2019
Annual Report
to Shareholders
Contents
Letter to Shareholders
Form 10-K
01
13
Our Vision
Ducommun Incorporated is dedicated to providing the
aerospace and defense industry with leading engineered
products, electronic and structural manufacturing and
assembly services, as well as aftermarket support.
The Company supplies high value, niche products and
services that deliver superior and sustainable value to
our customers and all other stakeholders.
Company Profi le
Ducommun Incorporated delivers innovative value-added
manufacturing solutions to customers in the aerospace and
defense markets. Founded in 1849, the Company specializes
in two core areas, Electronic Systems and Structural Systems,
which produce complex products and components for
commercial aircraft platforms, mission-critical military and
space programs. For more information, visit Ducommun.com.
Dear Fellow Shareholders:
I am delighted to report that in 2019, we continued
to make signifi cant progress in the transformation
of Ducommun into a high-performance company.
Our team the past year worked diligently to
improve all of our operations, develop the
product portfolio, drive new technologies such
as VersaCore Composite™, provide high-value
to customers and acquire a strategic company
to support our long-term plan for growth.
STEPHEN G. OSWALD
Chairman, President and
Chief Executive Offi cer
Our strategic focus was to strengthen and grow
Ducommun’s success was also evidenced by the
Ducommun’s position as an innovative, niche solutions
growth in shareholder value, refl ected in the 39%
provider for the aerospace and defense industry by
growth in the stock price for the year. Investors were
developing our proprietary processes, engineered
rewarded as the team drove double digit organic
products and aftermarket services. The results were
growth along with signifi cant expansion of margins.
signifi cant, demonstrated by strong growth across all of
We are looking for continued success in the future
our key markets, whether it be commercial aerospace
as we develop our value offering further and drive
or defense. Our backlog as well reached an all-time
strong results.
high for the Company.
Ducommun Incorporated › 2019 Annual Report › 01
02
In August, we also celebrated the 170th anniversary
of Ducommun’s founding in 1849, which today is
recognized as the oldest company in California. We
celebrated the entrepreneurial and pioneering spirit of
our founder, Charles L. Ducommun, who walked across
the country by way of the Santa Fe Trail, to what at that
time was known as the Pueblo of Los Angeles. Charles
originally arrived in New York as an immigrant in
the early 1840s. The Company also had the opportunity
to ring the closing bell at the NYSE to commemorate
this important milestone on August 15.
topline expansion of multiple missile system platforms
BALANCED FOCUS ON COMMERCIAL
and helicopters, including the Blackhawk, Apache and
AEROSPACE AND DEFENSE CUSTOMERS
Chinook. In July, Ducommun also signed a new
As mentioned, it was a very successful year in both
Strategic Supplier Agreement with Raytheon, giving us
the commercial aerospace and defense markets.
the ability to engage in more opportunities within the
Regarding defense, we spent a signifi cant amount
Raytheon Missile Systems portfolio. We ended the year
of time during the past few years improving the
with a defense sector backlog of roughly $450 million,
performance of our operations and business
up 32% year-over-year. We are now well-positioned for
development team, and are now realizing the results.
future growth across all of our defense platforms as we
The team is also leveraging Ducommun’s capabilities
drive higher engagement with the industry.
in Structural Systems, driving new opportunities in the
defense markets.
In the commercial aerospace market, revenue grew
15% in 2019 to nearly $350 million. Ducommun’s
In 2019, we experienced a double digit increase in
growth continues to be fueled by large, narrow body
demand for our military fi xed wing aircraft programs,
aircraft platforms, nearly all of which experienced
such as the F-15 and F-35, as well as substantial
double-digit growth last year, including both Boeing
Ducommun Incorporated › 2019 Annual Report › 03
04
2019 Net Revenues
of $721.1 Million
Total Backlog* as of
December 31, 2019
of $910.2 Million
7%
48%
45%
3%
47%
50%
COMMERCIAL AEROSPACE
MILITARY AND SPACE
INDUSTRIAL
* We defi ne backlog as potential revenue based on customer purchase orders and long-term agreements with fi rm fi xed prices and
expected delivery dates of 24 months or less.
and Airbus. Our expansion with Airbus since 2017 has
where our headquarters is located and we were
also created important balance in our portfolio as we
honored to be included on this list with other companies
move forward in time. The Airbus A320 and A220 have
in the area such as Edwards Lifesciences Corporation.
especially become important factors in our growth
trajectory, and Airbus represented a larger share, both
FINANCIAL PERFORMANCE
directly and indirectly, of Ducommun’s commercial
In 2019, Ducommun sales grew to $721 million, an
revenue last year. The backlog within our commercial
increase of 15% over 2018 and the highest since 2014.
aerospace sector stood at roughly $431 million at the
Our gross margins also grew to 21.1%, which is the
end of 2019, positioning us well for solid performance
highest level since 2003 and refl ects signifi cant
in 2020.
operational improvements, effective portfolio
management and our acquisitions exceeding
Our customers are also taking note of our improved
expectations. We posted net income of $32.5 million
performance, and with great pride, I am happy to
in 2019, or $2.75 per diluted share, compared to
report that the Company was recognized by two
$9.0 million in 2018, or $0.77 per diluted share. The
strategic customers in 2019. Our Monrovia, California
Company also increased operating margin to 7.8%,
Performance Center received a Raytheon Corporate
delivering $56 million in operating income and strong
Supplier Excellence Premier Award, while our
cash fl ow from operations at $51 million. Adjusted
Performance Center in Appleton, Wisconsin received
EBITDA generation in 2019 reached $92 million,
the 2019 Supplier of the Year Award from Viasat, a
up 30% compared to 2018.
leading provider of high-speed satellite broadband
services and secure networking systems.
As mentioned previously, Ducommun’s overall backlog
In November 2019, Ducommun Incorporated was
$864 million at the end of 2018, a new record for
also hit an all time high of $910 million, compared to
also named to the Orange County Business Journal’s
the Company.
(OCBJ) 2019 List of Fastest-Growing Public
Companies, ranking 11th in the Large Public
Overall, the 2019 numbers were excellent and we see
Companies category. Orange County, California is
a great deal of runway ahead for the Company.
Ducommun Incorporated › 2019 Annual Report › 05
06
DRIVING INNOVATION
The development and transformation of the business
continued throughout 2019 and remained a top
priority as we transitioned to more proprietary
products, aftermarket services and advanced
technology. In October 2019, we closed on another
important acquisition, Nobles Worldwide, which
supplies OEM and aftermarket ammunition handling
systems and related high performance technical
products for a variety of aircraft, naval vessels and
military vehicles. The integration is going very well
and the team is already adding great value, opening
new markets and expanding our engineered
products portfolio.
“”
In October 2019, we closed on
another important acquisition,
Nobles Worldwide, which supplies
OEM and aftermarket ammunition
handling systems and related high
performance technical products for
a variety of aircraft, naval vessels
and military vehicles.
Ducommun is also benefi ting from new process
technologies through the use of our proprietary
We also successfully developed new applications
VersaCore Composite™ Technology, which is
in legacy operations such as the Monrovia, California
exemplifi ed by our $200 million, 10-year contract to
Performance Center. This operation has a long
supply aerostructures to Middle River Aircraft Systems
history with suppling rotor blades and other structures
(MRAS) for the A320 platform. These are products for
products for many decades, and won two new major
the engine nacelle and Ducommun collaborated with
programs from both Raytheon and Boeing in 2019.
MRAS to design the composite structural design,
It had been over 10 years since Monrovia won
which is now being fully produced at our Guaymas,
signifi cant new business and we are excited to see
Mexico Performance Center. We except to deliver more
this team reaching and winning important long-term
than $10 million in revenue in 2020, with the full ramp
business for 2020 and in the future.
up to $20 million in 2021.
Ducommun Incorporated › 2019 Annual Report › 07
08
During 2019, Ducommun has continued to
develop its Operating System, which is driving
operational excellence and execution velocity
across all performance centers.
DUCOMMUN OPERATING SYSTEM
During 2019, Ducommun has continued to develop
In 2019, an average of 35% of production employees
its Operating System, which is driving operational
at our performance centers were involved in GEMBA
excellence and execution velocity across all
activities and driving corrective actions. This advanced
performance centers. We use a common standard
understanding of continuous improvement contributed to
tool set to institutionalize and sustain processes and
a signifi cant reduction in the scrap rate for the Company.
improve operating results. One example is the daily
GEMBA forum and walk, which is conducted across
Ducommun also places top priority and premium on
performance centers to actively manage real time
the safety of its employees. To that end, the Company
operations, ensuring performance is being achieved,
established an incident investigation policy to identify
required actions are planned and taken, improvement
the root cause of accidents that result in lost time,
opportunities are identifi ed, and risk mitigation is
implement corrective measures and improve training
acted upon.
“”
As we continue our transformation
into a high-performance organization,
I believe it’s important to stay invested
in the well-being of our employees
and drive high engagement as this,
in my opinion, is the top driver for
customer satisfaction.
to proactively prevent occupational accidents.
For example, in 2019, the number of lost time cases
decreased by 40% and the Company’s lost work
incident rate decreased by 41%.
EMPLOYEE ENGAGEMENT
AND WELL-BEING PROGRAMS
As we continue our transformation into a high-
performance organization, I believe it’s important to
stay invested in the well-being of our employees and
drive high engagement as this, in my opinion, is the
top driver for customer satisfaction.
Ducommun Incorporated › 2019 Annual Report › 09
Community Involvement and Donations
As an aerospace and defense company, we support community-based programs that
stimulate interest in Science, Technology, Engineering and Math (STEM), and throughout 2019,
we remained committed to initiatives that help develop our next generation of innovators and
technical leaders.
In 2019, we marked our second year of participation
Ducommun also supported the 2019 Medal of Honor
with STEM on the Sidelines™, a regional competition to
Convention, which is our nation’s highest and most
promote STEM education in greater Los Angeles and
prestigious personal military decoration. In addition, we
Orange County high schools. A partnership between
contributed to the 1st Light Armored Reconnaissance
Ducommun, the Los Angeles Chargers and the
Battalion Association Memorial Project and Wounded
University of California, Irvine (UCI), STEM on the
Warriors Project.
Sidelines™ drew 173 student participants from 24 local
high schools achieving our 2019 goal to grow and
expand this innovative program.
10
Photos Courtesy of C. Morgan Engel/Los Angeles Chargers
The results of our Employee Engagement Survey
showed that our strengths as an organization include
purpose, clarity of role and a performance-driven
culture. We increased Ducommun’s Engagement
Score by 19% over two years ago, which is signifi cant
with more opportunity ahead of us. The results also
reinforced that our employees take pride in their
work and in the products and solutions we design,
engineer and manufacture.
As part of a performance culture, I am also pleased
to let you know that for the second year in a row the
Company paid record bonuses. Ducommun awards
pay-for-performance for all eligible employees across
the Company, ensuring that each and every person
has a stake in our success.
In 2019, we also launched an Employee Stock
Purchase Program (ESPP), which provides our
employees with the opportunity to share in the
ownership of Ducommun and its performance
through the purchase of shares of the Company’s
stock at a discounted price. Participation in the
ESPP is voluntary, and I’m pleased to report that
we’ve experienced strong participation across the
entire employee base in the fi rst year.
Congratulations to the
2019 Ducommun ScholarS
Ducommun Awards Twenty-Two College Scholarships
Ducommun Incorporated (NYSE:
DCO) has named twenty-two
Ducommun Scholars who will
each receive a $3,000 or $2,000
scholarship for college expenses
in the 2019-2020 academic year.
Ducommun provides funding for
up to Twenty-two scholarships
annually. The program is exclusively
for full-time employees’ children and
grandchildren who attend a college
or vocational school.
“Congratulations to our 2019
Ducommun Scholars! We are pleased
that our company is able to increase
the scholarship amount add 6 new
scholarships for Vocational/Technical
Education for children or grandchildren
of our employees. We are committed
to each scholarship awardee and
wish them much success in this next
journey of their lives,” said Rose
Rogers, vice president and chief
human resources officer.
The students were selected by
Scholarship Management Services,
a division of Scholarship America,
which independently administers the
application and review process, and
award selection for the Ducommun
Scholars program. The scholarships
are based solely on merit—academic
record, leadership, and participation
in school and community activities.
JosLyn
aguiLar
University of
La Verne
Field oF Study:
Political Science
Granddaughter of
Mary Valenzuela,
Monrovia, CA
miChaeL
branD
Santiago
Canyon College
Field oF Study:
Economics
Son of
Thomas Brand,
Orange, CA
JaDa
burgess
Labette
Community College
Field oF Study:
General Studies
Daughter of
Ronald Burgess,
Parsons, KS
emma
CoLLins
Siena
College
Field oF Study:
Psychology
Daughter of
Terrance Collins,
Coxsackie, NY
ryLi
CoPeLanD
Crowder
College
Field oF Study:
Nursing
Granddaughter of
Pamela Smith,
Joplin, MO
Kezia
DeCKer
Columbia-Greene
Community College
Field oF Study:
Nursing
Daughter of
Matthew Decker,
Coxsackie, NY
Jeovanny
DiLLion
El Camino
College
Field oF Study:
Nursing
Son of
Jose Dillion,
Gardena, CA
maDison
FoWLer
Pittsburg State
University
Field oF Study:
Biology
Daughter of
Miranda Fowler,
Parsons, KS
PauL
garCia
California State
University: Long Beach
Field oF Study:
Music Education
Grandson of
Porfirio Tovar,
Huntington
Beach, CA
sheLby
greathouse
Missouri State
University
Field oF Study:
Nursing
Daughter of
Shona Greathouse,
Joplin, MO
shayna
hoWe
SUNY College
at New Paltz
Field oF Study:
Childhood Education
Daughter of
Millage Howe,
Coxsackie, NY
Camryn
Johnson
University
of Arkansas
Field oF Study:
International Business
Daughter of
Charla Martin,
Tulsa, OK
Jeremy
Long
Missouri State
University
Field oF Study:
Electrical Engineering
Grandson of
Judy Long,
Joplin, MO
abraham
Lor
Tulsa
Community College
Field oF Study:
Healthcare
Son of
Amanda Lor,
Tulsa, OK
Destini
Phongsavath
Cypress
College
Field oF Study:
Political Science
Daughter of
Vince Phongsavath,
Carson, CA
aLexis
rinne
Avila
University
Field oF Study:
Biochemistry
Daughter of
Marilyn Rinne,
Parsons, KS
LesLey
thao
University of
Wisconsin-Madison
Field oF Study:
Human Development/
Family Studies
Daughter of
Nikki Her,
Appleton, WI
Joanna
viLLanueva
California State
University: Long Beach
Field oF Study:
Biochemistry
Granddaughter of
Tuyet Villanueva,
Carson, CA
isabeL
viLLarreaL
Mount Saint Mary’s
University
Field oF Study:
History and English
Granddaughter of
Maria de Jesus Romo,
Carson, CA
Logan
WaLDen
University
of Arkansas
Field oF Study:
Chemistry
Son of
Michael Walden,
Berryville, AR
beau
WheLCheL
University
of Arkansas
Field oF Study:
Kinesiology
Grandson of
Connie Rowlins,
Huntsville, AR
Kamri
WoLverton
Pittsburg State
University
Field oF Study:
Social Work
Daughter of
Jeffery Wolverton,
Parsons, KS
Ducommun Incorporated › 2019 Annual Report › 11
We also continued to grow and expand participation
In closing, we have the right footprint, cost structure,
in the Ducommun Scholars program, an exclusive
discipline and operational leadership to continue
benefi t for the children and grandchildren of full-time
developing and strengthening the Company in 2020,
Ducommun employees. In 2019, we increased the
and I want to thank our team at Ducommun for their
amount of the Ducommun scholarship awards to
dedication and excellent results in 2019.
$3,000 each for university and introduced a new
$2,000 award for vocational education, with a total
The Company has a long runway ahead and we are
of 22 deserving students receiving support from
prepared to take full advantage of those numerous
this program. I feel strongly that we have to support
opportunities!
vocational careers as well, and encourage young
people to also pursue that career path.
OUTLOOK
As I refl ect on the conclusion of my third year at
Ducommun, I am very pleased with our improving
Best regards,
operational performance, fi nancial results, and
Stephen G. Oswald
continued growth of our people and organization.
Chairman, President and Chief Executive Offi cer
We remained focused on delivering exceptional value
to our customers, investing in our employees and
driving innovation and results. We look forward as well
to continued performance as we drive for excellence
and industry-leading customer satisfaction across the
Company. The year ahead will include increased
content with Airbus, continued strength across our
defense platforms, and a determined focus on serving
Boeing and it suppliers on the important Boeing 737
MAX program.
12
Table of Contents
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, 2019
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)
Securities registered pursuant to Section 12(b) of the Act:
Registrant’s telephone number, including area code: (657) 335-3665
Title of each class
Common Stock, $.01 par value per share
Trading Symbol(s)
DCO
Name of each exchange on which registered
New York Stock Exchange
_________________________________________________________
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 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 such files). Yes
No
Table of Contents
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 June 29, 2019 was $519 million.
The number of shares of common stock outstanding on February 7, 2020 was 11,606,827.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference:
(a) Proxy Statement for the 2020 Annual Meeting of Shareholders (the “2020 Proxy Statement”), incorporated partially in Part
III hereof.
Table of Contents
DUCOMMUN INCORPORATED AND SUBSIDIARIES
PART I
PART I
Page
Item 1.
Item 1.
Item 1A.
Item 1A.
Item 1B.
Item 1B.
Item 2.
Item 2.
Item 3.
Item 3.
Item 4.
Item 4.
Item 5.
Item 5.
Item 6.
Item 6.
Item 7.
Item 7.
Forward-Looking Statements and Risk Factors
Forward-Looking Statements and Risk Factors
Business
Business
Risk Factors
Risk Factors
Unresolved Staff Comments
Unresolved Staff Comments
Properties
Properties
Legal Proceedings
Legal Proceedings
Mine Safety Disclosures
Mine Safety Disclosures
PART II
PART II
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Equity Securities
Selected Financial Data
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 8.
Item 9.
Item 9.
Item 9A.
Item 9A.
Item 9B.
Item 9B.
Item 10.
Item 10.
Item 11.
Item 11.
Item 12.
Item 12.
Item 13.
Item 13.
Item 14.
Item 14.
Item 15.
Item 15.
Item 16.
Item 16.
Financial Statements and Supplementary Data
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosures
Changes in and Disagreements With Accountants on Accounting and Financial Disclosures
Controls and Procedures
Controls and Procedures
Other Information
Other Information
Directors, Executive Officers and Corporate Governance
Directors, Executive Officers and Corporate Governance
Executive Compensation
Executive Compensation
PART III
PART III
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedules
Exhibits and Financial Statement Schedules
PART IV
PART IV
Form 10-K Summary
Form 10-K Summary
Signatures
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 “could,” “may,” “believe,”
“expect,” “anticipate,” “plan,” “estimate,” “expect,” 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.
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, some 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;
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 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;
the risk of environmental liabilities;
3
Table of Contents
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the risk of cyber security attacks or not being able to detect such attacks; 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 except as required by law.
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 advanced 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, on October 8, 2019, we acquired all the outstanding equity interests of Nobles Parent Inc., the parent company
of Nobles Worldwide, Inc. (“Nobles”), a privately-held global leader in the design and manufacturing of high performance
ammunition handling systems for a wide range of military platforms including fixed-wing aircraft, rotary-wing aircraft,
ground vehicles, and shipboard systems for $77.0 million, net of cash acquired, funded by drawing down on our revolving
credit facility. The acquisition of Nobles advances our strategy to diversify and offer more customized, value-driven
engineered products with aftermarket opportunities and is included in our Structural Systems segment.
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 various sizes of
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, 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,
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assembly, electronic integration, and related processes. Engineering, technical and program management services 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, bonded (metal and composite) components, precision profile extrusions and extruded assemblies, and
ammunition handling systems. In the structural components products, Structural Systems provides design services, engineers,
and manufacturing of 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 services 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 93% of
our total net revenues in 2019. 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 higher value added 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 48% of our total net revenues for 2019.
Global economic growth, a primary driver for air travel, was 2.6% in 2019, below the long-term average of three percent.
Passenger traffic in 2019 grew at an estimated four percent, close to the long-term average of approximately five percent. The
grounding of The Boeing Company’s (“Boeing”) 737 MAX platform and suspension of the 737 MAX deliveries has slowed
growth at certain airlines. While growth was solid across most major world regions, there continues to be variation between
regions and airline business models. Despite some moderation in the growth rates, airlines operating in Asia Pacific and
Europe, as well as low-cost-carriers globally, are leading the 2019 growth in passenger traffic. Air cargo traffic growth is
expected to contract this year due to weak global trade growth.
