of this Annual Report on Form 10-K for further information.
(d) The results for 2016 included a gain on divestitures, net in our Electronic Systems operating segment of $17.6 million
related to the divestitures of our Pittsburgh and Miltec operations.
(e) The results for 2015 included a goodwill impairment charge in our Structural Systems operating segment and an
indefinite-lived trade name intangible asset impairment charge in our Electronic Systems operating segment of $57.2
million and $32.9 million, respectively, resulting from our annual impairment testing.
(f) The results for 2015 included a loss on extinguishment of debt of $14.7 million related to the retirement of the $200.0
million senior unsecured notes and existing credit facility.
(g) The results for 2013 included a $14.1 million in charges related to the Embraer Legacy 450/500 and Boeing 777 wing tip
contracts and was comprised of $7.0 million of asset impairment charges for production cost of contracts; $5.2 million of
forward loss reserves and $1.9 million of inventory write-offs.
(h) Total assets and long-term debt for the years 2014 - 2013 have not been recasted for the impact of the adoption of
Accounting Standards Update 2015-03, as amended by Accounting Standards Update 2015-15, which required the
reclassification of certain debt issuance costs from an asset to a liability. See Note 1 to our consolidated financial
statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K for further information.
23
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.
Recap of the year ended December 31, 2017:
•
•
•
•
•
Net revenues of $558.2 million
Net income of $20.1 million, or $1.74 per diluted share, which includes $12.5 million of income tax benefit
primarily due to the adoption of the Tax Cuts and Jobs Act
Adjusted EBITDA of $53.5 million
Backlog of $726.5 million
Completed the acquisition of Lightning Diversion Systems, LLC
Non-GAAP Financial Measures
Adjusted earnings before interest, taxes, depreciation and amortization, and restructuring charges (“Adjusted EBITDA”) was
$53.5 million and $54.8 million for years ended December 31, 2017 and December 31, 2016, respectively.
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 table 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
operating commitments.
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;
24
•
•
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 or subtracted from our net income when calculating Adjusted
EBITDA:
•
•
•
•
•
•
•
•
•
•
Interest expense 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;
Restructuring charges may be useful to our investors in evaluating our core operating performance;
Purchase accounting inventory step-ups may be useful to our investors as they do not necessarily reflect the
current or on-going cash charges related to our core operating performance;
Net gain on divestitures may be useful to our investors in evaluating our on-going operating performance;
Loss on extinguishment of debt may be useful to our investors for determining current cash flow;
Asset impairments (including goodwill and intangible assets) may be useful to our investors as it generally
represents a decline in value in our assets used in our operations.
25
Reconciliations of net income (loss) to Adjusted EBITDA and the presentation of Adjusted EBITDA as a percentage of net
revenues were as follows:
Net income (loss)
Interest expense
Income tax (benefit) expense
Depreciation
Amortization
Stock-based compensation expense
Restructuring charges (1)
Inventory purchase accounting adjustments (2)
Gain on divestitures, net (3)
Loss on extinguishment of debt
Goodwill impairment (4)
Intangible asset impairment (5)
Adjusted EBITDA
% of net revenues
(In thousands)
Years Ended December 31,
2017
2016
2015
$
$
20,077
8,261
(12,468)
13,162
9,683
4,675
8,838
1,235
—
—
—
—
53,463
$
$
25,261
8,274
12,852
13,326
9,534
3,007
182
—
(17,604)
—
—
—
54,832
$
$
(74,879)
18,709
(31,711)
15,707
11,139
3,495
2,125
—
—
14,720
57,243
32,937
49,485
9.6%
10.0%
7.4%
(1) 2017 included $0.5 million of restructuring charges that were recorded as cost of goods sold.
(2) 2017 included inventory purchase accounting adjustments of inventory that was stepped up as part of our purchase
price allocation from our acquisition of Lightning Diversion Systems, LLC (“LDS”) in September 2017 and is part of
our Electronic Systems operating segment.
(3) 2016 included gain on divestitures, net in our Electronic Systems operating segment related to the divestitures of our
Pittsburgh and Miltec operations.
(4) 2015 included goodwill impairment related to our Structural Systems operating segment.
(5) 2015 included intangible asset impairment related to our Electronic Systems operating segment.
26
RESULTS OF OPERATIONS
2017 Compared to 2016
The following table sets forth net revenues, selected financial data, the effective (benefit) tax rate and diluted earnings per
share:
Net Revenues
Cost of Sales
Gross Profit
Selling, General and Administrative Expenses
Restructuring Charges
Operating Income
Interest Expense
Gain on Divestitures, Net
Other Income, Net
Income Before Taxes
Income Tax (Benefit) Expense
Net Income
Effective (Benefit) Tax Rate
Diluted Earnings Per Share
nm = not meaningful
(in thousands, except per share data)
Years Ended December 31,
%
of Net Revenues
100.0 % $
81.6 %
18.4 %
14.2 %
1.5 %
2.7 %
(1.5)%
— %
0.2 %
1.4 %
nm
3.6 % $
2016
550,642
444,449
106,193
77,443
182
28,568
(8,274)
17,604
215
38,113
12,852
25,261
2017
558,183
455,363
102,820
79,435
8,360
15,025
(8,261)
—
845
7,609
(12,468)
20,077
(163.8)%
1.74
nm
nm $
33.7%
2.24
$
$
$
%
of Net Revenues
100.0 %
80.7 %
19.3 %
14.1 %
— %
5.2 %
(1.5)%
3.2 %
— %
6.9 %
nm
4.6 %
nm
nm
27
Net Revenues by End-Use Market and Operating Segment
Net revenues by end-use market and operating segment during 2017 and 2016, respectively, were as follows:
Consolidated Ducommun
Military and space
Defense electronics
Defense structures
Commercial aerospace
Industrial
Total
Structural Systems
Military and space (defense structures)
Commercial aerospace
Total
Electronic Systems
Military and space (defense electronics)
Commercial aerospace
Industrial
Total
(In thousands)
Years Ended December 31,
% of Net Revenues
Change
2017
2016
2017
2016
$
$
$
$
$
$
25,979
4,662
(15,899)
(7,201)
7,541
$
$
203,164
56,392
240,735
57,892
558,183
$
4,662
(9,667)
(5,005) $
56,392
185,068
241,460
25,979
(6,232)
(7,201)
12,546
$
$
203,164
55,667
57,892
316,723
$
$
$
$
$
$
177,185
51,730
256,634
65,093
550,642
51,730
194,735
246,465
177,185
61,899
65,093
304,177
36.4%
10.1%
43.1%
10.4%
100.0%
23.4%
76.6%
100.0%
64.1%
17.6%
18.3%
100.0%
32.2%
9.4%
46.6%
11.8%
100.0%
21.0%
79.0%
100.0%
58.3%
20.3%
21.4%
100.0%
Net revenues for 2017 were $558.2 million compared to $550.6 million for 2016. The year-over-year increase was primarily
due to the following:
•
•
•
$30.6 million higher revenues in our military and space end-use markets mainly due to increased demand,
which favorably impacted our helicopter, missile, and fixed-wing platforms that was partially offset by the
divestiture of our Miltec operations in March 2016; partially offset by
$15.9 million lower revenues in our commercial aerospace end-use markets mainly due to the winding down of
a regional jet program and continued softness in demand within the regional and business jet end-use markets;
and
$7.2 million lower revenues in our industrial end-use markets.
Net Revenues by Major Customers
A significant portion of our net revenues are from our top ten customers as follows:
Boeing Company
Lockheed Martin Corporation
Raytheon Company
Spirit AeroSystems Holdings, Inc.
United Technologies Corporation
Top ten customers (1)
Years Ended December 31,
2017
2016
16.4%
5.5%
13.5%
8.2%
4.7%
62.5%
17.3%
5.6%
8.4%
8.2%
5.3%
58.6%
(1) Includes The Boeing Company (“Boeing”), Lockheed Martin Corporation (“Lockheed Martin”), Raytheon Company
(“Raytheon”), Spirit AeroSystems Holdings, Inc. (“Spirit”), and United Technologies Corporation (“United Technologies”).
28
The revenues from Boeing, Lockheed Martin, Raytheon, Spirit, and United Technologies are diversified over a number of
commercial, military and space programs and were made by both operating segments.
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 18.4% in 2017 compared to 19.3% in 2016 primarily due to unfavorable product mix, partially offset by higher volume.
Selling, General and Administrative (“SG&A”) Expenses
SG&A expenses increased $2.0 million in 2017 compared to 2016 primarily due to the higher compensation and benefit costs
of $3.1 million, partially offset by a decrease due to the divestitures of our Pittsburgh and Miltec operations and closure of
certain facilities of $1.3 million.
Restructuring Charges
Restructuring charges increased $8.7 million (of which $0.5 million was included in cost of sales) in 2017 compared to 2016
primarily due to the restructuring plan that was implemented in 2017 that is expected to increase operating efficiencies. See
Note 3 to our consolidated financial statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K for
further information on restructuring activities.
Interest Expense
Interest expense was essentially flat in 2017 compared to 2016 primarily due to a lower outstanding Term Loan balance a
result of voluntary principal prepayments on our credit facilities, offset by higher utilization of the Revolving Credit Facility,
including the acquisition of LDS. See Note 10 to our consolidated financial statements included in Part IV, Item 15(a) of this
Annual Report on Form 10-K for further information on our long-term debt.
Income Tax Expense
We recorded an income tax benefit of $12.5 million (an effective tax benefit rate of 163.8%) in 2017, compared to income tax
expense of $12.9 million (an effective tax rate of 33.7%) in 2016. The decrease in the effective tax rate for 2017 compared to
2016 was primarily due to $13.0 million of provisional deferred income tax benefit recorded in connection with the Tax Cuts
and Jobs Act (the “2017 Tax Act”). The reduction in the U.S. corporate tax rate from 35.0% to 21.0% required the federal
portion of our deferred tax assets and liabilities at December 31, 2017 to be re-measured at the enacted tax rate expected to
apply when the temporary differences are to be realized or settled using 21.0%. In addition, the pre-tax income in 2017 was
lower compared to 2016 pre-tax income which caused tax incentives such as research and development tax credits and
discrete items to have a greater impact on our effective tax rate.
Our unrecognized tax benefits were $5.3 million and $3.0 million in 2017 and 2016, respectively. We record interest and
penalty charge, if any, related to uncertain tax positions as a component of tax expense and unrecognized tax benefits. The
amounts accrued for interest and penalty charges as of December 31, 2017 and 2016 were not significant. If recognized, $3.4
million would affect the effective tax rate. We do not reasonably expect significant increases or decreases to our unrecognized
tax benefits in the next twelve months.
We file U.S. Federal and state income tax returns. During the fourth quarter of 2017, the Internal Revenue Service (“IRS”)
completed the audit of tax years 2013, 2014, and 2015. Consequently, Federal income tax returns after 2015 are subject to
examination. California franchise (income) tax returns after 2012 and other state income tax returns after 2012 are subject to
examination. While we are no longer subject to examination prior to those periods, carryforwards generated prior to those
periods may still be adjusted upon examination by the IRS or state taxing authority if they either have been or will be used in
a subsequent period. We believe we have adequately accrued for tax deficiencies or reductions in tax benefits, if any, that
could result from the examination and all open audit years.
Net Income and Earnings per Diluted Share
Net income and earnings per diluted share for 2017 were $20.1 million, or $1.74, compared to net income and earnings per
diluted share for 2016 were $25.3 million, or $2.24. The decrease in net income in 2017 compared to 2016 was primarily due
to the following:
29
•
•
•
•
•
Prior year included a pre-tax gain on divestitures, net of our Pittsburgh and Miltec operations of $17.6 million;
Higher restructuring charges of $8.7 million (of which $0.5 million is included in cost of sales)
Lower gross profit of $2.9 million (which excludes $0.5 million of restructuring charges in cost of sales); and
Higher SG&A expenses of $2.0 million; partially offset by
Lower income tax expense of $25.3 million.
Business Segment Performance
We report our financial performance based upon the two reportable operating segments: Structural Systems and Electronic
Systems. 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 2017 and 2016:
30
Net Revenues
Structural Systems
Electronic Systems
Total Net Revenues
Segment Operating Income
Structural Systems
Electronic Systems
Corporate General and Administrative Expenses (1)
Total Operating Income
Adjusted EBITDA
Structural Systems
Operating Income
Other Income
Depreciation and Amortization
Restructuring Charges
Electronic Systems
Operating Income
Other Income
Depreciation and Amortization
Restructuring Charges
Inventory purchase accounting adjustments
Corporate General and Administrative Expenses (1)
Operating Loss
Other Income
Depreciation and Amortization
Stock-Based Compensation Expense
Restructuring Charges
Adjusted EBITDA
Capital Expenditures
Structural Systems
Electronic Systems
Corporate Administration
Total Capital Expenditures
%
Change
(In thousands)
Years Ended December 31,
2017
2016
%
of Net
Revenues
2017
%
of Net
Revenues
2016
(2.0)% $ 241,460
$ 246,465
4.1 %
316,723
304,177
43.3 %
56.7 %
44.8 %
55.2 %
1.4 % $ 558,183
$ 550,642
100.0 %
100.0 %
2.3 %
9.8 %
(3.8)%
2.7 %
6.7 %
9.5 %
(3.1)%
5.2 %
$
5,477
$
16,497
30,940
36,417
(21,392)
15,025
$
28,983
45,480
(16,912)
28,568
5,477
$
16,497
200
8,860
5,866
141
8,688
—
20,403
25,326
8.4 %
10.3 %
30,940
645
13,888
1,190
1,235
47,898
(21,392)
—
97
4,675
1,782
(14,838)
53,463
20,679
5,019
775
28,983
—
14,087
182
—
43,252
15.1 %
14.2 %
(16,912)
74
85
3,007
—
(13,746)
54,832
15,661
3,032
—
$
$
9.6 %
10.0 %
$
26,473
$
18,693
$
$
$
$
(1) Includes costs not allocated to either the Structural Systems or Electronic Systems operating segments.
Structural Systems
Structural Systems’ net revenues in 2017 compared to 2016 decreased $5.0 million primarily due to the following:
31
•
•
$9.7 million lower revenues in commercial aerospace end-use markets mainly due to the wind down of a
regional jet program and continued softness in demand within the regional and business jet end-use markets;
partially offset by
$4.7 million higher revenues in military and space end-use markets mainly due to increased demand which
favorably impacted our helicopter platforms.
