2020Annual 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,
and 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 Profile
ducommun Incorporated delivers innovative
value-added manufacturing solutions to
customers in the aerospace & defense, and
Industrial markets. Founded in 1849, the
Company specializes in two core areas,
electronic Systems and Structural Systems,
which produce complex products and
components for commercial aircraft platforms,
mission-critical military and space programs.
For more information, visit ducommun.com.
D
Dear Fellow Shareholders,
As we all know, 2020 was a very difficult time for the world,
the United States, many industries including Commercial
Aerospace, and Ducommun. It is in the most difficult times, that
values need to shine and I am happy to report that our team
came together and lived the Company’s values of Honesty,
Respect, Professionalism, Teamwork and Trust in 2020.
Stephen G. OSwald
Chairman, President and
Chief Executive Officer
Ducommun team members, their families and other
I also said it throughout the year, how proud I am of all
stakeholders connected to our Company as we all
worked together and did our best. The hard work and
year, a record, leveraging an array of integral military
programs and missile systems. Additionally, our
Military & Space backlog increased by $78.4 million to
$529.7 million, or 17.4%, bolstering the outlook across
dedication were evident in many areas, and despite all
this important part of the business. These results
the challenges, the Company is well positioned for a
were due to the last several years of hard work with
return to growth in 2021 with hopefully many more
Defense primes and others and it made a big
good years ahead.
difference in 2020.
The number one priority during the year was the health
and safety of our employees and facilities. Designated
as an essential business provider of products for
Critical Infrastructure Sectors including the Defense
Industrial Base, Transportation Systems and Critical
Manufacturing Systems, Ducommun continued to
operate, produce and ship products to our valued
customers throughout 2020. We prioritized employee
safety and efficiency, drove operational excellence, and
regularly communicated with team members,
customers, supply chain and colleagues, and focused on
four key areas: Employee health and safety, Customer
business continuity, Supply chain integrity and Support
for the local communities where we live and work.
While Commercial Aerospace demand in 2020 was
negatively impacted by the pandemic, along with the
Boeing 737 MAX’s continued grounding, our Military &
Space revenue increased by $99.1 million year-over-
The number one priority during the
year was the health and safety of our
employees and facilities. Designated
as an essential business provider of
products for Critical Infrastructure
Sectors including the Defense
Industrial Base, Transportation
Systems and Critical Manufacturing
Systems, Ducommun continued to
operate, produce and ship products to
our valued customers throughout 2020.
01
Ducommun Incorporated / 2020 Annual Report Despite the pandemic’s impact, the Company posted
revenues of $628.9 million for the year, a decline of
only 12.8% year-over-year — overcoming a 51.8%
reduction in Commercial Aerospace revenue. Strong
growth of 30.6% in Military & Space revenues were a
critical component in keeping Ducommun on track for
its long-term goals and significantly offsetting the
impact of Commercial Aerospace. Ducommun’s
performance highlights our portfolio’s strength and
diversity along with the many measures taken to
streamline and optimize our operations since I joined
the Company in 2017.
The other great story was margin expansion across the
board. Gross margins expanded once again in 2020 to
21.9%, up 80 basis points (bps) from one year ago,
driving adjusted EBITDA up 120 bps. These increases
resulted from improved product mix in defense,
effective cost controls, value-added pricing and
continuous improvement efforts through the DCO
Operating System in all of our Performance Centers.
Earnings per share (EPS) was also excellent in 2020
Financial Performance and Shareholder Return
As previously mentioned, Ducommun posted revenue
of $628.9 million in 2020, a decrease of 12.8% from
2019, with gross margins expanding to 21.9%, which is
the highest level since 2003 and reflects excellent
performance in many different areas of our business
and Performance Centers. We maintained strong
operating margins of 7.2%, delivering $45.5 million of
operating income which resulted in $29.2 million of net
income in 2020 - down slightly from $32.5 million in
2019. Adjusted EBITDA generation in 2020 reached
$87.9 million, down less than 5% compared to 2019 —
despite the revenue decline. Additionally, Ducommun’s
overall backlog remained strong at $822.0 million,
with Military & Space backlog growing 17% to an all
time record of $529.7 million. Overall, the 2020
numbers were very strong despite the pandemic’s
impact on Commercial Aerospace, and we are excited
about the future.
Total Shareholder Return (TSR) over the last three
years was very strong at 89%, placing Ducommun in
the 86th percentile of the Russell 2000 Index for TSR
with reported EPS of $2.45 per diluted share, compared
over the period.
to $2.75 in 2019. Adjusted EPS was $2.74 per diluted
share and roughly flat to 2019 performance of $2.80.
2020 Net Revenues
of $628.9 Million
Total Backlog* as of
December 31, 2020
of $822.0 Million
$628.9
27%
6%
67%
$822.0
33%
3%
64%
COMMERCIAL AEROSPACE
INDUSTRIAL
MILITARY & SPACE
* We define backlog as potential revenue based on customer purchase orders and long-term
agreements with firm fixed prices and expected delivery dates of 24 months or less.
02
Ducommun Incorporated / 2020 annual Report
Our Pandemic Response
Employee Safety, Above All Else
Ensuring the safety and well-being of Ducommun
Customer Business Continuity
& Supply Chain Integrity
As our country faced a genuinely unprecedented
employees has always been our top priority. With the
situation with the COVID-19 pandemic, Ducommun
onset of the COVID-19 pandemic, we immediately
remained focused on manufacturing and delivering
developed and deployed company-wide risk mitigation
essential products to our customers. Our supply chain
and preventive measures based on guidelines from the
worked proactively with all available sources,
Centers for Disease Control & Prevention (CDC), state
navigating the challenges to ensure material
departments of health, and state and local authorities.
availability to support Ducommun operation
Included were mandatory social distancing and face
requirements and customer service.
masks, enhanced environmental sanitation standards,
frequent disinfecting of work areas and equipment,
Ducommun maintained business continuity plans at
temperature screenings, proper handwashing
multiple levels for all operations. These plans supported
techniques, and business-critical visitors only with
risk mitigation for operations, data disaster recovery
advanced COVID-19 pre-screening.
and materials risk mitigation. Our Supply Chain
leadership remained diligently focused on materials risk
Due to the fluid and evolving nature of the COVID-19
management and mitigation. We contacted and
pandemic, we understood the importance of clear,
evaluated our key suppliers. As we worked to ensure
concise and consistent communication with employees.
our raw materials inventory and supply chain continuity
Since early March, we have provided regular training
as expeditiously as possible, we seamlessly continued
and education sessions on COVID-19 disease
our operations. There was no recorded or specific
prevention, produced a Safe Workplace Playbook for
disruption of our upstream supply chain, and we
Ducommun manufacturing facilities’ operation and
received a continuous flow of goods and products from
distributed a weekly update to every employee.
suppliers. We were in regular communication with
suppliers for inventory updates and requested
alternative sources for products as needed.
03
Support for the Local Communities Where We Live & Work
DuCommun PAnDEmIC
RElIEF EFFoRtS 2020
• California Community Foundation’s
LA Students in Need Campaign
• Crosslines of Joplin Food Bank
• Fox Valley Community Foundation’s
COVID-19 Response Fund
• Labette County Assistance
• Labette Health Foundation
• Lafayette House
• Loaves & Fishes Food Bank of the Ozarks
When the COVID-19 pandemic shut down all but
essential businesses in March 2020, there was both
an unprecedented need and opportunity to make a
difference in the local communities in which
Ducommun operates. Ducommun partnered with
The Ducommun Foundation as its main philanthropic
avenue and provided more than $1.3 million in 2020
for relief efforts supporting the most vulnerable
individuals and families impacted by the pandemic.
Charitable organizations were selected by Ducommun’s
15 Performance Center leaders across the U.S., and
• Los Angeles Urban League Small Business
The Ducommun Foundation made donations in April,
May and November 2020, for an average of $85,000
per Ducommun Performance Center location.
Contributions were made to such notable organizations
as the United Way, Ronald McDonald House Charities®,
Mercy Health Foundation, the California Community
Foundation, and numerous food banks and non-profit
community groups.
The Ducommun Foundation in 2020 supported
underrepresented students and local communities
through donations to NACME (National Action Council
for Minorities in Engineering) for student scholarships
and the Los Angeles Urban League for small business
recovery.
In a time of unprecedented need, the Company and its
employees stepped up and helped our struggling
neighbors and uplifted individuals and families in our
local communities.
Relief & Recovery Fund
• Madison County Law Enforcement
Auxiliary Pandemic Relief Fund
• Mercy Health Foundation
• Merlin Foundation Shelter & Food Bank
• National Action Council for Minorities in
Engineering (NACME)
• Northwest Arkansas Food Bank Pandemic Relief
• Parsons Area Community Foundation
• Parsons Foursquare Church Food Bank
• Proud Animal Lovers Shelter
• Regional Food Bank of Northwestern, New York
• Ronald McDonald House Charities® of the
Capital Region (RMHC®-CR) Pandemic Relief Fund
• Tulsa City Lights Pandemic Relief
• Tulsa Community Foundation’s
Tulsa Area COVID-19 Response Fund
• United Way of Greater Los Angeles County
Pandemic Relief Fund
• United Way of Orange County
Pandemic Relief Fund
• United Way of Southwest Missouri
& Southwest, Kansas
• United Way Valley Foundation
COVID-19 Response Fund
• Watered Gardens Homeless Shelter
04
Our Donations are Helping those Who Need it Most
orange County united Way | Irvine, California
In 2020, The Ducommun Foundation contributed to
Orange County United Way’s Pandemic Relief Fund,
which provides rental, food, utility, academic and other
emergency assistance to those most at risk including
low-income individuals, families and students. In this
time of uncertainty, we are all united.
Ronald mcDonald House Charities
of the Capital Region | Albany, new York
Children of all ages continue to face serious health
challenges during the pandemic. The Ducommun
Foundation’s donation to support Ronald McDonald
House Charities® of the Capital Region (RMHC®-CR)
Pandemic Relief provides needed resources for families
during this unprecedented time.
mercy Health Foundation | Berryville, Arkansas
The Ducommun Foundation donated to Mercy Hospital
in Berryville, Arkansas for the creation of two
“negative pressure” room environments. These
specialized rooms safely isolate patients with
symptoms of infectious diseases, including COVID-19.
These rooms will continue to serve patients and help
protect the community long after the pandemic is over.
Courtesy of RMHC®-CR
05
Ducommun Incorporated / 2020 Annual Report A Culture of Continuous Innovation
Once again, in 2020, the business’s development and
Through process innovation and value engineering,
we delivered our first integrated TOW missile case to
transformation through innovation continued to be a
Raytheon, a milestone for Ducommun that combined
top priority for Ducommun.
two of our core capabilities — Aerostructures
composites and electronic wiring harnesses. This was
In March, Lightning Diversion Systems signed a
the first major integration of capabilities from both the
technology licensing agreement with Wichita State
Structural and Electronic segments of Ducommun.
University for wind turbine lightning protection. The
agreement allows us to commercialize advanced
In July, Ducommun contributed to the historic Mars
lightning protection technology further to offer wind
2020 Mission Perseverance Rover through innovative
turbine operators and OEMs better, more cost-effective
manufacturing and engineered products we built at
protection against lightning strikes.
our Performance Center in Carson, California.
In June, our Performance Center in Carson, California
for the Jet Propulsion Laboratory (JPL) and NASA
delivered Variable Reluctance Resolvers to our
that support key functions on the rover, including
customer Leonardo Electronics in Florence, Italy.
sample handling, bit carousel docking assembly and
Ducommun manufactured high reliability Resolvers
Leonardo is responsible for building the JIRAM Imaging
rotor mechanism.
Spectrometer, a collaboration between NASA and ASI
(Italian Space Agency), which is used to acquire
In 2020, our Joplin, Missouri Performance Center
infrared images on the historic Juno Mission to Jupiter.
drove business transformation focused on
06
h
c
e
t
l
a
C
-
L
P
J
/
A
S
A
N
y
s
e
t
r
u
o
C
Ducommun Incorporated / 2020 annual Report
manufacturing innovations for the future growth of
Unmanned Aerial Vehicles (UAVs). Our team in Joplin
Environmental, Health & Safety
In support of our pledge to deliver exceptional value to
transformed an available manufacturing area into an
all stakeholders, in 2020, we remained committed to
advanced state-of-the-art manufacturing cell,
the following environmental management practices:
producing complex interconnects that support General
Atomics Aeronautical Systems’ Predator, Gray Eagle
• Strove to avoid adverse impact and harm to the
and other UAV programs.
environment in the communities where we do
business and to identify business partners who
Our Joplin technical team also delivered advanced
share these values.
interconnect products to Northrop Grumman Space
Systems for NASA’s Space Launch System (SLS)
• Promoted compliance with all applicable laws
boosters. The SLS rocket is the backbone of the
and regulations pertaining to the environment
Artemis Program, which is the next step in lunar
and natural resources.
exploration. Artemis is part of NASA’s Moon to Mars
exploration approach, which will enable the first
• Continually improved our Environmental
woman and next man to step foot on the Moon by
Management System, employee awareness
2024, and will establish sustainable exploration and
and performance.
feature innovative engineered manufacturing solutions
developed by Ducommun.
07
Total Energy Use (GigaJoules)
Carbon Dioxide (Tons)
390,000
380,000
370,000
360,000
350,000
340,000
330,000
320,000
310,000
2018
2020
9,000
8,500
8,000
7,500
7,000
6,500
2018
2020
• Strove to establish meaningful goals and objectives
high-performance organization in 2020, focusing on all
in the pursuit of Environmental, Health and Safety
Ducommun employees’ total physical, emotional and
excellence, including but not limited to, implementing
financial well-being.
metrics established by the Sustainability Accounting
Standards Board (SASB) applicable to our operations.
We increased benefits to take care of COVID-19 testing
For example, between 2018 and 2020, we reduced
and co-payments, and we paid our employees during
carbon dioxide emissions by 15% and our total energy
COVID-19 quarantine or illness. We developed and
usage by 13% as depicted in the graphs above.
deployed our company-wide Healthy Minds at Work
campaign to promote the wide range of mental health
Throughout the year, we continued to place a premium on
services available to employees and their families who
the safety of our employees. We established an incident
may be experiencing stress and anxiety because of the
investigation policy to identify the root cause of accidents
pandemic or other life challenges.
that resulted in lost time, implemented corrective
measures and improved training to reduce occupational
Our Employee Stock Purchase Plan (ESPP) was
accidents. In addition, we tracked the number of lost
introduced in 2019, and in 2020, it continued to grow,
time incidents incurred by our employees as a measure
with a 35% increase in participation since the program
of the effectiveness of our health and safety programs.
was launched. Our 401K program has 86% of eligible
Lost time incidents are defined as incidents that
employees actively participating, with annual meetings
resulted in days away from work and are similar to the
and monthly educational sessions held at each
days away, restricted or transferred metric utilized by
Ducommun location.
the Occupational Safety and Health Administration
(OSHA). During the three-year period between January
Despite the pandemic-related challenges impacting
1, 2018 and December 31, 2020, the Company’s lost work
Ducommun in 2020, the Company paid bonuses to all
incident rate decreased by over 52% and the total
eligible employees for the third year in a row. Due to
recordable incident rate decreased by 35%.
cost-cutting and other measures, we set aside a bonus
Employee Engagement & Well-being Programs
Against the backdrop of a nationwide pandemic,
Ducommun continued its transformation into a
pool to continue awarding pay-for-performance for all
eligible employees across the Company, ensuring that
every person has a stake in our success.
08
Community Involvement
As a leader in the Aerospace and Defense industry,
In 2020, we marked our third year in partnership with
we continued to support community-based Science,
the Los Angeles Chargers and University of California,
Technology, Engineering and Math (STEM) programs
Irvine, to sponsor STEM on the Sidelines™, a regional
and initiatives that nurture and develop the next
competition promoting STEM education in Los Angeles
generation of innovators, thinkers and technicians.
and Orange County, California high schools. The 2020
contest shifted to an online format, where we focused
on innovation and engagement with students, despite
challenges presented by pandemic restrictions. More
than 20 high schools embraced the competition and
managed COVID-related challenges this year, bringing
the total to more than 400 students who have
benefited from their involvement in STEM on the
Sidelines™ since 2018.