In addition, airline financial performance also plays a role in the demand for new capacity. Airlines continue to focus on
increasing revenue through alliances, partnerships, new marketing initiatives, and effective leveraging of ancillary services
and related revenues. Airlines are also focusing on reducing costs and renewing fleets to leverage more efficient airplanes.
Net profits in 2019 are expected to approximate $26 billion.
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Further, the availability of internal or external funding impacts commercial aircraft build rates. Failure of our customers to
obtain financing may result in cancellation or deferral of orders.
The long-term outlook for the industry continues to remain positive due to the fundamental drivers of air travel demand:
economic growth and the increasing propensity to travel due to increased trade, globalization, and improved airline services
driven by liberalization of air traffic rights between countries. Boeing’s 20 year forecast projections in their 2019 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. Based on long-term
global economic growth projections of almost three percent average annual gross domestic product (“GDP”) growth, Boeing
projects a $6.8 trillion market for more than 44,000 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 2019 represented 45% of our total net revenues during 2019.
The Bipartisan Budget Act of 2019 raised the Budget Control Act limits on federal discretionary defense and non-defense
spending for fiscal years 2020 (“FY2020”) and 2021 (“FY2021”), reducing budget uncertainty and the risk of sequestration.
The consolidated appropriations acts for FY2020, enacted in December 2019, provided FY2020 appropriations for
government departments and agencies, including the United States Department of Defense (“U.S. DoD”), the National
Aeronautics and Space Administration (“NASA”), and the Federal Aviation Administration (“FAA”).
In addition, there continues to be uncertainty with respect to program-level appropriations for the U.S. DoD and other
government agencies, including NASA. Future budget cuts or investment priority changes, including changes associated with
the authorizations and appropriations process, could result in reductions, cancellations, and/or delays of existing contracts or
programs. Any of these impacts could have a material effect on our results of 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 7% of our total net revenues during
2019.
We believe our business in these markets is stable and we are well positioned in these markets.
SALES AND MARKETING
Our commercial revenues are substantially dependent on airframe manufacturers’ production rates of new aircraft. Deliveries
of new aircraft by airframe manufacturers are dependent on the financial capacity of its customers, primarily airlines and
leasing companies, to purchase the aircraft. Thus, revenues from commercial aircraft could be affected as a result of changes
in new aircraft orders, or the cancellation or deferral by airlines of purchases of ordered aircraft. Further, our revenues from
commercial aircraft programs could be affected by changes in our customers’ inventory levels and changes in our customers’
aircraft production build rates. Even with the uncertainty related to the Boeing 737 MAX platform, in recent years, both
major large aircraft manufacturers, Boeing and Airbus, have announced higher build rates due to increases in production for a
majority of their existing programs, including more fully-developed models, and 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.
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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, commercial aerospace, and Industrial end-use markets in 2019 and 2018 were as follows:
2019 Net Revenues of $721.1 Million
2018 Net Revenues of $629.3 Million
48%
7%
45%
Commercial
Aerospace: 48%
Military
and Space: 45%
Industrial: 7%
48%
8%
44%
Commercial
Aerospace: 48%
Military
and Space: 44%
Industrial: 8%
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, Raytheon Company (“Raytheon”), and Spirit AeroSystems Holdings, Inc.
(“Spirit”) were each greater than 10 percent of our 2019 or 2018 net revenues. Revenues from our top ten customers,
including Boeing, Raytheon, and Spirit were 64% of total net revenues during 2019. Net revenues by major customer for
2019 and 2018 were as follows:
2019 Net Revenues by Major Customer
2018 Net Revenues by Major Customer
36%
17%
11%
12%
24%
Boeing: 17%
Raytheon: 11%
Spirit: 12%
Next Top Seven Customers: 24%
All Other Customers: 36%
37%
17%
12%
10%
24%
Boeing: 17%
Raytheon: 12%
Spirit: 10%
Next Top Seven Customers: 24%
All Other Customers: 37%
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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 16 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 AND REMAINING PERFORMANCE OBLIGATIONS
We define backlog as potential revenue that is based on customer placed purchase orders (“POs”) and long-term agreements
(“LTAs”) with firm fixed price and expected 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 several programs to a greater extent than our net revenues. Backlog in Industrial
markets tends to be of a shorter duration and is generally fulfilled within a three 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 revenues. Backlog was $910.2 million
at December 31, 2019, compared to $863.6 million at December 31, 2018. The increase in backlog was primarily in the
military and space end-use markets.
We define remaining performance obligations as customer placed POs with firm fixed price and firm delivery dates. The
majority of the LTAs do not meet the definition of a contract under Accounting Standards Codification 606 (“ASC 606”) and
thus, the backlog amount is greater than the remaining performance obligations amount as defined under ASC 606. Similar to
backlog, revenue based on remaining performance obligations is subject to delivery delays or program cancellations, which
are beyond our control. Remaining performance obligations were $745.3 million at December 31, 2019.We anticipate
recognizing an estimated $484.0 million of our remaining performance obligations during 2020.
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
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disposal of hazardous and non-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, or
endanger human health, 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 2020 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 at December 31, 2019 for our estimated liabilities related to
these sites. For further information, see Note 15 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, 2019, we employed 2,800 people, of which 415 are subject to collective bargaining agreements expiring
in June 2021 and April 2022. 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 with 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.
On December 20, 2019, we completed the refinancing of a portion of our existing debt by entering into a new revolving
credit facility (“New Revolving Credit Facility”) to replace the existing revolving credit facility that was entered into in
November 2018 (“2018 Revolving Credit Facility”) and entering into a new term loan (“New Term Loan”). The New
Revolving Credit Facility is a $100.0 million senior secured revolving credit facility that matures on December 20, 2024
replacing the $100.0 million 2018 Revolving Credit Facility that would have matured on November 21, 2023. The New Term
Loan is a $140.0 million senior secured term loan that matures on December 20, 2024. We also have an existing $240.0
million senior secured term loan that was entered into in November 2018 that matures on November 21, 2025 (“2018 Term
Loan”). The original amounts available under the New Revolving Credit Facility, New Term Loan, and 2018 Term Loan
(collectively, the “Credit Facilities”) in aggregate, totaled $480.0 million. In conjunction with the closing of the New
Revolving Credit Facility and the New Term Loan, we drew down the entire $140.0 million on the New Term Loan and used
those proceeds to pay off and close the 2018 Revolving Credit Facility of $58.5 million, pay down a portion of the 2018 Term
Loan of $56.0 million, pay the accrued interest associated with the amounts being paid down on the 2018 Revolving Credit
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Facility and 2018 Term Loan, pay the fees related to this transaction, and the remainder will be used for general corporate
expenses.
At December 31, 2019, we had a total of $310.0 million of outstanding long-term debt under the Credit Facilities. The total
long-term debt was primarily the result of our acquisitions, LaBarge, Inc. in 2011, Lightning Diversion Systems, LLC
(“LDS”) in September 2017, Certified Thermoplastics Co., LLC (“CTP”) in April 2018, and Nobles on October 8, 2019.
Our ability to obtain additional financing or 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 other forms of capital. Our ability to complete reasonable
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 capital expenditures, investments or acquisitions or other
general corporate requirements;
require a 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 almost 30% 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;
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 run our business.
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.
On December 20, 2019, we completed the refinancing of a portion of our existing debt by entering into the New Revolving
Credit Facility to replace the 2018 Revolving Credit Facility and entering into the New Term Loan. The New Revolving
Credit Facility is a $100.0 million senior secured revolving credit facility that matures on December 20, 2024 replacing the
$100.0 million 2018 Revolving Credit Facility that would have matured on November 21, 2023. The New Term Loan is a
$140.0 million senior secured term loan that matures on December 20, 2024. We also have the 2018 Term Loan of $240
million senior secured term loan that matures on November 21, 2025. In conjunction with the closing of the New Revolving
Credit Facility and the New Term Loan, we drew down the entire $140.0 million on the New Term Loan and used those
proceeds to pay off and close the 2018 Revolving Credit Facility of $58.5 million, pay down a portion of the 2018 Term Loan
of $56.0 million, pay the accrued interest associated with the amounts being paid down on the 2018 Revolving Credit Facility
and 2018 Term Loan, pay the fees related to this transaction, with the remainder to be used for general corporate expenses.
We are required to make installment payments of 1.25% of the initial outstanding principal balance of the New Term Loan
amount on a quarterly basis in addition to making installment payments of 0.25% of the outstanding principal balance of the
2018 Term Loan amount on a quarterly basis. In addition, if we meet the annual excess cash flow threshold, we will be
required to make excess flow payments on an annual basis. Further, the undrawn portion of the commitment of the New
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Revolving Credit Facility is subject to a commitment fee ranging from 0.175% to 0.275%, based upon the consolidated total
net adjusted leverage ratio. In October 2015, we entered into interest rate cap hedges designated as cash flow hedges, with a
portion of these interest rate cap hedges maturing on a quarterly basis, and a final quarterly maturity date of June 2020 with
notional value in aggregate, totaling $135.0 million. At December 31, 2019, the outstanding balance on the Credit Facilities
was $310.0 million with an average interest rate of 6.87%. Should interest rates increase significantly, even though $81.0
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 keep our interest rate towards the lower 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 New Revolving Credit Facility agreement. The leverage
covenant is defined as Consolidated Funded Indebtedness less unrestricted cash and cash equivalents in excess of $5.0
million, divided by consolidated earnings before interest, taxes and depreciation and amortization (“EBITDA”).
At December 31, 2019, we were in compliance with the leverage covenant under the Credit Facilities. However, there is no
assurance that we will continue to be in compliance with the leverage covenant in future periods.
The Credit Facilities’ agreements 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 the Credit Facilities could result in a default under the Credit Facilities agreements. 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.
We may be adversely affected by changes in LIBOR reporting practices or the method in which LIBOR is
determined.
In July 2017, the Financial Conduct Authority, the authority that regulates London Interbank Offering Rate (“LIBOR”),
announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The Alternative
Reference Rates Committee (“ARRC”) has proposed that the Secured Overnight Financing Rate (“SOFR”) is the rate that
represents the best practice as the alternative to USD-LIBOR for use in derivatives and other financial contracts that are
currently indexed to USD-LIBOR. ARRC has proposed a paced market transition plan to SOFR from USD-LIBOR, and
organizations are currently working on industry wide and/or company specific transition from LIBOR to an alternative that
will not result in financial market disruptions, significant increases in benchmark rates, or financing costs to borrowers. The
consequences of these developments cannot be entirely predicted, but could result in an increase in the cost of our variable
rate debt.
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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 acquisitions.
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 may 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
customers. Sales to The Boeing Company (“Boeing”) and Spirit AeroSystems Holdings, Inc. (“Spirit”) 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 original equipment manufacturers (“OEMs”), under their prime contracts with the U. S.
Government. We had significant sales to Lockheed Martin Corporation and Raytheon Company in 2019 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, shifts in government
spending priorities have caused and may continue to cause additional uncertainty in the placement of orders.
Our revenues from our top ten customers, which represented 64% of our total 2019 net revenues, were diversified over a
number of different aerospace and defense 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, 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 December 2019, Boeing announced plans to temporarily suspend 737 MAX production, starting in January 2020. Boeing
is our largest customer and the 737 MAX is our highest revenue platform. In January 2020, Boeing then announced they
anticipate regulatory approval during mid-2020, which should enable 737 MAX deliveries to resume at that time. Later that
same month, Boeing’s President and Chief Executive Officer stated Boeing was committed to restarting production of the
737 MAX as soon as April 2020, in advance of receiving certification from regulators. Spirit, which is also one of our largest
customers, announced in January 2020, they had reached an agreement with Boeing to restart production of the 737 MAX
during the first quarter of 2020. Spirit anticipates slowly ramping up deliveries throughout the year to reach a total of 216
shipsets of 737 MAX to be delivered to Boeing in 2020. As such, our rate of production of 737 MAX products was impacted
beginning in January 2020 and we undertook the necessary steps to adjust our cost structure, including personnel
requirements. Further delays in regulatory approval of the 737 MAX will likely have an impact on our production rates
though we anticipate resuming shipment of products to Spirit in March 2020 and to Boeing as soon as April 2020. In
addition, we expect revenue growth with our other commercial customers and defense OEMs (also known as prime
contractors) to help mitigate this risk, with the anticipation we will be able to offset the majority of the 737 MAX impact on
our revenues.
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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 plus profit, 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.
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 for
convenience 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
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, or others working
on our behalf, such as 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 customers’ 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.
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Contracts with some of our customers, including Federal government contracts, contain provisions which give our
customers a variety of rights that are unfavorable to us and the OEMs to whom we provide products and services,
including the ability to terminate a contract at any time for convenience.
Contracts with some of our customers, including Federal government contracts, contain provisions and are subject to laws
and regulations that provide rights and remedies not typically found in commercial contracts. These provisions may allow our
customers to:
•
•
•
•
terminate existing contracts, in whole or in part, for convenience, as well as for default, or if funds for contract
performance for any subsequent year become unavailable;
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; and
claim rights in products and systems produced by us.
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 customers’ government prime or subcontracts is
terminated or canceled, our failure to replace sales generated from such contracts would result in lower sales and could 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.
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 may not realize
the expected benefits from an acquisition or that an acquisition could adversely affect our existing operations. Acquisitions
entail certain risks, including:
•
•
•
•
•
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.
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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, performance center
consolidations, realignment, cost reduction, and other strategic initiatives.
In recent years, we have implemented a number of restructuring, realignment, and cost reduction initiatives, including
performance center 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 impacted.
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 import tariffs, the loss of a critical supplier or raw materials and/or component shortages, could cause disruptions or
cost inefficiencies in our operations. Additionally, our competitors that have greater direct purchasing power, may have
product cost advantages 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. Inaccurate estimates of
these costs could 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 estimates could have
a material adverse effect on our financial results.
As we move up the value chain to become a more value added 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 more value added
supplier of more complex 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 move up the value chain 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 U.S. administration.
While the impact of these factors is difficult to predict, we believe 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 as of the first day of our fourth quarter or more frequently if events or
circumstances occur which could indicate 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 any of these or other estimates and assumptions are
not realized in the future, or if market multiples decline, we may be required to record an impairment charge for goodwill.
We also test intangible assets with indefinite life periods for potential impairment annually and on an interim basis if there are
indicators of potential impairment.
In addition, we evaluate amortizable intangible assets, fixed assets, and production cost of contracts for impairment if there
are indicators of a potential impairment.
Further, 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, 2019 was $9.4 million or 1% of total assets. Our goodwill and other
intangible assets as of December 31, 2019 were $309.3 million, or 39% of total assets. See “Goodwill and Indefinite-Lived
Intangible Assets” in Note 7 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 our major customers that have contracts with various agencies of the U.S. Government 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 of false claims to the U.S. Government for payment, defining
reimbursable costs, establishing ethical standards for the procurement process and controlling the import and export of
defense articles and services.
Noncompliance could expose us to liability for penalties, including termination of our 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
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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 2020 and beyond. Competitive pricing pressures may have an adverse effect on our financial condition and operating
results. Further, there can be no assurance that competition from existing or potential competitors in other segments of our
business will not have a material adverse effect on our financial results. If we do not continue to compete effectively and win
contracts, our future business, financial condition, results of operations and our ability to meet our financial obligations may
be materially compromised.
Our products and processes are subject to 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 and non-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 site and our ultimate liability for such matters will depend upon a number of factors. See Note 15 to
our consolidated financial statements included in Part IV, Item 15(a) of this Form 10-K for further information.
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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, our employees, 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 2021 and 2026. 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 could be potentially
jeopardized. An occurrence of any of these events could have a material adverse effect on our financial results.
Additionally, if we choose to move any of our operations, those operations may 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 property damage, 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, fires 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, fires 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 $239.5 million in net revenues during 2019. 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.
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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 performance center 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, 2019, we employed 2,800 people. Two of our performance centers are parties to collective bargaining
agreements, covering 175 full time hourly employees in one of those performance centers and 240 full time hourly
employees in the other performance center, and will expire in June 2021 and April 2022, 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.
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. For
example, 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”) in our 2017 consolidated
financial statements. During 2018, these estimates were subject to further analysis and review which could have required
adjustments, but no adjustments were required to be made 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.
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ITEM 2. PROPERTIES
We occupy 28 owned or leased facilities, totaling 2.0 million square feet of manufacturing area and office space. At
December 31, 2019, facilities which were in excess of 50,000 square feet each were occupied as follows:
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
Joplin, Missouri
Tulsa, Oklahoma
Orange, California
Berryville, Arkansas
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
Structural Systems
Electronic 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
55,000
55,000
53,000
50,000
Expiration
of Lease
Owned
Owned
Owned
Owned
2021
2022
2023
Owned
Owned
Owned
2024
2026
Owned
Owned
2024
Owned
Management believes these properties are adequate to meet our current requirements, are in good condition and are suitable
for their present use.
ITEM 3. LEGAL PROCEEDINGS
See Note 15 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.
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, 2019, we had 173
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. 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,
2019
2018
High
Low
High
Low
46.27
51.80
46.97
51.67
$
$
$
$
34.92
39.02
39.33
39.34
$
$
$
$
30.84
35.43
40.84
44.23
$
$
$
$
26.30
28.17
31.63
33.83
$
$
$
$
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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.
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 median of our 2020 Proxy Statement peers (“Median of Proxy Peers”) over a
five year period, assuming the reinvestment of any dividends. A modified version of this graph over a three year period will
be used in our 2020 Proxy Statement, 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 2019
$250
$225
$200
$175
$150
$125
$100
$75
$50
$25
$0
$100
$200
$164
$148
2014
2015
2016
2017
2018
2019
Ducommun Inc.
Russell 2000 Index
Median of Proxy Peers
21
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ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction with Part II, Item 7 and Part IV, Item 15(a)
of this Annual Report on Form 10-K (“Form 10-K”):
Net Revenues
Gross Profit as a Percentage of Net Revenues
Income (Loss) Before Taxes
Income Tax Expense (Benefit)
Net Income (Loss)
Per Common Share
Basic earnings (loss) per share
Diluted earnings (loss) per share
Working Capital
Total Assets
Long-Term Debt, Including Current Portion
Total Shareholders’ Equity
(In thousands, except per share amounts)
Years Ended December 31,
2019(a)
721,088
2018(b)(c)
629,307
$
2017(d)(e)
558,183
$
21.1%
19.5%
37,763
5,302
32,461
2.82
2.75
196,078
790,429
307,887
292,800
10,271
1,236
9,035
0.79
0.77
157,547
644,739
231,198
256,825
$
$
$
$
$
$
$
18.5%
7,609
(12,468)
20,077
1.78
1.74
140,778
566,753
216,055
235,583
$
$
$
$
$
$
$
2016(f)
550,642
2015(g)(h)
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
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
(a) The results for 2019 included Nobles’ results of operations since the date of acquisition of October 8, 2019.
(b) The results for 2018 included CTP’s results of operations since the date of acquisition in April 2018.
(c) The results for 2018 and 2017 included restructuring charges of $14.8 million and $8.8 million, respectively. See Note 4
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 2017 included LDS’ results of operations since the date of acquisition in September 2017.
(e) 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 14 to our consolidated financial statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K for
further information.
(f) 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.
(g) 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.
(h) 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.
22
Table of Contents
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, 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.
Highlights for the year ended December 31, 2019:
•
•
•
•
Net revenues of $721.1 million
Net income of $32.5 million, or $2.75 per diluted share
Adjusted EBITDA of $92.3 million
Completed the acquisition of Nobles Worldwide, Inc.
Non-GAAP Financial Measures
Adjusted earnings before interest, taxes, depreciation, amortization, stock-based compensation expense, restructuring
charges, inventory purchase accounting adjustments, and loss on extinguishment of debt (“Adjusted EBITDA”) was $92.3
million and $70.7 million for years ended December 31, 2019 and December 31, 2018, 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;
23
Table of Contents
•
•
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; and
Loss on extinguishment of debt may be useful to our investors for determining current cash flow.