The Structural Systems operating income in 2017 compared to 2016 decreased primarily due to restructuring charges of $5.9
million, the impact of new program development on large airframe platforms, and lower manufacturing volume.
Electronic Systems
Electronic Systems’ net revenues in 2017 compared to 2016 increased $12.5 million primarily due to the following:
•
•
•
$25.9 million higher revenues in our military and space end-use markets mainly due to increased demand,
which favorably impacted our missile, fixed-wing, and helicopter platforms; partially offset by
$7.2 million lower revenues in our Industrial end-use markets; and
$6.2 million lower revenues in our commercial aerospace end-use markets mainly due to continued softness in
demand in the business jet market.
Electronic Systems segment operating income in 2017 compared to 2016 increased primarily due to higher manufacturing
volume, partially offset by restructuring charges of $1.2 million and unfavorable product mix.
Corporate General and Administrative (“CG&A”) Expenses
CG&A expenses in 2017 compared to 2016 increased primarily due to higher compensation and benefit costs of $3.1 million
and restructuring charges of $1.8 million.
Backlog
We define backlog as customer placed purchase orders (“POs”) and long-term agreements (“LTAs”) with firm fixed price and
firm delivery dates of 24 months or less. Backlog is subject to delivery delays and 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 Industrial 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.
32
Backlog was $726.5 million at December 31, 2017, compared to $641.3 million at December 31, 2016, as shown in more
detail below. The increase in backlog was primarily in the commercial aerospace end-use markets and defense technologies
end-use markets. $544.0 million of total backlog is expected to be delivered during 2018. The following table summarizes
our backlog for 2017 and 2016:
Consolidated Ducommun
Military and space
Defense electronics
Defense structures
Commercial aerospace
Industrial
Total
Structural Systems
Military and space (defense structures)
Commercial aerospace
Total
Electronic Systems
Military and space (defense electronics)
Commercial aerospace
Industrial
Total
Change
2017
2016
(In thousands)
December 31,
$
$
$
$
$
$
18,931
2,044
60,313
3,938
85,226
2,044
42,068
44,112
18,931
18,245
3,938
41,114
$
$
$
$
$
$
216,508
60,921
417,981
31,068
726,478
60,921
361,586
422,507
216,508
56,395
31,068
303,971
$
$
$
$
$
$
197,577
58,877
357,668
27,130
641,252
58,877
319,518
378,395
197,577
38,150
27,130
262,857
33
2016 Compared to 2015
The following table sets forth net revenues, selected financial data, the effective tax (benefit) rate and diluted earnings (loss)
per share:
Net Revenues
Cost of Sales
Gross Profit
Selling, General and Administrative Expenses
Goodwill Impairment
Intangible Asset Impairment
Restructuring Charges
Operating Income (Loss)
Interest Expense
Gain on Divestitures, Net
Loss on Extinguishment of Debt
Other Income
Income (Loss) Before Taxes
Income Tax Expense (Benefit)
Net Income (Loss)
Effective Tax (Benefit) Rate
Diluted Earnings (Loss) Per Share
nm = not meaningful
(in thousands, except per share data)
Years Ended December 31,
%
of Net Revenues
2016
100.0 % $
80.7 %
19.3 %
14.1 %
— %
— %
— %
5.2 %
(1.5)%
3.2 %
— %
— %
6.9 %
nm
4.6 % $
2015
666,011
565,219
100,792
83,796
57,243
32,937
2,125
(75,309)
(18,709)
—
(14,720)
2,148
(106,590)
(31,711)
(74,879)
2016
550,642
444,449
106,193
77,443
—
—
182
28,568
(8,274)
17,604
—
215
38,113
12,852
25,261
33.7%
2.24
nm
nm $
(29.7)%
(6.78)
$
$
$
%
of Net Revenues
2015
100.0 %
84.9 %
15.1 %
12.6 %
8.6 %
4.9 %
0.3 %
(11.3)%
(2.8)%
— %
(2.2)%
0.3 %
(16.0)%
nm
(11.2)%
nm
nm
34
Net Revenues by End-Use Market and Operating Segment
Net revenues by end-use market and operating segment during 2016 and 2015, respectively, were as follows:
Consolidated Ducommun
Military and space
Defense electronics
Defense structures
Commercial aerospace
Industrial
Total
Structural Systems
Military and space (defense structures)
Commercial aerospace
Total
Electronic Systems
Military and space (defense electronics)
Commercial aerospace
Industrial
Total
(In thousands)
Years Ended December 31,
% of Net Revenues
Change
2016
2015
2016
2015
$
$
$
$
$
$
(35,352) $
(23,364)
7,333
(63,986)
(115,369) $
177,185
51,730
256,634
65,093
550,642
(23,364) $
(3,490)
(26,854) $
51,730
194,735
246,465
(35,352) $
10,823
(63,986)
(88,515) $
177,185
61,899
65,093
304,177
$
$
$
$
$
$
212,537
75,094
249,301
129,079
666,011
75,094
198,225
273,319
212,537
51,076
129,079
392,692
32.2%
9.4%
46.6%
11.8%
100.0%
21.0%
79.0%
100.0%
58.3%
20.3%
21.4%
100.0%
31.9%
11.3%
37.4%
19.4%
100.0%
27.5%
72.5%
100.0%
54.1%
13.0%
32.9%
100.0%
Net revenues for 2016 were $550.6 million compared to $666.0 million for 2015. The year-over-year decrease was primarily
due to the following:
•
•
•
$64.0 million lower revenues in our industrial end-use markets mainly due to the divestiture of our Pittsburgh
operation in January 2016 and closure of our Houston operation in December 2015;
$58.7 million lower revenues in our military and space end-use markets mainly due to the divestiture of our
Miltec operations in March 2016, as well as program delays and budget changes, which impacted our fixed-
wing and helicopter platforms and pushed out scheduled deliveries of these products to customers; partially
offset by
$7.3 million higher revenues in our commercial aerospace end-use markets mainly due to added content with
existing customers.
Net Revenues by Major Customers
A significant portion of our net revenues are from our top ten customers as follows:
Boeing
Lockheed Martin
Raytheon
Spirit
United Technologies
Top ten customers (1)
Years Ended December 31,
2016
2015
17.3%
5.6%
8.4%
8.2%
5.3%
58.6%
16.0%
1.2%
8.7%
7.4%
6.1%
55.7%
(1) Includes Boeing, Raytheon, Spirit, and United Technologies for 2016 and 2015 and Lockheed Martin for 2016.
35
The revenues from Boeing, Lockheed Martin, Raytheon, Spirit, and United Technologies are diversified over a number of
commercial, military and space programs and were made by both operating segments.
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 increased
to 19.3% in 2016 compared to 15.1% in 2015 primarily due to the following:
•
•
2015 included a forward loss reserve charge related to a regional jet program of $12.2 million; and
Total material costs as a percentage of revenues decreased 1.8% compared to the prior year as a result of our on-
going supply chain initiatives and improved operating performance.
Selling, General and Administrative Expenses
SG&A expenses decreased $6.4 million in 2016 compared to 2015 primarily due to the decrease of $9.4 million related to the
divestitures of our Pittsburgh and Miltec operations and closures of facilities.
Interest Expense
Interest expense decreased in 2016 compared to 2015 primarily due to a lower outstanding debt balance as a result of net
voluntary principal prepayments on our new credit facilities and a lower average interest rate as a result of completing the
refinancing of our debt in July 2015. See Note 10 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 $12.9 million (an effective tax rate of 33.7%) in 2016, compared to an income tax benefit
of $31.7 million (an effective tax benefit rate of 29.7%) in 2015. The increase in the effective tax rate for 2016 compared to
2015 was primarily due to pre-tax income in 2016, which included a gain on divestitures, net of our Pittsburgh and Miltec
operations of $17.6 million compared to a pre-tax loss in the prior year. The $17.6 million gain on divestitures, net resulted in
an increase in our state tax liability in 2016. The increase was partially offset by the U.S. Federal research and development
tax credit that was permanently extended in 2015 and the deduction for Qualified Domestic Production Activities.
Our unrecognized tax benefits were $3.0 million in both 2016 and 2015. We record interest and penalty charge, if any, related
to uncertain tax positions as a component of tax expense and unrecognized tax benefits. The amounts accrued for interest and
penalty charge as of December 31, 2016 and 2015 were not significant. If recognized, $2.0 million would affect the effective
tax rate. We do not reasonably expect significant increases or decreases to our unrecognized tax benefits in the next twelve
months.
We file U.S. Federal and state income tax returns. Federal income tax returns after 2012, California franchise (income) tax
returns after 2011 and other state income tax returns after 2011 are subject to examination. We are no longer subject to
examination prior to those periods, although carryforwards generated prior to those periods may still be adjusted upon
examination by the Internal Revenue Service (“IRS”) or state taxing authority if they either have been or will be used in a
subsequent period. During 2016, the IRS commenced an audit of our 2014 and 2015 tax years. Although the outcome of tax
examinations cannot be predicted with certainty, we believe we have adequately accrued for tax deficiencies or reductions in
tax benefits, if any, that could result from the examination and all open audit years.
36
Net Income (Loss) and Earnings (Loss) per Diluted Share
Net income and income per diluted share for 2016 were $25.3 million, or $2.24 per diluted share, compared to a net loss and
loss per share for 2015 were $(74.9) million, or $(6.78). The increase in net income in 2016 compared to 2015 was primarily
due to the following:
•
•
•
•
•
•
•
•
•
Prior year included a non-cash pre-tax goodwill impairment charge of $57.2 million;
Prior year included a non-cash pre-tax charge related to the impairment of an indefinite-lived trade name of
$32.9 million;
Prior year included a loss on extinguishment of debt of $14.7 million related to completing a new credit facility
to replace the existing credit facilities along with the redemption of the $200.0 million senior unsecured notes;
Prior year included a forward loss reserve charge related to a regional jet program of $12.2 million;
A pre-tax gain on divestitures, net of our Pittsburgh and Miltec operations of $17.6 million;
Lower interest expense of $10.4 million;
Lower SG&A expenses related to the divestitures of our Pittsburgh and Miltec operations and closures of
facilities in aggregate totaling $9.4 million; and
Improved operating performance; partially offset by
Higher income tax expense of $44.6 million.
37
Business Segment Performance
We report our financial performance based upon the two reportable operating segments; Structural Systems and Electronic
Systems. 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 2016 and 2015:
Net Revenues
Structural Systems
Electronic Systems
Total Net Revenues
Segment Operating Income (Loss)
Structural Systems
Electronic Systems
Corporate General and Administrative Expenses (1)
Total Operating Income (Loss)
Adjusted EBITDA
Structural Systems
Operating Income (Loss) (2)(3)
Other Income (4)
Depreciation and Amortization
Goodwill Impairment
Restructuring Charges
Electronic Systems
Operating Income (Loss) (3)(5)
Other Income
Depreciation and Amortization
Intangible Asset Impairment
Restructuring Charges
Corporate General and Administrative Expenses (1)
Operating Loss
Other Income (Expense)
Depreciation and Amortization
Stock-Based Compensation Expense
Adjusted EBITDA
Capital Expenditures
Structural Systems
Electronic Systems
Corporate Administration
Total Capital Expenditures
%
Change
(In thousands)
Years Ended December 31,
2016
2015
%
of Net
Revenues
2016
%
of Net
Revenues
2015
(9.8)% $ 246,465
$ 273,319
(22.5)%
304,177
392,692
44.8 %
55.2 %
41.0 %
59.0 %
(17.3)% $ 550,642
$ 666,011
100.0 %
100.0 %
$
16,497
28,983
45,480
(16,912)
28,568
$
$ (53,010)
(4,472)
(57,482)
(17,827)
$ (75,309)
6.7 %
9.5 %
(19.4)%
(1.1)%
(3.1)%
5.2 %
(2.7)%
(11.3)%
$ (53,010)
1,510
$
16,497
141
8,688
—
—
25,326
28,983
—
14,087
—
182
43,252
(16,912)
74
85
3,007
(13,746)
54,832
15,661
3,032
—
$
$
$
$
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
10.3 %
6.0 %
14.2 %
12.0 %
10.0 %
7.4 %
$
18,693
$
15,988
38
(1) Includes costs not allocated to either the Structural Systems or Electronic Systems operating segments.
(2) Goodwill impairment related to Structural Systems operating segment.
(3) 2015 includes restructuring charges for severance and benefits and loss on early exit from leases of $0.8 million and
$1.3 million recorded in the Electronic Systems and Structural Systems operating segments, respectively.
(4) Insurance recoveries related to property and equipment included as other income.
(5) Intangible asset impairment related to Electronic Systems operating segment.
Structural Systems
Structural Systems’ net revenues in 2016 compared to 2015 decreased $26.9 million primarily due to the following:
•
•
$23.4 million decrease in military and space revenues mainly due to program delays and budget changes which
impacted scheduled deliveries on our fixed-wing and helicopter platforms; and
$3.5 million decrease in commercial aerospace revenues mainly due to the wind down of a regional jet program
and continued softness in the commercial helicopter end-use market.
The Structural Systems operating income in 2016 compared to 2015 increased primarily due to higher operating margins in
2016 and the prior year included a $57.2 million non-cash goodwill impairment charge and forward loss reserve charge
related to a regional jet program of $12.2 million.
Electronic Systems
Electronic Systems’ net revenues in 2016 decreased primarily due to the following:
•
•
•
$64.0 million decrease in our industrial revenues mainly due to the divestiture of our Pittsburgh operation in
January 2016 and closure of our Houston operation in December 2015; and
$35.3 million decrease in our military and space revenue mainly due to the divestiture of our Miltec operation in
March 2016 and program delays and budget changes, which impacted scheduled deliveries on our fixed-wing
and helicopter platforms; partially offset by
$10.8 million increase in our commercial aerospace revenue mainly due to added content with existing
customers.
Electronic Systems segment operating income in 2016 compared to 2015 increased primarily due to the prior year included a
$32.9 million non-cash impairment charge of an indefinite-lived trade name intangible asset and higher operating margins in
2016.
Corporate General and Administrative Expenses
CG&A expenses in 2016 compared to 2015 decreased primarily due to lower professional services fees of $1.3 million and
lower compensation and benefits of $1.1 million, partially offset by one-time retirement charges of $0.9 million.