Congratulations to the
2020 Ducommun ScholarS
Ducommun Awards 25 College Scholarships for the 2020-2021 Academic Year
Ducommun Incorporated
(NYSE: DCO) has named 25
Ducommun Scholars who will
each receive a $2,000 or $3,000
scholarship for college expenses
during the 2020-2021 academic
year. Starting in 2020, each
scholarship award will be renewable
for 2 to 3 years based on student
eligibility. The program is available
exclusively to Ducommun full-time
employees’ children and
grandchildren who attend a
4-year college/university or
2-year accredited technical or
vocational college.
“Congratulations to our 2020
Ducommun Scholars! It is great
to see these deserving students
starting a new beginning and I am
thrilled that the Company is able to
support them. We are committed for
either the next two or four years,
depending on the program, to ensure
they graduate and wish them all
the best pursuing their goals and
dreams,” said Stephen G. Oswald,
chairman, president and chief
executive officer.
Ducommun Scholars are selected
each year by Scholarship
Management Services, a division
of Scholarship America, which
independently administers the
application, eligibility and award
selection process. Ducommun
scholarship awards are based solely
on merit. Criteria include academic
record, demonstrated leadership,
and participation in school and
community activities.
destiny
calico
University of Arkansas
Field oF Study
Biology/Pre-Pharmacy
Daughter of
Michael Calico
Huntsville, AR
Jessica
cHeng
San Diego
State University
Field oF Study
Software Engineering/
Product Management
Daughter of
Xiaoyan Wang
Carson, CA
ryli
coPeland
Crowder College
Field oF Study
Nursing
Granddaughter of
Pamela Smith
Joplin, MO
lily
dang
University of Missouri,
Kansas City
Field oF Study
Biology/Pre-Med
Daughter of
Tien Dang
Joplin, MO
roBBy
daVis
Missouri University of
Science & Technology
Field oF Study
Chemical Engineering
Grandson of
Deborah Roberts
Huntsville, AR
kezia
decker
Columbia-Greene
Community College
Field oF Study
Nursing
Daughter of
Matthew Decker
Coxsackie, NY
JeoVanny
dillon
University of
California, Los Angeles
Field oF Study
Psychology
Son of
Jose Dillon
Gardena, CA
ransoM
Herring
Arkansas Tech
University
Field oF Study
Nursing
Daughter of
Sayward Herring
Huntsville, AR
aMBerlyn
JarMan
University of Kansas
Medical Center
Field oF Study
Nursing
Daughter of
Tiffany Jarman
Parsons, KS
allison
JoHnson
The Paul Mitchell
School
Field oF Study
Cosmetology
Granddaughter of
Deborah Roberts
Huntsville, AR
Brenda
kennedy
California State
University, Fullerton
Field oF Study
Psychology
Daughter of
Edmund Kennedy
Monrovia, CA
sydney
lancaster
Kansas State
University
Field oF Study
Political Science
Daughter of
Martha Lancaster
Parsons, KS
lauren
lane
University of
California,
Santa Barbara
Field oF Study
English Literature
Daughter of
Robert Lane
Monrovia, CA
Jennifer
Marino
Worcester State
University
Field oF Study
Communication
Disorders/
Speech Pathology
Daughter of
Anthony Marino
Merrimack, NH
Hailey
MitcHell
SUNY College
at Brockport
Field oF Study
Biology
Daughter of
Anthony Mitchell
Coxsackie, NY
taylor
o’Brien
Pittsburg State
University
Field oF Study
Business Management
Grandson of
Larry Taylor
Parsons, KS
Bianca
Padilla
California State
University, Long Beach
Field oF Study
Family Life Education
Daughter of
Erika Padilla
Gardena, CA
akesHa
Poyner
North Arkansas
College
Field oF Study
Child Education
Daughter of
Heather Weelborg
Berryville, AR
carlos
rodriguez
California State
University, Fullerton
Field oF Study
Communications/PR
Son of
Victor Rodriguez
Gardena, CA
susan
roMan
California State
University, Long Beach
Field oF Study
Family & Consumer
Sciences
Daughter of
Maria Lopez
Carson, CA
WilliaM
salts
Oklahoma State
University
Field oF Study
Aerospace Engineering
Son of
Chonta Salts
Joplin, MO
alaina
sHutter
Siena College
Field oF Study
Health Studies
Daughter of
Tom Shutter
Coxsackie, NY
rayna
Van Handel
University of
Wisconsin-Eau Claire
Field oF Study
Nursing
Daughter of
Dawna Van Handel
Appleton, WI
alessandra
Vargas
University of
California, Davis
Field oF Study
Design
Daughter of
Carlos Vargas
Santa Clarita, CA
dylan
Walker
Missouri Southern
State University
Field oF Study
Nursing
Son of
David Walker
Parsons, KS
0
2
0
2
/
5
1
/
9
0
r
e
t
s
o
P
s
r
a
l
o
h
c
S
O
C
D
|
The Ducommun Scholars is a college scholarship
program available exclusively to the children and
grandchildren of Ducommun employees. These
merit-based awards are given to deserving students
who attend a four-year college or university or
two-year accredited technical or vocational college.
In September 2020, we named 25 new Ducommun
Scholars. They each received a $2,000 or $3,000
scholarship for college expenses during the 2020-
2021 academic year. They may be eligible for the
scholarship to be renewed each year for the
remainder of their education.
.
D
E
V
R
E
S
E
R
S
T
H
G
R
L
L
A
I
.
D
E
T
A
R
O
P
R
O
C
N
I
N
U
M
M
O
C
U
D
0
2
0
2
©
T
H
G
R
Y
P
O
C
I
09
Ducommun Incorporated / 2020 Annual Report
10
Ducommun Incorporated / 2020 annual Report
Diversity & Inclusion
In 2020, we began seeing the results of the diversity
more than 12,000 talented, highly qualified and diverse
STEM students while offering students work experience
and inclusion initiatives we implemented in 2019. We
and access to future job opportunities.
achieved a 22% year-over-year increase in women
being promoted into leadership roles and a 20%
year-over-year increase in minorities being promoted
Recognition
In February 2020, Ducommun was recognized by
into such positions during the past year. The total
Boeing as meeting performance criteria for
percentage of women and minorities in leadership
participation in their initial launch of the “Boeing
positions at the Company as of December 31, 2020, is
Premier Bidding” program. This recognition was given
33% women and 23% minorities.
to select suppliers who have demonstrated high level
quality and delivery performance among other criteria.
We continue to focus on developing a diverse talent
We are excited about the program and the opportunity
pipeline to support our ongoing focus on innovation,
to further build upon our partnership as a key product
creativity and improving results. In 2020 we partnered
provider to Boeing.
with established and recognized diversity job boards
and college internship programs that provide access to
In March 2020, Ducommun’s Performance Center in
highly qualified and diverse Science, Technology,
Coxsackie, New York, received the Sikorsky Black Hawk
Engineering and Math (STEM) students. These
Supplier of the Year 2019. This award recognizes the
programs are intended to augment our existing
Coxsackie team for overall performance, customer
internship matching process by providing access to
service and support of Sikorsky initiatives that enabled
this significant accomplishment.
11
In November 2020, Ducommun Incorporated was
everyone looks forward to better days ahead for the
named to the Orange County, California Business
entire world in 2021, and we are ready to be a part of
Journal’s (OCBJ) 2020 List of Fastest-Growing Public
the recovery. Finally, my sincere thanks to our team
Companies. Ducommun ranked 5th among large public
members and their families who supported them, as
companies, a significant increase from our position as
they showed up and delivered every day despite all the
the 11th fastest-growing public Company in 2019.
issues. I am proud of you and personally grateful for
In December 2020, Ducommun’s Performance Center
in Huntsville, Arkansas, received the Gold Medallion
Sincerely,
your support!
Award from BAE Combat Mission Systems, which
recognizes suppliers’ ability to deliver quality products
on time and on budget throughout the year.
outlook
As I mentioned at the beginning of my letter to you,
2020 was a very difficult time. The circumstances
during the year required a great deal of resolve, and
the Ducommun team strived to do its very best. My
hope is you will see it in this year’s report. I also want
to take this time to thank our dedicated shareholders
who continue to believe in our team and future. I know
Stephen G. Oswald
Chairman, President and Chief Executive Officer
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, 2020
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 001-08174
_________________________________________________________
DUCOMMUN INCORPORATED
(Exact name of registrant as specified in its charter)
_________________________________________________________
Delaware
(State or other jurisdiction of
incorporation or organization)
200 Sandpointe Avenue, Suite 700, Santa Ana,
California
(Address of principal executive offices)
95-0693330
(I.R.S. Employer
Identification No.)
92707-5759
(Zip code)
Registrant’s telephone number, including area code: (657) 335-3665
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $.01 par value per share
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 x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically 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 x No ¨
Table of Contents
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a
smaller reporting company, or an emerging growth 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
x
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 has filed a report on and attestation to its management's assessment of the
effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act by the registered
public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes ☐ No x
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the
price of which the common equity was last sold, or the average bid and asked price of such common equity, as of the last
business day of the registrant’s most recently completed second fiscal quarter ended June 27, 2020 was $381 million.
The number of shares of common stock outstanding on February 3, 2021 was 11,763,468.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference:
(a) Proxy Statement for the 2021 Annual Meeting of Shareholders (the “2021 Proxy Statement”), incorporated
partially in Part III hereof.
Table of Contents
DUCOMMUN INCORPORATED AND SUBSIDIARIES
Page
Forward-Looking Statements and Risk Factors
Forward-Looking Statements and Risk Factors
PART I
PART I
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 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.
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
3
3
4
4
10
10
21
21
21
21
21
21
22
22
22
22
22
22
23
23
36
36
37
37
37
37
37
37
38
38
38
38
38
38
38
38
39
39
39
39
40
40
82
82
82
82
2
Table of Contents
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, industry trends and expectations, 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:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
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;
economic and geopolitical developments and conditions;
pandemics, such as COVID-19, significantly impacting the global economy and specifically, the commercial
aerospace end-use market;
disasters, natural or otherwise, damaging or disrupting our operations;
unfavorable developments in the global credit markets;
our ability to operate within highly competitive markets;
3
Table of Contents
•
•
•
•
•
technology changes and evolving industry and regulatory standards;
possible goodwill and other asset impairments;
the risk of environmental liabilities;
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, in October 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 $76.8 million, net of cash acquired, funded by drawing down on our revolving
credit facility. The acquisition of Nobles advanced 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
4
Table of Contents
and electromechanical systems. Our products include sophisticated radar enclosures, aircraft avionics racks and shipboard
communications and control enclosures, printed circuit board assemblies, cable assemblies, wire harnesses, and interconnect
systems, lightning diversion strips, surge suppressors, conformal shields and other high-level complex assemblies. Electronic
Systems utilizes a highly-integrated production process, including manufacturing, engineering, fabrication, machining,
assembly, electronic integration, and related processes. Engineering, technical and 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, engine components, and ammunition handling systems. 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 94% of
our total net revenues in 2020. These markets are serviced by suppliers which are stratified, from the lowest value provided to
the highest, into four tiers: original equipment manufacturers (“OEMs”), Tier One, Tier Two, and Tier Three. 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 One
suppliers manufacture aircraft sections and purchase assemblies. 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 Three suppliers principally provide components or detailed parts. 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 27% of our total net revenues for 2020.
The COVID-19 pandemic has caused an unprecedented adverse impact to demand for civil air travel, creating a significant
challenge for some of our customers and the entire commercial aerospace manufacturing and services sector. Global
economic growth, a primary driver for air travel, is expected to have declined to between negative four percent and negative
five percent in 2020. The latest International Air Transport Association (“IATA”) forecast projected full-year 2020 passenger
traffic to be down more than 60% compared to 2019 as global economic activity slows due to COVID-19, and governments
severely restricted travel to contain the spread of the virus. The recovery remains slow and uneven as travel restrictions and
varying regional travel protocols continue to impact air travel. Generally, it is expected that domestic travel will recover
5
Table of Contents
faster than international travel. The pace of the commercial market recovery will be heavily dependent on COVID-19
infection rates, progress on testing, government travel restrictions, and timing and availability of vaccines.
In addition, airline financial performance, which also plays a role in the demand for new capacity, has been adversely
impacted by the COVID-19 pandemic. According to IATA, net losses in 2020 for the airline industry are expected to be
approximately $118 billion, compared to net profits of $26 billion in 2019. Our customers are taking actions to combat the
effects of the COVID-19 pandemic on the market by preserving liquidity. This comes in many forms such as deferral of
advances and other payments to suppliers, deferrals of deliveries, reduced spending, and in some cases, cancellation of
orders. We face a challenging environment in the near and medium future as airlines adjust to reduced air traffic, which in
turn, will lower demand for commercial aerospace products. The current environment is also affecting the financial viability
of some airlines.
In The Boeing Company’s (“Boeing”) 2020 Annual Report on Form 10-K filed with the Securities and Exchange
Commission (the “SEC”), they indicated that they expect it will take approximately three years for worldwide travel to return
to 2019 levels and a few years beyond that for the industry to return to the long-term trend growth of five percent.
The long-term outlook for the industry continues to remain positive due to the fundamental drivers of air travel demand:
economic growth, increasing propensity to travel due to increased trade, globalization, and improved airline services driven
by liberalization of air traffic rights between countries. The COVID-19 pandemic has reduced the near to medium term
demand, but Boeing’s commercial market outlook forecast projects a four percent growth rate for passenger and cargo traffic
over a 20 year period. Based on long-term global economic growth projections of two and a half percent average annual gross
domestic product (“GDP”) growth, Boeing projects a demand for 43,000 new airplanes over the next 20 years. However, the
industry remains vulnerable to various developments including business travel may not return to pre-pandemic levels due to
the use of virtual meeting platforms, fuel price spikes, credit market fluctuations, acts of terrorism, natural disasters, conflicts,
epidemics, pandemics, and increased global environmental regulations. We believe we are well positioned given our product
capabilities and our initiatives to increase operating efficiencies to participate in the near term recovery and the long term
projected growth rate for commercial air traffic and build rates for large commercial aircraft for the airframe manufacturing
industry. If the recovery is slower than anticipated or any of the developments occur, it could have a material adverse effect
on our results of operations, financial position, and/or cash flows.
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 2020 represented 67% of our total net revenues during 2020.
The Omnibus appropriations acts for fiscal year 2021 (“FY2021”), enacted in December 2020, provided FY2021
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”), reducing
budget uncertainty and the risk of sequestration. However, there continues to be uncertainty with respect to future 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 6% of our total net revenues during
2020.
We believe our business in these markets in the long-term, is stable and we are well positioned in these markets even though
the COVID-19 pandemic has had and will continue to have at least a near term impact on our on our business.
6
Table of Contents
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 demand and 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. As a result of the COVID-19 pandemic, both major large aircraft
manufacturers, Boeing and Airbus SE (“Airbus”), have announced lower build rates for the near and medium future. While
the ramp up in production and demand will be slower in the near and medium future, we will continue to identify
opportunities to expand our presence and offerings with both major large aircraft manufacturers and their supply chain.
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 are expanding our presence with unmanned aerial vehicles
and continue to support various satellite programs.
Our sales into the Industrial end-use markets are customer focused in the various markets and driven primarily by their
capital spending and manufacturing outsourcing demands.