24
Table of Contents
Reconciliations of net income to Adjusted EBITDA and the presentation of Adjusted EBITDA as a percentage of net
revenues were as follows:
Net income
Interest expense
Income tax expense (benefit)
Depreciation
Amortization
Stock-based compensation expense
Restructuring charges (1)
Inventory purchase accounting adjustments (2)
Loss on extinguishment of debt
Other debt refinancing costs
Adjusted EBITDA
% of net revenues
(Dollars in thousands)
Years Ended December 31,
2019
2018
2017
32,461
18,290
5,302
13,519
14,786
7,161
—
511
180
77
92,287
$
$
9,035
13,024
1,236
13,501
11,795
5,040
14,792
622
926
697
70,668
$
$
20,077
8,870
(12,468)
13,162
9,683
4,675
8,838
1,235
—
—
54,072
12.8%
11.2%
9.7%
$
$
(1) 2018 and 2017 included $0.1 million and $0.5 million, respectively, of restructuring charges that were recorded as
cost of goods sold.
(2) 2019, 2018, and 2017 included inventory purchase accounting adjustments of inventory that was stepped up as part of
our purchase price allocation from our acquisitions of Nobles Worldwide, Inc. (“Nobles”), Certified Thermoplastics
Co., LLC (“CTP”) and Lightning Diversion Systems, LLC (“LDS”) on October 8, 2019, April 2018, and September
2017, respectively, and is part of our Structural Systems, Structural Systems, and Electronic Systems operating
segment, respectively.
25
Table of Contents
RESULTS OF OPERATIONS
2019 Compared to 2018
The following table sets forth net revenues, selected financial data, the effective tax rate and diluted earnings per share:
Net Revenues
Cost of Sales
Gross Profit
Selling, General and Administrative Expenses
Restructuring Charges
Operating Income
Interest Expense
Loss on Extinguishment of Debt
Other Income, Net
Income Before Taxes
Income Tax Expense
Net Income
Effective Tax Rate
Diluted Earnings Per Share
nm = not meaningful
(Dollars in thousands, except per share data)
Years Ended December 31,
2019
721,088
568,891
152,197
95,964
—
56,233
(18,290)
(180)
—
37,763
5,302
32,461
%
of Net Revenues
100.0 % $
78.9 %
21.1 %
13.3 %
— %
7.8 %
(2.6)%
— %
— %
5.2 %
nm
4.5 % $
2018
629,307
506,711
122,596
84,007
14,671
23,918
(13,024)
(926)
303
10,271
1,236
9,035
14.0%
2.75
nm
nm $
12.0%
0.77
$
$
$
%
of Net Revenues
100.0 %
80.5 %
19.5 %
13.3 %
2.3 %
3.9 %
(2.1)%
(0.1)%
— %
1.7 %
nm
1.4 %
nm
nm
Net Revenues by End-Use Market and Operating Segment
Net revenues by end-use market and operating segment during 2019 and 2018, respectively, were as follows:
Consolidated Ducommun
Military and space
Commercial aerospace
Industrial
Total
Electronic Systems
Military and space
Commercial aerospace
Industrial
Total
Structural Systems
Military and space
Commercial aerospace
Total
(Dollars in thousands)
Years Ended December 31,
% of Net Revenues
Change
2019
2018
2019
2018
323,800
348,503
48,785
721,088
244,245
67,343
48,785
360,373
79,555
281,160
360,715
$
$
$
$
$
$
277,592
303,522
48,193
629,307
215,719
73,956
48,193
337,868
61,873
229,566
291,439
$
$
$
$
$
$
$
$
$
$
$
$
46,208
44,981
592
91,781
28,526
(6,613)
592
22,505
17,682
51,594
69,276
26
44.9%
48.3%
6.8%
100.0%
67.8%
18.7%
13.5%
100.0%
22.1%
77.9%
100.0%
44.1%
48.2%
7.7%
100.0%
63.8%
21.9%
14.3%
100.0%
21.2%
78.8%
100.0%
Table of Contents
Net revenues for 2019 were $721.1 million compared to $629.3 million for 2018. The year-over-year increase was due to the
following:
•
•
$46.2 million higher revenues in our military and space end-use markets due to higher build rates on other
military and space platforms, higher build rates on various missile platforms, and higher build rates on various
military fixed-wing aircraft platforms; and
$45.0 million higher revenues in our commercial aerospace end-use markets due to additional content and
higher build rates on large aircraft platforms.
Net Revenues by Major Customers
A significant portion of our net revenues are from our top ten customers as follows:
Boeing Company
Raytheon Company
Spirit AeroSystems Holdings, Inc.
Top ten customers(1)
Years Ended December 31,
2019
2018
16.6%
11.0%
12.2%
63.5%
17.0%
11.7%
9.5%
62.9%
(1) Includes The Boeing Company (“Boeing”), Raytheon Company (“Raytheon”), and Spirit AeroSystems Holdings, Inc.
(“Spirit”).
The revenues from Boeing, Raytheon, and Spirit are diversified over a number of commercial, military and space programs
and were generated 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 21.1% in 2019 compared to 19.5% in 2018 due to favorable product mix and favorable manufacturing volume, partially
offset by higher other manufacturing costs.
Selling, General and Administrative (“SG&A”) Expenses
SG&A expenses increased $12.0 million in 2019 compared to 2018 due to higher compensation and benefit costs of $5.5
million, higher one-time severance charges of $1.7 million, and higher acquisition related costs of $0.8 million.
Restructuring Charges
Restructuring charges decreased $14.8 million (of which zero and $0.1 million, respectively, was included in cost of sales) in
2019 compared to 2018 due to the restructuring plan that began in 2017 that was expected to increase operating efficiencies.
See Note 4 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 increased in 2019 compared to 2018 due to a higher outstanding balance on the Credit Facilities, reflecting
the acquisitions of Nobles Worldwide, Inc. (“Nobles”) on October 8, 2019 and Certified Thermoplastics Co., LLC (“CTP”) in
April 2018, and higher interest rates. See Note 9 to our consolidated financial statements included in Part IV, Item 15(a) of
this Annual Report on Form 10-K for further information on our long-term debt.
Loss on Extinguishment of Debt
Loss on extinguishment of debt for 2019 was related to the refinancing of our existing Credit Facilities in December 2019
which resulted in writing off of a portion of the unamortized debt issuance costs associated with the existing Credit Facilities
of $0.2 million. The New Credit Facilities were utilized to pay off the existing Revolving Credit Facility and a portion of the
existing Term Loan. See Note 9 to our consolidated financial statements included in Part IV, Item 15(a) of this Annual Report
on Form 10-K for further information on our long-term debt.
27
Table of Contents
Income Tax Expense
We recorded an income tax expense of $5.3 million (an effective tax rate of 14.0%) in 2019, compared to $1.2 million (an
effective tax rate of 12.0%) in 2018. The increase in the effective tax rate for 2019 compared to 2018 was primarily due to an
increase in pre-tax income from $10.3 million in 2018 to $37.8 million in 2019 which caused tax incentives such as research
and development tax credits and various discrete items to have an overall lower impact on our effective tax rate.
Our unrecognized tax benefits were $5.7 million and $5.3 million in 2019 and 2018, 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, 2019 and 2018 were not significant. If recognized, $4.0
million would affect the effective income tax rate. As a result of statute of limitations set to expire in 2020, we expect
decreases to our unrecognized tax benefits of approximately $2.0 million in the next twelve months.
We file U.S. Federal and state income tax returns. We are subject to examination by the Internal Revenue Service (“IRS”) for
tax years after 2015 and by state taxing authorities for tax years after 2014. 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 2019 were $32.5 million, or $2.75, compared to net income and earnings per
diluted share for 2018 of $9.0 million, or $0.77. The increase in net income in 2019 compared to 2018 was due to an increase
of $29.6 million in gross profit that was due to higher revenues and improved operating performance and lower restructuring
charges of $14.8 million. The increases were partially offset by higher selling, general and administrative expenses of $12.0
million, higher interest expense of $5.3 million, and income tax expense of $4.1 million.
28
Table of Contents
Business Segment Performance
We report our financial performance based upon the two reportable operating segments: Electronic Systems and Structural
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 2019 and 2018:
Net Revenues
Electronic Systems
Structural Systems
Total Net Revenues
Segment Operating Income
Electronic Systems
Structural Systems
Corporate General and Administrative Expenses (1)
Total Operating Income
Adjusted EBITDA
Electronic Systems
Operating Income
Other Income
Depreciation and Amortization
Restructuring Charges
Structural Systems
Operating Income
Other Income
Depreciation and Amortization
Restructuring Charges
Inventory purchase accounting adjustments
Corporate General and Administrative Expenses (1)
Operating Loss
Depreciation and Amortization
Stock-Based Compensation Expense
Restructuring Charges
Other Debt Refinancing Costs
Adjusted EBITDA
Capital Expenditures
Electronic Systems
Structural Systems
Corporate Administration
Total Capital Expenditures
29
%
Change
(Dollars in thousands)
Years Ended December 31,
2019
2018
%
of Net
Revenues
2019
%
of Net
Revenues
2018
6.7% $ 360,373
$ 337,868
23.8%
360,715
291,439
50.0 %
50.0 %
53.7 %
46.3 %
14.6% $ 721,088
$ 629,307
100.0 %
100.0 %
$
38,613
$
30,916
46,836
85,449
(29,216)
56,233
$
19,063
49,979
(26,061)
23,918
$
10.7 %
13.0 %
(4.1)%
7.8 %
9.2 %
6.5 %
(4.1)%
3.9 %
$
38,613
$
30,916
—
14,170
—
52,783
46,836
—
13,663
—
511
61,010
119
14,223
4,776
50,034
19,063
184
10,525
7,897
622
38,291
(29,216)
472
7,161
—
77
(21,506)
92,287
5,508
13,338
—
$
$
(26,061)
548
5,040
2,119
697
(17,657)
70,668
6,719
9,104
514
$
$
$
18,846
$
16,337
14.6 %
14.8 %
16.9 %
13.1 %
12.8 %
11.2 %
Table of Contents
(1) Includes costs not allocated to either the Structural Systems or Electronic Systems operating segments.
Electronic Systems
Electronic Systems’ net revenues in 2019 compared to 2018 increased $22.5 million due to the following:
•
•
$28.5 million higher revenues in our military and space end-use markets due to increased demand on other
military and space platforms, increased demand for military fixed-wing aircraft, increased demand for various
missile platforms, partially offset by lower build rates military rotary-wing aircraft; partially offset by
$6.6 million lower revenues in our commercial aerospace end-use markets due to lower build rates on other
commercial aerospace and lower build rates on large aircraft platforms, partially offset by higher demand for
commercial rotary-wing aircraft.
Electronic Systems segment operating income in 2019 compared to 2018 increased $7.7 million due to favorable product mix
and lower restructuring charges, partially offset by unfavorable manufacturing volume.
Structural Systems
Structural Systems’ net revenues in 2019 compared to 2018 increased $69.3 million due to the following:
•
•
$51.6 million higher revenues in commercial aerospace end-use markets due to higher build rates on large
aircraft platforms; and
$17.7 million higher revenues in military and space end-use markets due to higher build rates on military rotary-
wing aircraft platforms and higher build rates on other military and space platforms.
The Structural Systems operating income in 2019 compared to 2018 increased $27.8 million due to favorable product mix,
favorable manufacturing volume, lower restructuring charges, and improved operating performance, partially offset by higher
other manufacturing costs.
Corporate General and Administrative (“CG&A”) Expenses
CG&A expenses in 2019 compared to 2018 increased $3.2 million due to higher compensation and benefit costs of $2.7
million, one-time severance charges of $1.7 million, and higher other corporate related expenses of $0.9 million, partially
offset by lower restructuring charges of $2.1 million.
Backlog
We define backlog as customer placed purchase orders (“POs”) and long-term agreements (“LTAs”) with firm fixed price and
expected delivery dates of 24 months or less. The majority of the LTAs do not meet the definition of a contract under ASC
606 and thus, the backlog amount disclosed below is greater than the remaining performance obligations amount disclosed in
Note 1 to our consolidated financial statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K. Backlog
is subject to delivery delays or program cancellations, which are beyond our control. Backlog is affected by timing
differences in the placement of customer orders and tends to be concentrated in several programs to a greater extent than our
net revenues. Backlog in industrial markets tends to be of a shorter duration and is generally fulfilled within a three 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
revenues.
30
Table of Contents
The increase in backlog was primarily in the military and space end-use markets. The following table summarizes our
backlog for 2019 and 2018:
Consolidated Ducommun
Military and space
Commercial aerospace
Industrial
Total
Electronic Systems
Military and space
Commercial aerospace
Industrial
Total
Structural Systems
Military and space
Commercial aerospace
Total
2018 Compared to 2017
(Dollars in thousands)
December 31,
Change
2019
2018
$
$
$
$
$
$
109,213
(53,093)
(9,488)
46,632
67,186
30,332
(9,488)
88,030
$
$
$
$
$
42,027
(83,425)
(41,398) $
451,293
430,642
28,286
910,221
311,027
75,719
28,286
415,032
140,266
354,923
495,189
$
$
$
$
$
$
342,080
483,735
37,774
863,589
243,841
45,387
37,774
327,002
98,239
438,348
536,587
See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2018 Annual
Report on Form 10-K filed with the SEC.
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 Loans interest rate
Cash and cash equivalents
Unused Revolving Credit Facility
(Dollars in millions)
December 31,
2019
2018
310.0
$
233.0
6.87%
6.28%
39.6
99.8
$
$
4.71%
4.15%
10.3
99.7
$
$
$
On December 20, 2019, we completed the refinancing of a portion of our existing debt by entering into a new revolving
credit facility (“New Revolving Credit Facility”) to replace the existing revolving credit facility that was entered into in
November 2018 (“2018 Revolving Credit Facility”) and entering into a new term loan (“New Term Loan”). The New
Revolving Credit Facility is a $100.0 million senior secured revolving credit facility that matures on December 20, 2024
replacing the $100.0 million 2018 Revolving Credit Facility that would have matured on November 21, 2023. The New Term
Loan is a $140.0 million senior secured term loan that matures on December 20, 2024. We also have an existing $240.0
million senior secured term loan that was entered into in November 2018 that matures on November 21, 2025 (“2018 Term
Loan”). The original amounts available under the New Revolving Credit Facility, New Term Loan, and 2018 Term Loan
31
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(collectively, the “Credit Facilities”) in aggregate, totaled $480.0 million. We are required to make installment payments of
1.25% of the original outstanding principal balance of the New Term Loan amount on a quarterly basis. In addition, if we
meet the annual excess cash flow threshold, we will be required to make excess flow payments on an annual basis. Further,
the undrawn portion of the commitment of the New Revolving Credit Facility is subject to a commitment fee ranging from
0.175% to 0.275%, based upon the consolidated total net adjusted leverage ratio. As of December 31, 2019, we were in
compliance with all covenants required under the Credit Facilities. See Note 9 to our consolidated financial statements
included in Part IV, Item 15(a) of this Annual Report on Form 10-K for further information.
In November 2018, we completed credit facilities to replace the then existing credit facilities. The November 2018 credit
facilities consisted of the 2018 Term Loan and the 2018 Revolving Credit Facility (collectively, the “2018 Credit Facilities”).
We are required to make installment payments of 0.25% of the outstanding principal balance of the 2018 Term Loan amount
on a quarterly basis. In addition, if we meet the annual excess cash flow threshold, we will be required to make excess flow
payments on an annual basis. Further, the undrawn portion of the commitment of the 2018 Revolving Credit Facility is
subject to a commitment fee ranging from 0.200% to 0.300%, based upon the consolidated total net adjusted leverage ratio.
See Note 9 to our consolidated financial statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K for
further information.
In October 2015, we entered into interest rate cap hedges designated as cash flow hedges with a portion of these interest rate
cap hedges maturing on a quarterly basis, and a final quarterly maturity date of June 2020, 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.
On October 8, 2019, we acquired Nobles Parent Inc., the parent company of Nobles Worldwide, Inc. (“Nobles”) for a
purchase price of $77.0 million, net of cash acquired, all payable in cash. We paid an aggregate of $77.3 million in cash by
drawing down on the 2018 Revolving Credit Facility. 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.
In April 2018, we acquired Certified Thermoplastics Co., LLC (“CTP”) for a purchase price of $30.7 million, net of cash
acquired, all payable in cash. We paid an aggregate of $30.8 million in cash by drawing down on the 2018 Revolving Credit
Facility. 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.
In September 2017, we acquired Lightning Diversion Systems, LLC (“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
then existing revolving credit facility. The remaining $0.6 million was paid in October 2017 in cash, also by drawing down
on the then existing revolving credit facility.
We expect to spend a total of $16.0 million to $18.0 million for capital expenditures in 2020 financed by cash generated from
operations, principally to support new contract awards at Structural Systems and Electronic Systems. As part of our strategic
plan to become a supplier of higher-level assemblies 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
2019 Compared to 2018
Net cash provided by operating activities during 2019 increased to $51.0 million compared to $46.2 million during 2018 due to
higher net income partially offset by no restructuring charges in the current year.
Net cash used in investing activities in 2019 was $94.9 million compared to $47.9 million in 2018 due to higher payments for
acquisition.
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Net cash provided by financing activities during 2019 was $73.2 million compared to $9.8 million during 2018 due to higher
net borrowings on the credit facilities.
2018 Compared to 2017
See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2018 Annual
Report on Form 10-K filed with the SEC.
Contractual Obligations
A summary of our contractual obligations at December 31, 2019 was as follows (dollars 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
$
310,000
$
7,000
$
14,000
$
119,000
$
170,000
Future interest on long-term debt
Purchase orders (1)
Operating leases
Pension liability
Total (2)
97,088
187,428
25,531
20,865
18,050
144,999
4,178
1,841
34,570
42,429
7,903
3,905
34,024
—
6,428
4,105
10,444
—
7,022
11,014
$
640,912
$
176,068
$
102,807
$
163,557
$
198,480
(1) Purchase orders include non-cancelable commitments as of December 31, 2019 in which a written purchase order has
been issued but the goods have not been received.
(2) As of December 31, 2019, we have recorded $5.7 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 15 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 and finance leases not recorded as a result of the practical expedients
utilized as a part of the adoption of ASC 842 as of January 1, 2019 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
Our customers typically engage us to manufacture products based on designs and specifications provided by the end-use
customer. This requires the building of tooling and manufacturing first article inspection products (prototypes) before volume
manufacturing. Contracts with our customers generally include a termination for convenience clause.
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We have a significant number of contracts that are started and completed within the same year, as well as contracts derived
from long-term agreements and programs that can span several years. We recognize revenue under ASC 606, which utilizes a
five-step model.
The definition of a contract for us is typically defined as a customer purchase order as this is when we achieve an enforceable
right to payment. The majority of our contracts are firm fixed-price contracts. The deliverables within a customer purchase
order are analyzed to determine the number of performance obligations. In addition, at times, in order to achieve economies
of scale and based on our customer’s forecasted demand, we may build in advance of receiving a purchase order from our
customer. When that occurs, we would not recognize revenue until we have received the customer purchase order.
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of
account under ASC 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as
revenue when, or as, control is transferred and the performance obligation is satisfied. The majority of our contracts have a
single performance obligation as the promise to transfer the individual goods or services are highly interrelated or met the
series guidance. For contracts with multiple performance obligations, we allocate the contract transaction price to each
performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract.
The primary method used to estimate the standalone selling price is the expected cost plus a margin approach, under which
we forecast our expected costs of satisfying a performance obligation and then add an appropriate margin for that distinct
good or service.
We manufacture most products to customer specifications and the product cannot be easily modified for another customer. As
such, these products are deemed to have no alternative use once the manufacturing process begins. In the event the customer
invokes a termination for convenience clause, we would be entitled to costs incurred to date plus a reasonable profit. Contract
costs typically include labor, materials, overhead, and when applicable, subcontractor costs. For most of our products, we are
building assets with no alternative use and have enforceable right to payment, and thus, we recognize revenue using the over
time method.
The majority of our performance obligations are satisfied over time as work progresses. Typically, revenue is recognized over
time using an input measure (i.e., costs incurred to date relative to total estimated costs at completion, also known as cost-to-
cost plus reasonable profit) to measure progress. Our typical revenue contract is a firm fixed price contract, and the cost of
raw materials could make up a significant amount of the total costs incurred. As such, we believe using the total costs
incurred input method would be the most appropriate method. While the cost of raw materials could make up a significant
amount of the total costs incurred, there is a direct relationship between our inputs and the transfer of control of goods or
services to the customer.
Contract estimates are based on various assumptions to project the outcome of future events that can span multiple months or
years. These assumptions include labor productivity and availability; the complexity of the work to be performed; the cost
and availability of materials; and the performance of subcontractors.