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
39
(In millions)
December 31,
2017
2016
218.1
3.73%
3.74%
2.2
141.6
$
$
$
170.0
3.25%
3.31%
7.4
199.0
$
$
$
Our credit facility consists of a $275.0 million senior secured term loan, which matures on June 26, 2020 (“Term Loan”), and
a $200.0 million senior secured revolving credit facility (“Revolving Credit Facility”), which matures on June 26, 2020
(collectively, the “Credit Facilities”). We are required to make mandatory prepayments of amounts outstanding under the
Term Loan. As of December 31, 2017, we were in compliance with all covenants required under the Credit Facilities. See
Note 10 to our consolidated financial statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K for
further information. The undrawn portions of the commitments of the Credit Facilities are subject to a commitment fee
ranging from 0.175% to 0.300%, based upon the consolidated total net adjusted leverage ratio. In July 2017, we entered into
a technical amendment to the Credit Facilities (“First Amendment”) which provides more flexibility to close certain qualified
acquisitions permitted under the Credit Facilities.
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 $135.0 million of our debt. We paid a total of $1.0 million in connection with entering into the
interest rate cap hedges.
In September 2017, we acquired all the outstanding interests of LDS for a purchase price of $60.0 million, net of cash
acquired, all payable in cash. Upon the closing of the transaction, we paid $61.4 million in cash by drawing down on the
Revolving Credit Facility. The remaining $0.6 million was paid in October 2017 in cash, also by drawing down on the
Revolving Credit Facility. See Note 2 to our consolidated financial statements included in Part IV, Item 15(a) of this Annual
Report on Form 10-K for further information.
We expect to spend a total of $15.0 million to $17.0 million for capital expenditures in 2018 financed by cash generated from
operations, which will be lower than 2017, principally to support new contract awards at Structural Systems and Electronic
Systems. As part of our strategic plan to become a Tier Two supplier and win new contract awards, 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 Credit Facilities 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
2017 Compared to 2016
Net cash provided by operating activities during 2017 decreased to $35.4 million compared to $43.3 million during 2016 primarily
due to lower net income as a result of restructuring charges and lower gross margin, and lower accounts payable.
Net cash used in investing activities in 2017 of $86.2 million compared to cash provided by of $34.9 million in 2016 primarily
due to the payments for the purchase of LDS, net of cash acquired of $59.8 million in the current year. In addition, the prior
year included proceeds from the divestiture of our Pittsburgh and Miltec operations of $51.9 million. Further, 2017 included
higher purchases of property and equipment mainly to support the expansion of our Parsons, Kansas facility.
Net cash provided by financing activities during 2017 was $45.5 million compared to cash used in of $76.2 million during 2016
primarily due to net borrowings from the Revolving Credit Facility that was used for the purchase of LDS, partially offset by
repayments on the Credit Facilities.
2016 Compared to 2015
Net cash provided by operating activities during 2016 increased to $43.3 million compared to $23.7 million during 2015 primarily
due to higher net income as a result of lower interest expense and higher gross margin percentage.
Net cash provided by investing activities in 2016 of $34.9 million primarily due to proceeds from the divestiture of the Pittsburgh
and Miltec operations, partially offset by capital expenditures, principally to support new contract awards in both Structural
Systems and Electronic Systems.
40
Net cash used in financing activities during 2016 was $76.2 million compared to $50.4 million during 2015 primarily due to
net voluntary principal prepayments on our new credit facilities of $75.0 million primarily as a result of the proceeds received
from divestiture of the Pittsburgh and Miltec operations during the current-year.
Contractual Obligations
A summary of our contractual obligations at December 31, 2017 was as follows (in thousands):
Total
Less Than
1 Year
1-3 Years
3-5 Years
More Than
5 Years
Payments Due by Period
Long-term debt, including current portion
$
218,100
$
— $
218,100
$
— $
Future interest on long-term debt
Operating leases
Pension liability
Total(1)
28,483
12,360
19,387
10,266
3,586
1,739
18,217
5,347
3,574
—
2,874
3,806
$
278,330
$
15,591
$
245,238
$
6,680
$
—
—
553
10,268
10,821
(1) As of December 31, 2017, we have recorded $5.3 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 Structural Systems 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 17 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.
41
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
evaluation for impairment (which we perform based on the first day of the fourth fiscal 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 two internal reporting units: Structural Systems and Electronic Systems. The application of the goodwill
impairment test requires significant judgment, including the identification of the reporting units, and the determination of
both the carrying value and the fair value of the reporting units. The carrying value of each reporting unit is determined by
assigning the assets and liabilities, including existing goodwill, to those reporting units. The determination of the fair value of
each reporting unit requires significant judgment, including our estimation of future cash flows, which is dependent upon
internal forecasts, estimation of the long-term rate of growth of our businesses, estimation of the useful lives of the assets
which will generate the cash flows, determination of our weighted-average cost of capital and other factors. In determining
the appropriate discount rate, we considered the weighted-average cost of capital for each reporting unit which, among other
factors, considers the cost of common equity capital and the marginal cost of debt of market participants.
The estimates and assumptions used to calculate the fair value of a reporting unit may change from period to period based
upon actual operating results, market conditions and our view of the future trends. The estimates and assumptions used to
determine whether impairment exists and determine the amount of such impairment, if any, are subject to a high degree of
uncertainty. The estimated fair value of a reporting unit would change materially if different assumptions and estimates were
used.
We initially perform an assessment of qualitative factors to determine if it is necessary to perform the two-step goodwill
impairment test. We test goodwill for impairment using the two-step method if, based on our assessment of the qualitative
factors, we determined that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, or
if we decide to bypass the qualitative assessment. When performing the two-step impairment test, we use a combination of an
income approach, which estimates fair value of the reporting unit based upon future discounted cash flows, and a market
approach, which estimates fair value using market multiples for transactions in a set of comparable companies. If the carrying
value of the reporting unit exceeds its fair value, we then perform the second step of the impairment test to measure the
amount of the impairment loss, if any. The second step 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
42
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 evaluation for impairment of goodwill based on the first day of the fourth fiscal quarter each year.
The carrying amount of goodwill at the date of the most recent annual impairment test for the Electronic Systems internal
reporting unit was $117.4 million. As of the date of our 2017 annual evaluation for goodwill impairment, we used a
qualitative assessment noting it was not more likely than not that the fair value of a reporting unit is less than its carrying
amount and thus, goodwill was not deemed impaired.
We review our indefinite-lived intangible asset for impairment on an annual basis or when events or changes in
circumstances indicate that the carrying value of our intangible asset may not be recoverable. We may first assess qualitative
factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for
determining whether it is necessary to perform the quantitative impairment test. Impairment indicators include, but are not
limited to, cost factors, financial performance, adverse legal or regulatory developments, industry and market conditions and
general economic conditions. If the carrying amount of the indefinite-lived intangible asset exceeds its fair value, we would
recognize an impairment loss in the amount of such excess. 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
Electronic Systems and our discontinuation of the use of the trade name. Thus, we recorded a $32.9 million of trade name
impairment to the Electronic Systems trade name carrying value to decrease its trade name carrying value to zero as of
December 31, 2015. See Note 7 in Part IV, Item 15(a) of this Annual Report on Form 10-K 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. 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 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, with fair value being based on the closing
stock price on the date of grant except for market condition awards for which fair value was based on a Monte Carlo
simulation model. 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 net realizable value with cost being determined using a moving average cost
basis for raw materials and actual cost for work-in-process and finished goods, with units being relieved and charged to cost
of sales on a first-in, first-out basis. Market value for raw materials is based on replacement cost and for other inventory
classifications it is based on net realizable value. 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 a reserve for potentially excess and obsolete inventories and inventories that are carried at costs that
are higher than their estimated net realizable values.
43
We net progress payments from customers related to inventory purchases against inventories in the consolidated balance
sheets.
Income Taxes
The provision for income taxes is determined using an estimated annual effective tax rate, which is generally less than the
U.S. federal statutory rate, primarily as a result of research and development (“R&D”) tax credits available in the United
States and deductions available in the United States for domestic production activities. Our effective tax rate may be subject
to fluctuations during the year as new information is obtained, which may affect the assumptions used to estimate the annual
effective tax rate, including factors such as valuation allowances against deferred tax assets, the recognition or derecognition
of tax benefits related to uncertain tax positions, expected utilization of R&D tax credits and changes in or the interpretation
of tax laws in jurisdictions where we conduct business.
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, based on technical
merits, 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, including resolution of related appeals and/
or litigation process, if any.
On December 22, 2017, the Tax Cuts and Jobs Act (the “2017 Tax Act”) was enacted. The 2017 Tax Act represents major tax
reform legislation that, among other provisions, reduces the U.S. corporate tax rate. Certain provisional amounts for the
income tax effects of the 2017 Tax Act, including $13.0 million of deferred income tax benefit recorded principally due to the
re-measurement of the federal portion of our deferred tax assets and liabilities, are reflected in our financial results in
accordance with SEC Staff Accounting Bulletin No. 118 (“SAB 118”), which provides SEC staff guidance regarding the
application of Accounting Standards Codification (“ASC”) Topic 740, “Income Taxes,” in the reporting period in which the
2017 Tax Act became law. See Note 16 in Part IV, Item 15(a) of this Annual Report on Form 10-K for further information.
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.
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,
2017, we had borrowings of $218.1 million under our Credit Facilities 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 ranging from 1.50% to 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.
44
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 Annual Report on Form 10-K. Based on this evaluation, the Company’s
Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at
the reasonable assurance level as of December 31, 2017.
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 Exchange Act. 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 (“GAAP”). 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 GAAP, 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.
Management of the Company has assessed the effectiveness of the Company’s internal control over financial reporting as of
December 31, 2017. 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). Based on our
assessment and those criteria, management concluded that the Company maintained effective internal control over financial
reporting as of December 31, 2017.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2017 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report, which is included in
Item 15 of this Annual Report on Form 10-K.
Remediation of Prior Year Material Weakness
We previously identified and disclosed in our 2016 Annual Report on Form 10-K, as well as in our Quarterly Report on Form
10-Q (Form “10-Q”) for each interim period in fiscal 2017, a material weakness in our internal control over financial
reporting regarding the following:
We did not maintain effective controls related to the quarterly and annual accounting and disclosures for income
taxes. Specifically, we did not 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 accuracy and
completeness of the income tax amounts reported within the consolidated financial statements and disclosures at
period end.
45
During 2017, we successfully completed the testing necessary to conclude that the controls were operating effectively as of
December 31, 2017 and have concluded that the material weakness related to the accounting and disclosures for income taxes
has been remediated.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting during the quarter ended December 31, 2017.
ITEM 9B. OTHER INFORMATION
None.
46
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors of the Registrant
The information under the caption “Election of Directors” in the 2018 Proxy Statement is incorporated herein by reference.
Executive Officers of the Registrant
The information under the caption “Executive Officers of the Registrant” in the 2018 Proxy Statement is incorporated herein
by reference.
On December 31, 2017, Anthony J. Reardon resigned as an employee of the Company but will continue to serve as a non-
employee Chairman of the Board.
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 2018 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 2018 Proxy Statement
is incorporated herein by reference.
Code of Ethics
The information under the caption “Code of Ethics” in the 2018 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 2018 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 2018 Proxy
Statement is incorporated herein by reference.
Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information about our compensation plans under which equity securities are authorized for
issuance:
47
Number of Securities
to be Issued Upon
Exercise of
Outstanding
Options,
Warrants and Rights
(a)
Weighted-Average
Exercise Price of
Outstanding
Options,
Warrants and Rights
(b)
Number of Securities
Remaining
Available for
Future Issuance
Under Equity
Compensation Plans
(Excluding Securities
Reflected
in Column
(a))(c)(2)
$
713,069
—
713,069
23.38
—
77,693
—
77,693
Equity Compensation Plans
Approved by security holders (1)
Not approved by security holders
Total
(1) The number of securities to be issued consists of 306,225 for stock options, 185,344 for restricted stock units and
221,500 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 2018 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 2018 Proxy Statement is
incorporated herein by reference.
48
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
1. Financial Statements
PART IV
The following consolidated financial statements of Ducommun Incorporated and subsidiaries, are incorporated by
reference in Item 8 of this report.
Page
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets - December 31, 2017 and 2016
Consolidated Statements of Operations - Years Ended December 31, 2017, 2016, and 2015
Consolidated Statements of Comprehensive Income (Loss) - Years Ended December 31, 2017,
2016, and 2015
Consolidated Statements of Changes in Shareholders’ Equity - Years Ended December 31, 2017,
2016, and 2015
Consolidated Statements of Cash Flows - Years Ended December 31, 2017, 2016, and 2015
Notes to Consolidated Financial Statements
Supplemental Quarterly Financial Data (Unaudited)
2. Financial Statement Schedule
The following schedule for the years ended December 31, 2017, 2016 and 2015 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.
3. Exhibits
See Item 15(b) for a list of exhibits.
ITEM 16. FORM 10-K SUMMARY
Signatures
50
52
53
54
55
56
57
84
85
—
—
—
49
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Ducommun Incorporated
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Ducommun Incorporated and its subsidiaries (the
“Company”) as of December 31, 2017 and 2016, and the related consolidated statements of operations, comprehensive
income (loss), changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31,
2017, including the related notes and financial statement schedule listed in the index appearing under Item 15(a)2
(collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control
over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of the Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2017 in conformity with accounting principles generally accepted in the
United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework
(2013) issued by the COSO.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting,
included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility
is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over
financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting
Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance
with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material
misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in
all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material
misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond
to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. 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.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
50
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
February 28, 2018
We have served as the Company’s auditor since 1989.
51
Ducommun Incorporated and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share and per share data)
Assets
Current Assets
Cash and cash equivalents
Accounts receivable (less allowance for doubtful accounts of $868 and $495 at
December 31, 2017 and 2016, respectively)
Inventories
Production cost of contracts
Other current assets
Total Current Assets
Property and Equipment, Net
Goodwill
Intangibles, Net
Non-Current Deferred Income Taxes
Other Assets
Total Assets
Liabilities and Shareholders’ Equity
Current Liabilities
Current portion of long-term debt
Accounts payable
Accrued liabilities
Total Current Liabilities
Long-Term Debt, Less Current Portion
Non-Current Deferred Income Taxes
Other Long-Term Liabilities
Total Liabilities
Commitments and Contingencies (Notes 14, 17)
Shareholders’ Equity
Common stock - $0.01 par value; 35,000,000 shares authorized; 11,332,841 and
11,193,813 shares issued and outstanding at December 31, 2017 and 2016,
respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total Shareholders’ Equity
Total Liabilities and Shareholders’ Equity
December 31,
2017
2016
$
2,150
$
7,432
74,064
122,161
11,204
11,435
221,014
110,252
117,435
114,693
261
3,098
566,753
$
— $
51,907
28,329
80,236
216,055
15,981
18,898
331,170
113
80,223
161,364
(6,117)
235,583
566,753
$
76,239
119,896
11,340
11,034
225,941
101,590
82,554
101,573
286
3,485
515,429
3
57,024
29,279
86,306
166,896
31,417
18,707
303,326
112
76,783
141,287
(6,079)
212,103
515,429
$
$
$
See accompanying notes to consolidated financial statements.