We continue to broaden and diversify our customer base in the end-use markets we serve by providing innovative product
and service solutions by drawing on our core competencies, experience and technical expertise. Net revenues related to
military and space, commercial aerospace, and Industrial end-use markets in 2020 and 2019 were as follows:
2020 Net Revenues of $628.9 Million
2019 Net Revenues of $721.1 Million
$628.9
27%
6%
67%
$721.1
48%
7%
45%
COMMERCIAL AEROSPACE
INDUSTRIAL
MILITARY & SPACE
Many of our contracts are firm 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, plus a reasonable profit. 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. The Boeing Company (“Boeing”) and Raytheon Technologies Corporation
(“Raytheon”) were our largest customers, both generating more than 10 percent of our 2020 net revenues. Revenues from our
7
Table of Contents
top 10 customers, including Boeing and Raytheon were 61% of total net revenues during 2020. Net revenues by major
customer for 2020 and 2019 were as follows:
2020 Net Revenues by Major Customer
2019 Net Revenues by Major Customer
39%
11%
5%
Boeing: 11%
Lockheed Martin: 5%
2020
9%
Northrop: 9%
Raytheon: 21%
Spirit: 3%
21%
Next Top Five Customers: 12%
All Other Customers: 39%
12%
3%
35%
17%
Boeing: 17%
4%
4%
16%
Lockheed Martin: 4%
Northrop: 4%
Raytheon: 16%
Spirit: 12%
Next Top Five Customers: 12%
All Other Customers: 35%
2019
12%
12%
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 15 to our consolidated financial statements included in Part IV, Item 15(a) of this Form 10-K.
RESEARCH AND DEVELOPMENT
We perform concurrent engineering with our customers and product development activities under our self-funded programs,
as well as under contracts with others. Concurrent engineering and product development activities are performed for
commercial, military and space applications.
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
8
Table of Contents
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 $822.0 million
at December 31, 2020, compared to $910.2 million at December 31, 2019. The decrease in backlog was primarily in the
commercial aerospace end-use market.
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 $779.7 million at December 31, 2020. We anticipate
recognizing an estimated 65% or $507.0 million of our remaining performance obligations during 2021.
ENVIRONMENTAL MATTERS
Our business, operations and facilities are subject to numerous stringent federal, state and local environmental laws and
regulations issued by government agencies, including the Environmental Protection Agency (“EPA”). Among other matters,
these regulatory authorities impose requirements that regulate the emission, discharge, generation, management, transport and
disposal of hazardous 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 2021 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, 2020 for our estimated liabilities related to
these sites. For further information, see Note 14 in the accompanying notes to consolidated financial statements included in
Part IV, Item 15(a) of this Form 10-K. In addition, see Risk Factors contained within Part I, Item 1A of this Form 10-K for
certain risks related to environmental matters.
HUMAN CAPITAL
Our employees are critical to our success. We attract, develop, and retain employee talent by offering competitive
compensation packages and fostering a culture of care about their well being. As such, we strive to make the safety of our
workforce our highest priority as evidenced by our response to the COVID-19 pandemic. To this end, we focus on protecting
the health and safety of our employees and establishing a safe work environment by following the COVID-19 safety
recommendations issued by the Centers for Disease Control and Prevention at all of our facilities.
In addition, we endeavor to be a proactive corporate citizen by being responsive and supportive of the needs of our
employees to attract qualified talent. We strive to provide opportunities for qualified members of underrepresented
communities and women for advancement within our company and award scholarships to the children and grandchildren of
our employees so that they may develop the skills that will support their entry into the workforce. In addition, in 2018, we
implemented an Employee Stock Purchase Plan (“ESPP”) to provide employees the opportunity to share in the ownership of
our company and benefit from our performance through the purchase of our company’s stock. The ESPP allows eligible
employees to accumulate contributions through after-tax payroll deductions to purchase shares of our company’s stock at a
15% discount and serves as a key retention mechanism for our human capital.
As of December 31, 2020, we employed 2,450 people, of which 445 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
9
Table of Contents
available free of charge on our website as soon as reasonably practicable after they are filed with or furnished to the SEC.
Information included on 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.
CAPITAL STRUCTURE RISKS
Our indebtedness could limit our financing options, adversely affect our financial condition, and prevent us from
fulfilling our debt obligations.
In December 2019, we completed the refinancing of a portion of our existing debt by entering into both a new revolving
credit facility (“New Revolving Credit Facility”) and a new term loan (“New Term Loan”). These replaced the existing
revolving credit facility that was entered into in November 2018 (“2018 Revolving Credit Facility”). 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, paid down a portion of the 2018 Term Loan of $56.0 million,
paid the accrued interest associated with the amounts being paid down on the 2018 Revolving Credit Facility and 2018 Term
Loan, paid the fees related to this transaction, and the remainder used for general corporate expenses.
At December 31, 2020, we had a total of $320.6 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 in October 2019.
Our ability to obtain additional financing or complete a debt refinancing in the future may be limited. Should we not have
ready access to capital markets, 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;
10
Table of Contents
•
•
•
•
•
expose us to the risk of increased borrowing costs and higher interest rates as all 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.
In December 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 entered 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 $240.0 million
that is a 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, paid down a portion of the 2018 Term
Loan of $56.0 million, paid the accrued interest associated with the amounts being paid down on the 2018 Revolving Credit
Facility and 2018 Term Loan, paid the fees related to this transaction, with the remainder used for general corporate
expenses.
The terms of the New Term Loan require that we make installment payments of 1.25% of the initial outstanding principal
balance on a quarterly basis, on the last day of each calendar quarter. We were required to make installment payments of
0.25% of the outstanding principal balance of the 2018 Term Loan amount on a quarterly basis, however, the $56.0 million
we paid as part of the December 2019 refinancing paid all the required quarterly installment payments on the 2018 Term
Loan until maturity. In addition, if we exceed the annual excess cash flow threshold, we are required to make an annual
additional principal payment based on the consolidated adjusted leverage ratio. 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. 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, with notional value in
aggregate, totaling $135.0 million. However, all of these interest rate cap hedges matured in June 2020. At December 31,
2020, the outstanding balance on the Credit Facilities was $320.6 million with an average interest rate of 3.59%. Should
interest rates increase significantly, 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.
11
Table of Contents
The covenants in 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”) and
other adjustments.
At December 31, 2020, 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. 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.
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.
BUSINESS AND OPERATIONAL RISKS
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, pandemics, and other developments affecting our end-
12
Table of Contents
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 a significant
portion 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 (“Lockheed”), Northrop Grumman Corporation
(“Northrop”), and Raytheon Technologies Corporation (“Raytheon”) in 2020 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 61% of our total 2020 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.
Boeing was our largest customer prior to 2020 and remains one of our largest customers in 2020, and the 737 MAX was our
highest revenue platform prior to 2020. Boeing recently received regulatory approval of the 737 MAX and as such, we expect
to begin a modest ramp up in our production rates. Revenue growth with our other commercial customers and defense OEMs
(also known as prime contractors) has helped to mitigate a significant portion of this risk for the time being. However, the
COVID-19 pandemic has dampened civil air travel demand significantly, and if traveler confidence does not return in the
near future, it may make it difficult to continue to offset a significant portion of this risk.
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
13
Table of Contents
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.
Exports of certain of our products are subject to various export control regulations and authorizations, and we may
not be successful in obtaining the necessary U.S. Government approvals and related export licenses for proposed sales
to certain foreign customers.
We must comply with numerous laws and regulations relating to the export of some of our products before we are permitted
to sell those products outside the United States. Compliance often entails the submission and timely receipt of the necessary
export approvals, licenses, or authorizations from the U.S. Government. Over the last several years, the U.S. export licensing
environment for munitions has been adversely affected by a number of factors, including, but not limited to, the changing
geopolitical environment and heightened tensions with other countries (which shift and evolve over time). Accordingly, we
can give no assurance that we will be successful in obtaining, in a timely manner or at all, the approvals, licenses or
authorizations we need to sell our products outside the United States, which may result in the cancellation of orders and
significant penalties to our customers if we do not make deliveries and fulfill our contractual commitments. Any significant
delay in, or impairment of, our ability to sell products outside of the United States could have a material adverse effect on our
business, financial condition and results of operations.
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.
14
Table of Contents
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.
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.
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:
•
•
•
•
•
•
political instability;
economic and geopolitical developments and conditions;
pandemics and disasters, natural or otherwise;
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
15
Table of Contents
•
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.
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 2021 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.
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.
LEGAL, REGULATORY, TAX, AND ACCOUNTING RISKS
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
16
Table of Contents
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.
Our operations are subject to numerous extensive, complex, costly and evolving laws, regulations and restrictions,
including cybersecurity requirements, 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, controlling the import and export of defense
articles and services, and cybersecurity requirements.
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
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, procurement reform, and compliance with cybersecurity
requirements. 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.
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
17
Table of Contents
failure by us to comply with present or future regulations could subject us to future liabilities or the suspension of production,
which could have a material adverse effect on our financial results. Moreover, some environmental laws relating to
contaminated sites can impose joint and several liability retroactively regardless of fault or the legality of the activities giving
rise to the contamination. Compliance with existing or future environmental laws and regulations may require extensive
capital expenditures, increase our cost or impact our production capabilities. Even if such expenditures are made, there can be
no assurance that we will be able to comply. We have been directed to investigate and take corrective action for groundwater
contamination at certain sites and our ultimate liability for such matters will depend upon a number of factors. See Note 14 to
our consolidated financial statements included in Part IV, Item 15(a) of this Form 10-K for further information.
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.
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 a majority 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.
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, changes 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, production cost of contracts, and lease right-of-use assets
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 goodwill and other intangible assets as of December 31, 2020 were $295.6 million, or 35% of total assets. If our
goodwill and/or other assets are impaired, it could have an adverse effect on our results of operations and financial condition.
18
Table of Contents
See “Goodwill and Indefinite-Lived Intangible Assets” in Note 6 of our consolidated financial statements included in Part IV,
Item 15(a) of this Form 10-K for further information.
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 in December
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.
Our ability to accurately report our financial results or prevent fraud may be adversely affected if our internal
control over financial reporting is not effective.
The accuracy of our financial reporting is dependent on the effectiveness of our internal controls. We are required to provide
a report from management to our shareholders on our internal control over financial reporting that includes an assessment of
the effectiveness of these controls. Internal control over financial reporting has inherent limitations, including human error,
the possibility that controls could be circumvented or become inadequate as a result of changed conditions, and fraud. Due to
these inherent limitations, internal control over financial reporting might not prevent or detect all misstatements or fraud. If
we cannot maintain and execute adequate internal control over financial reporting or implement required new or improved
controls that provide reasonable assurance of the reliability of the financial reporting and preparation of our financial
statements for external use, our ability to accurately report our financial results or prevent fraud could be adversely affected.
LABOR AND SUPPLY CHAIN RISKS
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, 2020, we employed 2,450 people. Two of our performance centers are parties to collective bargaining
agreements, covering 155 full time hourly employees in one of those performance centers and 290 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.
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
19
Table of Contents
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.
GENERAL RISKS
The COVID-19 pandemic has had a significant impact but could have a material adverse effect on our business,
results of operations and financial condition.
The COVID-19 pandemic has caused and continues to cause significant volatility in financial markets, including the market
price of our stock, and in the commercial aerospace industry during 2020, which has raised the prospect of an extended global
recession. Public health problems resulting from COVID-19 and precautionary measures instituted by governments and
businesses to mitigate its spread, including travel restrictions, quarantines, shelter in place directives, and shutting down of
non-essential businesses has and continues to contribute to a general slowdown in the global economy. The COVID-19
pandemic has had, and if it continues for an extended period of time, it could have a material adverse impact on our business
and the businesses of our customers, suppliers and distribution partners, and could further disrupt our operations. Changes in
our operations in response to the COVID-19 pandemic or employee illnesses resulting from the pandemic, may result in
inefficiencies or delays, including in sales and product development efforts and our manufacturing and supply chain, and
additional costs related to business continuity initiatives, that cannot be fully mitigated through succession planning,
employees working remotely, or teleconferencing technologies. The spread of COVID-19 along with related travel
restrictions and operational issues has caused a decrease in the demand for air travel and has resulted in lower demand from
civil aviation customers for our products. While the full extent and impact of the COVID-19 pandemic cannot be reasonably
estimated with certainty at this time, COVID-19 has had a significant impact on our business, the businesses of our customers
and suppliers, as well as our results of operations and financial condition, and may have a material adverse impact on our
business, results of operations and financial condition in 2021 and beyond.
Cybersecurity 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. Cybersecurity 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.
Assertions by third parties that we violated their intellectual property rights could have a material adverse effect on
our business, financial condition, and results of operations.
Third parties may claim that we, our customers, licensees, or parties indemnified by us are infringing upon or otherwise
violating their intellectual property rights. Such claims may be made by competitors seeking to obtain a competitive
advantage or by other parties. Additionally, in recent years, individuals and groups have begun purchasing intellectual
property assets for the purpose of making claims of infringement and attempting to extract settlements from companies like
ours.
Any claims that we violated a third party’s intellectual property rights can be time consuming and costly to defend and
distract management’s attention and resources, even if the claims are without merit. Such claims may also require us to
redesign affected products and services, enter into costly settlement or license agreements or pay costly damage awards, or
face a temporary or permanent injunction prohibiting us from marketing or providing the affected products and services.
Even if we have an agreement to indemnify us against such costs, the indemnifying party may not have sufficient financial
20
Table of Contents
resources or otherwise be unable to uphold its contractual obligations. If we cannot or do not license the infringed technology
on favorable terms or cannot or do not substitute similar technology from another source, our revenue and earnings could be
adversely impacted.
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 performance centers generated $178.6 million in net revenues during 2020. Even if covered by insurance, any
significant damage or destruction of our facilities due to storms, earthquakes, fires 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. See discussion of a fire on June 29, 2020 which severely damaged our Guaymas,
Mexico performance center in Note 14 to our consolidated financial statements included in Part IV, Item 15(a) of this Form
10-K for further information.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We occupy 27 owned or leased facilities, totaling 2.0 million square feet of manufacturing area and office space. At
December 31, 2020, facilities which were in excess of 50,000 square feet each were all manufacturing facilities as follows:
Location
Carson, California
Monrovia, California
Parsons, Kansas
Coxsackie, New York
Carson, California
Joplin, Missouri
Phoenix, Arizona
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
104,000
100,000
88,000
80,000
77,000
77,000
69,000
55,000
55,000
53,000
50,000
Owned/Expiration
of Lease
Owned
Owned
Owned
Owned
2021
2021
2022
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. All properties are occupied except for Phoenix, Arizona.
ITEM 3. LEGAL PROCEEDINGS
See Note 14 to our consolidated financial statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K for
a description of our legal proceedings.
21
Table of Contents
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, 2020, we had 157
holders of record of our common stock. We have not paid any dividends since the first quarter of 2011 and we do not expect
to pay dividends for the foreseeable future.
See “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 2021 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 2021 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 2020
$350
$325
$300
$275
$250
$225
$200
$175
$150
$125
$100
$75
$50
$25
$0
$100
$331
$209
$186
2015
2016
2017
2018
2019
2020
Ducommun Inc.
Russell 2000 Index
Median of Peers
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
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.
COVID-19 Pandemic Impact on Our Business
The COVID-19 pandemic has had a significant impact on our overall business during the year ended December 31, 2020. As
a result of the COVID-19 pandemic, precautionary measures were instituted by governments and businesses to mitigate its
spread, including the imposition of travel restrictions, quarantines, shelter in place directives, and shutting down of non-
essential businesses.
We have made the safety of our workforce our top priority by implementing numerous well-being protocols related to health
and welfare at all of our facilities. Safety protocols consistent with guidelines provided by state and local governments and
the Centers for Disease Control and Prevention (“CDC”) have been put into practice, including social distancing, provision of
personal protective equipment, enhanced cleaning, and flexible work arrangements wherever possible. We have also offered
enhanced leave and benefits to our employees and provide frequent updates to ensure our workforce is kept apprised of
evolving regulations and safety measures.
On March 27, 2020, the U.S. enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) which
provides tax relief to individuals and businesses affected by the coronavirus pandemic. We have not requested or accepted
any loans or payments that are available under the CARES Act, however, we have utilized the option to defer payment of the
employer portion of payroll taxes (Social Security) that would otherwise be required to be made during the period beginning
March 27, 2020 to December 31, 2020. One half of the deferred amount is required to be paid by December 31, 2021, with
the remaining 50% to be paid by December 31, 2022. As of December 31, 2020, we deferred $6.1 million, which is included
as part of accrued liabilities and other long-term liabilities on the consolidated balance sheets.