As a significant change in one or more of these estimates could affect the profitability of our contracts, we review and update
our contract-related estimates on a regular basis. We recognize adjustments in estimated profit on contracts under the
cumulative catch-up method. Under this method, the impact of the adjustment on profit recorded to date is recognized in the
period the adjustment is identified. Revenue and profit in future periods of contract performance is recognized using the
adjusted estimate. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, we
recognize the total loss in the quarter it is identified.
The impact of adjustments in contract estimates on our operating earnings can be reflected in either operating costs and
expenses or revenue. See Note 1 to our consolidated financial statements included in Part IV, Item 15(a) of this Annual
Report on Form 10-K for the net impact of these adjustments to our consolidated financial statements for 2019.
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 us 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. Our estimate of the future cost to complete a contract may include
assumptions as to changes in manufacturing efficiency, 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 adjust the provisions for estimated losses on contracts. The provision for estimated losses on contracts is included
as part of contract liabilities on the consolidated balance sheets.
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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 sales using the over time revenue recognition model. We review the value of the production cost of contracts on a
quarterly basis to ensure when added to the estimated cost to complete, the value is not greater than the estimated realizable
value of the related contracts.
Goodwill
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). If certain factors occur,
including significant under performance of our business relative to expected operating results, significant adverse economic
and industry trends, significant decline in our market capitalization for an extended period of time relative to net book value,
a decision to divest individual businesses within a reporting unit, or a decision to group individual businesses differently, we
may perform an impairment test prior to the fourth quarter. In addition, we early adopted ASU 2017-04 on January 1, 2019
which simplified our goodwill impairment testing by eliminating Step Two of the goodwill impairment test. See Note 1 to our
consolidated financial statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K.
We acquired Certified Thermoplastics Co., LLC (“CTP”) in April 2018 and recorded goodwill of $18.6 million in our
Structural Systems segment, which is also our reporting unit. Since a goodwill impairment analysis is required to be
performed within one year of the acquisition date or sooner upon a triggering event, we performed a Step One goodwill
impairment analysis as of April 2019 for our Structural Systems segment. The fair value of our Structural Systems segment
exceeded its carrying value by 85% and thus, was not deemed impaired.
In the fourth quarter of 2019, the carrying amount of goodwill at the date of the most recent annual impairment evaluation for
Electronic Systems and Structural Systems was $117.4 million and $18.6 million, respectively. As of the date of our 2019
annual evaluation for goodwill impairment, for the Electronic Systems segment, which is also our reporting unit, we elected
to perform a Step One goodwill impairment analysis and will continue to do so from time to time. The fair value of our
Electronic Systems segment exceeded its carrying value by 44% and thus, was not deemed impaired.
As of the date of our 2019 annual evaluation for goodwill impairment, for the Structural Systems segment, we used a
qualitative assessment including 1) margin of passing most recent step 1 analysis, 2) earnings before interest, taxes,
depreciation, and amortization, 3) long-term growth rate, 4) analyzing material adverse factors/changes between valuation
dates, 5) general macroeconomic factors, and 6) industry and market conditions, 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.
Other Intangible Assets
We amortize acquired other intangible assets with finite lives over the estimated economic lives of the assets, ranging from
10 years to 18 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.
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.
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. The majority of our inventory is charged to
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cost of sales as raw materials are placed into production and the related revenue is recognized. Inventoried costs include raw
materials, outside processing, direct labor and allocated overhead, adjusted for any abnormal amounts of idle performance
center expense, freight, handling costs, and wasted materials (spoilage) incurred. 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. The majority of our revenues are recognized over time,
however, for revenue contracts where revenue is recognized using the point in time method, inventory is not reduced until it
is shipped or transfer of control to the customer has occurred. Our ending inventory consists of raw materials, work-in-
process, and finished goods.
Income Taxes
Income taxes are accounted for using an asset and liability approach that requires the recognition of deferred tax assets and
liabilities. 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.
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. and U.K. interest rates on our outstanding long-term debt. At
December 31, 2019, we had borrowings of $310.0 million under our Credit Facilities.
The New Term Loan bears interest, at our option, at a rate equal to either (i) the Eurodollar Rate (defined as the London
Interbank Offered Rate [“LIBOR”]) plus an applicable margin ranging from 1.50% to 2.50% 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 1.50% per year, in each case based upon the consolidated total
net adjusted leverage ratio.
The New Revolving Credit Facility bears 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 2.50% 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 1.50% per year, in each case based upon the consolidated total net adjusted leverage ratio.
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 are included herein by reference.
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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, 2019.
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, 2019. 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, 2019.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2019 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.
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, 2019.
ITEM 9B. OTHER INFORMATION
None.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors of the Registrant
The information under the caption “Election of Directors” in the 2020 Proxy Statement is incorporated herein by reference.
Executive Officers of the Registrant
The information under the caption “Executive Officers of the Registrant” in the 2020 Proxy Statement is incorporated herein
by reference.
Audit Committee and Audit Committee Financial Expert
The information under the caption “Committees of the Board of Directors” relating to the Audit Committee of the Board of
Directors in the 2020 Proxy Statement is incorporated herein by reference.
Compliance with Section 16(a) of the Exchange Act
The information under the caption “Delinquent Section 16(a) Reports” in the 2020 Proxy Statement is incorporated herein by
reference.
Code of Business Conduct and Ethics
The information under the caption “Code of Business Conduct and Ethics” in the 2020 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 2020 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 2020 Proxy
Statement is incorporated herein by reference.
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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:
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)
771,815
$
34.68
—
—
771,815
—
—
Number of Securities
Remaining
Available for
Future Issuance
Under Equity
Compensation Plans
(Excluding Securities
Reflected
in Column
(a))(c)(3)
222,132
723,479
—
945,611
Equity Compensation Plans approved by
security holders(1)
Employee stock purchase plan approved by
security holders(2)
Equity compensation plans not approved by
security holders
Total
(1) Consists of the 2007 Stock Incentive Plan (“2007 Plan”) and the 2013 Stock Incentive Plan (“2013 Plan”), although
the 2007 Plan has expired and no new grants can be made out of the 2007 Plan. The number of securities to be issued
consists of 446,818 for stock options, 127,423 for restricted stock units and 197,574 for performance stock units at
target. The weighted average exercise price applies only to the stock options.
(2) The 2018 Employee Stock Purchase Plan enables employees to purchase our common stock at a 15% discount to the
lower of the market value at the beginning or end of each six month offering period. As such, the number of share that
may be issued during a given six month period and the purchase price of such shares cannot be determined in
advance. See Note 11 to our consolidated financial statements included in Part IV, Item 15(a) of this Annual Report on
Form 10-K.
(3) 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 “Certain Relationships and Related Transactions” in the 2020 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 2020 Proxy Statement is
incorporated herein by reference.
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ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
1. Financial Statements
PART IV
The following consolidated financial statements of Ducommun Incorporated and subsidiaries, are incorporated by
reference in Item 8 of this report.
Page
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets - December 31, 2019 and 2018
Consolidated Balance Sheets - December 31, 2019 and 2018
Consolidated Statements of Income - Years Ended December 31, 2019, 2018, and 2017
Consolidated Statements of Income - Years Ended December 31, 2019, 2018, and 2017
Consolidated Statements of Comprehensive Income - Years Ended December 31, 2019, 2018, and
Consolidated Statements of Comprehensive Income - Years Ended December 31, 2019,
2017
2018, and 2017
Consolidated Statements of Changes in Shareholders’ Equity - Years Ended December 31, 2019,
Consolidated Statements of Changes in Shareholders’ Equity - Years Ended December 31, 2019,
2018, and 2017
2018, and 2017
Consolidated Statements of Cash Flows - Years Ended December 31, 2019, 2018, and 2017
Consolidated Statements of Cash Flows - Years Ended December 31, 2019, 2018, and 2017
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Supplemental Quarterly Financial Data (Unaudited)
Supplemental Quarterly Financial Data (Unaudited)
2. Financial Statement Schedule
The following schedule for the years ended December 31, 2019, 2018 and 2017 is filed herewith:
Schedule II - Consolidated 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
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41
43
43
44
44
45
45
46
46
47
47
48
48
79
79
81
81
—
—
—
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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, 2019 and 2018, and the related consolidated statements of income, comprehensive income,
changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2019, 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, 2019, 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, 2019 and 2018, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2019 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, 2019, based on criteria established in Internal Control - Integrated Framework
(2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for
leases in 2019 and the manner in which it accounts for revenues from contracts with customers in 2018.
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
41
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expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Irvine, California
February 20, 2020
We have served as the Company’s auditor since 1989.
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Ducommun Incorporated and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except share and per share data)
Assets
Current Assets
Cash and cash equivalents
Accounts receivable (net of allowance for doubtful accounts of $1,321 and
$1,135 at December 31, 2019 and 2018, respectively)
Contract assets
Inventories
Production cost of contracts
Other current assets
Total Current Assets
Property and Equipment, Net
Operating lease right-of-use assets
Goodwill
Intangibles, Net
Non-Current Deferred Income Taxes
Other Assets
Total Assets
Liabilities and Shareholders’ Equity
Current Liabilities
Accounts payable
Contract liabilities
Accrued liabilities
Operating lease liabilities
Current portion of long-term debt
Total Current Liabilities
Long-Term Debt, Less Current Portion
Non-Current Operating Lease Liabilities
Non-Current Deferred Income Taxes
Other Long-Term Liabilities
Total Liabilities
Commitments and Contingencies (Notes 13, 15)
Shareholders’ Equity
Common stock - $0.01 par value; 35,000,000 shares authorized; 11,572,668 and
11,417,863 shares issued and outstanding at December 31, 2019 and 2018,
respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total Shareholders’ Equity
Total Liabilities and Shareholders’ Equity
December 31,
2019
2018
$
39,584
$
10,263
67,133
106,670
112,482
9,402
5,497
340,768
115,216
19,105
170,917
138,362
55
6,006
790,429
82,597
14,517
37,620
2,956
7,000
144,690
300,887
17,565
16,766
17,721
497,629
$
$
67,819
86,665
101,125
11,679
6,531
284,082
107,045
—
136,057
112,092
308
5,155
644,739
69,274
17,145
37,786
—
2,330
126,535
228,868
—
18,070
14,441
387,914
116
88,399
212,553
(8,268)
292,800
790,429
$
114
83,712
180,356
(7,357)
256,825
644,739
$
$
$
See accompanying notes to consolidated financial statements.
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Ducommun Incorporated and Subsidiaries
Consolidated Statements of Income
(Dollars in thousands, except per share amounts)
Net Revenues
Cost of Sales
Gross Profit
Selling, General and Administrative Expenses
Restructuring Charges
Operating Income
Interest Expense
Loss on Extinguishment of Debt
Other Income, Net
Income Before Taxes
Income Tax Expense (Benefit)
Net Income
Earnings Per Share
Basic earnings per share
Diluted earnings per share
Weighted-Average Number of Shares Outstanding
Basic
Diluted
Years Ended December 31,
2019
2018
2017
$
$
$
$
$
$
$
$
721,088
568,891
152,197
95,964
—
56,233
(18,290)
(180)
—
37,763
5,302
32,461
2.82
2.75
11,518
11,792
$
$
$
$
629,307
506,711
122,596
84,007
14,671
23,918
(13,024)
(926)
303
10,271
1,236
9,035
0.79
0.77
11,390
11,659
558,183
455,050
103,133
79,139
8,360
15,634
(8,870)
—
845
7,609
(12,468)
20,077
1.78
1.74
11,290
11,558
See accompanying notes to consolidated financial statements.
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Ducommun Incorporated and Subsidiaries
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
Net Income
Other Comprehensive (Loss) Income, Net of Tax:
Pension Adjustments:
Years Ended December 31,
2019
2018
2017
$
32,461
$
9,035
$
20,077
Amortization of actuarial losses and prior service costs, net of tax
of $209, $173, and $302 for 2019, 2018, and 2017, respectively
Actuarial losses arising during the period, net of tax benefit of
$502, $302, and $194 for 2019, 2018, and 2017, respectively
Change in net unrealized gains (losses) on cash flow hedges, net of
tax expense (benefit) of $29, $121, and $(145) for 2019, 2018, and
2017, respectively
Other Comprehensive (Loss) Income, Net of Tax
Comprehensive Income, Net of Tax
$
676
(1,682)
95
(911)
31,550
570
(899)
407
78
$
9,113
$
508
(304)
(242)
(38)
20,039
See accompanying notes to consolidated financial statements.
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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
Net income
Other comprehensive
income, net of tax
Adoption of ASC 606
adjustment
Adoption of ASU 2018-02
adjustment
Stock options exercised
Stock repurchased related
to the exercise of stock
options
Stock awards vested
Stock-based compensation
Balance at December 31,
2018
Net income
Other comprehensive loss,
net of tax
Adoption of ASC 842
adjustment
Employee stock purchase
plan
Stock options exercised
Stock repurchased related
to the exercise of stock
options
Stock awards vested
Stock-based compensation
Balance at December 31,
2019
Ducommun Incorporated and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
(Dollars in thousands, except share data)
Shares
Outstanding
Common
Stock
Treasury
Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Total
Shareholders’
Equity
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
—
—
—
—
—
11,332,841
$
113
$
— $
80,223
$ 161,364
$
—
—
—
—
84,800
(98,438)
98,660
—
—
—
—
—
1
(1)
1
—
—
—
—
—
—
—
—
—
—
—
—
—
1,821
(3,371)
(1)
5,040
9,035
—
8,665
1,292
—
—
—
—
11,417,863
$
114
$
— $
83,712
$ 180,356
$
—
—
—
26,521
80,693
(123,192)
170,783
—
—
—
—
—
1
(1)
2
—
—
—
—
—
—
—
—
—
—
—
—
1,118
2,014
(5,604)
(2)
7,161
32,461
—
(264)
—
—
—
—
(6,079) $ 212,103
20,077
—
(38)
—
—
—
—
(38)
4,336
(6,904)
—
6,009
(6,117) $ 235,583
9,035
—
78
—
(1,318)
—
—
—
—
78
8,665
(26)
1,822
(3,372)
—
5,040
(7,357) $ 256,825
32,461
—
(911)
—
—
—
—
—
(911)
(264)
1,118
2,015
(5,605)
—
7,161
11,572,668
$
116
$
— $
88,399
$ 212,553
$
(8,268) $ 292,800
See accompanying notes to consolidated financial statements.
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Table of Contents
Ducommun Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
Cash Flows from Operating Activities
Net Income
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and amortization
Non-cash operating lease cost
Property and equipment impairment due to restructuring
Stock-based compensation expense
Deferred income taxes
Provision for doubtful accounts
Noncash loss on extinguishment of debt
Other
Changes in Assets and Liabilities:
Accounts receivable
Contract assets
Inventories
Production cost of contracts
Other assets
Accounts payable
Contract liabilities
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
Payments for acquisition of Lightning Diversion Systems, LLC, net
of cash acquired
Payments for acquisition of Certified Thermoplastics Co., LLC, net
of cash acquired
Payments for acquisition of Nobles Worldwide, Inc. net of cash
acquired
Net Cash Used in Investing Activities
Cash Flows from Financing Activities
Borrowings from senior secured revolving credit facility
Repayment of senior secured revolving credit facility
Borrowings from term loans
Repayments of term loans
Repayments of other debt
Debt issuance costs
Net cash paid from issuance of common stock under stock plans
Net Cash Provided by Financing Activities
Net Increase (Decrease) 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,
2019
2018
2017
$
32,461
$
9,035
$
20,077
28,305
2,669
—
7,161
(1,830)
186
180
942
2,380
(20,005)
(8,491)
(1,079)
1,358
11,620
(2,628)
(2,198)
51,031
(18,290)
3
—
—
—
25,296
—
6,207
5,040
2,042
267
926
11,659
7,495
(86,665)
23,243
(1,569)
1,881
18,496
17,145
5,739
46,237
(17,617)
396
—
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)
(30,712)
—
(76,647)
(94,934)
—
(47,933)
—
(86,207)
298,400
(298,400)
140,000
(63,000)
(169)
(1,135)
(2,472)
73,224
29,321
10,263
39,584
$
296,400
(354,500)
240,000
(167,000)
—
(3,541)
(1,550)
9,809
8,113
2,150
10,263
$
395,900
(337,800)
—
(10,000)
(3)
—
(2,606)
45,491
(5,282)
7,432
2,150
$
See accompanying notes to consolidated financial statements.
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DUCOMMUN INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Description of Business
We are a leading global provider of engineering and manufacturing services for high-performance products and high-cost-of
failure applications used primarily in the aerospace and defense (“A&D”), industrial, medical, and other industries
(collectively, “Industrial”). Our operations 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 A&D and Industrial 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
present our consolidated financial position, statements of income, comprehensive income, 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.
Changes in Accounting Policies
We adopted Accounting Standards Codification (“ASC”) 842, “Leases” (“ASC 842”), on January 1, 2019. As a result, we
changed our accounting policy for lease accounting as discussed in Note 2.
We applied ASC 842 using the additional transition method and therefore, recognized the cumulative effect of initially
applying ASC 842 as an adjustment to the opening consolidated balance sheet at January 1, 2019. Therefore, the comparative
information has not been adjusted and continues to be reported under the previous lease accounting standard, ASC 840,
“Leases” (“ASC 840”). The details of the significant changes and quantitative impact of the changes are described in Note 2.
We adopted ASC 606, “Revenue from Contracts with Customers” (“ASC 606”), on January 1, 2018. As a result, we changed
our accounting policy for revenue recognition and the majority of our revenues began being recognized over time. The
majority of our inventory began being charged to cost of sales as raw materials are placed into production and the related
revenue is recognized. Revenues recognized before billing are classified as contract assets. Payments received from
customers prior to our billing are classified as contract liabilities. The determination of our provision for estimated losses on
contracts was also changed as the definition of a contract for us became the customer purchase order instead of the long-term
arrangements and are classified as contract liabilities.
We applied ASC 606 using the modified retrospective method (also known as the cumulative effect method) and as such,
recognized the cumulative effect of initially applying ASC 606 as an adjustment to the opening consolidated balance sheet at
January 1, 2018. Therefore, the comparative information has not been adjusted and continues to be reported under the
previous revenue recognition accounting standard, ASC 605, “Revenue Recognition” (“ASC 605”).
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
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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
(Dollars in thousands)
Years Ended December 31,
2019
2018
2017
$
$
$
16,474
5,699
1,380
$
$
$
11,573
316
824
$
$
$
7,307
3,125
2,104
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 for identical assets.
Level 2 refers to fair values estimated using significant observable inputs. Level 3, the lowest level, includes fair values
estimated using significant unobservable inputs.
We have money market funds and they are included as cash and cash equivalents. We also have interest rate cap hedge
agreements and the fair value of the interest rate cap hedge agreements were determined using pricing models that use
observable market inputs as of the balance sheet date, a Level 2 measurement. The interest rate cap hedge premium was zero
as of December 31, 2019.
There were no transfers between Level 1, Level 2, or Level 3 financial instruments in either 2019 or 2018.
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, 2019 and December 31, 2018, 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 in 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. In 2019, the impact of cash flow hedges was insignificant.
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.
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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. The majority of our inventory is charged to
cost of sales as raw materials are placed into production and the related revenue is recognized. Inventoried costs include raw
materials, outside processing, direct labor and allocated overhead, adjusted for any abnormal amounts of idle performance
center expense, freight, handling costs, and wasted materials (spoilage) incurred. 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. The majority of our revenues are recognized over time,
however, for revenue contracts where revenue is recognized using the point in time method, inventory is not reduced until it
is shipped or transfer of control to the customer has occurred. Our ending inventory consists of raw materials, work-in-
process, and finished goods.
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 sales using the over time revenue recognition model. We review the value of the production cost of contracts on a
quarterly basis to ensure when added to the estimated cost to complete, the value is not greater than the estimated realizable
value of the related contracts. As of December 31, 2019 and 2018, production costs of contracts were $9.4 million and $11.7
million, respectively.
Property and Equipment and Depreciation
Property and equipment, including assets recorded under operating and finance 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
Goodwill is evaluated for impairment on an annual basis on the first day of the fourth fiscal quarter. If certain factors occur,
including significant under performance of our business relative to expected operating results, significant adverse economic
and industry trends, significant decline in our market capitalization for an extended period of time relative to net book value,
a decision to divest individual businesses within a reporting unit, or a decision to group individual businesses differently, we
may perform an impairment test prior to the fourth quarter. In addition, we early adopted ASU 2017-04 on January 1, 2019
which simplified our goodwill impairment testing by eliminating Step Two of the goodwill impairment test. See Note 1.