52
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
Restructuring Charges
Operating Income (Loss)
Interest Expense
Gain on Divestitures, Net
Loss on Extinguishment of Debt
Other Income, Net
Income (Loss) Before Taxes
Income Tax (Benefit) Expense
Net Income (Loss)
Earnings (Loss) Per Share
Basic earnings (loss) per share
Diluted earnings (loss) per share
Weighted-Average Number of Shares Outstanding
Basic
Diluted
$
$
$
$
Years Ended December 31,
2017
2016
2015
$
$
$
$
558,183
455,363
102,820
79,435
—
—
8,360
15,025
(8,261)
—
—
845
7,609
(12,468)
20,077
1.78
1.74
11,290
11,558
$
$
$
$
550,642
444,449
106,193
77,443
—
—
182
28,568
(8,274)
17,604
—
215
38,113
12,852
25,261
2.27
2.24
11,151
11,299
666,011
565,219
100,792
83,796
57,243
32,937
2,125
(75,309)
(18,709)
—
(14,720)
2,148
(106,590)
(31,711)
(74,879)
(6.78)
(6.78)
11,047
11,047
See accompanying notes to consolidated financial statements.
53
Ducommun Incorporated and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
Net Income (Loss)
Other Comprehensive Income (Loss), Net of Tax:
Pension Adjustments:
Amortization of actuarial loss included in net income, net of tax
benefit of $302, $283, and $330 for 2017, 2016, and 2015,
respectively
Actuarial (loss) gain arising during the period, net of tax (benefit)
expense of $(194), $(413), and $300 for 2017, 2016, and 2015,
respectively
Decrease in net unrealized gains and losses on cash flow hedges,
net of tax benefit of $145, $180, and $0 for 2017, 2016, and 2015,
respectively
Other Comprehensive (Loss) Income, Net of Tax
Comprehensive Income (Loss), Net of Tax
Years Ended December 31,
2017
2016
2015
$
20,077
$
25,261
$
(74,879)
508
479
(304)
(650)
557
491
(242)
(38)
20,039
$
(305)
(476)
24,785
$
—
1,048
(73,831)
$
See accompanying notes to consolidated financial statements.
54
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
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
Tax shortfall from share-
based compensation
Balance at December 31,
2016
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
Balance at December 31,
2017
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
$ 190,905
(74,879)
$
(6,651) $ 256,570
(74,879)
—
10,952,268
$
110
$
— $
72,206
—
—
167,523
(137,194)
101,721
—
—
—
—
1
(1)
1
—
—
—
—
—
—
—
—
—
—
—
3,083
(4,209)
(1)
3,495
626
—
—
—
—
—
—
11,084,318
$
111
$
— $
75,200
$ 116,026
$
—
—
132,325
(151,916)
129,086
—
—
—
—
1
(1)
1
—
—
—
—
—
—
—
—
—
—
—
2,121
(3,464)
(1)
3,007
(80)
25,261
—
—
—
—
—
—
11,193,813
$
112
$
— $
76,783
$ 141,287
$
—
—
212,775
(219,164)
145,417
—
—
—
2
(2)
1
—
—
—
—
—
—
—
—
—
4,334
(6,902)
(1)
6,009
20,077
—
—
—
—
—
1,048
—
1,048
3,084
—
—
—
—
(4,210)
—
3,495
626
(5,603) $ 185,734
25,261
—
(476)
—
(476)
2,122
—
—
—
—
(3,465)
—
3,007
(80)
(6,079) $ 212,103
20,077
—
(38)
—
—
—
—
(38)
4,336
(6,904)
—
6,009
11,332,841
$
113
$
— $
80,223
$ 161,364
$
(6,117) $ 235,583
See accompanying notes to consolidated financial statements.
55
Ducommun Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Cash Flows from Operating Activities
Net Income (Loss)
Adjustments to Reconcile Net Income (Loss) to
Net Cash Provided by Operating Activities:
Depreciation and amortization
Gain on divestitures, net
Goodwill impairment
Intangible asset impairment
Property and equipment impairment due to restructuring
Stock-based compensation expense
Deferred income taxes
Excess tax benefits from stock-based compensation
Provision for 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
Proceeds from divestitures
Payments for purchase of Lightning Diversion Systems, LLC,
net of cash acquired
Net Cash (Used in) Provided by 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 cash paid from issuance of common stock under stock
plans
Net Cash Provided by (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
Years Ended December 31,
2017
2016
2015
$
20,077
$
25,261
$
(74,879)
22,845
—
—
—
3,607
4,675
(15,411)
—
373
—
(1,182)
2,720
(533)
(267)
40
(4,015)
2,505
35,434
(27,610)
913
288
—
(59,798)
(86,207)
395,900
(337,800)
—
(10,000)
(3)
—
—
(2,606)
45,491
(5,282)
7,432
2,150
$
$
22,860
(17,604)
—
—
—
3,007
3,519
(248)
112
—
(7,204)
3,220
(5,182)
(1,536)
2,974
15,055
(966)
43,268
(17,001)
16
—
51,893
—
34,908
71,800
(71,800)
—
(75,000)
(23)
—
248
(1,423)
(76,198)
1,978
5,454
7,432
$
26,846
—
57,243
32,937
—
3,495
(29,110)
(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
See accompanying notes to consolidated financial statements.
56
DUCOMMUN INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Description of Business
We are a leading global provider of engineering and manufacturing services for high-performance products and high-cost-of
failure applications used primarily in the aerospace and defense, industrial, 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. Electronic Systems designs, engineers and manufactures high-reliability electronic and
electromechanical products used in worldwide technology-driven markets including aerospace and defense, industrial,
medical, and other end-use markets. Electronic Systems’ product offerings primarily range from prototype development to
complex assemblies. Structural Systems designs, engineers and manufactures large, complex contoured aerostructure
components and assemblies and supplies composite and metal bonded structures and assemblies. Structural Systems’
products are primarily 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.
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”).
Our fiscal quarters typically 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. As a result of using fiscal quarters for the first
three quarters combined with leap years, our first and fourth fiscal quarters can range between 12 1/2 weeks to 13 1/2 weeks
while the second and third fiscal quarters remain at a constant 13 weeks per fiscal quarter.
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.
Supplemental Cash Flow Information
Interest paid
Taxes paid
Non-cash activities:
Purchases of property and equipment not paid
(In thousands)
Years Ended December 31,
2017
2016
2015
$
$
$
7,307
3,125
2,104
$
$
$
6,877
9,778
3,241
$
$
$
26,501
1,150
1,549
57
Fair Value
Assets and liabilities that are measured, recorded or disclosed at fair value on a recurring basis are categorized using the fair
value hierarchy. The fair value hierarchy has three levels based on the reliability of the inputs used to determine the fair
value. Level 1, the highest level, refers to the values determined based on quoted prices in active markets. Level 2 refers to
fair values estimated using significant observable inputs. Level 3, the lowest level, includes fair values estimated using
significant unobservable inputs.. See Note 4 for further information.
Cash Equivalents
Cash equivalents consist of highly liquid instruments purchased with original maturities of three months or less.These assets
are valued at cost, which approximates fair value, which we classify as Level 1. See Fair Value 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, 2017 and December 31, 2016, all of our derivative instruments were designated as cash flow hedges.
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 net realizable value with cost being determined using a moving average cost
basis for raw materials and actual cost for work-in-process and finished goods, with units being relieved and charged to cost
of sales on a first-in, first-out basis. 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 net progress payments 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
58
the carrying value of an asset exceeds the projected undiscounted future cash flows expected from its use and disposal. As of
December 31, 2017 and 2016, production costs of contracts were $11.2 million and $11.3 million, respectively.
Property and Equipment and Depreciation
Property and equipment, including assets recorded under capital leases, are recorded at cost. Depreciation and amortization
are computed using the straight-line method over the estimated useful lives of the related assets, or the lease term if shorter
for leasehold improvements. Repairs and maintenance are charged to expense as incurred. We evaluate long-lived assets for
recoverability considering undiscounted cash flows, when significant changes in conditions occur, and recognize impairment
losses if any, based upon the fair value of the assets.
Goodwill and Indefinite-Lived Intangible Asset
Goodwill is evaluated for impairment on a annual basis on the first day of the fourth fiscal quarter or more frequently if
events or changes in circumstances indicate that the asset may be impaired. Our impairment evaluation of goodwill consists
of a qualitative assessment to determine if it is more likely than not that the fair value of a reporting unit is less than its
carrying amount. If our qualitative assessment indicates it is more likely than not that the estimated fair value of a reporting
unit exceeds its carrying value, no further analysis is required and goodwill is not impaired. Otherwise, we will follow a two-
step quantitative goodwill impairment test to determine if goodwill is impaired.
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 goodwill 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.
In 2015, as a result of the annual goodwill impairment test, we recorded $57.2 million of goodwill impairment to the
Structural Systems operating segment reducing the goodwill carrying value to zero as of December 31, 2015.
We review our indefinite-lived intangible asset for impairment on an annual basis or when events or changes in
circumstances indicate that the carrying value of our intangible asset may not be recoverable. We may first assess qualitative
factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for
determining whether it is necessary to perform the quantitative impairment test. Impairment indicators include, but are not
limited to, cost factors, financial performance, adverse legal or regulatory developments, industry and market conditions and
general economic conditions. If the carrying amount of the indefinite-lived intangible asset exceeds its fair value, we would
recognize an impairment loss in the amount of such excess. 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
Electronic Systems and our discontinuation of the use of the trade name. Thus, we recorded a $32.9 million of trade name
impairment to the Electronic Systems trade name carrying value to decrease its trade name carrying value to zero as of
December 31, 2015.
Other Intangible Assets
We amortize purchased other intangible assets with finite lives over the estimated economic lives of the assets, ranging from
fourteen 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, and unrealized losses on cash flow hedges,
net of tax.
59
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.
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 2015, we recorded a charge in Structural Systems 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 $10.0 million. This amount was recorded as
part of cost of goods sold in our results of operations and increased accrued liabilities by $7.6 million and other long-term
liabilities by $2.4 million.
Income Taxes
The provision for income taxes is determined using an estimated annual effective tax rate, which is generally less than the
U.S. federal statutory rate, primarily as a result of research and development (“R&D”) tax credits available in the United
States and deductions available in the United States for domestic production activities. Our effective tax rate may be subject
to fluctuations during the year as new information is obtained, which may affect the assumptions used to estimate the annual
effective tax rate, including factors such as valuation allowances against deferred tax assets, the recognition or derecognition
of tax benefits related to uncertain tax positions, expected utilization of R&D tax credits and changes in or the interpretation
of tax laws in jurisdictions where we conduct business.
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, based on technical
merits, 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, including resolution of related appeals and/
or litigation process, if any.
On December 22, 2017, the Tax Cuts and Jobs Act (the “2017 Tax Act”) was enacted. The 2017 Tax Act represents major tax
reform legislation that, among other provisions, reduces the U.S. corporate tax rate. Certain provisional amounts for the
income tax effects of the 2017 Tax Act, including $13.0 million of deferred income tax benefit recorded principally due to the
re-measurement of the federal portion of our deferred tax assets and liabilities, are reflected in our financial results in
accordance with SEC Staff Accounting Bulletin No. 118 (“SAB 118”), which provides SEC staff guidance regarding the
application of Accounting Standards Codification (“ASC”) Topic 740, “Income Taxes,” in the reporting period in which the
2017 Tax Act became law. See Note 16 for further information.
60
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 of
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.
Management’s estimates could differ from actual results. The fair value of unvested stock awards is determined based on the
closing price of the underlying common stock on the date of grant except for market condition awards for which the fair
value was based on a Monte Carlo simulation model.
Earnings (Loss) Per Share
Basic earnings per share are computed by dividing income available to common shareholders by the weighted-average
number of common shares outstanding in each period. Diluted earnings per share are computed by dividing income available
to common shareholders plus income associated with dilutive securities by the weighted-average number of common shares
outstanding, plus any potential dilutive shares that could be issued if exercised or converted into common stock in each
period.
The net earnings (loss) and weighted-average number of common shares outstanding used to compute earnings (loss) per
share were as follows:
Net income (loss)
Weighted-average number of common shares outstanding
Basic weighted-average common shares outstanding
Dilutive potential common shares
Diluted weighted-average common shares outstanding
Earnings (loss) per share
Basic
Diluted
(In thousands, except per share data)
Years Ended December 31,
2017
2016
2015
$
20,077
$
25,261
$
(74,879)
11,290
268
11,558
11,151
148
11,299
$
$
1.78
1.74
$
$
2.27
2.24
$
$
11,047
—
11,047
(6.78)
(6.78)
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
61
(In thousands)
Years Ended December 31,
2017
2016
2015
126
553
778
Recent Accounting Pronouncements
New Accounting Guidance Adopted in 2017
In December 2016, the FASB issued ASU 2016-19, “Technical Corrections and Improvements” (“2016-19”), which cover a
variety of Topics in the Codification. The amendments in ASU 2016-19 represent changes to make corrections or
improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a
significant administrative cost to most entities. The new guidance was effective for us beginning January 1, 2017. The
adoption of this standard did not have a significant impact on our condensed consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to
Employee Share-Based Payment Accounting” (“ASU 2016-09”), which is intended to improve the accounting for employee
share-based payments. The new guidance was effective for us beginning January 1, 2017. The adoption of this standard did
not have a significant dollar impact on our condensed consolidated financial statements.