The COVID-19 pandemic has and continues to contribute to a general slowdown in the global economy and specifically, the
commercial aerospace end-use market. Both major large aircraft manufacturers, The Boeing Company and Airbus SE, have
announced lower build rates for the near and medium future. In its 2020 Annual Report on Form 10-K, Boeing indicated it
expects it will take approximately three years for worldwide travel to return to 2019 levels and a few years beyond that for
the industry to return to long-term trend growth of five percent. While the full extent and impact of the COVID-19 pandemic
cannot be reasonably estimated with certainty at this time, COVID-19 has had a significant impact on our business, the
businesses of our customers and suppliers, as well as our results of operations and financial condition, and may have a
material adverse impact on our business, results of operations and financial condition for 2021 and beyond. See Risk Factors
included in Part I, Item 1A of this Annual Report on Form 10-K (“Form 10-K”).
Recap for the year ended December 31, 2020:
•
•
•
Net revenues of $628.9 million
Net income of $29.2 million, or $2.45 per diluted share
Adjusted EBITDA of $87.9 million
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 $87.9
million and $92.3 million for years ended December 31, 2020 and December 31, 2019, 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
23
Table of Contents
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;
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;
24
Table of Contents
•
•
•
•
•
•
•
•
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 expense 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;
Guaymas fire related expenses 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;
Loss on extinguishment of debt may be useful to our investors for determining current cash flow; and
Other debt refinancing costs may be useful to our investors in evaluating our core operating performance.
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
Depreciation
Amortization
Stock-based compensation expense
Restructuring charges (1)
Guaymas fire related expenses
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,
2020
2019
2018
$
$
29,174
13,653
2,807
13,824
15,026
9,299
2,424
1,704
—
—
—
87,911
$
$
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
14.0 %
12.8 %
11.2 %
(1) 2018 included $0.1 million of restructuring charges that were recorded as cost of goods sold.
(2) 2019 and 2018 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”) and Certified Thermoplastics
Co., LLC (“CTP”) in October 2019 and April 2018, respectively, and are both part of our Structural Systems
operating segment.
25
Table of Contents
RESULTS OF OPERATIONS
2020 Compared to 2019
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,
2020
628,941
491,203
137,738
89,808
2,424
45,506
(13,653)
—
128
31,981
2,807
29,174
%
of Net Revenues
100.0 % $
78.1 %
21.9 %
14.3 %
0.4 %
7.2 %
(2.2) %
— %
— %
5.0 %
nm
4.6 % $
2019
721,088
568,891
152,197
95,964
—
56,233
(18,290)
(180)
—
37,763
5,302
32,461
8.8 %
2.45
nm
nm $
14.0 %
2.75
$
$
$
%
of Net Revenues
100.0 %
78.9 %
21.1 %
13.3 %
— %
7.8 %
(2.6) %
— %
— %
5.2 %
nm
4.5 %
nm
nm
Net Revenues by End-Use Market and Operating Segment
Net revenues by end-use market and operating segment during 2020 and 2019, respectively, were as follows:
(Dollars in thousands)
Years Ended December 31,
% of Net Revenues
Change
2020
2019
2020
2019
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
$
$
$
$
$
$
99,059 $
(180,361)
(10,845)
(92,147) $
422,859 $
168,142
37,940
628,941 $
323,800
348,503
48,785
721,088
64,431 $
(21,326)
(10,845)
32,260 $
308,676 $
46,017
37,940
392,633 $
244,245
67,343
48,785
360,373
67.2 %
26.8 %
6.0 %
100.0 %
78.6 %
11.7 %
9.7 %
100.0 %
44.9 %
48.3 %
6.8 %
100.0 %
67.8 %
18.7 %
13.5 %
100.0 %
34,628 $
(159,035)
(124,407) $
114,183 $
122,125
236,308 $
79,555
281,160
360,715
48.3 %
51.7 %
100.0 %
22.1 %
77.9 %
100.0 %
26
Table of Contents
Net revenues for 2020 were $628.9 million compared to $721.1 million for 2019. The year-over-year decrease was primarily
due to the following:
•
•
$180.4 million lower revenues in our commercial aerospace end-use markets due to lower build rates on large
aircraft platforms; partially offset by
$99.1 million higher revenues in our military and space end-use markets due to higher build rates on military
fixed-wing aircraft platforms, additional content and higher build rates on other military and space platforms,
and higher build rates on various missile platforms.
Net Revenues by Major Customers
A significant portion of our net revenues are from our top ten customers as follows:
Boeing Company
Lockheed Martin Corporation
Northrop Grumman Corporation
Raytheon Technologies Corporation
Spirit AeroSystems Holdings, Inc.
Top ten customers(1)
Years Ended December 31,
2020
2019
10.5 %
5.0 %
9.1 %
20.9 %
3.3 %
61.1 %
16.6 %
4.0 %
4.0 %
15.6 %
12.2 %
65.4 %
(1) Includes The Boeing Company (“Boeing”), Lockheed Martin Corporation (“Lockheed Martin”), Northrop Grumman
Corporation (“Northrop”), Raytheon Technologies Corporation (“Raytheon”), and Spirit AeroSystems Holdings, Inc.
(“Spirit”).
The revenues from Boeing, Lockheed Martin, Northrop, 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 21.9% in 2020 compared to 21.1% in 2019 primarily due to favorable product mix, partially offset by unfavorable
manufacturing volume.
Selling, General and Administrative (“SG&A”) Expenses
SG&A expenses decreased $6.2 million in 2020 compared to 2019 primarily due to lower other corporate expenses of $3.0
million, lower professional services fees of $2.6 million, and one-time severance charges of $1.7 million in the prior year,
which did not recur in 2020, partially offset by higher amortization of intangibles of $1.8 million.
Restructuring Charges
Restructuring charges increased $2.4 million in 2020 compared to 2019 due to the restructuring plan that began in 2020 that
was expected to increase operating efficiencies. See Note 1 to our consolidated financial statements included in Part IV,
Item 15(a) of this Annual Report on Form 10-K for further information on restructuring activities.
Interest Expense
Interest expense decreased in 2020 compared to 2019 primarily due to lower interest rates, partially offset by a higher
outstanding balance on the Credit Facilities driven by the acquisition of Nobles Worldwide, Inc. (“Nobles”) in October 2019,
and higher net draw downs on the Revolving Credit Facility, including $50.0 million during the first quarter of 2020 to hold
as cash on hand, $25.0 million of which was repaid during the fourth quarter of 2020. See Note 8 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
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 8 to our consolidated financial statements included in Part IV, Item 15(a) of this Annual Report
on Form 10-K for further information on our long-term debt.
Income Tax Expense
We recorded an income tax expense of $2.8 million (an effective tax rate of 8.8%) in 2020, compared to $5.3 million (an
effective tax rate of 14.0%) in 2019. The decrease in the effective tax rate for 2020 compared to 2019 was primarily due to
higher discrete income tax benefits recognized from releases of uncertain tax positions and additional research and
development tax credits related to 2019. The higher discrete income tax benefits were partially offset by a reduction in
discrete income tax benefits related to changes in valuation allowance and other deferred tax assets.
Our unrecognized tax benefits were $4.1 million and $5.7 million in 2020 and 2019, respectively. We record interest and
penalty charges, 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, 2020 and 2019 were not significant. If recognized, $2.4
million would affect the effective income tax rate. Due to federal and state statute of limitations for tax year 2016 that expired
on October 15, 2020, we released uncertain tax positions of $2.2 million and recognized income tax benefits of $2.1 million
in 2020. We do not expect the total amount of unrecognized tax benefits to increase or decrease by a material amount 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 2016 and by state taxing authorities for tax years after 2015. 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.
On March 27, 2020, the U.S. enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) that provides
tax relief to individuals and businesses affected by the coronavirus pandemic. We considered the provisions of the CARES
Act and determined they do not have a material impact to our overall income taxes. We have utilized the option to defer
payment of the employer portion of payroll taxes (Social Security) that would otherwise be required to be made during the
period beginning March 27, 2020 to December 31, 2020. See COVID-19 Pandemic Impact on Our Business included in Part
II, Item 7 of this Annual Report on Form 10-K (“Form 10-K”). As of December 31, 2020, we deferred income tax deductions
related to payroll taxes of $6.1 million and a deferred tax asset of $1.4 million is included as part of the net deferred income
taxes on the consolidated balance sheet.
On December 27, 2020, the U.S. enacted the Consolidated Appropriations Act, 2021 (the “Act”) that provides additional tax
relief to individuals and businesses affected by the coronavirus pandemic. We considered the provisions of the Act and
determined they do not have a material impact to our overall income taxes.
Net Income and Earnings per Diluted Share
Net income and earnings per diluted share for 2020 were $29.2 million, or $2.45 per diluted share, compared to net income
and earnings per diluted share for 2019 of $32.5 million, or $2.75 per diluted share. The decrease in net income in 2020
compared to 2019 was due to a decrease of $14.5 million in gross profit as a result of lower revenues and higher restructuring
charges of $2.4 million, partially offset by lower SG&A expenses of $6.2 million, lower interest expense of $4.6 million, and
lower income tax expense of $2.5 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 2020 and 2019:
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
Depreciation and Amortization
Restructuring Charges
Structural Systems
Operating Income
Depreciation and Amortization
Restructuring Charges
Inventory Purchase Accounting Adjustments
Guaymas Fire Related Expenses
Corporate General and Administrative Expenses (1)
Operating Loss
Other Income
Depreciation and Amortization
Stock-Based Compensation Expense
Other Debt Refinancing Costs
%
Change
(Dollars in thousands)
Years Ended December 31,
2020
2019
%
of Net
Revenues
2020
%
of Net
Revenues
2019
9.0 % $ 392,633 $ 360,373
(34.5) %
236,308
360,715
62.4 %
37.6 %
50.0 %
50.0 %
(12.8) % $ 628,941 $ 721,088
100.0 %
100.0 %
$
51,894 $ 38,613
19,584
71,478
46,836
85,449
(25,972)
(29,216)
$
45,506 $ 56,233
13.2 %
8.3 %
10.7 %
13.0 %
(4.1) %
7.2 %
(4.1) %
7.8 %
$
51,894 $ 38,613
14,038
14,170
596
—
66,528
52,783
16.9 %
14.6 %
19,584
14,559
1,828
—
1,704
37,675
46,836
13,663
—
511
—
61,010
15.9 %
16.9 %
(25,972)
(29,216)
128
253
9,299
—
—
472
7,161
77
(16,292)
(21,506)
Adjusted EBITDA
$
87,911 $ 92,287
14.0 %
12.8 %
Capital Expenditures
Electronic Systems
Structural Systems
Corporate Administration
Total Capital Expenditures
$
5,037 $
5,508
8,570
13,338
—
—
$
13,607 $ 18,846
29
Table of Contents
(1) Includes costs not allocated to either the Electronic Systems or Structural Systems operating segments.
Electronic Systems
Electronic Systems’ net revenues in 2020 compared to 2019 increased $32.3 million primarily due to the following:
•
•
•
$64.4 million higher revenues in our military and space end-use markets due to higher build rates on military
fixed-wing aircraft platforms, other military and space platforms, and various missile platforms; partially offset
by
$21.3 million lower revenues in our commercial aerospace end-use markets due to lower build rates on other
commercial aerospace platforms, large aircraft platforms, regional and business aircraft platforms, and
commercial rotary-wing aircraft platforms; and
$10.8 million lower revenues in our industrial end-use markets due to timing of customer requirements.
Electronic Systems segment operating income in 2020 compared to 2019 increased $13.3 million due to favorable
manufacturing volume and favorable product mix.
Structural Systems
Structural Systems’ net revenues in 2020 compared to 2019 decreased $124.4 million primarily due to the following:
•
•
$159.0 million lower revenues in commercial aerospace end-use markets due to lower build rates on large
aircraft platforms; partially offset by
$34.6 million higher revenues in military and space end-use markets due to higher build rates on various missile
platforms, additional content and higher build rates on other military and space platforms, and higher build rates
on military fixed-wing aircraft platforms.
The Structural Systems operating income in 2020 compared to 2019 decreased $27.3 million primarily due to unfavorable
manufacturing volume, partially offset by favorable product mix and lower other manufacturing costs.
On June 29, 2020, a fire severely damaged our performance center in Guaymas, Mexico, which is part of our Structural
Systems segment. There were no injuries, however, property and equipment, inventory, and tooling in this leased facility
were damaged. We have insurance coverage and expect the majority, if not all, of these items will be covered, less our
deductible. The full financial impact cannot be estimated at this time as we are currently working with our insurance carriers
to determine the cause of the fire. Our Guaymas performance center is comprised of two buildings with an aggregate total of
62,000 square feet. The loss of production from the Guaymas performance center is being absorbed by our other existing
performance centers. See Note 14 to our consolidated financial statements included in Part IV, Item 15(a) of this Annual
Report on Form 10-K for additional information.
Corporate General and Administrative (“CG&A”) Expenses
CG&A expenses in 2020 compared to 2019 decreased $3.2 million primarily due to lower professional services fees of $2.2
million and one-time severance charges of $1.7 million in the prior year, which did not recur in 2020.
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 decrease in backlog was primarily in the commercial aerospace end-use markets, partially offset by an increase in
military and space end-use markets. The following table summarizes our backlog for 2020 and 2019:
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
2019 Compared to 2018
(Dollars in thousands)
December 31,
Change
2020
2019
78,370 $
(162,316)
(4,267)
(88,213) $
529,663 $
268,326
24,019
822,008 $
93,117 $
(19,000)
(4,267)
69,850 $
404,144 $
56,719
24,019
484,882 $
451,293
430,642
28,286
910,221
311,027
75,719
28,286
415,032
(14,747) $
(143,316)
(158,063) $
125,519 $
211,607
337,126 $
140,266
354,923
495,189
$
$
$
$
$
$
See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2019 Annual
Report on Form 10-K filed with the SEC on February 20, 2020, which is incorporated by reference herein.
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,
2020
2019
$
$
$
320.6
3.59 %
3.81 %
56.5
74.8
$
$
$
310.0
6.87 %
6.28 %
39.6
99.8
In December 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 will mature 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 will mature on December 20, 2024. We also have an existing $240.0 million
senior secured term loan that was entered into in November 2018 that will mature 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. We are required to make installment payments of
31
Table of Contents
1.25% of the original outstanding principal balance of the New Term Loan amount on a quarterly basis, on the last day of the
calendar quarter. In addition, if we meet the annual excess cash flow threshold, we are required to make an annual additional
principal payment based on the consolidated adjusted leverage ratio. During the first quarter of 2020, we made the required
2019 annual excess cash flow payment of $7.4 million. 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, 2020, we were in compliance with all covenants required under the Credit
Facilities. See Note 8 to our consolidated financial statements included in Part IV, Item 15(a) of this Annual Report on Form
10-K for further information.
We drew down $50.0 million on the New Revolving Credit Facility during the first quarter of 2020 to hold as cash on hand,
$25.0 million of which was repaid during the fourth quarter of 2020, and thus, we made no net aggregate voluntary
prepayments during 2020.
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 were required to make installment payments of 0.25% of the outstanding principal balance of the 2018 Term Loan
amount on a quarterly basis, however, in conjunction with the 2019 refinancing where we paid down $56.0 million on the
2018 Term Loan, it paid all the required quarterly installment payments on the 2018 Term Loan until maturity.
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. The interest
rate cap hedges matured during our second quarter of 2020 and as such, all remaining amounts related to the interest rate cap
hedges were fully amortized and unrealized gains and losses recorded in accumulated other comprehensive income were also
realized at that time. See Note 1 to our consolidated financial statements included in Part IV, Item 15(a) of this Annual
Report on Form 10-K for further information.
In October 2019, we acquired Nobles Parent Inc., the parent company of Nobles Worldwide, Inc. (“Nobles”) for an original
purchase price of $77.0 million, net of cash acquired, all payable in cash. Upon the closing of the transaction, we paid a gross
total aggregate of $77.3 million in cash by drawing down on the 2018 Revolving Credit Facility. See Note 2 to our
consolidated financial statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K for further information.