We acquired Certified Thermoplastics Co., LLC (“CTP”) in April 2018 and recorded goodwill of $18.6 million in our
Structural Systems segment, which is also our reporting unit. Since a goodwill impairment analysis is required to be
performed within one year of the acquisition date or sooner upon a triggering event, we performed a Step One goodwill
impairment analysis as of April 2019 for our Structural Systems segment. The fair value of our Structural Systems segment
exceeded its carrying value by 85% and thus, was not deemed impaired.
In the fourth quarter of 2019, the carrying amount of goodwill at the date of the most recent annual impairment evaluation for
Electronic Systems and Structural Systems was $117.4 million and $18.6 million, respectively. As of the date of our 2019
annual evaluation for goodwill impairment, for the Electronic Systems segment, which is also our reporting unit, we elected
to perform a Step One goodwill impairment analysis and will continue to do so from time to time. The fair value of our
Electronic Systems segment exceeded its carrying value by 44% and thus, was not deemed impaired.
As of the date of our 2019 annual evaluation for goodwill impairment, for the Structural Systems segment, we used a
qualitative assessment including 1) margin of passing most recent step 1 analysis, 2) earnings before interest, taxes,
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depreciation, and amortization, 3) long-term growth rate, 4) analyzing material adverse factors/changes between valuation
dates, 5) general macroeconomic factors, and 6) industry and market conditions, 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.
Other Intangible Assets
We amortize acquired other intangible assets with finite lives over the estimated economic lives of the assets, ranging from
10 to 18 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 on the consolidated balance sheets under the equity section, was
comprised of cumulative pension and retirement liability adjustments, net of tax, and change in net unrealized gains and
losses on cash flow hedges, net of tax.
Revenue Recognition
Our customers typically engage us to manufacture products based on designs and specifications provided by the end-use
customer. This requires the building of tooling and manufacturing first article inspection products (prototypes) before volume
manufacturing. Contracts with our customers generally include a termination for convenience clause.
We have a significant number of contracts that are started and completed within the same year, as well as contracts derived
from long-term agreements and programs that can span several years. We recognize revenue under ASC 606, which utilizes a
five-step model.
The definition of a contract for us is typically defined as a customer purchase order as this is when we achieve an enforceable
right to payment. The majority of our contracts are firm fixed-price contracts. The deliverables within a customer purchase
order are analyzed to determine the number of performance obligations. In addition, at times, in order to achieve economies
of scale and based on our customer’s forecasted demand, we may build in advance of receiving a purchase order from our
customer. When that occurs, we would not recognize revenue until we have received the customer purchase order.
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of
account under ASC 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as
revenue when, or as, control is transferred and the performance obligation is satisfied. The majority of our contracts have a
single performance obligation as the promise to transfer the individual goods or services are highly interrelated or met the
series guidance. For contracts with multiple performance obligations, we allocate the contract transaction price to each
performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract.
The primary method used to estimate the standalone selling price is the expected cost plus a margin approach, under which
we forecast our expected costs of satisfying a performance obligation and then add an appropriate margin for that distinct
good or service.
We manufacture most products to customer specifications and the product cannot be easily modified for another customer. As
such, these products are deemed to have no alternative use once the manufacturing process begins. In the event the customer
invokes a termination for convenience clause, we would be entitled to costs incurred to date plus a reasonable profit. Contract
costs typically include labor, materials, overhead, and when applicable, subcontractor costs. For most of our products, we are
building assets with no alternative use and have enforceable right to payment, and thus, we recognize revenue using the over
time method.
The majority of our performance obligations are satisfied over time as work progresses. Typically, revenue is recognized over
time using an input measure (i.e., costs incurred to date relative to total estimated costs at completion, also known as cost-to-
cost plus reasonable profit) to measure progress. Our typical revenue contract is a firm fixed price contract, and the cost of
raw materials could make up a significant amount of the total costs incurred. As such, we believe using the total costs
incurred input method would be the most appropriate method. While the cost of raw materials could make up a significant
amount of the total costs incurred, there is a direct relationship between our inputs and the transfer of control of goods or
services to the customer.
Contract estimates are based on various assumptions to project the outcome of future events that can span multiple months or
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years. These assumptions include labor productivity and availability; the complexity of the work to be performed; the cost
and availability of materials; and the performance of subcontractors.
As a significant change in one or more of these estimates could affect the profitability of our contracts, we review and update
our contract-related estimates on a regular basis. We recognize adjustments in estimated profit on contracts under the
cumulative catch-up method. Under this method, the impact of the adjustment on profit recorded to date is recognized in the
period the adjustment is identified. Revenue and profit in future periods of contract performance is recognized using the
adjusted estimate. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, we
recognize the total loss in the quarter it is identified.
The impact of adjustments in contract estimates on our operating earnings can be reflected in either operating costs and
expenses or revenue.
Net cumulative catch-up adjustments on profit recorded were not material for the year ended December 31, 2019.
Payments under long-term contracts may be received before or after revenue is recognized. When revenue is recognized
before we bill our customer, a contract asset is created for the work performed but not yet billed. Similarly, when we receive
payment before we ship our products to our customer, a contract liability is created for the advance or progress payment.
Contract Assets and Contract Liabilities
Contract assets consist of our right to payment for work performed but not yet billed. Contract assets are transferred to
accounts receivable when we bill our customers. We bill our customers when we ship the products and meet the shipping
terms within the revenue contract. Contract liabilities consist of advance or progress payments received from our customers
prior to the time transfer of control occurs plus the estimated losses on contracts.
Contract assets and contract liabilities from revenue contracts with customers are as follows:
Contract assets
Contract liabilities
(Dollars in thousands)
December 31,
2019
106,670
14,517
$
$
December 31,
2018
$
$
86,665
17,145
Remaining performance obligations is defined as customer placed purchase orders (“POs”) with firm fixed price and firm
delivery dates. Our remaining performance obligations as of December 31, 2019 totaled $745.3 million. We anticipate
recognizing an estimated 65% of our remaining performance obligations as revenue during the next 12 months with the
remaining performance obligations being recognized in 2021 and beyond.
Revenue by Category
In addition to the revenue categories disclosed above, the following table reflects our revenue disaggregated by major end-
use market:
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Consolidated Ducommun
Military and space
Commercial aerospace
Industrial
Total
Electronic Systems
Military and space
Commercial aerospace
Industrial
Total
Structural Systems
Military and space
Commercial aerospace
Total
(Dollars in thousands)
Years Ended December 31,
% of Net Revenues
Change
2019
2018
2019
2018
$
$
$
$
$
$
46,208
44,981
592
91,781
28,526
(6,613)
592
22,505
17,682
51,594
69,276
$
$
$
$
$
$
323,800
348,503
48,785
721,088
244,245
67,343
48,785
360,373
79,555
281,160
360,715
$
$
$
$
$
$
277,592
303,522
48,193
629,307
215,719
73,956
48,193
337,868
61,873
229,566
291,439
44.9%
48.3%
6.8%
100.0%
67.8%
18.7%
13.5%
100.0%
22.1%
77.9%
100.0%
44.1%
48.2%
7.7%
100.0%
63.8%
21.9%
14.3%
100.0%
21.2%
78.8%
100.0%
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 us 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. Our estimate of the future cost to complete a contract may include
assumptions as to changes in manufacturing efficiency, 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 adjust the provisions for estimated losses on contracts. The provision for estimated losses on contracts is included
as part of contract liabilities on the consolidated balance sheets. As of December 31, 2019 and 2018, provision for estimated
losses on contracts were $4.2 million and $5.3 million, respectively.
Income Taxes
Income taxes are accounted for using an asset and liability approach that requires the recognition of deferred tax assets and
liabilities. 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.
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
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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 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 is computed by dividing income available
to common shareholders by the weighted-average number of common shares outstanding, plus potentially dilutive shares that
could be issued if exercised or converted into common stock in each period.
The net income and weighted-average common shares outstanding used to compute earnings per share were as follows:
Net income
Weighted-average number of common shares outstanding
Basic weighted-average common shares outstanding
Dilutive potential common shares
Diluted weighted-average common shares outstanding
Earnings per share
Basic
Diluted
(In thousands, except per share data)
Years Ended December 31,
2019
2018
2017
$
32,461
$
9,035
$
20,077
11,518
274
11,792
11,390
269
11,659
$
$
2.82
2.75
$
$
0.79
0.77
$
$
11,290
268
11,558
1.78
1.74
Potentially dilutive stock awards to purchase common stock, as shown below, were excluded from the computation of diluted
earnings per share because their inclusion would have been anti-dilutive. However, these shares may be potentially dilutive
common shares in the future.
Stock options and stock units
Recent Accounting Pronouncements
New Accounting Guidance Adopted in 2019
(In thousands)
Years Ended December 31,
2019
2018
2017
127
208
126
In July 2019, the FASB issued ASU 2019-07, “Codification Updates to SEC Sections: Amendments to SEC Paragraphs
Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442,
Investment Company Reporting Modernization, and Miscellaneous Updates” (“ASU 2019-07”), which improve, update, and
simplify its regulations on financial reporting and disclosure. The new guidance was effective when issued, which is our
interim period ending September 28, 2019. The adoption of this standard did not have a material impact on our consolidated
financial statements.
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
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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 is our interim period beginning January 1, 2019. Early adoption is permitted,
including adoption in any interim period after the issuance of ASU 2017-12. The adoption of this standard did not have a
material impact on our consolidated financial statements.
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
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. The adoption of this standard did not have a material impact on our consolidated financial statements.
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 or the additional transition method. Under the additional transition method, 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 2019, and the prior years’ financial information will be presented under the
prior accounting standard, ASC 840, “Leases,” (“ASC 840”). Additional guidance was issued subsequently as follows:
•
•
July 2018, the FASB issued ASU 2018-11, “Leases (Topic 842): Targeted Improvements” (“ASU 2018-11”); and
July 2018, the FASB issued ASU 2018-10, “Codification Improvements to Topic 842, Leases” (“ASU 2018-10”)
All the new guidance was effective for us beginning January 1, 2019. The cumulative impact to our retained earnings at
January 1, 2019 was a net decrease of $0.3 million. See Note 2.
Recently Issued Accounting Standards
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740), Simplifying the Accounting for Income
Taxes” (“ASU 2019-12”), which removes certain exceptions and provides guidance on various areas of tax accounting. The
new guidance is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal
years, which will be our interim period beginning January 1, 2021. Early adoption is permitted. We are evaluating the impact
of this standard.
In April 2019, the FASB issued ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments - Credit
Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Statements” (“ASU 2019-04”), which clarify, correct,
and improve various aspects of the guidance in ASU 2016-01, ASU 2016-13, and ASU 2017-12. The new guidance is
effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, which will
be our interim period beginning January 1, 2020. We are evaluating the impact of this standard.
In March 2019, the FASB issued ASU 2019-01, “Leases (Topic 842): Codification Improvements” (“ASU 2019-01”), which
addresses various lessor implementation issues and clarifies that lessees and lessors are exempt from certain interim
disclosure requirements associated with the adoption of ASC 842. The new guidance is effective for fiscal years beginning
after December 15, 2019, including interim periods within those fiscal years, which will be our interim period beginning
January 1, 2020. Early adoption is permitted. We are evaluating the impact of this standard.
In August 2018, the FASB issued ASU 2018-14, “Compensation - Retirement Benefits - Defined Benefit Plans - General
(Topic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans” (“ASU
2018-14”), which will remove disclosures that no longer are considered cost-beneficial, clarify the specific requirements of
disclosures, and add disclosure requirements identified as relevant. The new guidance is effective for fiscal years ending after
December 15, 2020 and no amendments are made to the interim disclosure requirements. Early adoption is permitted. We are
evaluating the impact of this standard.
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In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to
the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”), which should improve the effectiveness of fair
value measurement disclosures by removing certain requirements, modifying certain requirements, and adding certain new
requirements. The new guidance is effective for fiscal years beginning after December 15, 2019, including interim periods
within those fiscal years, which will be our interim period beginning January 1, 2020. Early adoption is permitted. We are
evaluating the impact of this standard.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments” (“ASU 2016-13”), which is intended to improve financial reporting by requiring timelier
recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. ASU
2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on
historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other
organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss
estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the
full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method
is appropriate for their circumstances. ASU 2016-13 requires enhanced disclosures to help investors and other financial
statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit
quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative
requirements that provide additional information about the amounts recorded in the financial statements. The new guidance is
effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, which will
be our interim period beginning January 1, 2020. We are evaluating the impact of this standard.
Note 2. Adoption of Accounting Standards Codification 842
We adopted ASC 842 with an initial application as of January 1, 2019. We utilized the additional transition method, under
which the cumulative effect of initially applying the new guidance is recognized as an adjustment to certain captions on the
consolidated balance sheet, including the opening balance of retained earnings in the year ended December 31, 2019. As part
of the adoption of ASC 842, we have elected to utilize the following practical expedients that are permitted under ASC 842:
• Need not reassess whether any expired or existing contracts are or contain leases;
• Need not reassess the lease classification for any expired or existing leases;
• Need not reassess initial direct costs for any existing leases;
• As an accounting policy election by class of underlying asset, choose not to separate nonlease components from
lease components and instead to account for each separate lease component and the nonlease components associated
with that lease component as a single lease component; and
• As an accounting policy election not to apply the recognition requirements in ASC 842 to short term leases (a lease
at commencement date has a lease term of 12 months or less and does not contain a purchase option that the lessee is
reasonably certain to exercise).
The net impact to the various captions on our January 1, 2019 opening consolidated balance sheets was as follows:
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Unaudited Consolidated Balance Sheets
Assets
Other current assets
Operating lease right-of-use assets
Non-current deferred income taxes
Other assets
Liabilities
Operating lease liabilities
Accrued and other liabilities
Non-current operating lease liabilities
Non-current deferred income taxes
Other long-term liabilities
Shareholders’ Equity
Retained earnings
December 31,
2018
Balances
Without
Adoption of
ASC 842
(Dollars in thousands)
January 1,
2019
Effect of
Adoption
Balances With
Adoption of
ASC 842
$
$
$
$
$
$
$
$
$
$
6,531
$
— $
$
308
$
5,155
— $
$
— $
$
$
37,786
18,070
14,441
(208) $
$
$
$
18,985
5
254
18,117
$
2,544
(329) $
$
(76) $
(956) $
6,323
18,985
313
5,409
2,544
37,457
18,117
17,994
13,485
180,356
$
(264) $
180,092
The net impact to retained earnings as a result of adopting ASC 842 on the January 1, 2019 opening balance sheet was shown
as a change in “other” on the consolidated statements of cash flows.
We have operating and finance leases for manufacturing facilities, corporate offices, and various equipment. Our leases have
remaining lease terms of 1 to 11 years, some of which include options to extend the leases for up to 5 years, and some of
which include options to terminate the leases within 1 year.
The components of lease expense for the year ended December 31, 2019 were as follows:
Operating leases expense
Finance leases expense:
Amortization of right-of-use assets
Interest on lease liabilities
Total finance lease expense
(In thousands)
3,963
216
42
258
$
$
$
Short term and variable lease expense for the year ended December 31, 2019 were not material.
Supplemental cash flow information related to leases for the year ended December 31, 2019 was as follows:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
Operating cash flows from finance leases
Financing cash flows from finance leases
Right-of-use assets obtained in exchange for lease obligations:
Operating leases
Finance leases
57
(In thousands)
$
$
$
$
$
4,030
39
169
2,574
483
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The weighted average remaining lease terms as of December 31, 2019 were as follows:
Operating leases
Finance leases
(In years)
7
4
When a lease is identified, we recognize a right-of-use asset and a corresponding lease liability based on the present value of
the lease payments over the lease term discounted using our incremental borrowing rate, unless an implicit rate is readily
determinable. As the discount rate in our leases is usually not readily available, we use our own incremental borrowing rate as
the discount rate. Our incremental borrowing rate is based on the interest rate on our term loan, which is a secured rate. The
interest rate on our term loan is based on London Interbank Offered Rate (“LIBOR”) plus an applicable margin. The
difference between a three year, five year, or seven year LIBOR rate was not deemed significant and thus, we have chosen to
use the five year incremental borrowing rate for all our leases.
The weighted average discount rates as of December 31, 2019 were as follows:
Operating leases
Finance leases
Maturity of operating and finance lease liabilities are as follows:
2020
2021
2022
2023
2024
Thereafter
Total lease payments
Less imputed interest
Total
6.5%
6.5%
(In thousands)
Operating Leases
Finance Leases
$
$
4,178
4,147
3,756
3,425
3,003
7,022
25,531
5,010
20,521
$
$
242
229
92
53
26
46
688
74
614
Operating lease payments include $11.4 million related to options to extend lease terms that are reasonably certain of being
exercised. As of December 31, 2019, there are no legally binding minimum lease payments for leases signed but not yet
commenced.
Finance lease payments related to options to extend lease terms that are reasonably certain of being exercised are not
significant. As of December 31, 2019, it excludes $1.3 million of legally binding minimum lease payments for leases signed
but not yet commenced. These finance leases will commence during 2020 with lease terms of 7 years to 10 years.
As previously disclosed in our 2018 Annual Report on Form 10-K and under the previous accounting maturities of lease
liabilities were as follows as of December 31, 2018:
2019
2020
2021
2022
2023
Thereafter
Total
(In thousands)
3,680
3,405
2,789
1,404
980
580
12,838
$
$
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Note 3. Business Combinations
Nobles Worldwide, Inc.
On October 8, 2019, we acquired 100.0% of the outstanding equity interests of Nobles Parent Inc., the parent company of
Nobles Worldwide, Inc. (“Nobles”), a privately-held global leader in the design and manufacturing of high performance
ammunition handling systems for a wide range of military platforms including fixed-wing aircraft, rotary-wing aircraft,
ground vehicles, and shipboard systems. Nobles is located in St. Croix Falls, Wisconsin. The acquisition of Nobles advances
our strategy to diversify and offer more customized, value-driven engineered products with aftermarket opportunities.
The purchase price for Nobles was $77.0 million, net of cash acquired, all payable in cash. We paid $77.3 million upon the
closing of the transaction. We preliminarily allocated the gross purchase price of $77.3 million to the assets acquired and
liabilities assumed at estimated fair values. The excess of the purchase price over the aggregate fair values of the net assets
was recorded as goodwill. The allocation is subject to revision as the estimates of fair value of the assets acquired and
liabilities assumed are based on preliminary information and are subject to refinement. We are in the process of reviewing
third party valuation of the assets and liabilities.
The following table summarizes the preliminary 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
Other non-current assets
Total assets acquired
Current liabilities
Net non-current deferred tax liability
Other non-current liabilities
Total liabilities assumed
Total purchase price allocation
Intangible assets:
Customer relationships
Trade names and trademarks
Estimated
Fair Value
658
1,880
2,866
168
2,319
37,700
34,860
675
81,126
(2,285)
(861)
(675)
(3,821)
77,305
Estimated
Fair Value
(In thousands)
34,700
3,000
37,700
$
$
$
$
Useful Life
(In years)
15-16
15
The intangible assets acquired of $37.7 million were preliminarily 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 trade names and trademarks was assessed using the relief from royalty methodology.
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 Structural
Systems segment. The Nobles acquisition, for tax purposes, is also deemed a stock acquisition and thus, the goodwill
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recognized is not deductible for income tax purposes except for $6.7 million of pre-acquisition goodwill that is tax
deductible.
Acquisition related transaction costs were not included as components of consideration transferred but have been expensed as
incurred. Total acquisition-related transaction costs incurred by us were $0.8 million during 2019 and charged to selling,
general and administrative expenses.
Nobles’ results of operations have been included in our consolidated statements of income since the date of acquisition as part
of the Structural Systems segment. Pro forma results of operations of the Nobles acquisition have not been presented as the
effect of the Nobles acquisition was not material to our financial results.
Certified Thermoplastics Co., LLC
In April 2018, we acquired 100.0% of the outstanding equity interests of Certified Thermoplastics Co., LLC (“CTP”), a
privately-held leader in precision profile extrusions and extruded assemblies of engineered thermoplastic resins, compounds,
and alloys for a wide range of commercial aerospace, defense, medical, and industrial applications. CTP is located in Santa
Clarita, California. The acquisition of CTP was part of our strategy to diversify towards more customized, higher value,
engineered products with greater aftermarket potential.