In March 2016, the FASB issued ASU 2016-05, “Derivatives and Hedging (Topic 815): Effect of Derivative Contract
Novations on Existing Hedge Accounting Relationships” (“ASU 2016-05”), which clarifies that a change in the counter party
to a derivative instrument designated as a hedging instrument does not require dedesignation of that hedging relationship,
provided that all other hedge accounting criteria are met. The new guidance was effective for us beginning January 1, 2017.
The adoption of this standard did not have a significant impact on our condensed consolidated financial statements.
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 or net realizable value. Subsequent measurement is unchanged for
inventory measured using last-in, first-out (“LIFO”) or the retail inventory value. The new guidance was effective for us
beginning January 1, 2017. The adoption of this standard did not have a significant impact on our condensed consolidated
financial statements.
Recently Issued Accounting Standards
In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to
Accounting for Hedging” (“ASU 2017-12”), which intends to improve and simplify accounting rules around hedge
accounting. ASU 2017-12 refines and expands hedge accounting for both financial (i.e., interest rate) and commodity risks. In
addition, it creates more transparency around how economic results are presented, both on the face of the financial statements
and in the footnotes. The new guidance is effective for annual periods beginning after December 15, 2018, including interim
periods within those annual periods, which will be our interim period beginning January 1, 2019. Early adoption is permitted,
including adoption in any interim period after the issuance of ASU 2017-12. We are evaluating the impact of this standard.
In May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification
Accounting” (“ASU 2017-09”), which provides clarity on determining which changes to the terms and conditions of share-
based payment awards require an entity to apply modification accounting under Topic 718. The new guidance is effective for
annual periods beginning after December 15, 2017, including interim periods within those annual periods, which will be our
interim period beginning January 1, 2018. Early adoption is permitted, including adoption in any interim period. The
amendments should be applied prospectively to an award modified on or after the adoption date. We are evaluating the
impact of this standard.
In March 2017, the FASB issued ASU 2017-07, “Compensation - Retirement Benefits (Topic 715): Improving the
Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Costs” (“ASU 2017-07”), which require
an employer to report the service cost component in the same line item or items as other compensation costs arising from
services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be
presented in the income statement separately from the service cost component and outside a subtotal of income from
operations, if one is presented. If a separate line item or items are used to present the other components of net benefit cost,
that line item or items must be appropriately described. If a separate line item or items are not used, the line item or items
used in the income statement to present the other components of net benefit cost must be disclosed. The amendments also
allow only the service cost component to be eligible for capitalization when applicable. The new guidance is effective for
annual periods beginning after December 15, 2017, including interim periods within those annual periods, which will be our
interim period beginning January 1, 2018. We are evaluating the impact of this standard.
In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for
Goodwill Impairment” (“ASU 2017-04”), which simplifies the subsequent measurement of goodwill, the amendments
eliminate Step Two from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by
comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the
amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed
62
the total amount of goodwill allocated to that reporting unit. In addition, income tax effects from any tax deductible goodwill
on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if
applicable. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to
perform a qualitative assessment and, if it fails that qualitative test, to perform Step Two of the goodwill impairment test. An
entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment
test is necessary. The new guidance is effective for annual or interim goodwill impairment tests in fiscal years beginning after
December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates
after January 1, 2017. We are evaluating the impact of this standard.
In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a
Business” (“ASU 2017-01”), which clarify the definition of a business with the objective of adding guidance to assist entities
with evaluating whether transactions should be accounted for as acquisitions (or disposals) of businesses. The new guidance
is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods,
which will be our interim period beginning January 1, 2018. We are evaluating the impact of this standard.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash
Receipts and Cash Payments” (“ASU 2016-15”), which addresses the following eight specific cash flow issues: Debt
prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon
interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration
payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement
of corporate-owned life insurance policies (“COLIs”) (including bank-owned life insurance policies [“BOLIs”]); distributions
received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash
flows and application of the predominance principle. The new guidance is effective for annual periods beginning after
December 15, 2017, including interim periods within those annual periods, which will be our interim period beginning
January 1, 2018. We are evaluating the impact of this standard.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which requires lessees to present
right-of-use assets and lease liabilities on the balance sheet. Lessees are required to apply a modified retrospective transition
approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the
financial statements. The new guidance is effective for fiscal years beginning after December 15, 2018, including interim
periods within those fiscal years, which will be our interim period beginning January 1, 2019. We are evaluating the impact
of this standard and currently anticipate it will impact our condensed 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 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. Additional guidance was issued subsequently as follows:
• December 2016, the FASB issued ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue
from Contracts with Customers” (“ASU 2016-20”);
• May 2016, the FASB issued ASU 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope
Improvements and Practical Expedients” (“ASU 2016-12”);
• May 2016, the FASB issued ASU 2016-11, “Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic
815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-06 Pursuant to
Staff Announcements at the March 3, 2016 EITF Meeting” (“ASU 2016-11”);
• April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying
Performance Obligations and Licensing” (“ASU 2016-10”); and
• August 2015, the FASB issued ASU 2015-14, “Revenue From Contracts With Customers (Topic 606)” (“ASU
2015-14”).
All of this new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within
those fiscal years, which will be our interim period beginning January 1, 2018.
63
We are in the process of completing the implementation phase of the project. We have noted that under ASU 2014-09, the
percentage of completion, unit of delivery method of recognizing revenue will no longer be an acceptable method for us and
production costs will generally not be deferred. Instead, revenue will be recognized as the customer obtains control of the
goods and services promised in the contract (i.e., performance obligations). Given the nature of our products and terms and
conditions in the majority of our contracts, our customer obtains control as we perform work under the contract. As such, the
majority of our revenues will be recognized sooner as a result of changing to an over time method (i.e., cost-to-cost plus
margin) from a point-in-time method, which is our current method for recognizing revenue. This will result in eliminating the
majority of our work-in-process and finished goods inventory and a significant increase in unbilled accounts receivables (i.e.,
contract assets). This change will also impact our information technology systems, systems of internal controls over financial
reporting, and certain accounting policies, requiring the usage of more judgment in determining our revenue recognition. We
have selected a software solution and are in the process of implementing the software solution to comply with this new
accounting standard. The new accounting standard will be adopted using the modified retrospective method, whereby the
cumulative effect of applying the new guidance is recognized as an adjustment to certain captions on the balance sheet,
including the opening balance of retained earnings in the first quarter of 2018. We have periodically briefed our Audit
Committee of the Board of Directors on the progress made towards the adoption of this revenue recognition accounting
standard. Since we have not completed the implementation of the software solution, we currently are unable to determine the
exact impact to our consolidated financial statements. However, we expect the impact to be significant on certain captions on
our January 1, 2018 opening balance sheet.
Note 2. Business Combination
On September 11, 2017, we acquired 100.0% of the outstanding equity interests of Lightning Diversion Systems, LLC
(“LDS”), a privately-held, worldwide leader in lightning protection systems serving the aerospace and defense industries,
located in Huntington Beach, California. The acquisition of LDS is part of our strategy to enhance revenue growth by
focusing on advanced proprietary technology on various aerospace and defense platforms.
The purchase price for LDS was $60.0 million, net of cash acquired, all payable in cash. Upon the closing of the transaction,
we paid $61.4 million with the remaining $0.6 million paid in October 2017. We allocated the gross purchase price of $62.0
million to the assets acquired and liabilities assumed at estimated fair values. The excess of the purchase price over the
aggregate fair values was recorded as goodwill.
The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of
acquisition (in thousands):
Cash
Accounts receivable
Inventories
Other current assets
Property and equipment
Intangible assets
Goodwill
Total assets acquired
Current liabilities
Total liabilities assumed
Total purchase price allocation
Intangible assets:
Customer relationships
Trade name
Estimated
Fair Value
2,223
918
1,732
54
138
22,400
34,881
62,346
(325)
(325)
62,021
Estimated
Fair Value
(In thousands)
21,100
1,300
22,400
$
$
$
$
Useful Life
(In years)
15
15
64
The intangible assets acquired of $22.4 million were determined based on the estimated fair values using valuation
techniques consistent with the income approach to measure fair value. The useful lives were estimated based on the
underlying agreements or the future economic benefit expected to be received from the assets. The fair values of the
identifiable intangible assets were estimated using several valuation methodologies, which represented Level 3 fair value
measurements. The value for customer relationships was estimated based on a multi-period excess earnings approach, while
the value for the trade name was assessed using the relief from royalty methodology. Further, we analyzed the technology
acquired and concluded no fair value should be assigned to it.
The goodwill of $34.9 million arising from the acquisition is attributable to the benefits we expect to derive from expected
synergies from the transaction, including complementary products that will enhance our overall product portfolio,
opportunities within new markets, and an acquired assembled workforce. All the goodwill was assigned to the Electronic
Systems segment. Since the LDS acquisition, for tax purposes, was deemed an asset acquisition, the goodwill recognized is
deductible for income tax purposes.
Acquisition related transaction costs are not included as components of consideration transferred but have been expensed as
incurred. Total acquisition-related transaction costs incurred by us were $0.3 million during 2017 and charged to selling,
general and administrative expenses.
LDS’ results of operations have been included in our consolidated statements of operations since the date of acquisition as
part of the Electronic Systems segment. Pro forma results of operations of the LDS acquisition have not been presented as the
effect of the LDS acquisition was not material to our financial results.
Note 3. Restructuring Activities
Summary of 2017 Restructuring Plan
In November 2017, management approved and commenced a restructuring plan that is expected to increase operating
efficiencies. We currently estimate this initiative will result in $19.0 million to $22.0 million in total pre-tax restructuring
charges through 2018, with $8.8 million recorded during 2017. We are currently evaluating a number of possible scenarios to
execute the second phase of the restructuring plan, which will result in additional restructuring charges during 2018. We
anticipate the additional charges will include cash payments for employee separation and non-cash charges for asset
impairments, depending on the specific plan we develop. On an annualized basis, beginning in 2019, we estimate these
restructuring actions will result in total savings of $14.0 million.
In the Electronic Systems segment, we have recorded expenses of $1.2 million for severance and benefits which was charged
to restructuring charges.
In the Structural Systems segment, we have recorded expenses of $1.7 million for severance and benefits which was charged
to restructuring charges. In addition, we recorded non-cash expenses of $3.6 million for property and equipment impairment
which was charged to restructuring charges. Further, we recorded non-cash expenses of $0.5 million for inventory write down
which was charged to cost of sales.
In Corporate, we have recorded expenses of $0.4 million for severance and benefits and non-cash expenses of $1.4 million
for stock-based compensation awards which were modified, all of which was charged to restructuring charges.
As of December 31, 2017, we have accrued $1.0 million, $1.3 million, and $0.4 million for severance and benefits and loss
on early exit from lease in the Electronic Systems segment, Structural Systems segment, and Corporate, respectively.
Summary of 2016 Restructuring Plan
In May 2016, management approved and commenced implementation of the closure of one of our Tulsa facilities that was
completed in June 2016, and is part of our overall strategy to streamline operations. We have recorded cumulative expenses
of $0.2 million for severance and benefits and loss on early exit from a lease, all of which were charged to restructuring
charges in 2016. We do not expect to record additional expenses related to this restructuring plan.
As of December 31, 2017, we have accrued less than $0.1 million for loss on early exit from lease in the Electronic Systems
segment.
Summary of 2015 Restructuring Plans
In September 2015, management approved and commenced implementation of several restructuring actions, including
organizational re-alignment, consolidation and relocation of the New York facilities that was completed in December 2015,
closure of the Houston facility that was completed in December 2015, and closure of the St. Louis facility that was completed
65
in April 2016, all of which are part of our overall strategy to streamline operations. We have recorded cumulative expenses of
$2.2 million for severance and benefits and loss on early exit from leases, all of which were charged to restructuring charges
in 2015. We do not expect to record additional expenses related to these restructuring plans.
As of December 31, 2017, all payments have been made on early exit from lease in the Structural Systems segment.
Our restructuring activities for 2017 and 2016 were as follows (in thousands):
December 31,
2016
2017
December 31,
2017
Balance
Charges
Cash
Payments
Non-Cash
Payments
Change in
Estimates
Balance
Severance and benefits
Modification of stock-based compensation
awards
Lease termination
Property and equipment impairment due to
restructuring
Inventory write down
Ending balance
$
$
Note 4. Fair Value Measurements
— $
—
$
3,337
1,334
(678) $
—
18
3,607
(670)
—
— $
(1,334)
—
(3,607)
478
8,774
$
—
(1,348) $
(478)
(5,419) $
$
654
—
—
654
— $
—
2,659
—
64
—
—
64
66
—
—
2,725
$
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
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, 2017
As of December 31, 2016
Fair Value Measurements Using
Fair Value Measurements Using
Level 1
Level 2
Level 3
Total
Balance
Level 1
Level 2
Level 3
Total
Balance
Assets
Money market funds(1)
Interest rate cap hedges(2)
Total Assets
$
$
26
—
26
$
$
— $
165
165
$
— $
—
— $
26
165
191
$
$
3,751
—
3,751
$
$
— $
553
553
$
— $
—
— $
3,751
553
4,304
(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 2017 or 2016.
66
Note 5. 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.
Our interest rate cap hedges were designated as cash flow hedges and deemed highly effective at the inception of the hedges.
These interest rate cap hedges mature concurrently with the term loan in June 2020. In 2017, the interest rate cap hedges
continued to be highly effective and $0.2 million, net of tax, was recognized in other comprehensive income. No amount was
recorded in the consolidated statements of operations in 2017. See Note 10.
The recorded fair value of the derivative financial instruments in the consolidated balance sheets were as follows:
Derivatives Designated as Hedging Instruments
Cash Flow Hedges:
Interest rate cap premiums
Total Derivatives
Note 6. Inventories
Inventories consisted of the following:
Raw materials and supplies
Work in process
Finished goods
Less progress payments
Total
(In thousands)
December 31, 2017
(In thousands)
December 31, 2016
Other Current
Assets
Other Long
Term Assets
Other Current
Assets
Other Long
Term Assets
$
$
— $
165
— $
165
$
$
— $
553
— $
553
(In thousands)
December 31,
2017
2016
$
$
65,221
62,584
10,665
138,470
16,309
122,161
$
$
64,650
56,806
9,180
130,636
10,740
119,896
We net progress payments from customers related to inventory purchases against inventories on the consolidated balance
sheets.