We expect to spend a total of $16.0 million to $18.0 million for capital expenditures in 2021 (excluding capital expenditures
we will spend to restore the manufacturing capabilities related to our Guaymas performance center that was severely
damaged by fire on June 29, 2020), financed by cash generated from operations, principally to support new contract awards
in Electronic Systems and Structural 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. However, some portion of the expected capital
expenditures in 2021 could be delayed as a result of the COVID-19 pandemic.
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 from the date of issuance of these financial statements.
Cash Flow Summary
2020 Compared to 2019
Net cash provided by operating activities during 2020 was $12.6 million, compared to $51.0 million during 2019. The lower
cash provided by operating activities during 2020 was primarily due to higher contract assets, higher inventories, and lower
accounts payable, partially offset by higher contract liabilities and lower accounts receivable.
Net cash used in investing activities during 2020 was $5.5 million compared to $94.9 million during 2019. The lower cash
used in investing activities during 2020 was primarily due to lower payments for acquisitions.
32
Table of Contents
Net cash provided by financing activities during 2020 was $9.7 million compared to $73.2 million during 2019. The lower
cash provided by financing activities during 2020 was primarily due to lower net borrowings on the Credit Facilities.
2019 Compared to 2018
See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2019 Annual
Report on Form 10-K filed with the SEC on February 20, 2020, which is incorporated by reference herein.
Contractual Obligations
A summary of our contractual obligations at December 31, 2020 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
$
320,638 $
7,000 $
14,000 $
299,638 $
Future interest on long-term debt
Purchase orders (1)
Operating leases
Pension liability
Total (2)
56,672
204,499
21,478
12,232
184,736
4,163
24,064
19,444
7,212
18,826
319
5,498
21,274
624,561 $
1,882
210,013 $
$
3,996
68,716 $
4,215
328,496 $
—
1,550
—
4,605
11,181
17,336
(1) Purchase orders include non-cancelable commitments as of December 31, 2020 in which a written purchase order has
been issued but the goods have not been received.
(2) As of December 31, 2020, we have recorded $4.1 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 relate to 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 14 to our consolidated financial statements included in Part IV, Item 15(a) of
this Annual Report on Form 10-K for discussion of our environmental liabilities.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements consist of operating and finance leases not recorded as a result of the practical expedients
utilized, right of offset of industrial revenue bonds and associated failed sales-leasebacks on property and equipment, and
indemnities, none of which we believe may have a material current or future effect on our financial condition, liquidity,
capital resources, or results of operations.
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
33
Table of Contents
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
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 2020.
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.
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
34
Table of Contents
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.
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
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 be required to perform an interim impairment test prior to the fourth quarter.
We may use either a qualitative or quantitative approach when testing a reporting unit’s goodwill for impairment. The
qualitative approach for potential impairment analysis to determine whether it is more likely than not that the fair value of a
reporting unit was less than its carrying amount includes consideration of 1) margin of passing most recent annual goodwill
impairment test or step one 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.
The quantitative approach for potential impairment analysis is performed by comparing the fair value of a reporting unit to its
carrying value, including goodwill. Fair value is estimated by management using a combination of the income approach
(discounted cash flow model) and the market approach. Management’s cash flow projections include significant judgments
and assumptions, including the amount and timing of expected cash flows, long-term growth rates, and discount rates. The
cash flows used in the discounted cash flow model are based on our best estimate of future revenues, gross margins, and
adjusted after-tax earnings. The market approach also requires significant management judgment in selecting comparable
business acquisitions and the transaction values observed and its related control premiums. In addition, we early adopted
Accounting Standards Update 2017-04 (“ASU 2017-04”) on January 1, 2019 which simplified our goodwill impairment
testing by eliminating step two of the goodwill impairment test.
We acquired Nobles in October 2019 and recorded goodwill of $34.9 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 the first day of the fourth
quarter of 2020 for our Structural Systems segment. The fair value of our Structural Systems segment exceeded its carrying
value by 69% and thus, was not deemed impaired.
In the fourth quarter of 2020, 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 $53.4 million, respectively.
As of the date of our 2020 annual evaluation for goodwill impairment, for the Electronic Systems segment, we used a
qualitative assessment including 1) margin of passing most recent step one 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. Based upon our qualitative assessment, we
concluded that it was more likely than not that the fair value of the reporting unit exceeded 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.
35
Table of Contents
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
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.
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, 2020, we had borrowings of $320.6 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.
36
Table of Contents
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.
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, 2020.
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, 2020. 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, 2020.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2020 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, 2020.
37
Table of Contents
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors of the Registrant
The information under the caption “Election of Directors” in the 2021 Proxy Statement is incorporated herein by reference.
Executive Officers of the Registrant
The information under the caption “Executive Officers of the Registrant” in the 2021 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 2021 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 2021 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 2021 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 2021 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 2021 Proxy
Statement is incorporated herein by reference.
38
Table of Contents
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)
835,004 $
35.46
—
—
835,004
—
—
Number of Securities
Remaining
Available for
Future Issuance
Under Equity
Compensation Plans
(Excluding Securities
Reflected
in Column
(a))(c)(3)
409,487
666,194
—
1,075,681
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 2020 Stock Incentive Plan (“2020 Plan”) and the 2013 Stock Incentive Plan, as Amended (“2013
Plan”), although the remaining shares available under the 2013 Plan as of May 6, 2020 were folded into the 2020 Plan
plus any shares of common stock subject to outstanding awards under the 2013 Plan on or after May 6, 2020 that are
forfeited, terminated, expire, or otherwise lapse without being exercised (to the extent applicable). The number of
securities to be issued consists of 380,143 for stock options, 165,907 for restricted stock units and 288,954 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 shares
that may be issued during a given six month period and the purchase price of such shares cannot be determined in
advance. See Note 10 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 2021 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 2021 Proxy Statement is
incorporated herein by reference.
39
Table of Contents
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
1. Financial Statements
PART IV
The following consolidated financial statements of Ducommun Incorporated and subsidiaries, are incorporated by
reference in Item 8 of this report.
Page
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets - December 31, 2020 and 2019
Consolidated Balance Sheets - December 31, 2020 and 2019
Consolidated Statements of Income - Years Ended December 31, 2020, 2019, and 2018
Consolidated Statements of Income - Years Ended December 31, 2020, 2019, and 2018
Consolidated Statements of Comprehensive Income - Years Ended December 31, 2020, 2019, and
Consolidated Statements of Comprehensive Income - Years Ended December 31, 2020, 2019, and
2018
2018
Consolidated Statements of Changes in Shareholders’ Equity - Years Ended December 31, 2020,
Consolidated Statements of Changes in Shareholders’ Equity - Years Ended December 31, 2020,
2019, and 2018
2019, and 2018
Consolidated Statements of Cash Flows - Years Ended December 31, 2020, 2019, and 2018
Consolidated Statements of Cash Flows - Years Ended December 31, 2020, 2019, and 2018
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
2. Financial Statement Schedule
The following schedule for the years ended December 31, 2020, 2019 and 2018 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
41
41
43
43
44
44
45
45
46
46
47
47
48
48
78
78
—
—
—
40
Table of Contents
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, 2020 and 2019, and the related consolidated statements of income, of comprehensive
income, of changes in shareholders’ equity and of cash flows for each of the three years in the period ended December 31,
2020, 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, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2020 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, 2020, based on criteria established in Internal Control - Integrated Framework
(2013) issued by the COSO.
Changes in Accounting Principles
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
41
Table of Contents
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial
statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or
disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective,
or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated
financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate
opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Goodwill Impairment Assessment - Structural Systems Reporting Unit
As described in Notes 1 and 6 to the consolidated financial statements, the Company’s consolidated goodwill balance was
$171 million as of December 31, 2020, and the goodwill associated with the Structural Systems reporting unit was $53
million. Goodwill is evaluated for impairment on an annual basis on the first day of the fourth fiscal quarter. If certain factors
occur, management may be required to perform an interim impairment test. Potential impairment is identified by comparing
the fair value of a reporting unit to its carrying value, including goodwill. Fair value is estimated by management using a
combination of the income approach (discounted cash flow model) and the market approach. Management’s cash flow
projections include significant judgments and assumptions, including the amount and timing of expected cash flows, long-
term growth rates, and discount rates. The cash flows used in the discounted cash flow model are based on management’s
best estimate of future revenues, gross margins, and adjusted after-tax earnings. The market approach also requires significant
management judgment in selecting comparable business acquisitions and the transaction values observed and its related
control premiums.
The principal considerations for our determination that performing procedures relating to the goodwill impairment
assessment of the Structural Systems reporting unit is a critical audit matter are (i) the significant judgment by management
when estimating the fair value of the reporting unit; (ii) a high degree of auditor judgment, subjectivity, and effort in
performing procedures and evaluating management’s significant assumption related to the estimated gross margin; and (iii)
the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall
opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to
management’s goodwill impairment assessment, including controls over the valuation of the Company’s Structural Systems
reporting unit. These procedures also included, among others (i) testing management’s process for estimating the fair value of
the reporting unit; (ii) evaluating the appropriateness of the valuation model; (iii) testing the completeness and accuracy of
underlying data used in the model; and (iv) evaluating the significant assumption used by management related to the
estimated gross margin. Evaluating management’s assumption related to the estimated gross margin involved evaluating
whether the assumption used by management was reasonable considering (i) the current and past performance of the
reporting unit; (ii) the consistency with external market and industry data; and (iii) whether the assumption was consistent
with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in
the evaluation of the Company’s model.
/s/ PricewaterhouseCoopers LLP
Irvine, California
February 11, 2021
We have served as the Company’s auditor since 1989.
42
Table of Contents
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 credit losses of $1,552 and $1,321 at
December 31, 2020 and 2019, 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
Deferred Income Taxes
Other Assets
Total Assets
Liabilities and Shareholders’ Equity
Current Liabilities
Accounts payable
Contract liabilities
Accrued and other liabilities
Operating lease liabilities
Current portion of long-term debt
Total Current Liabilities
Long-Term Debt, Less Current Portion
Non-Current Operating Lease Liabilities
Deferred Income Taxes
Other Long-Term Liabilities
Total Liabilities
Commitments and Contingencies (Notes 12, 14)
Shareholders’ Equity
Common stock - $0.01 par value; 35,000,000 shares authorized; 11,728,212 and
11,572,668 shares issued and outstanding at December 31, 2020 and 2019,
respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total Shareholders’ Equity
Total Liabilities and Shareholders’ Equity
December 31,
2020
2019
$
56,466 $
39,584
58,025
154,028
129,223
6,971
5,571
410,284
109,990
16,348
170,830
124,744
33
5,118
837,347 $
63,980 $
28,264
40,526
3,132
7,000
142,902
311,922
14,555
16,992
21,642
508,013
117
97,090
241,727
(9,600)
329,334
837,347 $
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
116
88,399
212,553
(8,268)
292,800
790,429
$
$
$
See accompanying notes to consolidated financial statements.
43
Table of Contents
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
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,
2020
2019
2018
628,941 $
491,203
137,738
89,808
2,424
45,506
(13,653)
—
128
31,981
2,807
29,174 $
721,088 $
568,891
152,197
95,964
—
56,233
(18,290)
(180)
—
37,763
5,302
32,461 $
2.50 $
2.45 $
2.82 $
2.75 $
11,676
11,932
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
See accompanying notes to consolidated financial statements.
44
Table of Contents
Ducommun Incorporated and Subsidiaries
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
Net Income
Other Comprehensive (Loss) Income, Net of Tax:
Pension Adjustments:
Amortization of actuarial losses and prior service costs, net of tax
of $236, $209, and $173 for 2020, 2019, and 2018, respectively
Actuarial losses arising during the period, net of tax benefit of
$701, $502, and $302 for 2020, 2019, and 2018, respectively
Change in net unrealized gains on cash flow hedges, net of tax of
$57, $29, and $121 for 2020, 2019, and 2018, respectively
Other Comprehensive (Loss) Income, Net of Tax
Years Ended December 31,
2020
2019
2018
$
29,174 $
32,461 $
9,035
757
676
(2,251)
(1,682)
162
(1,332)
95
(911)
570
(899)
407
78
9,113
Comprehensive Income, Net of Tax
$
27,842 $
31,550 $
See accompanying notes to consolidated financial statements.
45
Table of Contents
Ducommun Incorporated and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
(Dollars in thousands, except share data)
Balance at December 31,
2017
Net income
Other comprehensive loss,
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
and stock awards vested
Stock awards vested
Stock-based compensation
Balance at December 31,
2018
Net income
Other comprehensive
income, net of tax
Adoption of ASC 842
adjustment
Employee stock purchase
plan
Stock options exercised
Stock repurchased related to
the exercise of stock options
and stock awards vested
Stock awards vested
Stock-based compensation
Balance at December 31,
2019
Net income
Other comprehensive loss,
net of tax
Employee stock purchase
plan
Stock options exercised
Stock repurchased related to
the exercise of stock options
and stock awards vested
Stock awards vested
Stock-based compensation
Balance at December 31,
2020
Shares
Outstanding
Common
Stock
Treasury
Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Total
Shareholders’
Equity
11,332,841 $
113 $
— $
80,223 $ 161,364 $
(6,117) $ 235,583
—
—
—
—
84,800
—
—
—
—
1
(98,438)
(1)
98,660
—
1
—
—
—
—
—
—
—
—
—
—
—
—
—
1,821
(3,371)
(1)
5,040
9,035
—
8,665
1,292
—
—
—
—
—
78
—
(1,318)
—
—
—
—
9,035
78
8,665
(26)
1,822
(3,372)
—
5,040
11,417,863 $
114 $
— $
83,712 $ 180,356 $
(7,357) $ 256,825
—
—
—
26,521
80,693
—
—
—
—
1
(123,192)
(1)
170,783
—
2
—
—
—
—
—
—
—
—
—
—
—
—
1,118
2,014
(5,604)
(2)
7,161
32,461
—
32,461
—
(911)
(911)
(264)
—
(264)
—
—
—
—
1,118
2,015
(5,605)
—
7,161
—
—
—
—
11,572,668 $
116 $
— $
88,399 $ 212,553 $
(8,268) $ 292,800
—
—
57,285
54,063
—
—
1
1
(95,411)
(2)
139,607
—
1
—
—
—
—
—
—
—
—
—
—
2,193
1,563
(4,363)
(1)
9,299
29,174
—
29,174
—
(1,332)
(1,332)
—
—
—
—
2,194
1,564
(4,365)
—
9,299
—
—
—
—
11,728,212 $
117 $
— $
97,090 $ 241,727 $
(9,600) $ 329,334
See accompanying notes to consolidated financial statements.
46
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 credit losses
Noncash loss on extinguishment of debt
Insurance recoveries related to loss on operating assets
Other
Changes in Assets and Liabilities:
Accounts receivable
Contract assets
Inventories
Production cost of contracts
Other assets
Accounts payable
Contract liabilities
Operating lease 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
Life insurance proceeds
Payments for acquisition of Certified Thermoplastics Co., LLC, net of cash
acquired
Payments for acquisition of Nobles Worldwide, Inc. net of cash acquired
Post closing cash received from the acquisition of Nobles Worldwide, Inc.,
net
Net Cash Used in Investing Activities
Cash Flows from Financing Activities
Borrowings from senior secured revolving credit facility
Repayments of senior secured revolving credit facility
Borrowings from term loans
Repayments of term loans
Repayments of other debt
Debt issuance costs
Net cash paid upon issuance of common stock under stock plans
Net Cash Provided by Financing Activities
Net Increase in Cash and Cash Equivalents
Cash and Cash Equivalents at Beginning of Year
Cash and Cash Equivalents at End of Year
Years Ended December 31,
2020
2019
2018
$
29,174 $
32,461 $
9,035
28,850
3,157
—
9,299
327
231
—
8,546
826
8,877
(47,358)
(20,183)
(1,488)
(212)
(19,714)
13,747
(2,953)
1,485
12,611
(12,510)
5
4,954
1,889
—
—
190
(5,472)
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)
(2,713)
515
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
—
—
—
(30,712)
(76,647)
—
—
—
(94,934)
(47,933)
65,900
298,400
(40,900)
—
(14,362)
(288)
—
(607)
9,743
16,882
39,584
56,466 $
(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
$
See accompanying notes to consolidated financial statements.