The purchase price for CTP was $30.7 million, net of cash acquired, all payable in cash. We paid an aggregate of $30.8
million in cash related to this transaction. We allocated the gross purchase price of $30.8 million to the assets acquired and
liabilities assumed at estimated fair values. The estimated fair value of the assets acquired included $8.1 million of intangible
assets, $2.2 million of inventories, $1.5 million of accounts receivable, $0.6 million of property and equipment, $0.1 million
of cash, less than $0.1 million of other current assets, and $0.4 million of liabilities assumed. The excess of the purchase price
over the aggregate fair values of the assets acquired and liabilities assumed of $18.6 million was recorded as goodwill. The
intangible assets acquired were comprised of $6.9 million for customer relationships and $1.2 million for trade names and
trademarks, all of which were assigned an estimated useful life of 10 years. All the goodwill was assigned to the Structural
Systems segment. Since the CTP acquisition, for tax purposes, was deemed an asset acquisition, the goodwill recognized is
deductible for income tax purposes.
CTP’s results of operations have been included in our consolidated statements of income since the date of acquisition as part
of the Structural Systems segment.
Note 4. Restructuring Activities
In November 2017, management approved and commenced a restructuring plan that was intended to increase operating
efficiencies (“2017 Restructuring Plan”). We completed the 2017 Restructuring Plan as of December 31, 2018 and have
recorded cumulative expenses of $23.6 million, with $14.8 million recorded during 2018, and $8.8 million recorded during
2017.
In the Electronic Systems segment, we recorded cumulative expenses of $3.8 million for severance and benefits which were
classified as restructuring charges. We recorded cumulative of $0.9 million for loss on early exit from lease termination
which was classified as restructuring charges. We also recorded cumulative expenses of $0.9 million of other expenses which
were classified as restructuring charges. In addition, we recorded cumulative expenses of $0.2 million for professional service
fees which were classified as restructuring charges. Further, we recorded cumulative non-cash expenses of $0.1 million for
inventory write down which were classified as cost of sales. Finally, we recorded cumulative non-cash expenses of $0.1
million for property and equipment impairment which were classified as restructuring charges.
In the Structural Systems segment, we recorded cumulative expenses of $3.0 million for severance and benefits which were
classified as restructuring charges. We recorded cumulative non-cash expenses of $9.8 million for property and equipment
impairment which were classified as restructuring charges. We also recorded cumulative non-cash expenses of $0.5 million
for inventory write down which were classified as cost of sales. Further, we recorded cumulative other expenses of $0.4
million which were classified as restructuring charges.
In Corporate, we recorded cumulative expenses of $1.4 million for severance and benefits which was classified as
restructuring charges. We recorded cumulative non-cash expenses of $1.4 million for stock-based compensation awards
which were modified, all of which were classified as restructuring charges. We also recorded cumulative expenses of $1.0
million for professional service fees which were classified as restructuring charges.
As of December 31, 2019, all restructuring activities have been completed and thus, there were no accruals remaining.
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Our restructuring activities for 2019 were as follows (in thousands):
Severance and benefits
Lease termination
Professional service fees
Other
Total charged to restructuring charges
Inventory reserve
Total charged to cost of sales
Ending balance
Note 5. Inventories
Inventories consisted of the following:
Raw materials and supplies
Work in process
Finished goods
Total
December 31,
2018
Balance
Charges
2019
Cash
Payments
Adoption of
ASC 842
Adjustment
December 31,
2019
Change in
Estimates
Balance
$
$
2,631
861
43
416
3,951
50
50
— $
—
—
—
—
—
—
$
4,001
$
— $
(2,631) $
(126)
(43)
(416)
(3,216)
—
—
(3,216) $
— $
(735)
—
—
(735)
—
—
(735) $
— $
—
—
—
—
(50)
(50)
(50) $
—
—
—
—
—
—
—
—
(In thousands)
December 31,
2019
2018
$
$
98,151
10,887
3,444
112,482
$
$
89,767
9,199
2,159
101,125
Note 6. Property and Equipment, Net
Property and equipment, net consisted of the following:
Land
Buildings and improvements
Machinery and equipment
Furniture and equipment
Construction in progress
Less accumulated depreciation
Total
(In thousands)
December 31,
2019
2018
15,765
61,626
167,688
18,714
14,343
278,136
162,920
115,216
$
$
15,662
57,642
160,163
19,676
8,742
261,885
154,840
107,045
$
$
Range of
Estimated
Useful Lives
5 - 40 Years
2 - 20 Years
2 - 10 Years
Depreciation expense was $13.5 million, $13.5 million, and $13.2 million, for the years ended December 31, 2019, 2018 and
2017, respectively.
Note 7. Goodwill and Other Intangible Assets
Goodwill
The carrying amounts of goodwill, by operating segment, for the years ended December 31, 2019 and 2018 were as follows:
61
Gross goodwill
Accumulated goodwill impairment
Balance at December 31, 2018
Goodwill from acquisition during the period
Balance at December 31, 2019
Electronic
Systems
(In thousands)
Structural
Systems
Consolidated
Ducommun
$
$
199,157
(81,722)
117,435
—
117,435
$
$
18,622
—
18,622
34,860
53,482
$
$
217,779
(81,722)
136,057
34,860
170,917
We perform our annual goodwill impairment test as of the first day of the fourth quarter. See Note 1.
We acquired Certified Thermoplastics Co., LLC (“CTP”) in April 2018 and recorded goodwill of $18.6 million in our
Structural Systems segment. Since a goodwill impairment analysis is required to be performed within one year of the
acquisition date or sooner upon a triggering event, we performed a Step One goodwill impairment analysis as of April 2019
for our Structural Systems segment, which is also our reporting unit. The fair value of our Structural Systems segment
exceeded its carrying value by 85% and thus, was not deemed impaired.
On October 8, 2019, we acquired 100.0% of the outstanding equity interests of Nobles for a purchase price of $77.0 million,
net of cash acquired. We allocated the gross purchase price of $77.3 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 within the
Structural Systems reporting unit. See Note 3.
In April 2018, we acquired 100.0% of the outstanding equity interests of CTP for a purchase price of $30.7 million, net of
cash acquired. We allocated the gross purchase price of $30.8 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 within the
Structural Systems reporting unit. See Note 3.
Other intangible assets are related to acquisitions, including Nobles, 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 10 to
18 years. Intangible assets are as follows:
Wtd.
Avg
Life
(Yrs)
17
14
14
15
Finite-lived assets
Customer relationships
Trade names and trademarks
Contract renewal
Technology
Total
December 31, 2019
December 31, 2018
(In thousands)
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
$ 221,900
5,500
1,845
400
$ 229,645
$
$
88,838
450
1,757
238
91,283
$ 133,062
5,050
88
162
$ 138,362
$ 187,200
2,500
1,845
400
$ 191,945
$
$
77,824
193
1,625
211
79,853
$ 109,376
2,307
220
189
$ 112,092
The carrying amount of other intangible assets by operating segment as of December 31, 2019 and 2018 was as follows:
Other intangible assets
Electronic Systems
Structural Systems
Total
(In thousands)
December 31, 2019
December 31, 2018
Gross
Accumulated
Amortization
Net
Carrying
Value
Gross
Accumulated
Amortization
Net
Carrying
Value
$ 164,545
65,100
$ 229,645
$
$
71,527
$
93,018
$ 164,545
19,756
45,344
27,400
91,283
$ 138,362
$ 191,945
$
$
62,108
$ 102,437
17,745
9,655
79,853
$ 112,092
62
Amortization expense of other intangible assets was $11.4 million, $10.7 million and $9.3 million for the years ended
December 31, 2019, 2018 and 2017, respectively. Future amortization expense by operating segment is expected to be as
follows:
(In thousands)
Electronic
Systems
Structural
Systems
Consolidated
Ducommun
$
$
9,348
9,287
9,288
9,287
9,288
46,520
93,018
$
$
3,719
3,614
3,553
3,495
3,260
27,703
45,344
$
$
13,067
12,901
12,841
12,782
12,548
74,223
138,362
(In thousands)
December 31,
2019
2018
31,342
163
6,115
37,620
$
$
29,616
82
8,088
37,786
(In thousands)
December 31,
2019
2018
310,000
—
310,000
7,000
303,000
2,113
300,887
1,894
$
$
$
233,000
—
233,000
2,330
230,670
1,802
228,868
1,907
6.87%
4.71%
$
$
$
$
$
2020
2021
2022
2023
2024
Thereafter
Note 8. Accrued Liabilities
The components of accrued liabilities consisted of the following:
Accrued compensation
Accrued income tax and sales tax
Other
Total
Note 9. Long-Term Debt
Long-term debt and the current period interest rates were as follows:
Term loans
Revolving credit facility
Total debt
Less current portion
Total long-term debt, less current portion
Less debt issuance costs - term loans
Total long-term debt, net of debt issuance costs - term loans
Debt issuance costs - revolving credit facility (1)
Weighted-average interest rate
(1) Included as part of other assets.
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Future long-term debt payments at December 31, 2019 were as follows:
2020
2021
2022
2023
2024
Thereafter
Total
(In thousands)
7,000
7,000
7,000
7,000
112,000
170,000
310,000
$
$
On December 20, 2019, we completed the refinancing of a portion of our existing debt by entering into a new revolving
credit facility (“New Revolving Credit Facility”) to replace the existing revolving credit facility that was entered into in
November 2018 (“2018 Revolving Credit Facility”) and entering into a new term loan (“New Term Loan”). The New
Revolving Credit Facility is a $100.0 million senior secured revolving credit facility that matures on December 20, 2024
replacing the $100.0 million 2018 Revolving Credit Facility that would have matured on November 21, 2023. The New Term
Loan is a $140.0 million senior secured term loan that matures on December 20, 2024. We also have an existing $240.0
million senior secured term loan that was entered into in November 2018 that matures on November 21, 2025 (“2018 Term
Loan”). The original amounts available under the New Revolving Credit Facility, New Term Loan, and 2018 Term Loan
(collectively, the “Credit Facilities”) in aggregate, totaled $480.0 million.
The New Term Loan bears interest, at our option, at a rate equal to either (i) the Eurodollar Rate (defined as the London
Interbank Offered Rate [“LIBOR”]) plus an applicable margin ranging from 1.50% to 2.50% 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 1.50% per year, in each case based upon the consolidated total
net adjusted leverage ratio, typically payable quarterly. In addition, the New Term Loan requires installment payments of
1.25% of the original outstanding principal balance of the New Term Loan amount on a quarterly basis.
The New Revolving Credit Facility bears 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 2.50% 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 1.50% per year, in each case based upon the consolidated total net adjusted leverage ratio,
typically payable quarterly. The undrawn portion of the commitment of the New Revolving Credit Facility is subject to a
commitment fee ranging from 0.175% to 0.275%, based upon the consolidated total net adjusted leverage ratio.
In November 2018, we completed credit facilities to replace the then existing credit facilities. The November 2018 credit
facilities consisted of the 2018 Term Loan and the 2018 Revolving Credit Facility.
The 2018 Term Loan bears interest, at our option, at a rate equal to either (i) the Eurodollar Rate (defined as LIBOR plus an
applicable margin ranging from 3.75% to 4.00% 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 3.75% to 4.00% per year, in each case based upon the consolidated total net adjusted leverage ratio, typically
payable quarterly. In addition, the 2018 Term Loan requires installment payments of 0.25% of the outstanding principal
balance of the 2018 Term Loan amount on a quarterly basis.
The 2018 Revolving Credit Facility bears interest, at our option, at a rate equal to either (i) the Eurodollar Rate (defined as
LIBOR) plus an applicable margin ranging from 1.75% 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 0.75% to 1.75% per year, in each case based upon the consolidated total net adjusted leverage ratio,
typically payable quarterly. The undrawn portion of the commitment of the 2018 Revolving Credit Facility is subject to a
commitment fee ranging from 0.200% to 0.300%, based upon the consolidated total net adjusted leverage ratio.
Further, under the Credit Facilities, if we meet the annual excess cash flow threshold, we will be required to make excess
flow payments. The annual mandatory excess cash flow payments will be based on (i) 50% of the excess cash flow amount if
the adjusted leverage ratio is greater than 3.25 to 1.0, (ii) 25% of the excess cash flow amount if the adjusted leverage ratio is
less than or equal to 3.25 to 1.0 but greater than 2.50 to 1.0, and (iii) zero percent of the excess cash flow amount if the
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adjusted leverage ratio is less than or equal to 2.50 to 1.0. As of December 31, 2019, we were in compliance with all
covenants required under the Credit Facilities.
We have been making periodic voluntary principal prepayments on our credit facilities, however, during 2019, as a result of
drawing down on the New Term Loan, we made no net aggregate voluntary prepayments.
In conjunction with entering into the New Revolving Credit Facility and the New Term Loan, we drew down the entire
$140.0 million on the New Term Loan and used those proceeds to pay off and close the 2018 Revolving Credit Facility of
$58.5 million, pay down a portion of the 2018 Term Loan of $56.0 million, pay the accrued interest associated with the
amounts being paid down on the 2018 Revolving Credit Facility and 2018 Term Loan, pay the fees related to this transaction,
and the remainder will be used for general corporate expenses. The New Term Loan and 2018 Term Loan were considered a
modification of debt and thus, no gain or loss was recorded. Instead, the new fees paid to the lenders of $0.6 million were
capitalized and are being amortized over the life of the New Term Loan. The remaining debt issuance costs related to the
2018 Term Loan of $1.5 million will continue to be amortized over its remaining life.
The New Revolving Credit Facility that replaced the 2018 Revolving Credit Facility was considered an extinguishment of
debt except for the portion related to the creditors that were part of both the New Revolving Credit Facility and the 2018
Revolving Credit Facility and in which case, it was considered a modification of debt. As a result, we expensed the portion of
the unamortized debt issuance costs related to the 2018 Revolving Credit Facility that was considered an extinguishment of
debt of $0.5 million. In addition, the new fees paid to the lenders of $0.5 million as part of the New Revolving Credit Facility
were capitalized and are being amortized over its remaining life. Further, the remaining debt issuance costs related to the
2018 Revolving Credit Facility of $1.1 million will also be amortized its remaining life.
In conjunction with entering into the 2018 Credit Facilities in November 2018, we drew down the entire $240.0 million on
the 2018 Term Loan, $7.9 million on the 2018 Revolving Credit Facility and used those proceeds along with current cash on
hand to pay off the then existing credit facilities of $247.9 million. The 2018 Term Loan replaced the term loan that was a
part of the then existing credit facilities was considered an extinguishment of debt except for the portion related to a creditor
that was part of the then existing term loan and the 2018 Term Loan and in which case, it was considered a modification of
debt. As a result, we expensed the portion of the unamortized debt issuance costs related to the then existing term loan that
was considered an extinguishment of debt of $0.4 million. In addition, the 2018 Revolving Credit Facility replaced the then
existing revolving credit facility that was part of the then existing credit facilities was considered an extinguishment of debt
except for the portion related to the creditors that were part of the then existing revolving credit facility and the 2018
Revolving Credit Facility and in which case, it was considered a modification of debt. As a result, we expensed the portion of
the unamortized debt issuance costs related to the 2018 Revolving Credit Facility that was considered an extinguishment of
debt of $0.5 million. As such, an aggregate total loss on extinguishment of debt of $0.9 million was recorded in 2018.
Further, we incurred $3.5 million of new debt issuance costs that can be capitalized related to the 2018 Credit Facilities, of
which $1.7 million were allocated to the 2018 Term Loan and the remaining $1.8 million was allocated to the 2018
Revolving Credit Facility. The 2018 Term Loan new debt issuance costs of $1.7 million and remaining unamortized then
existing term loan debt issuance costs of $0.1 million, for an aggregate total of $1.8 million of debt issuance costs related to
the 2018 Term Loan were capitalized and are being amortized over the seven year life of the 2018 Term Loan. The 2018
Revolving Credit Facility new debt issuance costs of $1.8 million and remaining unamortized then existing revolving credit
facility debt issuance costs of $0.2 million, for an aggregate total of $2.0 million of debt issuance costs related to the 2018
Revolving Credit Facility were capitalized and were being amortized over the five years life of the 2018 Revolving Credit
Facility.
On October 8, 2019, we acquired 100.0% of the outstanding equity interests of Nobles for a purchase price of $77.0 million,
net of cash acquired, all payable in cash. Upon the closing of the transaction, we paid $77.3 million in cash by drawing down
on the 2018 Revolving Credit Facility. See Note 3.
In April 2018, we acquired CTP for a purchase price of $30.7 million, net of cash acquired, all payable in cash. We paid an
aggregate of $30.8 million in cash by drawing down on the then existing revolving credit facility. See Note 3.
In September 2017, we acquired Lightning Diversion Systems, LLC (“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 our
then existing revolving credit facility. The remaining $0.6 million was paid in October 2017 in cash, also by drawing down
on our then existing revolving credit facility.
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As of December 31, 2019, we had $99.8 million of unused borrowing capacity under the New Revolving Credit Facility, after
deducting $0.2 million for standby letters of credit.
The New Credit Facilities were entered into by us (“Parent Company”) and guaranteed by all of our subsidiaries, other than
two subsidiaries that were considered minor (“Subsidiary Guarantors”). The Subsidiary Guarantors jointly and severally
guarantee the New Credit Facilities. The Parent Company has no independent assets or operations and therefore, no
consolidating financial information for the Parent Company and its subsidiaries are presented.
In October 2015, we entered into interest rate cap hedges designated as cash flow hedges with a portion of these interest rate
cap hedges maturing on a quarterly basis, and a final quarterly maturity date of June 2020, 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 1 for further
information.
In December 2018 and 2017, we entered into agreements to purchase $2.2 million and $14.2 million of industrial revenue
bonds (“IRBs”) issued by the city of Parsons, Kansas (“Parsons”) and concurrently, sold $2.2 million and $14.2 million of
property and equipment (“Property”) to Parsons as well as entered into lease agreements to lease the Property from Parsons
(“Lease”) with lease payments totaling $2.2 million and $14.2 million over the lease terms, respectively. The sale of the
Property and concurrent lease back of the Property in December 2018 and 2017 did not meet the sale-leaseback accounting
requirements as a result of our continuous involvement with the Property and thus, the $2.2 million and $14.2 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 obligations of $2.2 million and $14.2 million
were offset against the $2.2 million and $14.2 million, respectively, of IRBs assets and are presented net on the consolidated
balance sheets with no impact to the consolidated statements of income or consolidated cash flow statements.
Note 10. Shareholders’ Equity
We are authorized to issue five million shares of preferred stock. At December 31, 2019 and 2018, no preferred shares were
issued or outstanding.
Note 11. Stock-Based Compensation
Stock Incentive Compensation Plans
We currently have two stock incentive plans: i) the 2013 Stock Incentive Plan, as amended (the “2013 Plan”), which expires
on May 2, 2028, provided that Incentive Stock Options may not be granted after February 21, 2028, and ii) the 2018
Employee Stock Purchase Plan (“ESPP”). The 2013 Plan 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 “Compensation Committee”). The aggregate number of shares
available for issuance under the 2013 Plan is 1,690,000. Under the 2013 Plan, no more than an aggregate of 337,693 shares
are available for issue of stock-based awards other than stock options and stock appreciation rights after December 31, 2017.
As of December 31, 2019, shares available for future grant under the 2013 Plan are 222,132. Prior to the adoption of the 2013
Plan, we granted stock-based awards to purchase shares of our common stock under certain predecessor plans. No further
awards can be granted under these predecessor plans.
Employee Stock Purchase Plan
The ESPP was adopted by the Board of Directors and approved by the shareholders in 2018, including 750,000 shares that
can be awarded. The first offering period closed on July 31, 2019. Under the ESPP, our employees who elect to participate
have the right to purchase common stock at a 15% discount from the lower of the market value of the common stock at the
beginning or the end of each six month offering period and the discount will be treated as compensation to those employees.
Employees purchase common stock using payroll deductions, which may not exceed 10% of their eligible compensation and
other limitations. The Compensation Committee administers the ESPP. As of December 31, 2019, there are 723,479 shares
available for future award grants.