67
Note 7. 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,
2017
2016
15,662
57,024
146,175
21,127
13,480
253,468
143,216
110,252
$
$
15,662
49,870
137,555
21,749
12,238
237,074
135,484
101,590
$
$
Range of
Estimated
Useful Lives
5 - 40 Years
2 - 20 Years
2 - 10 Years
Depreciation expense was $13.2 million, $13.3 million and $15.7 million, for the years ended December 31, 2017, 2016 and
2015, respectively.
Note 8. Goodwill and Other Intangible Assets
Goodwill
The carrying amounts of goodwill, all in our Electronic Systems segment, for the years ended December 31, 2017 and 2016
were as follows:
Gross goodwill
Accumulated goodwill impairment
Balance at December 31, 2016
Goodwill from acquisition during the period
Balance at December 31, 2017
(In thousands)
$
$
164,276
(81,722)
82,554
34,881
117,435
Goodwill is evaluated for impairment on a annual basis on the first day of the fourth fiscal quarter or more frequently if
events or changes in circumstances indicate that the asset may be impaired. Our impairment evaluation of goodwill consists
of a qualitative assessment to determine if it is more likely than not that the fair value of a reporting unit is less than its
carrying amount. The qualitative evaluation is an assessment of factors, including reporting unit specific operating results as
well as industry, market, and economic conditions, to determine whether it is more likely than not that the fair value of a
reporting unit is less than its carrying amount, including goodwill. If our qualitative assessment indicates it is more likely
than not that the estimated fair value of a reporting unit exceeds its carrying value, no further analysis is required and
goodwill is not impaired. Otherwise, we will follow a two-step quantitative goodwill impairment test to determine if goodwill
is impaired.
In the fourth quarter of 2017, the carrying amount of goodwill at the date of the most recent annual impairment evaluation
was $117.4 million, all of which was in our Electronic Systems operating segment. As of the date of our 2017 annual
evaluation for goodwill impairment, we used a qualitative assessment noting it was not more likely than not that the fair
value of a reporting unit is less than its carrying amount and thus, goodwill was not deemed impaired. Our most recent step-
one goodwill impairment analysis was in the prior year fourth quarter of 2016 and the fair value of the Electronic Systems
internal reporting unit exceeded its carrying value at that time by 32% and thus, was not deemed impaired.
In September 2017, we acquired 100.0% of the outstanding equity interests of LDS for a purchase price of $60.0 million, net
of cash acquired. We allocated the gross purchase price of $62.0 million to the assets acquired and liabilities assumed at
estimated fair values. The excess of the purchase over the aggregate fair values was recorded as goodwill. See Note 2.
Other intangible assets are related to acquisitions, including LDS, and recorded at fair value at the time of the acquisition.
Other intangible assets with finite lives are generally amortized on the straight-line method over periods ranging from
fourteen to eighteen years. Intangible assets are as follows:
68
December 31, 2017
December 31, 2016
(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
17
15
14
15
$
$
180,300
1,300
1,845
400
183,845
$
$
67,449
26
1,493
184
69,152
$
$
112,851
1,274
352
216
114,693
$
$
159,200
—
1,845
400
161,445
$
$
58,352
—
1,362
158
59,872
$
$
100,848
—
483
242
101,573
The carrying amount of other intangible assets by operating segment as of December 31, 2017 and 2016 was as follows:
Other intangible assets
Structural Systems
Electronic Systems
Total
(In thousands)
December 31, 2017
December 31, 2016
Gross
Accumulated
Amortization
Net
Carrying
Value
Gross
Accumulated
Amortization
Net
Carrying
Value
$
$
19,300
164,545
183,845
$
$
16,464
52,688
69,152
$
$
2,836
111,857
114,693
$
$
19,300
142,145
161,445
$
$
15,555
44,317
59,872
$
$
3,745
97,828
101,573
Amortization expense of other intangible assets was $9.3 million, $9.0 million and $10.0 million for the years ended
December 31, 2017, 2016 and 2015, respectively. Future amortization expense by operating segment is expected to be as
follows:
2018
2019
2020
2021
2022
Thereafter
(In thousands)
Structural
Systems
Electronic
Systems
Consolidated
Ducommun
$
$
737
591
490
381
320
317
2,836
$
$
9,420
9,419
9,348
9,287
9,288
65,095
111,857
$
$
10,157
10,010
9,838
9,668
9,608
65,412
114,693
69
Note 9. Accrued Liabilities
The components of accrued liabilities consisted of the following:
Accrued compensation
Accrued income tax and sales tax
Customer deposits
Provision for forward loss reserves
Other
Total
Note 10. Long-Term Debt
Long-term debt and the current period interest rates were as follows:
Term loan
Revolving credit facility
Other debt (fixed 5.41%)
Total debt
Less current portion
Total long-term debt
Less debt issuance costs
Total long-term debt, net of debt issuance costs
Weighted-average interest rate
Future long-term debt payments at December 31, 2017 were as follows:
2018
2019
2020
2021
2022
Total
$
$
$
$
(In thousands)
December 31,
2017
2016
18,925
71
3,970
1,226
4,137
28,329
$
$
15,455
332
3,204
4,780
5,508
29,279
(In thousands)
December 31,
2017
2016
160,000
58,100
—
218,100
—
218,100
2,045
216,055
$
$
170,000
—
3
170,003
3
170,000
3,104
166,896
3.73%
3.25%
(In thousands)
—
—
218,100
—
—
218,100
$
$
Our credit facility consists of a $275.0 million senior secured term loan, which matures on June 26, 2020 (“Term Loan”), and
a $200.0 million senior secured revolving credit facility (“Revolving Credit Facility”), which matures on June 26, 2020
(collectively, the “Credit Facilities”). The 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 Credit Facilities are subject to a commitment fee
ranging from 0.175% to 0.300%, based upon the consolidated total net adjusted leverage ratio.
70
Further, we are required to make mandatory prepayments of amounts outstanding under the 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 Revolving Credit Facility are due on June
26, 2020. As of December 31, 2017, we were in compliance with all covenants required under the Credit Facilities.
In addition, we incurred $4.8 million of debt issuance costs related to the Credit Facilities and those costs were capitalized
and are being amortized over the five year life of the Credit Facilities.
In September 2017, we acquired LDS for a purchase price of $60.0 million, net of cash acquired, all payable in cash. Upon
the closing of the transaction, we paid $61.4 million in cash by drawing down on the Revolving Credit Facility. The
remaining $0.6 million was paid in October 2017 in cash, also by drawing down on the Revolving Credit Facility. See Note 2.
In July 2017, we entered into a technical amendment to the Credit Facilities (“First Amendment”) which provided more
flexibility to close certain qualified acquisitions permitted under the Credit Facilities.
We made voluntary principal prepayments of $10.0 million under the Term Loan during 2017.
As of December 31, 2017, we had $141.6 million of unused borrowing capacity under the Revolving Credit Facility, after
deducting $58.1 million for draw down on the Revolving Credit Facility and $0.3 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 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 $135.0 million of our debt. We paid a total of $1.0 million in connection with the interest rate cap
hedges. See Note 5 for further information.
In December 2017 and 2016, we entered into agreements to purchase $14.2 million and $9.9 million of industrial revenue
bonds (“IRBs”) issued by the city of Parsons, Kansas (“Parsons”) and concurrently, sold $14.2 million and $9.9 million of
property and equipment (“Property”) to Parsons as well as entered into a lease agreement to lease the Property from Parsons
(“Lease”) with lease payments totaling $14.2 million and $9.9 million over the lease term, respectively. The sale of the
Property and concurrent lease back of the Property in December 2017 and 2016 did not meet the sale-leaseback accounting
requirements as a result of our continuous involvement with the Property and thus, the $14.2 million and $9.9 million in cash
received from Parsons was not recorded as a sale but as a financing obligation, respectively. Further, the Lease included a
right of offset so long as we continue to own the IRBs and thus, the financing obligation of $14.2 million and $9.9 million
was offset against the $14.2 million and $9.9 million, respectively, of IRBs assets and are presented net on the consolidated
balance sheets with no impact to the consolidated statements of operations or consolidated cash flow statements.
Note 11. Shareholders’ Equity
We are authorized to issue five million shares of preferred stock. At December 31, 2017 and 2016, no preferred shares were
issued or outstanding.
Note 12. 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”). The Stock
Incentive Plans permit 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 shares available for issuance under the 2007 Plan and 2013
Plan is 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, 2017,
shares available for future grant under the 2007 Plan and 2013 Plan are zero and 77,693, 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-
71
employee directors under certain predecessor plans. No further awards can be granted under the 2007 Plan or these
predecessor plans.
Stock Options
In the years ended December 31, 2017, 2016, and 2015, we granted stock options to our officers, key employees and non-
employee directors of 129,400, 123,500, and 73,000, respectively, with weighted-average grant date fair values of $11.88,
$6.53, and $10.63, 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 seven years from the date of grant. The stock options typically vest over a
period of four years from 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, 2017 were as follows:
Weighted-
Average
Exercise
Price Per
Share
Weighted-
Average
Remaining
Contractual
Life (Years)
Aggregate
Intrinsic Value
(in thousands)
Outstanding at January 1, 2017
Granted
Exercised
Expired
Forfeited
Outstanding at December 31, 2017
Exerciseable at December 31, 2017
Number
of Stock
Options
$
439,550
129,400
$
(212,775) $
(5,800) $
(44,150) $
$
306,225
$
86,425
20.07
29.19
20.38
21.12
22.19
23.38
20.78
Changes in nonvested stock options for the year ended December 31, 2017 were as follows:
Nonvested at January 1, 2017
Granted
Vested
Forfeited
Nonvested at December 31, 2017
5.2
2.9
$
$
1,654
663
Weighted-
Average
Grant
Date Fair
Value
8.77
11.88
8.87
7.93
11.07
Number of
Stock Options
$
225,175
129,400
$
(90,625) $
(44,150) $
$
219,800
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, 2017, 2016 and 2015 was $2.5 million, $1.3 million, and $2.3 million, respectively. Cash received from stock
options exercised for the years ended December 31, 2017, 2016 and 2015 was $4.3 million, $2.1 million, and $3.1 million,
respectively, with related tax benefits of $0.9 million, $0.5 million, and $0.9 million, respectively. The total amount of stock
options vested and expected to vest in the future is 306,225 shares with a weighted-average exercise price of $23.38 and an
aggregate intrinsic value of $1.7 million. These stock options have a weighted-average remaining contractual term of 5.2
years.
The share-based compensation cost expensed for stock options for the years ended December 31, 2017, 2016, and 2015
(before tax benefits) was $0.7 million, $0.8 million, and $1.2 million, respectively, and is included in selling, general and
administrative expenses on the consolidated income statements. At December 31, 2017, total unrecognized compensation
cost (before tax benefits) related to stock options of $1.5 million is expected to be recognized over a weighted-average period
of 3.1 years. The total fair value of stock options vested during the years ended December 31, 2017, 2016, and 2015 was $0.8
million, $0.9 million, and $1.3 million, respectively.
72
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. The assumptions used to compute the fair value of stock option grants
under the Stock Incentive Plans for years ended December 31, 2017, 2016, and 2015 were as follows:
Risk-free interest rate
Expected volatility
Expected dividends
Expected term (in months)
Years Ended December 31,
2017
2016
2015
1.75%
50.37%
—
48
1.20%
51.79%
—
48
1.13%
53.72%
—
47
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 135,350,
139,450, and 108,500 RSUs during the years ended December 31, 2017, 2016, and 2015, respectively, with weighted-average
grant date fair values (equal to the fair market value of our stock on the date of grant) of $28.97, $15.97, and $25.15 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 typically have a three year vesting term of 33%, 33% and 34% on the first, second and third
anniversaries of the date of grant, respectively. 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, 2017 was as follows:
Outstanding at January 1, 2017
Granted
Vested
Forfeited
Outstanding at December 31, 2017
Number of
Restricted
Stock Units
Weighted-
Average
Grant
Date Fair Value
18.88
$
193,382
28.97
135,350
$
(101,930) $
19.66
(41,458) $
21.93
25.14
$
185,344
The share-based compensation cost expensed for RSUs for the years ended December 31, 2017, 2016, and 2015 (before tax
benefits) was $2.0 million, $1.8 million, and $1.8 million respectively, and is included in selling, general and administrative
expenses on the consolidated income statements. At December 31, 2017, total unrecognized compensation cost (before tax
benefits) related to RSUs of $3.0 million is expected to be recognized over a weighted average period of 2.0 years. The total
fair value of RSUs vested for the years ended December 31, 2017, 2016, and 2015 was $3.0 million, $1.3 million, and $1.8
million, respectively. The tax benefit realized from vested RSUs for the years ended December 31, 2017, 2016, and 2015 was
$1.1 million, $0.7 million, and $0.7 million, respectively.
Performance Stock Units
We granted performance stock awards (“PSUs”) to certain key employees of 126,000, 62,500, and 64,000 PSUs during the
years ended December 31, 2017, 2016, and 2015, respectively, with weighted-average grant date fair values of $26.31,
$15.92, and $25.51 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 that specifies the manner of
determining the number of performance stock awards that will be granted if performance goals are attained. If an employee
73
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, 2017 was as follows:
Outstanding at January 1, 2017
Granted
Adjustment for target performance
Vested
Forfeited
Outstanding at December 31, 2017
Number of
Performance
Stock Units
Weighted-
Average
Grant
Date Fair
Value
$
121,637
$
126,000
37,350
$
(43,487) $
(20,000) $
$
221,500
20.39
26.31
25.48
24.98
22.63
23.52
The share-based compensation cost expensed for PSUs for the years ended December 31, 2017, 2016, and 2015 (before tax
benefits) was $2.0 million, $0.4 million and $0.5 million, respectively, and is included in selling, general and administrative
expenses on the consolidated income statements. At December 31, 2017, total unrecognized compensation cost (before tax
benefits) related to PSUs of $2.4 million is expected to be recognized over a weighted-average period of 1.7 years. The total
fair value of PSUs vested during the years ended December 31, 2017, 2016, and 2015, was $1.2 million, $1.1 million, and
$0.9 million, respectively. The tax benefit realized from PSUs for the years ended December 31, 2017, 2016, and 2015 were
$0.5 million, $0.2 million, and $0.3 million, respectively.
Note 13. 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 $0.1 million and $0.7 million, respectively, at December 31, 2017 and $0.6 million and $0.8 million,
respectively, at December 31, 2016. The accumulated benefit obligations of the first two plans at December 31, 2017 and
December 31, 2016 were $0.6 million and $0.7 million, respectively, and are included in accrued liabilities.