47
Table of Contents
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 have been prepared in accordance with accounting principles generally accepted in the
United States of America (“GAAP”), and include the accounts of Ducommun Incorporated and its subsidiaries
(“Ducommun,” the “Company,” “we,” “us” or “our”), after eliminating intercompany balances and transactions.
Our fiscal quarters 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.
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”).
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 are now recognized over time. The majority
of our inventory is now 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 retained earnings.
Use of Estimates
Certain amounts and disclosures included in the consolidated financial statements required management to make estimates
and judgments that affect the amount of assets, liabilities (including forward loss reserves), revenues and expenses, and
related disclosures of contingent assets and liabilities. These estimates are based on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results
could differ from these estimates.
48
Table of Contents
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
Fair Value
(Dollars in thousands)
Years Ended December 31,
2020
2019
2018
11,859
3,810
$
$
16,474
5,699
$
$
11,573
316
2,477
$
1,380
$
824
$
$
$
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 had 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 hedges matured during
the second quarter of 2020 and as such, the premium was zero as of December 31, 2020.
There were no transfers between Level 1, Level 2, or Level 3 financial instruments in either 2020 or 2019.
Cash and 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, or a derivative instrument
that will not be accounted for using hedge accounting methods. As of December 31, 2020, we had no derivative instruments
as our cash flow hedges matured in the second quarter of 2020.
Allowance for Credit Losses
We maintain an allowance for credit losses for expected losses from the inability of customers to make required payments.
The allowance for credit losses is evaluated periodically for expected credit losses based on the financial condition of
customers and their payment history, the aging of accounts receivable, 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
49
Table of Contents
is shipped or transfer of control to the customer has occurred. Our ending inventory consists of raw materials, work-in-
process, and finished goods.
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 be required to perform an interim impairment test prior to the fourth quarter.
We may use either a qualitative or quantitative approach when testing a reporting unit’s goodwill for impairment. The
qualitative approach for potential impairment analysis to determine whether it is more likely than not that the fair value of a
reporting unit was less than its carrying amount includes consideration of 1) margin of passing most recent annual goodwill
impairment test or step one 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.
The quantitative approach for potential impairment analysis is performed by comparing the fair value of a reporting unit to its
carrying value, including goodwill. Fair value is estimated by management using a combination of the income approach
(discounted cash flow model) and the market approach. Management’s cash flow projections include significant judgments
and assumptions, including the amount and timing of expected cash flows, long-term growth rates, and discount rates. The
cash flows used in the discounted cash flow model are based on our best estimate of future revenues, gross margins, and
adjusted after-tax earnings. Changes in any of these assumptions may have a significant impact on the estimated fair value of
a reporting unit. The market approach also requires significant management judgment in selecting comparable business
acquisitions and the transaction values observed and its related control premiums. In addition, we adopted Accounting
Standards Update 2017-04 (“ASU 2017-04”) on January 1, 2019 which simplified our goodwill impairment testing by
eliminating step two of the goodwill impairment test.
In the fourth quarter of 2020, 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 $53.4 million, respectively.
We acquired Nobles in October 2019 and recorded goodwill of $34.9 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 the first day of the fourth
quarter of 2020 for our Structural Systems segment. The fair value of our Structural Systems segment exceeded its carrying
value by 69% and thus, was not deemed impaired.
As of the date of our 2020 annual evaluation for goodwill impairment for the Electronic Systems segment, which is also our
reporting unit, we performed a qualitative assessment including 1) margin of passing most recent step one 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. Based
upon our qualitative assessment, we concluded that it was more likely than not that the fair value of the reporting unit
exceeded 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.
50
Table of Contents
Restructuring Charges
In May 2020, management approved and commenced a restructuring plan in the Structural Systems segment mainly to reduce
headcount in response to the impact from the COVID-19 pandemic on commercial aerospace demand outlook. We recorded
an aggregate total of $2.4 million for severance and benefit costs which were charged to restructuring charges during the year
ended December 31, 2020.
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
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
51
Table of Contents
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, 2020.
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.
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, 2020 and 2019, provision for estimated
losses on contracts were $2.3 million and $4.2 million, respectively.
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, 2020 and 2019, production costs of contracts were $7.0 million and $9.4
million, respectively.
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:
(Dollars in thousands)
Contract assets
Contract liabilities
December 31,
2020
154,028 $
28,264 $
December 31,
2019
106,670
14,517
$
$
The increase in our contract assets as of December 31, 2020 compared to December 31, 2019 was primarily due to a net
increase of products in work in process and finished goods in the current year compared to the prior year.
The increase in our contract liabilities as of December 31, 2020 compared to December 31, 2019 was primarily due to a net
increase of advance or progress payments received from our customers in the current year compared to the prior year. We
recognized $6.3 million of the contract liabilities as of December 31, 2019 as revenues during the year ended December 31,
2020.
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, 2020 totaled $779.7 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 2022 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:
52
Table of Contents
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
Income Taxes
(Dollars in thousands)
Years Ended December 31,
% of Net Revenues
Change
2020
2019
2020
2019
99,059 $
(180,361)
(10,845)
(92,147) $
422,859 $
168,142
37,940
628,941 $
323,800
348,503
48,785
721,088
64,431 $
(21,326)
(10,845)
32,260 $
308,676 $
46,017
37,940
392,633 $
244,245
67,343
48,785
360,373
67.2 %
26.8 %
6.0 %
100.0 %
78.6 %
11.7 %
9.7 %
100.0 %
44.9 %
48.3 %
6.8 %
100.0 %
67.8 %
18.7 %
13.5 %
100.0 %
34,628 $
(159,035)
(124,407) $
114,183 $
122,125
236,308 $
79,555
281,160
360,715
48.3 %
51.7 %
100.0 %
22.1 %
77.9 %
100.0 %
$
$
$
$
$
$
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
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
53
Table of Contents
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.
Charitable Contributions
We contributed $1.4 million to the Ducommun Foundation during 2020.
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,
2020
2019
2018
$
29,174 $
32,461 $
9,035
11,676
256
11,932
11,518
274
11,792
$
$
2.50 $
2.45 $
2.82 $
2.75 $
11,390
269
11,659
0.79
0.77
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 2020
(In thousands)
Years Ended December 31,
2020
2019
2018
254
127
208
In March 2020, the FASB issued ASU 2020-03, “Codification Improvements to Financial Instruments” (“ASU 2020-03”),
which provides clarity to, or addresses various specific issues, including modifications of debt instruments. The new guidance
was effective upon issuance of this final accounting standards update. The adoption of this standard did not have a material
impact on our consolidated financial statements.
In February 2020, the FASB issued ASU 2020-02, “Financial Statements - Credit losses (Topic 326) and Leases (Topic 842)
- Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on
Effective Date Relating to Accounting Standards Update No. 2016-02, Leases (Topic 842)” (“ASU 2020-02”), which
provides guidance on the measurement and requirements related to credit losses. The new guidance was effective upon
issuance of this final accounting standards update. The adoption of this standard did not have a material impact on our
consolidated financial statements.
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 was
our interim period beginning January 1, 2020. The adoption of this standard did not have a material impact on our
consolidated financial statements.
54
Table of Contents
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 was our interim period beginning January
1, 2020. The adoption of this standard did not have a material impact on our consolidated financial statements.
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 was effective for fiscal years beginning after December 15, 2019, including interim periods
within those fiscal years, which was our interim period beginning January 1, 2020. Early adoption was permitted. The
adoption of this standard did not have a material impact on our consolidated financial statements.
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. 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 was effective for fiscal years beginning after December 15, 2019, including
interim periods within those fiscal years, which was our interim period beginning January 1, 2020. The adoption of this
standard did not have a material impact on our consolidated financial statements.
Recently Issued Accounting Standards
In October 2020, the FASB issued ASU 2020-10, “Codification Improvements” (“ASU 2020-10”), which affect a wide
variety of Topics in the Accounting Standards Codification (“Codification”). ASU 2020-10, among other things, contains
amendments that improve the consistency of the Codification by including all disclosure guidance in the appropriate
Disclosure Section (Section 50). Many of the amendments arose as the FASB provided an option to give certain information
either on the face of the financial statements or in the notes to financial statements and that option only was included in the
Other Presentation Matters Section (Section 45) of the Codification. Those amendments are not expected to change current
practice. The new guidance is effective for fiscal years beginning after December 15, 2020, which will be our interim period
beginning January 1, 2021. Early adoption is permitted. We are currently evaluating the impact of this standard but do not
expect it to impact us significantly.
In August 2020, the FASB issued ASU 2020-06, “Debt with Conversion and Other Options (Subtopic 470-20) and
Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40) - Accounting for Convertible Instruments and
Contracts in an Entity’s Own Equity” (“ASU 2020-06”), which simplifies reporting or provides clarification on various
topics, including clarification that an entity should use the weighted-average share count from each quarter when calculating
the year-to-date weighted-average share count. The new guidance is effective for fiscal years beginning after December 15,
2021, including interim periods within those fiscal years, which will be our interim period beginning January 1, 2022. Early
adoption is permitted. We are evaluating the impact of this standard.
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848), Facilitation of the Effects of
Reference Rate Reform on Financial Reporting” (“ASU 2020-04”), which provides optional guidance for a limited time for
contracts that reference London Interbank Offered Rate (“LIBOR”), to ease the potential burden in accounting for, or
recognizing the effects, of reference rate reform on financial reporting as a result of the cessation of LIBOR. The new
guidance is effective at any time after March 12, 2020 but no later than December 31, 2022. We are evaluating the impact of
this standard.
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 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
55
Table of Contents
disclosures, and add disclosure requirements identified as relevant. 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.
Note 2. Business Combinations
In October 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 original purchase price for Nobles was $77.0 million, net of cash acquired, all payable in cash. We paid a gross aggregate
of $77.3 million in cash upon the closing of the transaction. Subsequent to the closing of the transaction, during the three
months ended March 28, 2020, we received $0.2 million back from the seller which lowered the purchase price to
$76.8 million, net of cash acquired. We allocated the final gross purchase price of $77.1 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 following table summarizes the final 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
288
2,319
37,200
34,850
675
80,736
(2,187)
(759)
(675)
(3,621)
77,115
$
$
Useful Life
(In years)
Estimated
Fair Value
(In thousands)
15-16
15
$
$
34,200
3,000
37,200
The intangible assets acquired of $37.2 million were determined based on the estimated fair values using valuation techniques
consistent with the income approach to measure fair value. The useful lives were estimated based on the underlying
agreements or the future economic benefit expected to be received from the assets. The fair values of the identifiable
intangible assets were estimated using several valuation methodologies, which represented Level 3 fair value measurements.
The value for customer relationships was estimated based on a multi-period excess earnings approach, while the value for
trade names and trademarks was assessed using the relief from royalty methodology.
56
Table of Contents
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
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.
Note 3. Inventories
Inventories consisted of the following:
Raw materials and supplies
Work in process
Finished goods
Total
Note 4. Property and Equipment, Net
Property and equipment, net consisted of the following:
Land
Buildings and improvements
Machinery and equipment
Furniture and equipment
Construction in progress
Less accumulated depreciation
Total
(In thousands)
December 31,
2020
2019
$
$
107,983 $
15,895
5,345
129,223 $
98,151
10,887
3,444
112,482
(In thousands)
December 31,
2020
2019
15,733 $
60,664
174,251
18,490
10,594
279,732
169,742
109,990 $
15,765
61,626
167,688
18,714
14,343
278,136
162,920
115,216
$
$
Range of
Estimated
Useful Lives
5 - 40 Years
2 - 20 Years
2 - 10 Years
Depreciation expense was $13.8 million, $13.5 million, and $13.5 million, for the years ended December 31, 2020, 2019 and
2018, respectively.
Note 5. Leases
We elected to utilize the following practical expedients that are permitted under ASC 842:
•
•
As an accounting policy election by class of underlying asset, elected 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).
57
We have operating and finance leases for manufacturing facilities, corporate offices, and various equipment. Our leases have
remaining lease terms of 1 to 9 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 consisted of the following:
Operating leases expense
Finance leases expense:
Amortization of right-of-use assets
Interest on lease liabilities
Total finance lease expense
(In thousands)
Years Ended
December 31,
2020
December 31,
2019
4,028
3,963
281
56
337 $
216
42
258
$
$
$
Short term and variable lease expenses for the year ended December 31, 2020 were not material.
Supplemental cash flow information related to leases 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
The weighted average remaining lease terms were as follows:
Operating leases
Finance leases
(In thousands)
Years Ended
December 31,
2020
December 31,
2019
$
$
$
$
$
4,191 $
56 $
288 $
165 $
1,241 $
4,030
39
169
2,574
483
(In years)
December 31,
2020
6
7
December 31,
2019
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 weighted average discount rates were as follows:
Operating leases
Finance leases
58
Years Ended
December 31,
2020
6.5%
4.3%
December 31,
2019
6.5%
6.5%
Maturity of operating and finance lease liabilities are as follows:
2021
2022
2023
2024
2025
Thereafter
Total lease payments
Less imputed interest
Total
(In thousands)
Operating Leases
Finance Leases
$
$
4,163 $
3,772
3,440
3,032
2,466
4,605
21,478
3,791
17,687 $
394
257
209
182
173
582
1,797
232
1,565
Operating lease payments include $11.5 million related to options to extend lease terms that are reasonably certain of being
exercised. As of December 31, 2020, 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, 2020, it excludes $0.2 million of legally binding minimum lease payments for leases signed
but not yet commenced. These finance leases will commence during 2021 with lease terms of 5 years.
Note 6. Goodwill and Other Intangible Assets
Goodwill
The carrying amounts of goodwill, by operating segment, for the years ended December 31, 2020 and 2019 were as follows:
Gross goodwill
Accumulated goodwill impairment
Balance at December 31, 2019
Purchase price allocation refinements
Balance at December 31, 2020
Electronic
Systems
(In thousands)
Structural
Systems
Consolidated
Ducommun
$
$
199,157 $
(81,722)
117,435
—
117,435 $
53,482 $
—
53,482
(87)
53,395 $
252,639
(81,722)
170,917
(87)
170,830
We perform our annual goodwill impairment test as of the first day of the fourth 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 be required to perform an interim impairment test prior to the fourth quarter.
We may use either a qualitative or quantitative approach when testing a reporting unit’s goodwill for impairment. The
qualitative approach for potential impairment analysis to determine whether it is more likely than not that the fair value of a
reporting unit was less than its carrying amount.
The quantitative approach for potential impairment analysis is performed by comparing the fair value of a reporting unit to its
carrying value, including goodwill. Fair value is estimated by management using a combination of a discounted cash flow
model and market approach. Management’s cash flow projections include significant judgments and assumptions, including
the amount and timing of expected cash flows, long-term growth rates, and discount rates. The cash flows used in the
discounted cash flow model are based on our best estimate of future revenues, gross margins, and adjusted after-tax earnings.
If any of these assumptions are incorrect, it will impact the estimated fair value of a reporting unit. The market approach also
requires significant management judgment in selecting comparable business acquisitions and the transaction values observed
and its related control premiums. 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.
59
Our business has been negatively impacted during the twelve months ended December 31, 2020 as a result of the COVID-19
pandemic. Therefore, we assessed our goodwill for potential impairment indicators. The most recent step one goodwill
impairment test for our Electronic Systems reporting unit was the annual goodwill impairment test as of the first day of the
fourth quarter of 2019 where the fair value of our Electronic Systems reporting unit exceeded its carrying value by 44%. For
our annual goodwill impairment test of our Electronic Systems reporting unit as of the first day of the fourth quarter of 2020,
we used a qualitative assessment and determined it was not more likely than not that the fair value of a reporting unit was less
than its carrying amount. The most recent step one goodwill impairment test for our Structural Systems reporting unit was the
first day of the fourth quarter of 2020, where the fair value of our Structural Systems reporting unit exceeded its carrying
value by 69%. Thus, the respective goodwill amounts were not deemed impaired.
We acquired Nobles in October 2019 and recorded goodwill of $34.9 million in our Structural Systems segment. See Note 2.