Stock Options
In the years ended December 31, 2019, 2018, and 2017, we granted stock options to our officers and key employees of
189,170, 176,940, and 129,400, respectively, with weighted-average grant date fair values of $15.95, $12.87, and $11.88,
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respectively. Stock options have been granted with an exercise price equal to the fair market value of our stock on the date of
grant and expire not more than ten years from the date of grant. The stock options typically vest over a period of three or 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, 2019 were as follows:
Weighted-
Average
Exercise
Price Per
Share
Weighted-
Average
Remaining
Contractual
Life (Years)
Aggregate
Intrinsic Value
(in thousands)
Outstanding at January 1, 2019
Granted
Exercised
Expired
Forfeited
Outstanding at December 31, 2019
Exerciseable at December 31, 2019
Number
of Stock
Options
363,225
$
$
189,170
(80,693) $
(2,857) $
(22,027) $
$
446,818
$
96,947
28.33
41.97
24.97
20.09
29.99
34.68
27.70
Changes in nonvested stock options for the year ended December 31, 2019 were as follows:
Nonvested at January 1, 2019
Granted
Vested
Forfeited
Nonvested at December 31, 2019
7.7
5.3
$
$
7,319
2,265
Weighted-
Average
Grant
Date Fair
Value
12.20
15.95
11.95
10.24
14.33
Number of
Stock Options
$
292,013
$
189,170
(109,285) $
(22,027) $
$
349,871
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, 2019, 2018 and 2017 was $1.8 million, $1.3 million, and $2.5 million, respectively. Cash received from stock
options exercised for the years ended December 31, 2019, 2018 and 2017 was $2.6 million, $1.8 million, and $4.3 million,
respectively, with related tax benefits of $0.6 million, $0.3 million, and $0.9 million, respectively. The total amount of stock
options vested and expected to vest in the future is 446,818 shares with a weighted-average exercise price of $34.68 and an
aggregate intrinsic value of $7.3 million. These stock options have a weighted-average remaining contractual term of 7.7
years.
The share-based compensation cost expensed for stock options for the years ended December 31, 2019, 2018, and 2017
(before tax benefits) was $1.6 million, $0.9 million, and $0.7 million, respectively, and is included in selling, general and
administrative expenses on the consolidated income statements. At December 31, 2019, total unrecognized compensation
cost (before tax benefits) related to stock options of $3.7 million is expected to be recognized over a weighted-average period
of 2.0 years. The total fair value of stock options vested during the years ended December 31, 2019, 2018, and 2017 was $1.3
million, $0.8 million, and $0.8 million, respectively.
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
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under the Stock Incentive Plans for years ended December 31, 2019, 2018, and 2017 were as follows:
Risk-free interest rate
Expected volatility
Expected dividends
Expected term (in months)
Years Ended December 31,
2019
2018
2017
1.92%
40.44%
—
60
2.65%
53.66%
—
36
1.75%
50.37%
—
48
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 award populations with option vesting terms of three and 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 62,520, 81,230,
and 135,350 RSUs during the years ended December 31, 2019, 2018, and 2017, respectively, with weighted-average grant
date fair values (equal to the fair market value of our stock on the date of grant) of $41.04, $32.36, and $28.97 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, 2019 was as follows:
Outstanding at January 1, 2019
Granted
Vested
Forfeited
Outstanding at December 31, 2019
Number of
Restricted
Stock Units
Weighted-
Average
Grant
Date Fair Value
28.96
157,937
$
41.04
$
62,520
(85,279) $
27.94
(7,755) $
30.80
36.22
$
127,423
The share-based compensation cost expensed for RSUs for the years ended December 31, 2019, 2018, and 2017 (before tax
benefits) was $2.4 million, $2.1 million, and $2.0 million respectively, and is included in selling, general and administrative
expenses on the consolidated income statements. At December 31, 2019, total unrecognized compensation cost (before tax
benefits) related to RSUs of $2.9 million is expected to be recognized over a weighted average period of 1.4 years. The total
fair value of RSUs vested for the years ended December 31, 2019, 2018, and 2017 was $2.4 million, $2.7 million, and $3
million, respectively. The tax benefit realized from vested RSUs for the years ended December 31, 2019, 2018, and 2017 was
$0.6 million, $0.6 million, and $1.1 million, respectively.
Performance Stock Units
We granted performance stock awards (“PSUs”) to certain key employees of 58,178, 64,700, and 126,000 PSUs during the
years ended December 31, 2019, 2018, and 2017, respectively, with weighted-average grant date fair values of $43.80,
$35.16, and $26.31 per share, respectively. PSU awards are subject to the attainment of performance goals established by the
Compensation 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
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employee terminates employment, their non-vested portion of the PSUs will not vest and all rights to the non-vested portion
will terminate.
Performance stock activity for the year ended December 31, 2019 was as follows:
Outstanding at January 1, 2019
Granted
Vested
Forfeited
Outstanding at December 31, 2019
Number of
Performance
Stock Units
Weighted-
Average
Grant
Date Fair
Value
$
236,700
58,178
$
(85,504) $
(11,800) $
$
197,574
26.21
43.80
19.05
33.21
33.98
The share-based compensation cost expensed for PSUs for the years ended December 31, 2019, 2018, and 2017 (before tax
benefits) was $3.2 million, $1.9 million and $2.0 million, respectively, and is included in selling, general and administrative
expenses on the consolidated income statements. At December 31, 2019, total unrecognized compensation cost (before tax
benefits) related to PSUs of $3.2 million is expected to be recognized over a weighted-average period of 2.3 years. The total
fair value of PSUs vested during the years ended December 31, 2019, 2018, and 2017, was $3.8 million, $0.3 million, and
$1.2 million, respectively. The tax benefit realized from PSUs for the years ended December 31, 2019, 2018, and 2017 were
$0.9 million, $0.1 million, and $0.5 million, respectively.
Note 12. Employee Benefit Plans
Supplemental Retirement Plans
We have three unfunded supplemental retirement plans. The first plan was suspended in 1986, but continues to cover certain
former executives. The second plan was suspended in 1997, but continues to cover certain current and retired directors. The
third plan covers certain current and retired employees and further employee contributions to this plan were suspended on
August 5, 2011. The liability for the third plan and interest thereon is included in accrued employee compensation and long-
term liabilities and was zero and $0.1 million, respectively, at December 31, 2019 and $0.7 million and $0.1 million,
respectively, at December 31, 2018. The accumulated benefit obligations of the first two plans at December 31, 2019 and
December 31, 2018 were $0.4 million and $0.6 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, 2019, 2018, and 2017 was $2.7 million, $2.6 million,
and $2.7 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”). As part of the acquisition of CTP, we acquired their defined benefit pension plan
(the “CTP Pension Plan”), which covered certain current and retired employees that were fully funded by CTP as of the
acquisition date in April 2018. The CTP Pension Plan was suspended as of the acquisition date but continued to cover certain
current and former CTP employees. The CTP Pension Plan gross assets, liabilities, and current year expense were immaterial
for disclosure purposes. The CTP Pension Plan was subsequently liquidated in November 2019 with no loss recorded as a
pension plan escrow fund was established as part of the acquisition to cover any losses until it was liquidated.
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The components of net periodic pension cost for the Pension Plan and LaBarge Retirement Plan in aggregate are as follows:
Service cost
Interest cost
Expected return on plan assets
Amortization of actuarial losses
Net periodic pension cost
(In thousands)
Years Ended December 31,
2019
2018
2017
$
$
503
1,388
(1,644)
885
1,132
$
$
601
1,268
(1,784)
743
828
$
$
531
1,329
(1,530)
810
1,140
The components of the reclassifications of net actuarial losses from accumulated other comprehensive loss to net income for
2019 were as follows:
Amortization of actuarial loss - total before tax (1)
Tax benefit
Net of tax
(In thousands)
Year Ended
December 31,
2019
$
$
885
(209)
676
(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 2020 is $0.9 million.
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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 (gain) loss
Benefits paid
Ending benefit obligation (December 31)
Change in plan assets
Beginning fair value of plan assets (January 1)
Return on assets
Employer contribution
Benefits paid
Ending fair value of plan assets (December 31)
Funded status (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 (gain) loss
Asset loss (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,
2019
2018
$
$
$
$
$
$
$
$
$
33,951
503
1,388
4,769
(1,526)
39,085
$
$
$
23,749
4,347
1,873
(1,526)
28,443
$
(10,642) $
— $
$
10,642
9,485
(885)
4,769
(2,709)
10,660
(2,544)
8,116
$
$
36,002
601
1,268
(2,415)
(1,505)
33,951
25,646
(1,951)
1,559
(1,505)
23,749
(10,202)
580
9,622
8,908
(743)
(2,415)
3,735
9,485
(2,263)
7,222
(1) Projected benefit obligation equals the accumulated benefit obligation for the plans.
On December 31, 2019, our annual measurement date, the accumulated benefit obligation exceeded the fair value of the plans
assets by $10.6 million. Such excess is referred to as an unfunded accumulated benefit obligation. We recorded unrecognized
loss included in accumulated other comprehensive loss, net of tax at December 31, 2019 and 2018 of $8.1 million and $7.2
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, 2019 and 2018, by asset category, were as follows:
Equity securities
Cash and equivalents
Debt securities
Total(1)
71
December 31,
2019
2018
69%
1%
30%
100%
57%
1%
42%
100%
Table of Contents
(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
0-10%
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, 2019
Level 1
Level 2
Level 3
Total
232
3,247
2,645
1,552
7,676
$
$
— $
—
—
—
— $
— $
—
—
—
—
$
232
3,247
2,645
1,552
7,676
20,767
28,443
(In thousands)
Year Ended December 31, 2018
Level 1
Level 2
Level 3
Total
153
3,647
1,475
851
6,126
$
$
— $
—
—
—
— $
— $
—
—
—
—
$
153
3,647
1,475
851
6,126
17,623
23,749
(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.
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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,
2019
2018
2017
3.22%
2.85%
3.64%
3.40%
4.18%
3.75%
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
2019
December 31,
2018
2017
4.23%
4.00%
7.00%
4.23%
4.00%
7.00%
3.64%
3.40%
7.00%
The following benefit payments under both plans, which reflect expected future service, as appropriate, are expected to be
paid:
2020
2021
2022
2023
2024
2025 - 2029
$
(In thousands)
LaBarge
Retirement
Plan
Pension Plan
$
1,252
1,339
1,452
1,495
1,607
9,002
589
569
545
517
486
2,012
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 2020.
Note 13. Indemnifications
We have made guarantees and indemnities under which we may be required to make payments to a guaranteed or
indemnified party, in relation to certain transactions, including revenue transactions in the ordinary course of business. In
connection with certain performance center leases, we have indemnified our lessors for certain claims arising from the
performance center 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.
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Note 14. 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
Federal
State
Deferred tax (benefit) expense
Federal
State
Income tax expense (benefit)
(In thousands)
Years Ended December 31,
2019
2018
2017
$
$
5,802
1,067
6,869
(650)
(917)
(1,567)
5,302
$
$
474
1,260
1,734
(789)
291
(498)
1,236
$
$
2,387
525
2,912
(15,515)
135
(15,380)
(12,468)
On December 22, 2017, the U. S. enacted 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”), allowed 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 tax guidance
and accounting interpretation were expected during 2018, we considered the accounting of the deferred tax re-measurement
and other items to be incomplete as of December 31, 2017. Based on our review of proposed tax regulations and related
guidance issued and available as of December 22, 2018, we determined that no refinements were needed to the tax positions
and provisional amounts recorded in the fourth quarter of 2017 and finalized the accounting of the tax effects of the 2017 Tax
Act as of December 31, 2018.
We recognized net income tax benefits from deductions of share-based payments in excess of compensation cost recognized
for financial reporting purposes of $0.8 million, $0.2 million, and $0.6 million for the years ended December 31, 2019, 2018,
and 2017, respectively.
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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
Federal and 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:
Deferred revenue
Depreciation
Goodwill
Intangibles
Prepaid insurance
Total gross deferred tax liabilities
Net deferred tax liabilities
(In thousands)
December 31,
2019
2018
$
$
$
776
314
1,004
94
5,049
494
84
2,334
2,552
6,251
8,900
1,672
43
1,409
30,976
(9,375)
21,601
(256)
(8,852)
(4,109)
(24,749)
(346)
(38,312)
(16,711) $
704
267
1,263
302
4,252
479
288
1,757
2,324
51
9,075
1,661
51
1,538
24,012
(9,083)
14,929
(649)
(7,951)
(3,963)
(19,905)
(223)
(32,691)
(17,762)
We have federal and state tax net operating losses of $22.5 million and $26.5 million, respectively, as of December 31, 2019.
The federal net operating losses acquired from the acquisition of Nobles are subject to an annual limitation under Internal
Revenue Code Section 382; however, we expect to fully realize them under ASC Subtopic 740-10 before they begin to expire
in 2033. The state net operating loss carryforwards include $16.9 million that is not expected to be realized due to various
limitations and has been reduced by a valuation allowance. If not realized, the state net operating loss carryforwards will
begin to expire in 2027.
We have federal and state tax credit carryforwards of $0.1 million and $12.8 million, respectively, as of December 31, 2019.
A valuation allowance of $10.7 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 begin to expire in
2020.
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.
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The principal reasons for the variation between the statutory and effective tax rates were as follows:
Years Ended December 31,
Statutory federal income tax rate
State income taxes (net of federal benefit)
Foreign derived intangible income deduction
Qualified domestic production activities
Stock-based compensation expense
Research and development tax credits
Other tax credits
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
2019
21.0%
3.6
(1.2)
—
(2.1)
(7.8)
—
(1.6)
3.9
(2.2)
—
1.2
(0.8)
14.0%
2018
21.0%
5.3
—
—
(1.9)
(32.0)
(1.2)
0.7
8.2
12.1
—
1.2
(1.4)
12.0%
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)%
As a result of the 2017 Tax Act, we began utilizing the enacted U.S. corporate rate of 21.0% for the tax year 2018 and
beyond.
Our total amount of unrecognized tax benefits was $5.7 million, $5.3 million, and $5.3 million at December 31, 2019, 2018,
and 2017, 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, 2019, 2018,
and 2017 were not significant. If recognized, $4.0 million would affect the effective income tax rate. As a result of statute of
limitations set to expire in 2020, we expect decreases to our unrecognized tax benefits of approximately $2.0 million 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,
2019
2018
2017
$
$
5,283
408
—
(28)
—
5,663
$
$
5,271
419
92
(499)
—
5,283
$
$
3,036
422
1,953
(99)
(41)
5,271
We file U.S. Federal and state income tax returns. We are subject to examination by the Internal Revenue Service (“IRS”) for
tax years after 2015 and by state taxing authorities for tax years after 2014. 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 authorities 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.
Note 15. 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, 2019, which is reflected in other long-term liabilities on its consolidated balance sheet.
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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,
2019, 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 16. 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 (“Primes”). 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”), and Spirit AeroSystems Holdings, Inc. (“Spirit”), represented the
following percentages of total net sales:
Boeing
Lockheed Martin
Raytheon
Spirit
Top ten customers (1)
Years Ended December 31,
2019
2018
2017
16.6%
4.0%
11.0%
12.2%
63.5%
17.0%
4.4%
11.7%
9.5%
62.9%
(1) Includes Boeing, Lockheed Martin, Raytheon, and Spirit.
Boeing, Lockheed Martin, Raytheon, and Spirit represented the following percentages of total accounts receivable:
Boeing
Lockheed Martin
Raytheon
Spirit
December 31,
2019
2018
5.9%
0.8%
3.3%
2.0%
16.3%
5.5%
13.5%
8.2%
62.5%
8.0%
2.5%
3.2%
—%
In 2019, 2018 and 2017, net revenues from foreign customers based on the location of the customer were $81.6 million,
$71.9 million and $57.2 million, respectively. No net revenues from a foreign country were greater than 4.0% of total net
revenues in 2019, 2018, and 2017. 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 2019, 2018, and 2017. We are
not subject to any significant foreign currency risks as all our sales are made in United States dollars.
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Note 17. Business Segment Information
We supply products and services primarily to the aerospace and defense industries. Our subsidiaries are organized into two
strategic businesses, Electronic Systems and Structural Systems, each of which is an operating segment as well as a
reportable segment.
Financial information by reportable segment was as follows:
Net Revenues
Electronic Systems
Structural Systems
Total Net Revenues
Segment Operating Income (Loss) (1)(2)(3)
Electronic Systems
Structural Systems
Corporate General and Administrative Expenses (4)
Operating Income
Depreciation and Amortization Expenses
Electronic Systems
Structural Systems
Corporate Administration
Total Depreciation and Amortization Expenses
Capital Expenditures
Electronic Systems
Structural Systems
Corporate Administration
Total Capital Expenditures
(In thousands)
Years Ended December 31,
2019
2018
2017
$
$
$
$
$
$
$
$
360,373
360,715
721,088
38,613
46,836
85,449
(29,216)
56,233
14,170
13,663
472
28,305
5,508
13,338
—
18,846
$
$
$
$
$
$
$
$
337,868
291,439
629,307
30,916
19,063
49,979
(26,061)
23,918
14,223
10,525
548
25,296
6,719
9,104
514
16,337
$
$
$
$
$
$
$
$
316,723
241,460
558,183
31,236
5,790
37,026
(21,392)
15,634
13,888
8,860
97
22,845
5,019
20,679
775
26,473
(1) The results for 2019 includes Nobles’ results of operations which have been included in our consolidated statements
of income since the date of acquisition as part of the Structural Systems segment. See Note 3.
(2) The results for 2018 includes CTP’s results of operations which have been included in our consolidated statements of
income since the date of acquisition as part of the Structural Systems segment. See Note 3.
(3) The results for 2017 includes LDS’ results of operations which have been included in our consolidated statements of
income since the date of acquisition as part of the Electronic Systems segment.
(4) Includes cost not allocated to either the Electronic Systems or Structural Systems operating segments.
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 2019 and 2018:
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Total Assets
Electronic Systems
Structural Systems
Corporate Administration
Total Assets
Goodwill and Intangibles
Electronic Systems
Structural Systems
Total Goodwill and Intangibles
(In thousands)
December 31,
2019
2018
$
$
$
$
411,981
328,718
49,730
790,429
210,453
98,826
309,279
$
$
$
$
405,743
220,993
18,003
644,739
219,872
28,277
248,149
On October 8, 2019, we acquired 100.0% of the outstanding equity interests of Nobles for a purchase price of $77.0 million,
net of cash acquired. We allocated the gross purchase price of $77.3 million to the assets acquired and liabilities assumed at
preliminary estimated fair values. The excess of the purchase price over the aggregate fair values of the net assets was
recorded as goodwill. See Note 3.
In April 2018, we acquired 100.0% of the outstanding equity interests of CTP for a purchase price of $30.7 million, net of
cash acquired. We allocated the gross purchase price of $30.8 million to the assets acquired and liabilities assumed at
estimated fair values. The excess of the purchase price over the aggregate fair values of the net assets was recorded as
goodwill. See Note 3.
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.
Note 18. Supplemental Quarterly Financial Data (Unaudited)
(In thousands, except per share amounts)
Three Months Ended
2019
Three Months Ended
2018
Dec 31
Sep 28
Jun 29
Mar 30
Dec 31
Sep 29
Jun 30
Mar 31
$ 186,926
$ 181,101
$ 180,495
$ 172,566
$ 164,183
$ 159,842
$ 154,827
$ 150,455
40,111
9,848
38,327
10,240
38,065
9,178
35,694
8,497
32,697
1,791
31,116
4,290
32,028
1,833
26,755
2,357
977
1,937
1,363
1,025
1,118
119
242
$
8,871
$
8,303
$
7,815
$
7,472
$
673
$
4,171
$
1,591
$
(243)
2,600
$
$
0.77
0.75
$
$
0.72
0.70
$
$
0.68
0.66
$
$
0.65
0.64
$
$
0.06
0.06
$
$
0.37
0.36
$
$
0.14
0.14
$
$
0.23
0.22
Net Revenues
Gross Profit
Income Before Taxes
Income Tax Expense
(Benefit)
Net Income
Earnings Per Share
Basic earnings per
share
Diluted earnings
per share
In the fourth quarter of 2019, we acquired 100.0% of the outstanding equity interests of Nobles and Nobles’ results of
operations have been included in our consolidated statements of income since the date of acquisition as part of the Structural
Systems segment. See Note 3.
In the fourth quarter of 2018, we recorded restructuring charges of $3.8 million as part of a restructuring plan that
commenced during the fourth quarter of 2017. See Note 4.
In the third quarter of 2018, we recorded restructuring charges of $3.4 million as part of a restructuring plan that commenced
during the fourth quarter of 2017. See Note 4.