Defined Contribution 401(K) Plans
We sponsor a 401(k) defined contribution plan for all our employees. The plan 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. Our provision for matching
and profit sharing contributions for the three years ended December 31, 2017, 2016, and 2015 was $2.7 million, $2.7 million,
and $3.2 million, respectively.
Other Plans
We have a defined benefit pension plan covering certain hourly employees of a subsidiary (the “Pension Plan”). Pension Plan
benefits are generally determined on the basis of the retiree’s age and length of service. Assets of the 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:
74
Service cost
Interest cost
Expected return on plan assets
Amortization of actuarial losses
Net periodic pension cost
(In thousands)
Years Ended December 31,
2017
2016
2015
$
$
531
1,329
(1,530)
810
1,140
$
$
531
1,367
(1,482)
762
1,178
$
$
785
1,350
(1,495)
887
1,527
The components of the reclassifications of net actuarial losses from accumulated other comprehensive loss to net income for
2017 were as follows:
Amortization of actuarial loss - total before tax (1)
Tax benefit
Net of tax
(In thousands)
Year Ended
December 31,
2017
$
$
810
(302)
508
(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 2018 is $0.7 million.
75
The obligations, fair value of plan assets, and funded status of both plans are as follows:
Change in benefit obligation(1)
Beginning benefit obligation (January 1)
Service cost
Interest cost
Actuarial 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 (underfunded)
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 loss
Asset gain
Ending unrecognized loss, before tax (December 31)
Tax impact
Unrecognized loss included in accumulated other comprehensive loss, net of tax
(In thousands)
December 31,
2017
2016
$
$
$
$
$
$
$
$
$
33,154
531
1,329
2,449
(1,461)
36,002
$
$
$
22,015
3,481
1,611
(1,461)
25,646
$
(10,356) $
560
9,796
9,220
(810)
2,449
(1,951)
8,908
(3,309)
5,599
$
$
$
$
31,510
531
1,367
1,132
(1,386)
33,154
19,933
1,551
1,917
(1,386)
22,015
(11,139)
544
10,595
8,919
(762)
1,132
(69)
9,220
(3,425)
5,795
(1) Projected benefit obligation equals the accumulated benefit obligation for the plans.
On December 31, 2017, our annual measurement date, the accumulated benefit obligation exceeded the fair value of the plans
assets by $10.4 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, 2017 and 2016 of $5.6 million and $5.8
million, respectively, which decreased shareholders’ equity. 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 which will cause the Pension Plan to return to
fully funded status.
Our Pension Plan asset allocations at December 31, 2017 and 2016, by asset category, were as follows:
Equity securities
Cash and equivalents
Debt securities
Total(1)
76
December 31,
2017
2016
70%
1%
29%
100%
65%
2%
33%
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.
Cash
Fixed income securities
Equities
0-5%
15-75%
30-80%
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 cash equivalents
Fixed income securities
Equities(1)
Other investments
Total plan assets at fair value
Pooled funds
Total fair value of plan assets
Cash and cash equivalents
Fixed income securities
Equities(1)
Other investments
Total plan assets at fair value
Pooled funds
Total fair value of plan assets
$
$
$
$
(In thousands)
Year Ended December 31, 2017
Level 1
Level 2
Level 3
Total
135
3,494
1,625
910
6,164
$
$
— $
—
—
—
— $
— $
—
—
—
—
$
135
3,494
1,625
910
6,164
19,482
25,646
(In thousands)
Year Ended December 31, 2016
Level 1
Level 2
Level 3
Total
366
3,468
1,611
760
6,205
$
$
— $
—
—
—
— $
— $
—
—
—
—
$
366
3,468
1,611
760
6,205
15,810
22,015
(1) Represents mutual funds and commingled accounts which invest primarily in equities, but may also hold fixed
income securities, cash and other investments. Commingled funds with publicly quoted prices and actively traded are
classified as Level 1 investments.
Pooled funds are measured using the net asset value (“NAV”) as a practical expedient for fair value as permissible under the
accounting standard for fair value measurements and have not been categorized in the fair value hierarchy in accordance with
ASU 2015-07, “Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net
Asset Value per Share (or Its Equivalent).” Pooled fund NAVs are provided by the trustee and are determined by reference to
the fair value of the underlying securities of the trust, less its liabilities, which are valued primarily through the use of directly
or indirectly observable inputs. Depending on the pooled fund, underlying securities may include marketable equity securities
or fixed income securities.
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 used 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.
77
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,
2017
2016
2015
4.18%
3.75%
4.55%
4.00%
4.25%
3.70%
The weighted-average assumptions used to determine the benefit obligations under the two plans were as follows:
Discount rate used to determine value of obligations
Pension Plan
LaBarge Retirement Plan
Long-term rate of return - Pension Plan only
2017
December 31,
2016
2015
3.64%
3.40%
7.00%
4.18%
3.75%
7.50%
4.55%
4.00%
7.50%
The following benefit payments under both plans, which reflect expected future service, as appropriate, are expected to be
paid:
2018
2019
2020
2021
2022
2023 - 2027
$
(In thousands)
LaBarge
Retirement
Plan
Pension Plan
$
1,178
1,212
1,288
1,365
1,453
8,246
561
546
528
506
482
2,022
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 $0.9 million to the plans in 2018.
Note 14. 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.
78
Note 15. 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 2017, 2016,
and 2015 was $5.0 million, $4.9 million, and $8.5 million, respectively. Future minimum rental payments under operating
leases having initial or remaining non-cancelable terms in excess of one year at December 31, 2017 were as follows:
2018
2019
2020
2021
2022
Thereafter
Total
(In thousands)
3,586
2,793
2,554
1,927
947
553
12,360
$
$
Note 16. Income Taxes
Our pre-tax income attributable to foreign operations was not material. The provision for income tax (benefit) expense
consisted of the following:
Current tax expense (benefit)
Federal
State
Deferred tax (benefit) expense
Federal
State
Income tax (benefit) expense
(In thousands)
Years Ended December 31,
2017
2016
2015
$
$
$
2,387
525
2,912
(15,515)
135
(15,380)
(12,468) $
5,953
2,982
8,935
3,876
41
3,917
12,852
$
$
(1,511)
(418)
(1,929)
(28,011)
(1,771)
(29,782)
(31,711)
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the “2017 Tax Act”)
which, among a broad range of tax reform measures, reduced the U.S. corporate tax rate from 35.0% to 21.0% effective
January 1, 2018. The reduction in the corporate tax rate required the federal portion of our deferred tax assets and liabilities at
December 31, 2017 to be re-measured at the enacted tax rate expected to apply when the temporary differences are to be
realized or settled using 21.0%. As a result, we recorded a provisional deferred income tax benefit of $13.0 million related to
the re-measurement for the year ended December 31, 2017. SEC Staff Accounting Bulletin No. 118, “Income Tax Accounting
Implications of the Tax Cuts and Jobs Act” (“SAB 118”), allows us to record provisional amounts during a measurement
period not to extend beyond one year of the enactment date. Since the 2017 Tax Act was passed late in the fourth quarter of
2017, and ongoing guidance and accounting interpretation are expected over the next 12 months, we consider the accounting
of the deferred tax re-measurement and other items to be incomplete due to the forthcoming guidance and our ongoing
analysis of final year-end data and tax positions. We expect to complete our analysis within the measurement period in
accordance with SAB 118.
ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment
Accounting” (“ASU 2016-09”), became effective beginning January 1, 2017 and required all the tax effects related to share-
based payments be recorded through the income statement. We recognized net income tax benefits from deductions of share-
based payments in excess of compensation cost recognized for financial reporting purposes of $0.6 million for the year ended
December 31, 2017. Prior to January 1, 2017, the current income tax expense (benefit) excluded net (tax shortfalls) excess tax
79
benefits which were previously recorded directly to additional paid-in-capital in the amounts of $(0.1) million, and $0.6
million for the years ended December 31, 2016 and 2015, respectively.
Deferred tax (liabilities) assets were comprised of the following:
Deferred tax assets:
Accrued expenses
Allowance for doubtful accounts
Contract overrun reserves
Deferred compensation
Employment-related accruals
Environmental reserves
Federal tax credit carryforwards
Inventory reserves
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
Unbilled receivables
Total gross deferred tax liabilities
Net deferred tax liabilities
(In thousands)
December 31,
2017
2016
$
$
$
313
208
294
177
2,091
501
5,613
1,315
2,398
86
9,051
1,480
75
1,492
25,094
(9,013)
16,081
(7,976)
(2,902)
(20,611)
(312)
—
(31,801)
(15,720) $
760
184
1,776
507
2,888
769
4,234
2,313
4,002
63
6,585
1,950
122
2,098
28,251
(6,607)
21,644
(13,167)
(3,909)
(35,071)
(626)
(2)
(52,775)
(31,131)
We have net operating losses in various states of $1.8 million as of December 31, 2017. The state net operating loss
carryforwards include $1.3 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 carryforwards will begin to expire in 2030.
We have federal and state tax credit carryforwards of $6.6 million and $12.8 million, respectively, as of December 31, 2017.
A valuation allowance of $11.3 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 2018
and 2037.
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.
80
The principal reasons for the variation between the statutory and effective tax rates were as follows:
Years Ended December 31,
Statutory federal income tax (benefit) rate
State income taxes (net of federal benefit)
Qualified domestic production activities
Stock-based compensation expense
Research and development tax credits
Other tax credits
Goodwill impairment
Changes in valuation allowance
Non-deductible book expenses
Changes in deferred tax assets
Re-measurement of deferred taxes for 2017 Tax Act
Changes in tax reserves
Other
Effective income tax (benefit) rate
2017
35.0%
2.5
(2.6)
(8.2)
(50.6)
(7.5)
—
10.6
1.1
15.4
(171.3)
11.4
0.4
(163.8)%
2016
35.0%
5.7
(2.0)
—
(8.6)
—
—
0.9
0.2
1.5
—
—
1.0
33.7%
2015
(35.0)%
(1.2)
0.5
—
(2.9)
—
8.1
0.6
0.2
0.1
—
0.1
(0.2)
(29.7)%
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. As part of the 2017 Tax Act, the qualified domestic
production deduction is repealed for tax years beginning after December 31, 2017.
We recorded a goodwill impairment charge related to the Structural Systems 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
$8.7 million.
Our total amount of unrecognized tax benefits was $5.3 million, $3.0 million, and $3.0 million at December 31, 2017, 2016,
and 2015, respectively. We record interest and penalty charge, if any, related to uncertain tax positions as a component of tax
expense and unrecognized tax benefits. The amounts accrued for interest and penalty charges as of December 31, 2017, 2016,
and 2015 were not significant. If recognized, $3.4 million would affect the effective 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 for tax positions related to the current year
Additions for tax positions related to prior years
Reductions for tax positions related to prior years
Reductions for lapse of statute of limitations
Balance at December 31,
(In thousands)
Years Ended December 31,
2017
2016
2015
3,036
422
1,953
(99)
(41)
5,271
$
$
2,963
476
385
(567)
(221)
3,036
$
$
2,803
702
—
(48)
(494)
2,963
$
$
We file U.S. Federal and state income tax returns. During the fourth quarter of 2017, the Internal Revenue Service (“IRS”)
completed the audit of tax years 2013, 2014, and 2015. Consequently, Federal income tax returns after 2015 are subject to
examination. California franchise (income) tax returns after 2012 and other state income tax returns after 2012 are subject to
examination. While we are no longer subject to examination prior to those periods, carryforwards generated prior to those
periods may still be adjusted upon examination by the IRS or state taxing authority if they either have been or will be used in
a subsequent period. We believe we have adequately accrued for tax deficiencies or reductions in tax benefits, if any, that
could result from the examination and all open audit years.
81
Note 17. Contingencies
Structural Systems 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 an accrual for its estimated liability for such investigation and corrective action of
$1.5 million at December 31, 2017, which is reflected in other long-term liabilities on its consolidated balance sheet.
Structural Systems also faces liability as a potentially responsible party for hazardous waste disposed at landfills located in
Casmalia and West Covina, California. Structural Systems 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 $0.4 million and $3.1 million. Ducommun has
established an accrual for its estimated liability in connection with the West Covina landfill of $0.4 million at December 31,
2017, 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 18. 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,
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”), Lockheed Martin
Corporation (“Lockheed Martin”), Raytheon Company (“Raytheon”), Spirit AeroSystems Holdings, Inc. (“Spirit”), and
United Technologies Corporation (“United Technologies”), represented the following percentages of total net sales:
Boeing
Lockheed Martin
Raytheon
Spirit
United Technologies
Top ten customers (1)
Years Ended December 31,
2017
2016
2015
16.4%
5.5%
13.5%
8.2%
4.7%
62.5%
17.3%
5.6%
8.4%
8.2%
5.3%
58.6%
16.0%
1.2%
8.7%
7.4%
6.1%
55.7%
(1) Includes Boeing, Raytheon, Spirit, and United Technologies for 2017, 2016, and 2015 and Lockheed Martin for 2017 and
2016.
Boeing, Lockheed Martin, Raytheon, Spirit, and United Technologies represented the following percentages of total accounts
receivable:
82
Boeing
Lockheed Martin
Raytheon
Spirit
United Technologies
December 31,
2017
2016
7.8%
5.9%
1.4%
13.5%
2.3%
7.8%
2.9%
10.9%
9.0%
7.8%
In 2017, 2016 and 2015, net revenues from foreign customers based on the location of the customer were $57.2 million,
$56.4 million and $60.2 million, respectively. No net revenues from a foreign country were greater than 3.0% of total net
revenues in 2017, 2016, and 2015. 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 2017, 2016, and 2015. We are
not subject to any significant foreign currency risks as all our sales are made in United States dollars.
Note 19. Business Segment Information
We supply products and services primarily to the aerospace and defense industries. Our subsidiaries are organized into two
strategic businesses, Structural Systems and Electronic Systems, each of which is an operating segment as well as a
reportable segment.