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, 2020
December 31, 2019
(In thousands)
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
$ 221,500 $ 101,535 $ 119,965 $ 221,900 $
5,500
1,845
400
857
1,845
264
4,643
—
136
5,500
1,845
400
$ 229,245 $ 104,501 $ 124,744 $ 229,645 $
88,838 $ 133,062
5,050
88
162
91,283 $ 138,362
450
1,757
238
The carrying amount of other intangible assets by operating segment as of December 31, 2020 and 2019 was as follows:
Other intangible assets
Electronic Systems
Structural Systems
Total
(In thousands)
December 31, 2020
December 31, 2019
Gross
Accumulated
Amortization
Net
Carrying
Value
Gross
Accumulated
Amortization
Net
Carrying
Value
$ 164,545 $
80,903 $
83,642 $ 164,945 $
71,527 $
93,418
64,700
23,598
41,102
64,700
19,756
44,944
$ 229,245 $ 104,501 $ 124,744 $ 229,645 $
91,283 $ 138,362
Amortization expense of other intangible assets was $13.2 million, $11.4 million and $10.7 million for the years ended
December 31, 2020, 2019 and 2018, respectively. Future amortization expense by operating segment is expected to be as
follows:
2021
2022
2023
2024
2025
Thereafter
(In thousands)
Electronic
Systems
Structural
Systems
Consolidated
Ducommun
$
$
9,288 $
9,288
9,288
9,288
9,288
37,202
83,642 $
3,733 $
3,661
3,604
3,368
3,368
23,368
41,102 $
13,021
12,949
12,892
12,656
12,656
60,570
124,744
60
Note 7. Accrued Liabilities
The components of accrued liabilities consisted of the following:
Accrued compensation
Accrued income tax and sales tax
Other
Total
Note 8. 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.
Future long-term debt payments at December 31, 2020 were as follows:
2021
2022
2023
2024
2025
Thereafter
Total
$
$
$
$
$
(In thousands)
December 31,
2020
2019
28,432 $
80
12,014
40,526 $
31,342
163
6,115
37,620
(In thousands)
December 31,
2020
295,638
25,000
320,638
7,000
313,638
1,716
311,922
1,515
3.59 %
2019
310,000
—
310,000
7,000
303,000
2,113
300,887
1,894
6.87 %
(In thousands)
7,000
7,000
7,000
137,000
162,638
—
320,638
$
$
$
$
$
In December 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 entered 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.
61
Table of Contents
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, on the last day of the
calendar quarter. During 2020, we made the required quarterly payments, in aggregate totaling $7.0 million.
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. However, the
New Revolving Credit Facility does not require any principal installment payments.
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 required installment payments of 0.25% of the outstanding principal
balance of the 2018 Term Loan amount on a quarterly basis.
Further, under the Credit Facilities, if we exceed the annual excess cash flow threshold, we are required to make an annual
additional principal payment based on the consolidated adjusted leverage ratio. The annual mandatory excess cash flow
payment is 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 consolidated adjusted leverage ratio is less than or equal to 2.50 to
1.0. During the first quarter of 2020, we made the required 2019 annual excess cash flow payment of $7.4 million. As of
December 31, 2020, we were in compliance with all covenants required under the Credit Facilities.
We drew down $50.0 million on the New Revolving Credit Facility during the first quarter of 2020 to hold as cash on hand,
$25.0 million of which was repaid during the fourth quarter of 2020, and thus, we made no net aggregate voluntary
prepayments during 2020.
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, paid down a portion of the 2018 Term Loan of $56.0 million, paid the accrued interest associated with the
amounts being paid down on the 2018 Revolving Credit Facility and 2018 Term Loan, paid the fees related to this
transaction, and the remainder used for general corporate expenses. The $56.0 million pay down on the 2018 Term Loan paid
all the required quarterly installment payments on the 2018 Term Loan until maturity.
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 over its remaining life.
In October 2019, we acquired 100.0% of the outstanding equity interests of Nobles for an original purchase price of $77.0
million, net of cash acquired, all payable in cash. Upon the closing of the transaction, we paid a gross total aggregate of $77.3
million in cash by drawing down on the 2018 Revolving Credit Facility. See Note 2.
62
Table of Contents
As of December 31, 2020, we had $74.8 million of unused borrowing capacity under the New Revolving Credit Facility, after
deducting $0.2 million for standby letters of credit.
The Credit Facilities were entered into by us (“Parent Company”) and guaranteed by all of our domestic subsidiaries, other
than two subsidiaries that were considered minor (“Subsidiary Guarantors”). The Subsidiary Guarantors jointly and severally
guarantee the 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 entering into the interest rate cap hedges. The interest
rate cap hedges matured during our second quarter of 2020 and as such, all remaining amounts related to the interest rate cap
hedges were fully amortized and unrealized gains and losses recorded in accumulated other comprehensive income were also
realized at that time. See Note 1 for further information.
Note 9. Shareholders’ Equity
We are authorized to issue five million shares of preferred stock. At December 31, 2020 and 2019, no preferred shares were
issued or outstanding.
Note 10. Stock-Based Compensation
Stock Incentive Compensation Plans
We currently have two active stock incentive plans: i) the 2020 Stock Incentive Plan (the “2020 Plan”), which expires on
May 6, 2030, and ii) the 2018 Employee Stock Purchase Plan (“ESPP”). The 2013 Stock Incentive Plan, as Amended (the
“2013 Plan”) was closed to further issuances of stock awards on May 6, 2020 and any remaining shares available were folded
into the 2020 Plan as part of the approval of the 2020 Plan by shareholders at the 2020 Annual Meeting of Shareholders on
May 6, 2020. The 2020 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 2020 Plan is 651,162 plus any outstanding awards issued under the 2013 Plan that are subsequently
forfeited, terminated, expire or otherwise lapse without being exercised. As of December 31, 2020, shares available for future
grant under the 2020 Plan are 409,487. Prior to the adoption of the 2020 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, 2020, there are 666,194 shares
available for future award grants.
Stock Options
In the years ended December 31, 2020, 2019, and 2018, we granted stock options to our officers and key employees of 8,000,
189,170, and 176,940, respectively, with weighted-average grant date fair values of $16.48, $15.95, and $12.87, 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.
63
Table of Contents
Stock option activity for the year ended December 31, 2020 were as follows:
Outstanding at January 1, 2020
Granted
Exercised
Expired
Forfeited
Outstanding at December 31, 2020
Exerciseable at December 31, 2020
Number
of Stock
Options
446,818 $
8,000 $
(54,063) $
— $
(20,612) $
380,143 $
188,466 $
Weighted-
Average
Exercise
Price Per
Share
34.68
44.45
28.91
—
39.21
35.46
32.37
Changes in nonvested stock options for the year ended December 31, 2020 were as follows:
Nonvested at January 1, 2020
Granted
Vested
Forfeited
Nonvested at December 31, 2020
Weighted-
Average
Remaining
Contractual
Life (Years)
Aggregate
Intrinsic Value
(in thousands)
6.8 $
5.9 $
7,170
4,137
Weighted-
Average
Grant
Date Fair
Value
Number of
Stock Options
349,871 $
8,000 $
(145,582) $
(20,612) $
191,677 $
14.33
16.48
13.81
15.04
14.73
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, 2020, 2019 and 2018 was $0.9 million, $1.8 million, and $1.3 million, respectively. Cash received from stock options
exercised for the years ended December 31, 2020, 2019 and 2018 was $1.9 million, $2.6 million, and $1.8 million,
respectively, with related tax benefits of $0.5 million, $0.6 million, and $0.3 million, respectively. The total amount of stock
options vested and expected to vest in the future is 380,143 shares with a weighted-average exercise price of $35.46 and an
aggregate intrinsic value of $7.2 million. These stock options have a weighted-average remaining contractual term of 6.8
years.
The share-based compensation cost expensed for stock options for the years ended December 31, 2020, 2019, and 2018
(before tax benefits) was $1.8 million, $1.6 million, and $0.9 million, respectively, and is included in selling, general and
administrative expenses on the consolidated income statements. At December 31, 2020, total unrecognized compensation
cost (before tax benefits) related to stock options of $1.8 million is expected to be recognized over a weighted-average period
of 1.1 years. The total fair value of stock options vested during the years ended December 31, 2020, 2019, and 2018 was $2.0
million, $1.3 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
under the Stock Incentive Plans for years ended December 31, 2020, 2019, and 2018 were as follows:
Risk-free interest rate
Expected volatility
Expected dividends
Expected term (in months)
Years Ended December 31,
2020
2019
2018
1.59 %
37.75 %
—
66
1.92 %
40.44 %
—
60
2.65 %
53.66 %
—
36
64
Table of Contents
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 118,835,
62,520, and 81,230 RSUs during the years ended December 31, 2020, 2019, and 2018, respectively, with weighted-average
grant date fair values (equal to the fair market value of our stock on the date of grant) of $27.62, $41.04, and $32.36 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, 2020 was as follows:
Outstanding at January 1, 2020
Granted
Vested
Forfeited
Outstanding at December 31, 2020
Number of
Restricted
Stock Units
Weighted-
Average
Grant
Date Fair Value
36.22
27.62
35.07
32.45
30.70
127,423 $
118,835 $
(75,226) $
(5,125) $
165,907 $
The share-based compensation cost expensed for RSUs for the years ended December 31, 2020, 2019, and 2018 (before tax
benefits) was $2.6 million, $2.4 million, and $2.1 million respectively, and is included in selling, general and administrative
expenses on the consolidated income statements. At December 31, 2020, total unrecognized compensation cost (before tax
benefits) related to RSUs of $3.4 million is expected to be recognized over a weighted average period of 1.8 years. The total
fair value of RSUs vested for the years ended December 31, 2020, 2019, and 2018 was $2.3 million, $2.4 million, and $2.7
million, respectively. The tax benefit realized from vested RSUs for the years ended December 31, 2020, 2019, and 2018 was
$0.5 million, $0.6 million, and $0.6 million, respectively.
Performance Stock Units
We granted performance stock awards (“PSUs”) to certain key employees of 159,136, 58,178, and 64,700 PSUs during the
years ended December 31, 2020, 2019, and 2018, respectively, with weighted-average grant date fair values of $29.65,
$43.80, and $35.16 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 PSUs that will be granted if performance goals are attained. If an employee terminates
employment, their non-vested portion of the PSUs will not vest and all rights to the non-vested portion will terminate.
65
Table of Contents
Performance stock activity for the year ended December 31, 2020 was as follows:
Outstanding at January 1, 2020
Granted
Vested
Forfeited
Outstanding at December 31, 2020
Number of
Performance
Stock Units
Weighted-
Average
Grant
Date Fair
Value
197,574 $
159,136 $
(64,381) $
(3,375) $
288,954 $
33.98
29.65
31.82
44.45
31.95
The share-based compensation cost expensed for PSUs for the years ended December 31, 2020, 2019, and 2018 (before tax
benefits) was $4.9 million, $3.2 million and $1.9 million, respectively, and is included in selling, general and administrative
expenses on the consolidated income statements. At December 31, 2020, total unrecognized compensation cost (before tax
benefits) related to PSUs of $4.2 million is expected to be recognized over a weighted-average period of 2.0 years. The total
fair value of PSUs vested during the years ended December 31, 2020, 2019, and 2018, was $3.7 million, $3.8 million, and
$0.3 million, respectively. The tax benefit realized from PSUs for the years ended December 31, 2020, 2019, and 2018 were
$0.9 million, $0.9 million, and $0.1 million, respectively.
Note 11. 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, 2020 and zero and $0.1 million, respectively, at
December 31, 2019. The accumulated benefit obligations of the first two plans at December 31, 2020 and December 31, 2019
were $0.3 million and $0.4 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, 2020, 2019, and 2018 was $2.6 million, $2.7 million,
and $2.6 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.
66
Table of Contents
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,
2020
2019
2018
$
$
622 $
1,209
(1,761)
993
1,063 $
503 $
1,388
(1,644)
885
1,132 $
601
1,268
(1,784)
743
828
The components of the reclassifications of net actuarial losses from accumulated other comprehensive loss to net income for
2020 were as follows:
Amortization of actuarial loss - total before tax (1)
Tax benefit
Net of tax
(In thousands)
Year Ended
December 31,
2020
$
$
993
(236)
757
(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 2021 is $1.0 million.
67
Table of Contents
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,
2020
2019
$
$
$
$
$
$
$
$
$
39,085 $
622
1,209
3,491
(1,603)
42,804 $
28,443 $
2,300
1,492
(1,603)
30,632 $
(12,172) $
605 $
11,567 $
10,660 $
(993)
3,491
(538)
12,620
(3,003)
9,617 $
33,951
503
1,388
4,769
(1,526)
39,085
23,749
4,347
1,873
(1,526)
28,443
(10,642)
588
10,054
9,485
(885)
4,769
(2,709)
10,660
(2,544)
8,116
(1) Projected benefit obligation equals the accumulated benefit obligation for the plans.
On December 31, 2020, our annual measurement date, the accumulated benefit obligation exceeded the fair value of the plans
assets by $12.2 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, 2020 and 2019 of $9.6 million and $8.1
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, 2020 and 2019, by asset category, were as follows:
Equity securities
Cash and equivalents
Debt securities
Total(1)
68
December 31,
2020
67%
—%
33%
100%
2019
69%
1%
30%
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, 2020
Level 1
Level 2
Level 3
Total
136 $
2,983
3,331
1,097
7,547 $
— $
—
—
—
— $
— $
—
—
—
—
$
136
2,983
3,331
1,097
7,547
23,085
30,632
(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
(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.
69
Table of Contents
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,
2020
2019
2018
3.22%
2.85%
4.23%
4.00%
3.64%
3.40%
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
2020
2.50%
1.85%
6.25%
December 31,
2019
3.22%
2.85%
7.00%
2018
4.23%
4.00%
7.00%
The following benefit payments under both plans, which reflect expected future service, as appropriate, are expected to be
paid:
2021
2022
2023
2024
2025
2026 - 2030
(In thousands)
LaBarge
Retirement
Plan
Pension Plan
$
$
$
$
$
$
1,277 $
1,409 $
1,460 $
1,577 $
1,647 $
9,235 $
605
578
549
515
476
1,946
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 2021.
Note 12. 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.
70
Table of Contents
Note 13. 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,
2020
2019
2018
$
$
2,525 $
(459)
2,066
1,294
(553)
741
2,807 $
5,802 $
1,067
6,869
(650)
(917)
(1,567)
5,302 $
474
1,260
1,734
(789)
291
(498)
1,236
We recognized net income tax benefits from deductions of share-based payments in excess of compensation cost recognized
for financial reporting purposes of $0.4 million, $0.8 million, and $0.2 million for the years ended December 31, 2020, 2019,
and 2018, respectively.
71
Table of Contents
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
Operating lease liabilities
Pension obligation
Federal and state net operating loss carryforwards
State tax credit carryforwards
Stock-based 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
Operating lease right-of-use assets
Prepaid insurance
Other
Total gross deferred tax liabilities
Net deferred tax liabilities
(In thousands)
December 31,
2020
2019
$
$
558 $
371
546
113
5,912
493
133
2,684
4,186
2,915
5,125
9,271
2,179
1,544
36,030
(9,330)
26,700
—
(11,255)
(5,493)
(22,298)
(3,879)
(385)
(349)
(43,659)
(16,959) $
776
314
1,004
94
5,049
494
84
2,334
4,830
2,552
6,251
8,900
1,672
1,226
35,580
(9,375)
26,205
(256)
(8,852)
(4,109)
(24,749)
(4,509)
(346)
(95)
(42,916)
(16,711)
We have federal and state tax net operating losses of $18.9 million and $20.7 million, respectively, as of December 31, 2020.
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 $12.2 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,
depending on the tax jurisdiction, will begin to expire between 2027 and 2033.
We have federal and state tax credit carryforwards of $0.1 million and $13.5 million, respectively, as of December 31, 2020.
A valuation allowance of $11.0 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 tax carryforwards will begin to expire in 2032 and state tax
credit carryforwards, depending on the tax jurisdiction, will begin to expire between 2021 and 2031.
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.