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In the second quarter of 2018, we acquired 100.0% of the outstanding equity interests of CTP and CTP’s results of operations
have been included in our consolidated statements of income since the date of acquisition as part of the Structural Systems
segment. See Note 3. In addition, we recorded restructuring charges of $5.4 million as part of a restructuring plan that
commenced during the fourth quarter of 2017. See Note 4.
In the first quarter of 2018, we recorded restructuring charges of $2.2 million as part of a restructuring plan that commenced
during the fourth quarter of 2017. See Note 4.
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SCHEDULE II
Description
2019
DUCOMMUN INCORPORATED AND SUBSIDIARIES
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2019, 2018, AND 2017
(Dollars in thousands)
Balance at
Beginning
of Period
Charged to
(Reduction of)
Costs and
Expenses
Deductions/
(Recoveries)
Other(1)
Balance at
End of Period
Allowance for Doubtful Accounts
Valuation Allowance on Deferred Tax Assets
2018
Allowance for Doubtful Accounts
Valuation Allowance on Deferred Tax Assets
2017
Allowance for Doubtful Accounts
Valuation Allowance on Deferred Tax Assets
$
$
$
$
$
$
1,135
9,083
868
9,013
495
6,607
$
$
$
$
$
$
219
$
33
$
— $
1,321
(593) $
— $
885
$
9,375
776
70
334
2,406
$
$
$
$
509
$
— $
1,135
— $
— $
9,083
(39) $
— $
868
— $
— $
9,013
(1) Includes opening balances of Nobles Worldwide, Inc. acquired in October 2019.
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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,
2.1 Agreement and Plan of Merger, dated as of April 3, 2011, among Ducommun Incorporated, DLBMS, Inc. and LaBarge, Inc.
Inc. Incorporated by reference to Exhibit 2.1 to Form 8-K filed on April 5, 2011.
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
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
Holdings Company LLC, and DLS Company LLC. Incorporated by reference to Exhibit 2.1 to Form 8-K filed on
September 11, 2017.
September 11, 2017.
2.3 Agreement and Plan of Merger, dated as of October 8, 2019, among Ducommun LaBarge Technologies, Inc., DLT
2.3 Agreement and Plan of Merger, dated as of October 8, 2019, among Ducommun LaBarge Technologies, Inc., DLT
Acquisition, Inc., Nobles Parent Inc., and the Stockholder Representative. Incorporated by reference to Exhibit 2.1 to
Acquisition, Inc., Nobles Parent Inc., and the Stockholder Representative. Incorporated by reference to Exhibit 2.1 to
Form 8-K filed on October 9, 2019.
Form 8-K filed on October 9, 2019.
2.4 Stock Purchase Agreement dated January 22, 2016, by and among Ducommun Incorporated, Ducommun LaBarge
2.4 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
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.
Exhibit 2.1 to Form 8-K dated January 25, 2016.
2.5 Stock Purchase Agreement dated February 24, 2016, by and between Ducommun LaBarge Technologies, Inc., as Seller,
2.5 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.
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
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.
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.
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.
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
3.3 Bylaws as amended and restated on March 19, 2013. Incorporated by reference to Exhibit 99.1 to Form 8-K dated
22, 2013.
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,
3.4 Amendment to Bylaws dated January 5, 2017. Incorporated by reference to Exhibit 99.2 to Form 8-K dated
2017.
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
3.5 Amendment to Bylaws dated February 21, 2018. Incorporated by reference to Exhibit 3.1 to Form 8-K dated
26, 2018.
February 26, 2018.
4.1 Description of Ducommun Incorporated Securities Registered under Section 12 of the Exchange Act.
4.1 Description of Ducommun Incorporated Securities Registered under Section 12 of the Exchange Act.
10.1 Incremental Term Loan Lender Joinder Agreement and Additional Credit Extension Amendment, dated as of December
10.1 Incremental Term Loan Lender Joinder Agreement and Additional Credit Extension Amendment, dated as of
20, 2019, by and among Ducommun Incorporated, as Borrower, the subsidiaries of the Borrower party thereto, as
December 20, 2019, by and among Ducommun Incorporated, as Borrower, the subsidiaries of the Borrower party thereto,
Guarantors, Bank of America, N.A., as Administrative Agent, Swingline Lender and an L/C Issuer, and the lender party
as Guarantors, Bank of America, N.A., as Administrative Agent, Swingline Lender and an L/C Issuer, and the lender party
thereto. Incorporated by reference to Exhibit 10.1 to Form 8-K filed on December 20, 2019.
thereto. Incorporated by reference to Exhibit 10.1 to Form 8-K filed on December 20, 2019.
10.2 Credit Agreement, dated as of November 21, 2018, among Ducommun Incorporated, certain of its subsidiaries, Bank of
10.2 Credit Agreement, dated as of November 21, 2018, among Ducommun Incorporated, certain of its subsidiaries,
America, N.A., as administrative agent, swingline lender and issuing bank, and other lenders party thereto. Incorporated
Bank of America, N.A., as administrative agent, swingline lender and issuing bank, and other lenders party thereto.
by reference to Exhibit 10.1 to Form 8-K filed on November 26, 2018.
Incorporated by reference to Exhibit 10.1 to Form 8-K filed on November 26, 2018.
*10.3 2007 Stock Incentive Plan. Incorporated by reference to Appendix B of Definitive Proxy Statement on Schedule 14a,
*10.3 2007 Stock Incentive Plan. Incorporated by reference to Appendix B of Definitive Proxy Statement on Schedule 14a,
filed on March 29, 2010.
filed on March 29, 2010.
*10.4 2013 Stock Incentive Plan (Amended and Restated March 18, 2015). Incorporated by reference to Appendix B of
*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.
Definitive Proxy Statement on Schedule 14a, filed on April 22, 2015.
*10.5 2013 Stock Incentive Plan (Amended and Restated May 2, 2018). Incorporated by reference to Appendix A of
*10.5 2013 Stock Incentive Plan (Amended and Restated May 2, 2018). Incorporated by reference to Appendix A of
Definitive Proxy Statement on Schedule 14a, filed on March 23, 2018.
Definitive Proxy Statement on Schedule 14a, filed on March 23, 2018.
*10.6 2018 Employee Stock Purchase Plan. Incorporated by reference to Appendix B of Definitive Proxy Statement on
*10.6 2018 Employee Stock Purchase Plan. Incorporated by reference to Appendix B of Definitive Proxy Statement on
Schedule 14a, filed on March 23, 2018.
Schedule 14a, filed on March 23, 2018.
*10.7 Form of Stock Option Agreement for 2016 and earlier. Incorporated by reference to Exhibit 10.8 to Form 10-K for the
*10.7 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.
year ended December 31, 2003.
*10.8 Form of Stock Option Agreement for 2017. Incorporated by reference to Exhibit 10.5 to Form 10-K for the year ended
*10.8 Form of Stock Option Agreement for 2017. Incorporated by reference to Exhibit 10.5 to Form 10-K for the year ended
December 31, 2016.
December 31, 2016.
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Exhibit
No.
Description
*10.9 Form of Stock Option Agreement for 2018 and after. Incorporated by reference to Exhibit 4.7 to Form S-8 filed on
*10.9 Form of Stock Option Agreement for 2018 and after. Incorporated by reference to Exhibit 4.7 to Form S-8
May 10, 2018.
filed on May 10, 2018.
*10.10 Form of Performance Stock Unit Agreement for 2014 and 2015. Incorporated by reference to Exhibit 10.19 to Form
*10.10 Form of Performance Stock Unit Agreement for 2014 and 2015. Incorporated by reference to Exhibit 10.19 to
10-Q for the period ended March 29, 2014.
Form 10-Q for the period ended March 29, 2014.
*10.11 Form of Performance Stock Unit Agreement for 2016. Incorporated by reference to Exhibit 10.6 to Form 10-Q for the
*10.11 Form of Performance Stock Unit Agreement for 2016. Incorporated by reference to Exhibit 10.6 to Form 10-Q
period ended April 2, 2016.
for the period ended April 2, 2016.
*10.12 Form of Performance Stock Unit Agreement for 2017. Incorporated by reference to Exhibit 10.21 to Form 10-Q for
*10.12 Form of Performance Stock Unit Agreement for 2017. Incorporated by reference to Exhibit 10.21 to Form 10-Q
the period ended April 1, 2017.
for the period ended April 1, 2017.
*10.13 Form of Restricted Stock Unit Agreement for 2016 and earlier. Incorporated by reference to Exhibit 99.1 to Form 8-
*10.13 Form of Restricted Stock Unit Agreement for 2016 and earlier. Incorporated by reference to Exhibit 99.1
K filed on May 8, 2007.
to Form 8-K filed on May 8, 2007.
*10.14 Form of Restricted Stock Unit Agreement for 2017 and after. Incorporated by reference to Exhibit 10.9 to Form 10-K
*10.14 Form of Restricted Stock Unit Agreement for 2017 and after. Incorporated by reference to Exhibit 10.9
for the year ended December 31, 2016.
to Form 10-K for the year ended December 31, 2016.
*10.15 Form of Directors’ Restricted Stock Unit Agreement. Incorporated by reference to Exhibit 99.1 to Form 8-K filed on
*10.15 Form of Directors’ Restricted Stock Unit Agreement. Incorporated by reference to Exhibit 99.1 to Form 8-K
May 10, 2010.
filed on May 10, 2010.
*10.16 Performance Restricted Stock Unit Agreement dated January 23, 2017 between Ducommun Incorporated and
*10.16 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.
Stephen G. Oswald. Incorporated by reference to Exhibit 10.11 to Form 10-K for the year ended December 31, 2016.
*10.17 Form of Indemnity Agreement entered with all directors and officers of Ducommun. Incorporated by reference to
*10.17 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
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:
except for the name of the director or officer and the date of the Agreement:
Director/Officer
Richard A. Baldridge
Gregory S. Churchill
Shirley G. Drazba
Robert C. Ducommun
Dean M. Flatt
Jay L. Haberland
Stephen G. Oswald
Robert D. Paulson
Jerry L. Redondo
Rosalie F. Rogers
Rajiv A. Tata
Christopher D. Wampler
Date of Agreement
March 19, 2013
March 19, 2013
October 18, 2018
December 31, 1985
November 5, 2009
February 2, 2009
January 23, 2017
March 25, 2003
October 1, 2015
July 24, 2008
January 24, 2020
January 1, 2016
*10.18 Ducommun Incorporated 2016 Bonus Plan. Incorporated by reference to Exhibit 99.3 to Form 8-K dated March 1,
*10.18 Ducommun Incorporated 2016 Bonus Plan. Incorporated by reference to Exhibit 99.3 to Form 8-K dated
2016.
March 1, 2016.
*10.19 Ducommun Incorporated 2017 Bonus Plan. Incorporated by reference to Exhibit 99.1 to Form 8-K dated February
*10.19 Ducommun Incorporated 2017 Bonus Plan. Incorporated by reference to Exhibit 99.1 to Form 8-K dated
27, 2017.
February 27, 2017.
*10.20 Directors’ Deferred Compensation and Retirement Plan, as amended and restated February 2, 2010. Incorporated by
*10.20 Directors’ Deferred Compensation and Retirement Plan, as amended and restated February 2, 2010.
reference to Exhibit 10.15 to Form 10-K for the year ended December 31, 2009.
Incorporated by reference to Exhibit 10.15 to Form 10-K for the year ended December 31, 2009.
*10.21 Non Qualified Deferred Compensation. Incorporated by reference to Exhibit 4.6 to Form S-8 dated November 26,
*10.21 Non Qualified Deferred Compensation. Incorporated by reference to Exhibit 4.6 to Form S-8 dated
2019.
November 26, 2019.
*10.22 Key Executive Severance Agreement between Ducommun Incorporated and Stephen G. Oswald dated January 23,
*10.22 Key Executive Severance Agreement between Ducommun Incorporated and Stephen G. Oswald dated
2017. Incorporated by reference to Exhibit 99.1 to Form 8-K dated January 27, 2017.
January 23, 2017. Incorporated by reference to Exhibit 99.1 to Form 8-K dated January 27, 2017.
83
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Exhibit
No.
Description
*10.23 Form of Key Executive Severance Agreement between Ducommun Incorporated and each of the individuals listed
*10.23 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
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, the address for notice, and the date of the
Severance Agreements are identical except for the name of the person, the address for notice, and the date of the
Agreement:
Agreement:
Person
Jerry L. Redondo
Rosalie F. Rogers
Rajiv A. Tata
Christopher D. Wampler
Date of Agreement
January 23, 2017
January 23, 2017
January 24, 2020
January 23, 2017
*10.24 Employment Letter Agreement dated January 3, 2017 between Ducommun Incorporated and Stephen G. Oswald.
*10.24 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.
Incorporated by reference to Exhibit 99.1 to Form 8-K dated January 9, 2017.
*10.25 Employment Letter Agreement dated December 19, 2016 between Ducommun Incorporated and Amy M. Paul.
*10.25 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.
Incorporated by reference to Exhibit 10.19 to Form 10-K for the year ended December 31, 2016.
*10.26 Transition Services Letter Agreement dated January 10, 2017 between Ducommun Incorporated and James S. Heiser.
*10.26 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 filed on January 17, 2017.
Incorporated by reference to Exhibit 99.1 to Form 8-K filed on January 17, 2017.
*10.27 Separation and Release Agreement dated May 14, 2018 between Ducommun Incorporated and Amy M. Paul.
*10.27 Separation and Release Agreement dated May 14, 2018 between Ducommun Incorporated and Amy M. Paul.
Incorporated by reference to Exhibit 10.1 to Form 8-K filed on May 23, 2018.
Incorporated by reference to Exhibit 10.1 to Form 8-K filed on May 23, 2018.
*10.28 Separation and Release Agreement dated June 26, 2019 between Ducommun Incorporated and Douglas L. Groves.
*10.28 Separation and Release Agreement dated June 26, 2019 between Ducommun Incorporated and Douglas L. Groves.
Incorporated by reference to Exhibit 10.1 to Form 8-K filed on June 28, 2019.
Incorporated by reference to Exhibit 10.1 to Form 8-K filed on June 28, 2019.
21 Subsidiaries of the registrant.
21 Subsidiaries of the registrant.
23 Consent of Independent Registered Public Accounting Firm.
23 Consent of Independent Registered Public Accounting Firm.
31.1 Certification of Principal Executive Officer.
31.1 Certification of Principal Executive Officer.
31.2 Certification of Principal Financial 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.
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.
84
Table of Contents
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 20, 2020
DUCOMMUN INCORPORATED
By:
/s/ Stephen G. Oswald
Stephen G. Oswald
Chairman, 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 20, 2020.
Signature
/s/ Stephen G. Oswald
Stephen G. Oswald
/s/ Christopher D. Wampler
Christopher D. Wampler
/s/ Richard A. Baldridge
Richard A. Baldridge
/s/ Gregory S. Churchill
Gregory S. Churchill
/s/ Shirley G. Drazba
Shirley G. Drazba
/s/ Robert C. Ducommun
Robert C. Ducommun
/s/ Dean M. Flatt
Dean M. Flatt
/s/ Jay L. Haberland
Jay L. Haberland
/s/ Robert D. Paulson
Robert D. Paulson
Title
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
Vice President, Interim Chief Financial Officer and
Treasurer, and Controller and Chief Accounting Officer
(Principal Financial and Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
85
Following is a list of the subsidiaries of the Company(1):
SUBSIDIARIES OF THE REGISTRANT
Name of Subsidiary
Certified Thermoplastics Company, LLC
CMP Display Systems, Inc.(2)
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 Acquisition Company, Inc.
LaBarge/STC, Inc.(2)
Lightning Diversion Systems, LLC
LS Holdings Company, LLC
Nobles Holdings Inc.
Nobles Parent Inc.
Nobles Worldwide, Inc.
(1) As of December 31, 2019.
(2) Inactive.
EXHIBIT 21
Jurisdiction of Incorporation
Delaware
California
Delaware
Delaware
Delaware
New York
England
Arizona
Delaware
Thailand
Missouri
Texas
Delaware
Delaware
Delaware
Delaware
Minnesota
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-234808) and Form
S-8 (Nos. 333-235278, 333-224838, 333-214408, and 333-188460) of Ducommun Incorporated of our report dated
February 20, 2020 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
Irvine, California
February 20, 2020
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, 2019;
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 20, 2020
/s/ Stephen G. Oswald
Stephen G. Oswald
Chairman, 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, Christopher D. Wampler, certify that:
1.
I have reviewed this Annual Report of Ducommun Incorporated (the “registrant”) on Form 10-K for the period
ended December 31, 2019;
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 20, 2020
/s/ Christopher D. Wampler
Christopher D. Wampler
Vice President, Interim Chief Financial Officer and
Treasurer, and Controller and Chief Accounting Officer
Certification Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
EXHIBIT 32
In connection with the Annual Report of Ducommun Incorporated (the “Company”) on Form 10-K for the period
ending December 31, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I,
Stephen G. Oswald, Chairman, 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
Chairman, President and Chief Executive Officer
February 20, 2020
In connection with the Annual Report of Ducommun Incorporated (the “Company”) on Form 10-K for the period
ending December 31, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I,
Christopher D. Wampler, Vice President, Interim Chief Financial Officer and Treasurer, and Controller and Chief Accounting
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/ Christopher D. Wampler
Christopher D. Wampler
Vice President, Interim Chief Financial Officer and Treasurer, and
Controller and Chief Accounting Officer
February 20, 2020
The foregoing certification is accompanying the Form 10-K solely pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, and is not being filed as part of the Form 10-K or as a separate disclosure document.
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Corporate Information
BOARD OF DIRECTORS
Stephen G. Oswald
Robert C. Ducommun
Chairman, President and Chief Executive Offi cer,
Business Adviser
Ducommun Incorporated
Richard A. Baldridge
Dean M. Flatt
President, Defense and Space,
President and Chief Operating Offi cer, Viasat, Inc.
Honeywell International, Inc. (Ret.)
Gregory S. Churchill
Jay L. Haberland
Executive Vice President, International and
Vice President, United Technologies Corp. (Ret.)
Service Solutions, Rockwell Collins, Inc. (Ret.)
Robert D. Paulson
Shirley G. Drazba
Chief Executive Offi cer, Aerostar Capital LLC
Vice President, Product Line Strategy and Innovation,
IDEX Corporation (Ret.)
OFFICERS
Stephen G. Oswald
Jerry L. Redondo
Chairman, President and Chief Executive Offi cer
Senior Vice President of Operations
Christopher D. Wampler
Rosalie F. Rogers
Vice President, Interim Chief Financial Offi cer and
Vice President and Chief Human Resources Offi cer
Treasurer, and Controller and Chief Accounting Offi cer
Rajiv A. Tata
Vice President, General Counsel and Secretary
COMMON STOCK
CERTIFICATIONS
Ducommun Incorporated common stock is listed on the
New York Stock Exchange (symbol DCO).
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
Ducommun.com
The Company has fi led the required certifi cations 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 fi scal year ended
December 31, 2019. After the 2020 Annual Meeting of
Shareholders, the Company intends to fi le with the New York
Stock Exchange the CEO certifi cation regarding its
compliance with the NYSE’s corporate governance listing
standards as required by NYSE Rule 303A.12. Last year, the
Company fi led this CEO certifi cation with the NYSE on or
about May 15, 2019.
SAFE HARBOR STATEMENT
With the exception of current and historical information, the statements set forth above contain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 that involve risk and uncertainties. These forward-looking statements
provide current expectations of future events based on certain beliefs and assumptions by management and include any statement that
does not directly relate to any historical or current fact. Forward-looking statements may be preceded by, follow, or include words such
as “looking,” “see,” “hope,” “could,” “may,” “believe,” “expect,” “anticipate,” “estimate,” “expect,” or similar expressions. Although the
Company believes the expectations refl ected in the forward-looking statements are based on reasonable assumptions, the forward-
looking statements are subject to numerous factors, risks and uncertainties that could cause actual outcomes and results to differ
materially from those projected. Factors that could cause actual results to differ materially from those in the forward-looking statements
are discussed in the Company’s fi lings with the Securities and Exchange Commission, including recent fi lings on Forms 8-K, 10-K and
10-Q, under the caption “Risk Factors.” The Company expressly disclaims any obligation or undertaking to release publicly any updates
or changes to these forward-looking statements.
Ducommun Incorporated
200 Sandpointe Avenue, Suite 700
Santa Ana, CA 92707-5759
+1 (657) 335-3665
Ducommun.com