Financial information by reportable segment was as follows:
Net Revenues
Structural Systems
Electronic Systems
Total Net Revenues
Segment Operating Income (Loss) (1)(2)
Structural Systems
Electronic Systems
Corporate General and Administrative Expenses (1)(2)
Operating Income (Loss)
Depreciation and Amortization Expenses
Structural Systems
Electronic Systems
Corporate Administration
Total Depreciation and Amortization Expenses
Capital Expenditures
Structural Systems
Electronic Systems
Corporate Administration
Total Capital Expenditures
(In thousands)
Years Ended December 31,
2017
2016
2015
$
$
$
$
$
$
$
$
241,460
316,723
558,183
5,477
30,940
36,417
(21,392)
15,025
8,860
13,888
97
22,845
20,679
5,019
775
26,473
$
$
$
$
$
$
$
$
246,465
304,177
550,642
16,497
28,983
45,480
(16,912)
28,568
8,688
14,087
85
22,860
15,661
3,032
—
18,693
$
$
$
$
$
$
$
$
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
(1) Includes cost not allocated to either the Structural Systems or Electronic Systems operating segments.
(2) The results for 2017 includes LDS’ results of operations which have been included in our consolidated statements of
operations since the date of acquisition as part of the Electronic Systems segment. See Note 2.
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 2017 and 2016:
83
Total Assets
Structural Systems
Electronic Systems
Corporate Administration
Total Assets
Goodwill and Intangibles
Structural Systems
Electronic Systems
Total Goodwill and Intangibles
(In thousands)
December 31,
2017
2016
$
$
$
$
193,600
362,831
10,322
566,753
2,836
229,292
232,128
$
$
$
$
175,580
325,780
14,069
515,429
3,745
180,382
184,127
In September 2017, we acquired 100.0% of the outstanding equity interests of LDS for a purchase price of $60.0 million, net
of cash acquired. We allocated the gross purchase price of $62.0 million to the assets acquired and liabilities assumed at
estimated fair values. The excess of the purchase over the aggregate fair values was recorded as goodwill. See Note 2.
In the first quarter of 2016, we entered into and completed the sale of our Pittsburgh, Pennsylvania and Miltec operations,
both of which were part of our Electronic Systems operating segment.
Note 20. Supplemental Quarterly Financial Data (Unaudited)
(In thousands, except per share amounts)
Three Months Ended
2017
Three Months Ended
2016
Dec 31
Sep 30
Jul 1
Apr 1
Dec 31
Oct 1
Jul 2
Apr 2
$ 142,258
$ 138,690
$ 140,938
$ 136,297
$ 142,486
$ 132,571
$ 133,437
$ 142,148
25,693
26,009
26,191
24,927
27,786
25,223
26,215
26,969
(5,057)
5,595
4,564
2,507
5,825
6,248
5,331
20,709
(14,541)
940
741
392
2,989
1,234
1,470
7,159
$
9,484
$
4,655
$
3,823
$
2,115
$
2,836
$
5,014
$
3,861
$ 13,550
$
$
0.84
0.82
$
$
0.41
0.41
$
$
0.34
0.33
$
$
0.19
0.18
$
$
0.25
0.25
$
$
0.45
0.44
$
$
0.35
0.34
$
$
1.22
1.21
Net Revenues
Gross Profit
(Loss) Income Before
Taxes
Income Tax (Benefit)
Expense
Net Income
Earnings Per Share
Basic earnings per
share
Diluted earnings
per share
In the fourth quarter of 2017, we adopted the Tax Cuts and Jobs Act and as a result, recorded a provisional deferred income
tax benefit of $13.0 million related to the re-measurement for the year ended December 31, 2017. See Note 16. In addition,
we commenced a restructuring plan and recorded restructuring charges of $8.8 million (with $0.5 million recorded as costs of
sales). See Note 3.
In the third quarter of 2017, we acquired 100.0% of the outstanding equity interests of LDS and LDS’ results of operations
have been included in our consolidated statements of operations since the date of acquisition as part of the Electronic
Systems segment. See Note 2.
In the first quarter of 2016, we entered into and completed the sale of our Pittsburgh, Pennsylvania and Miltec operations,
both of which were part of our Electronic Systems operating segment. We recorded a preliminary pre-tax gain of $18.8
million.
84
DUCOMMUN INCORPORATED AND SUBSIDIARIES
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2017, 2016, AND 2015
(in thousands)
SCHEDULE II
Description
2017
Allowance for Doubtful Accounts
Valuation Allowance on Deferred Tax Assets
2016
Allowance for Doubtful Accounts
Valuation Allowance on Deferred Tax Assets
2015
Allowance for Doubtful Accounts (1)
Balance at
Beginning
of Period
Charged to
Costs and
Expenses (1)
Deductions/
(Recoveries)
Balance at End
of Period
$
$
$
495
$
334
$
(39) $
868
6,607
2,406
—
9,013
359
$
233
$
97
$
495
7,477
(870)
—
6,607
252
$
235
$
128
$
359
Valuation Allowance on Deferred Tax Assets
6,882
595
—
7,477
(1) Included amount that was part of assets held for sale.
85
Exhibit
No.
EXHIBIT INDEX
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 Agreement and Plan of Merger, dated as of September 11, 2017, among Ducommun LaBarge Technologies, Inc., LS
Holdings Company LLC, and DLS Company LLC. Incorporated by reference to Exhibit 2.1 to Form 8-K filed on
September 11, 2017.
2.3 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.
2.4 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.
3.1 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.
3.2 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.
3.3 Bylaws as amended and restated on March 19, 2013. Incorporated by reference to Exhibit 99.1 to Form 8-K dated March
22, 2013.
3.4 Amendment to Bylaws dated January 5, 2017. Incorporated by reference to Exhibit 99.2 to Form 8-K dated January 9,
2017.
3.5 Amendment to Bylaws dated February 21, 2018. Incorporated by reference to Exhibit 3.1 to Form 8-K dated February
26, 2018.
10.1 Credit Agreement, dated as of June 26, 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 26, 2015.
10.2 First Amendment to Credit Agreement, dated as of July 14, 2017, 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 10.2 to Form 10-Q for the period ended July 1, 2017.
*10.3 2007 Stock Incentive Plan. Incorporated by reference to Appendix B of Definitive Proxy Statement on Schedule 14a,
filed on March 29, 2010.
*10.4 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.
*10.5 Form of Stock Option Agreement for 2016 and earlier. Incorporated by reference to Exhibit 10.8 to Form 10-K for the
year ended December 31, 2003.
*10.6 Form of Stock Option Agreement for 2017 and after. Incorporated by reference to Exhibit 10.5 to Form 10-K for the
year ended December 31, 2016.
*10.7 Form of Performance Stock Unit Agreement for 2014 and 2015. Incorporated by reference to Exhibit 10.19 to Form
10-Q dated April 28, 2014.
*10.8 Form of Performance Stock Unit Agreement for 2016. Incorporated by reference to Exhibit 10.6 to Form 10-Q for the
period ended April 2, 2016.
*10.9 Form of Performance Stock Unit Agreement for 2017. Incorporated by reference to Exhibit 10.21 to Form 10-Q for
the period ended April 1, 2017.
*10.10 Form of Restricted Stock Unit Agreement for 2016 and earlier. Incorporated by reference to Exhibit 99.1 to Form 8-
K dated May 8, 2007.
*10.11 Form of Restricted Stock Unit Agreement for 2017 and after. Incorporated by reference to Exhibit 10.9 to Form 10-K
for the year ended December 31, 2016.
86
Exhibit
No.
Description
*10.12 Form of Directors’ Restricted Stock Unit Agreement. Incorporated by reference to Exhibit 99.1 to Form 8-K dated
May 10, 2010.
*10.13 Performance Restricted Stock Unit Agreement dated January 23, 2017 between Ducommun Incorporated and
Stephen G. Oswald. Incorporated by reference to Exhibit 10.11 to Form 10-K for the year ended December 31, 2016.
*10.14 Form of Indemnity Agreement entered with all directors and officers of Ducommun. Incorporated by reference to
Exhibit 10.8 to Form 10-K for the year ended December 31, 1990. All of the Indemnity Agreements are identical
except for the name of the director or officer and the date of the Agreement:
Director/Officer
Richard A. Baldridge
Gregory S. Churchill
Robert C. Ducommun
Dean M. Flatt
Douglas L. Groves
Jay L. Haberland
Stephen G. Oswald
Amy M. Paul
Robert D. Paulson
Anthony J. Reardon
Jerry L. Redondo
Rosalie F. Rogers
Christopher D. Wampler
Date of Agreement
March 19, 2013
March 19, 2013
December 31, 1985
November 5, 2009
February 12, 2013
February 2, 2009
January 23, 2017
January 23, 2017
March 25, 2003
January 8, 2008
October 1, 2015
July 24, 2008
January 1, 2016
*10.15 Ducommun Incorporated 2016 Bonus Plan. Incorporated by reference to Exhibit 99.3 to Form 8-K dated March 1,
2016.
*10.16 Ducommun Incorporated 2017 Bonus Plan. Incorporated by reference to Exhibit 99.1 to Form 8-K dated February 27,
2017.
*10.17 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.
*10.18 Key Executive Severance Agreement between Ducommun Incorporated and Stephen G. Oswald dated January 23,
2017. Incorporated by reference to Exhibit 99.1 to Form 8-K dated January 27, 2017.
*10.19 Form of Key Executive Severance Agreement between Ducommun Incorporated and each of the individuals listed
below. Incorporated by reference to Exhibit 99.2 to Form 8-K dated January 27, 2017. All of the Key Executive
Severance Agreements are identical except for the name of the person and the address for notice:
Person
Douglas L. Groves
Amy M. Paul
Anthony J. Reardon
Jerry L. Redondo
Rosalie F. Rogers
Christopher D. Wampler
Date of Agreement
January 23, 2017
January 23, 2017
January 23, 2017
January 23, 2017
January 23, 2017
January 23, 2017
*10.20 Employment Letter Agreement dated January 3, 2017 between Ducommun Incorporated and Stephen G. Oswald.
Incorporated by reference to Exhibit 99.1 to Form 8-K dated January 9, 2017.
*10.21 Employment Letter Agreement dated December 19, 2016 between Ducommun Incorporated and Amy M. Paul.
Incorporated by reference to Exhibit 10.19 to Form 10-K for the year ended December 31, 2016.
87
Exhibit
No.
Description
*10.22 Transition Services Letter Agreement dated January 10, 2017 between Ducommun Incorporated and James S. Heiser.
Incorporated by reference to Exhibit 99.1 to Form 8-K dated January 16, 2017.
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
101.SCH
101.CAL
101.DEF
101.LAB
XBRL Instance Document
XBRL Taxonomy Extension Schema
XBRL Taxonomy Extension Calculation Linkbase
XBRL Taxonomy Extension Definition Linkbase
XBRL Taxonomy Extension Label Linkbase
XBRL Taxonomy Extension Presentation Linkbase
101.PRE
___________________
* Indicates an executive compensation plan or arrangement.
88
ITEM 16. FORM 10-K SUMMARY
Not applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: February 28, 2018
DUCOMMUN INCORPORATED
By:
/s/ Stephen G. Oswald
Stephen G. Oswald
President 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 February 28, 2018.
Signature
/s/ Stephen G. Oswald
Stephen G. Oswald
/s/ Douglas L. Groves
Douglas L. Groves
/s/ Christopher D. Wampler
Christopher D. Wampler
/s/ Anthony J. Reardon
Anthony J. Reardon
/s/ Richard A. Baldridge
Richard A. Baldridge
/s/ Gregory S. Churchill
Gregory S. Churchill
/s/ Robert C. Ducommun
Robert C. Ducommun
/s/ Dean M. Flatt
Dean M. Flatt
/s/ Jay L. Haberland
Jay L. Haberland
/s/ Robert D. Paulson
Robert D. Paulson
Title
President and Chief Executive Officer
(Principal Executive Officer)
Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer)
Vice President, Controller and Chief Accounting Officer
(Principal Accounting Officer)
Chairman of the Board
Director
Director
Director
Director
Director
Director
89
Following is a list of the subsidiaries of the Company(1):
SUBSIDIARIES OF THE REGISTRANT
EXHIBIT 21
Name of Subsidiary
Jurisdiction of Incorporation
CMP Display Systems, Inc.
Composite Structures, LLC
Ducommun AeroStructures, Inc.
Ducommun AeroStructures Mexico, LLC
Ducommun AeroStructures New York, Inc.
Ducommun (England) LTD
Ducommun LaBarge Technologies, Inc.
Ducommun LaBarge Technologies, Inc.
Ducommun Technologies (Thailand) Ltd.
LaBarge/STC, Inc.
LaBarge Acquisition Company, Inc.
Lightning Diversion Systems, LLC
LS Holdings Company, LLC
(1) As of December 31, 2017.
California
Delaware
Delaware
Delaware
New York
England
Arizona
Delaware
Thailand
Texas
Missouri
Delaware
Delaware
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. 333-214408, 333-188460, 333-167731, and 333-145008) of Ducommun Incorporated of our report dated
February 28, 2018 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
February 28, 2018
Certification of Principal Executive Officer
Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
EXHIBIT 31.1
I, Stephen G. Oswald, certify that:
1.
I have reviewed this Annual Report of Ducommun Incorporated (the “registrant”) on Form 10-K for the period
ended December 31, 2017;
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: February 28, 2018
/s/ Stephen G. Oswald
Stephen G. Oswald
President and Chief Executive Officer
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, 2017;
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: February 28, 2018
/s/ Douglas L. Groves
Douglas L. Groves
Vice President, Chief Financial Officer and Treasurer
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, 2017, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I,
Stephen G. Oswald, President 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/ Stephen G. Oswald
Stephen G. Oswald
President and Chief Executive Officer
February 28, 2018
In connection with the Annual Report of Ducommun Incorporated (the “Company”) on Form 10-K for the period
ending December 31, 2017, 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
February 28, 2018
The foregoing certification is accompanying the Form 10-K solely pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, and is not being filed as part of the Form 10-K or as a separate disclosure document.
corporate information
Board of directors
Anthony J. Reardon
Chairman of the Board,
Ducommun Incorporated
Stephen G. Oswald
President and Chief Executive Officer,
Ducommun Incorporated
Richard A. Baldridge
President and Chief Operating Officer, ViaSat, Inc.
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 Corp. (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).
officers
Stephen G. Oswald
President and Chief Executive Officer
Douglas L. Groves
Vice President, Chief Financial Officer and Treasurer
Amy M. Paul
Vice President, General Counsel and Secretary
Jerry L. Redondo
Senior Vice President of Operations
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 505000
Louisville, KY 40233-5000
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, 2017. After the 2018 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 2, 2017.
Ducommun Incorporated
200 Sandpointe Avenue, Suite 700
Santa Ana, CA 92707-5759
657.335.3665
www.ducommun.com