72
Table of Contents
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
Stock-based compensation expense
Research and development tax credits (1)
Other tax credits
Changes in valuation allowance
Non-deductible book expenses
Changes in deferred tax assets
Changes in tax reserves
Other
Effective income tax rate
2020
21.0%
4.6
(0.4)
(1.4)
(13.8)
(0.3)
(0.4)
3.6
(0.2)
(4.6)
0.7
8.8%
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%
(1) For 2020, (3.4)% is additional research and development tax credits related to 2019.
Our total amount of unrecognized tax benefits was $4.1 million, $5.7 million, and $5.3 million at December 31, 2020, 2019,
and 2018, respectively. We record interest and penalty charges, 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, 2020,
2019, and 2018 were not significant. If recognized, $2.4 million would affect the effective income tax rate. Due to federal and
state statute of limitations for tax year 2016 that expired on October 15, 2020, we released uncertain tax positions of
$2.2 million and recognized income tax benefits of $2.1 million in 2020. We do not expect the total amount of unrecognized
tax benefits to increase or decrease by a material amount 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,
2020
2019
2018
$
$
5,663 $
418
157
—
(2,169)
4,069 $
5,283 $
408
—
(28)
—
5,663 $
5,271
419
92
(499)
—
5,283
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 2016 and by state taxing authorities for tax years after 2015. 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.
On March 27, 2020, the U.S. enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) that provides
tax relief to individuals and businesses affected by the coronavirus pandemic. We considered the provisions of the CARES
Act and determined they do not have a material impact to our overall income taxes. We have utilized the option to defer
payment of the employer portion of payroll taxes (Social Security) that would otherwise be required to be made during the
period beginning March 27, 2020 to December 31, 2020. See COVID-19 Pandemic Impact on Our Business included in Part
II, Item 7 of this Annual Report on Form 10-K (“Form 10-K”). As of December 31, 2020, we deferred income tax deductions
related to payroll taxes of $6.1 million and a deferred tax asset of $1.4 million is included as part of the net deferred income
taxes on the consolidated balance sheet.
73
Table of Contents
On December 27, 2020, the U.S. enacted the Consolidated Appropriations Act, 2021 (the “Act”) that provides additional tax
relief to individuals and businesses affected by the coronavirus pandemic. We considered the provisions of the Act and
determined they do not have a material impact to our overall income taxes.
Note 14. Commitments and Contingencies
On December 16, 2020, a representative action under California’s Private Attorneys General Act was filed against us in the
Superior Court for the State of California, County of San Bernardino. We received service of process of this complaint on
January 28, 2021. The complaint alleges violations of California’s wage and hour laws relating to our current and former
employees and seeks attorney’s fees and penalties. We believe these claims are baseless, without merit and intend to
vigorously defend against them. We do not currently have enough information to make a reasonable estimate as to the
likelihood or amount of loss, or a range of reasonably possible losses as a result of this claim, so there have been no related
accrual for estimated liability recorded as of December 31, 2020.
Structural Systems has been directed by California environmental agencies to investigate and take corrective action for
groundwater contamination at our facilities located in El Mirage and Monrovia, California. Based on currently available
information, we have established an accrual for its estimated liability for such investigation and corrective action of $1.5
million at December 31, 2020, which is reflected in other long-term liabilities on the consolidated balance sheet.
Structural Systems also faces liability as a potentially responsible party for hazardous waste disposed at landfills located in
Casmalia and West Covina, California. Structural Systems and other companies and government entities have entered into
consent decrees with respect to these landfills with the United States Environmental Protection Agency and/or California
environmental agencies under which certain investigation, remediation and maintenance activities are being performed.
Based on currently available information, we preliminarily estimate that the range of our future liabilities in connection with
the landfill located in West Covina, California is between $0.4 million and $3.1 million. We have established an accrual for
the estimated liability in connection with the West Covina landfill of $0.4 million at December 31, 2020, which is reflected in
other long-term liabilities on the consolidated balance sheet. Our 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.
On June 29, 2020, a fire severely damaged our performance center in Guaymas, Mexico, which is part of our Structural
Systems segment. There were no injuries, however, property and equipment, inventories, and tooling in this leased facility
were damaged. Our Guaymas performance center is comprised of two buildings with an aggregate total of 62,000 square feet.
The loss of production from the Guaymas performance center is being absorbed by our other existing performance centers. A
neighboring, non-related manufacturing facility, also suffered fire damage during the same time as the fire that severely
damaged our Guaymas performance center. The cause of the fire is still undetermined and as such, there is no amount of loss
that is probable and reasonably estimable at this time.
Our insurance covers damage to the facility, equipment, unfinished inventory, and other assets at replacement cost, finished
goods inventory at selling price, as well as business interruption, third party property damage, and recovery related expenses
caused by the fire, less our per claim deductible. The anticipated insurance recoveries related to losses and incremental costs
incurred are recognized when receipt is probable. The anticipated insurance recoveries in excess of net book value of the
damaged operating assets and business interruption will not be recorded until all contingencies related to our claim have been
resolved. During the year ended December 31, 2020, $0.8 million of revenue and $0.5 million of related cost of sales that
were recognized earlier in the year using the over time method were subsequently reversed in the third quarter of 2020 as the
revenue recognition process for these items were deemed to be interrupted as a result of these inventory items being
damaged. Also during the year ended December 31, 2020, we wrote off property and equipment and tooling with an
aggregate total net book value of $7.1 million and inventory on hand of $3.4 million that were damaged by the fire. The
related anticipated insurance recoveries were also presented within the same financial statement line item in the consolidated
statements of income resulting in no net impact, with the anticipated insurance recoveries receivable included as part of other
current assets on the consolidated balance sheets. As of December 31, 2020, $13.5 million of general insurance recoveries
have been received to date. The timing of and the remaining amounts of insurance recoveries, including for business
interruption, are not known at this time.
74
Table of Contents
In the normal course of business, Ducommun and its subsidiaries are defendants in certain other litigation, claims and
inquiries, including matters relating to environmental laws. In addition, Ducommun makes various commitments and incurs
contingent liabilities. While it is not feasible to predict the outcome of these matters, Ducommun does not presently expect
that any sum it may be required to pay in connection with these matters would have a material adverse effect on its
consolidated financial position, results of operations or cash flows.
Note 15. Major Customers and Concentrations of Credit Risk
We provide proprietary products and services to the Department of Defense and various United States Government agencies,
and most of the aerospace and aircraft manufacturers who receive contracts directly from the U.S. Government as an original
equipment manufacturer (“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”), Northrop Grumman Corporation (“Northrop”), Raytheon Technologies Corporation (“Raytheon”), and
Spirit AeroSystems Holdings, Inc. (“Spirit”), represented the following percentages of total net revenues:
Boeing
Lockheed Martin
Northrop
Raytheon
Spirit
Top ten customers (1)
Years Ended December 31,
2020
2019
2018
10.5 %
5.0 %
9.1 %
20.9 %
3.3 %
61.1 %
16.6 %
4.0 %
4.0 %
15.6 %
12.2 %
65.4 %
17.0 %
4.4 %
3.6 %
16.3 %
9.5 %
65.3 %
(1) Includes Boeing, Lockheed Martin, Northrop, Raytheon, and Spirit.
Boeing, Lockheed Martin, Northrop, Raytheon, and Spirit represented the following percentages of total accounts receivable:
Boeing
Lockheed Martin
Northrop
Raytheon
Spirit
December 31,
2020
2019
4.8 %
2.4 %
12.3 %
15.0 %
1.1 %
5.9 %
1.3 %
6.5 %
6.7 %
2.0 %
In 2020, 2019 and 2018, net revenues from foreign customers based on the location of the customer were $58.5 million,
$81.6 million and $71.9 million, respectively. No net revenues from a foreign country were greater than 2.0% of total net
revenues in 2020, 2019, and 2018. 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 2020, 2019, and 2018. We are
not subject to any significant foreign currency risks as all our sales are made in United States dollars.
75
Table of Contents
Note 16. Business Segment Information
We supply products and services primarily to the aerospace and defense industries. Our subsidiaries are organized into two
strategic businesses, 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)
Electronic Systems
Structural Systems
Corporate General and Administrative Expenses (3)
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,
2020
2019
2018
$
$
$
$
$
$
$
$
392,633 $
236,308
628,941 $
51,894 $
19,584
71,478
(25,972)
45,506 $
14,038 $
14,559
253
28,850 $
5,037 $
8,570
—
13,607 $
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
(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 2.
(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.
(3) Includes cost not allocated to either the Electronic Systems or Structural Systems operating segments.
76
Table of Contents
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 2020 and 2019:
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,
2020
2019
$
$
$
$
448,606 $
325,604
63,137
837,347 $
201,077 $
94,497
295,574 $
411,981
328,718
49,730
790,429
210,453
98,826
309,279
In October 2019, we acquired 100.0% of the outstanding equity interests of Nobles for an original purchase price of $77.0
million, net of cash acquired. We allocated the final gross purchase price of $77.1 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 2.
77
Table of Contents
SCHEDULE II
Description
2020
DUCOMMUN INCORPORATED AND SUBSIDIARIES
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2020, 2019, AND 2018
(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 Credit Losses
Valuation Allowance on Deferred Tax Assets
2019
Allowance for Credit Losses
Valuation Allowance on Deferred Tax Assets
2018
Allowance for Credit Losses
Valuation Allowance on Deferred Tax Assets
$
$
$
$
$
$
1,321 $
231 $
— $
— $
1,552
9,375 $
(111) $
— $
66 $
9,330
1,135 $
219 $
33 $
— $
1,321
9,083 $
(593) $
— $
885 $
9,375
868 $
776 $
509 $
— $
1,135
9,013 $
70 $
— $
— $
9,083
(1) Includes opening balances of Nobles Worldwide, Inc. acquired in October 2019.
78
Table of Contents
Exhibit
No.
EXHIBIT INDEX
Description
2.1 Agreement and Plan of Merger, dated as of September 11, 2017, among Ducommun LaBarge Technologies, Inc., LS
2.1 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.
2.2 Agreement and Plan of Merger, dated as of October 8, 2019, among Ducommun LaBarge Technologies, Inc., DLT
2.2 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.
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 March
22, 2013.
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 January 9,
2017.
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 February
26, 2018.
26, 2018.
4.1 Description of Ducommun Incorporated Securities Registered under Section 12 of the Exchange Act. Incorporated by
4.1 Description of Ducommun Incorporated Securities Registered under Section 12 of the Exchange Act. Incorporated by
reference to Exhibit 4.1 to Form 10-K for the year ended December 31, 2019.
reference to Exhibit 4.1 to Form 10-K for the year ended December 31, 2019.
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 December
20, 2019, by and among Ducommun Incorporated, as Borrower, the subsidiaries of the Borrower party thereto, as
20, 2019, by and among Ducommun Incorporated, as Borrower, the subsidiaries of the Borrower party thereto, as
Guarantors, Bank of America, N.A., as Administrative Agent, Swingline Lender and an L.C. Issuer, and the lender
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.
party 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, Bank of
America, N.A., as administrative agent, swingline lender and issuing bank, and other lenders party thereto.
America, N.A., as administrative agent, swingline lender and issuing bank, and other lenders party thereto.
Incorporated by reference to Exhibit 10.1 to Form 8-K filed on November 26, 2018.
Incorporated by reference to Exhibit 10.1 to Form 8-K filed on November 26, 2018.
*10.3 2013 Stock Incentive Plan (Amended and Restated May 2, 2018). Incorporated by reference to Appendix A of
*10.3 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.
*10.4 2020 Stock Incentive Plan. Incorporated by reference to Appendix A of Definitive Proxy Statement on Schedule 14a,
*10.4 2020 Stock Incentive Plan. Incorporated by reference to Appendix A of Definitive Proxy Statement on Schedule 14a,
filed on March 20, 2020.
filed on March 20, 2020.
*10.5 2018 Employee Stock Purchase Plan. Incorporated by reference to Appendix B of Definitive Proxy Statement on
*10.5 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.
*10.6 2020 Employee Stock Purchase Plan. Incorporated by reference to Appendix A of Definitive Proxy Statement on
*10.6 2020 Employee Stock Purchase Plan. Incorporated by reference to Appendix A of Definitive Proxy Statement on
Schedule 14a, filed on March 20, 2020.
Schedule 14a, filed on March 20, 2020.
*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.
*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, filed on
May 10, 2018.
May 10, 2018.
*10.10 Form of Restricted Stock Unit Agreement for 2017 through 2019. Incorporated by reference to Exhibit 10.9 to Form
*10.10 Form of Restricted Stock Unit Agreement for 2017 through 2019. Incorporated by reference to Exhibit 10.9 to Form
10-K for the year ended December 31, 2016.
10-K for the year ended December 31, 2016.
*10.11 Performance Restricted Stock Unit Agreement dated January 23, 2017 between Ducommun Incorporated and
*10.11 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.
79
Table of Contents
Exhibit
No.
Description
*10.12 Form of Performance Stock Unit Agreement for 2020 and after. Incorporated by reference to Exhibit 10.18 to Form
*10.12 Form of Performance Stock Unit Agreement for 2020 and after. Incorporated by reference to Exhibit 10.18 to Form
10-Q for the period ended June 27, 2020.
10-Q for the period ended June 27, 2020.
*10.13 Form of Restricted Stock Unit Agreement for Non-Qualified Deferred Compensation Plan Participants for 2020 and
*10.13 Form of Restricted Stock Unit Agreement for Non-Qualified Deferred Compensation Plan Participants for 2020 and
after. Incorporated by reference to Exhibit 10.19 to Form 10-Q for the period ended June 27, 2020.
after. Incorporated by reference to Exhibit 10.19 to Form 10-Q for the period ended June 27, 2020.
*10.14 Form of Restricted Stock Unit Agreement for 2020 and after. Incorporated by reference to Exhibit 10.20 to Form 10-
*10.14 Form of Restricted Stock Unit Agreement for 2020 and after. Incorporated by reference to Exhibit 10.20 to Form 10-
Q for the period ended June 27, 2020.
Q for the period ended June 27, 2020.
*10.15 Form of Stock Option Agreement for 2020 and after. Incorporated by reference to Exhibit 10.21 to Form 10-Q for the
*10.15 Form of Stock Option Agreement for 2020 and after. Incorporated by reference to Exhibit 10.21 to Form 10-Q for the
period ended June 27, 2020.
period ended June 27, 2020.
*10.16 Form of Performance Restricted Stock Unit Agreement for 2020. Incorporated by reference to Exhibit 10.22 to Form
*10.16 Form of Performance Restricted Stock Unit Agreement for 2020. Incorporated by reference to Exhibit 10.22 to Form
10-Q for the period ended June 27, 2020.
10-Q for the period ended June 27, 2020.
*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
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
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
October 1, 2015
July 24, 2008
January 24, 2020
January 1, 2016
*10.18 Directors’ Deferred Compensation and Retirement Plan, as amended and restated February 2, 2010. Incorporated by
*10.18 Directors’ Deferred Compensation and Retirement Plan, as amended and restated February 2, 2010. Incorporated by
reference to Exhibit 10.15 to Form 10-K for the year ended December 31, 2009.
reference to Exhibit 10.15 to Form 10-K for the year ended December 31, 2009.
*10.19 Non Qualified Deferred Compensation. Incorporated by reference to Exhibit 4.6 to Form S-8 dated November 26,
*10.19 Non Qualified Deferred Compensation. Incorporated by reference to Exhibit 4.6 to Form S-8 dated November 26,
2019.
2019.
*10.20 Key Executive Severance Agreement between Ducommun Incorporated and Stephen G. Oswald dated January 23,
*10.20 Key Executive Severance Agreement between Ducommun Incorporated and Stephen G. Oswald dated January 23,
2017. Incorporated by reference to Exhibit 99.1 to Form 8-K dated January 27, 2017.
2017. Incorporated by reference to Exhibit 99.1 to Form 8-K dated January 27, 2017.
*10.21 Form of Key Executive Severance Agreement between Ducommun Incorporated and each of the individuals listed
*10.21 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
*10.22 Employment Letter Agreement dated January 3, 2017 between Ducommun Incorporated and Stephen G. Oswald.
*10.22 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.
80
Table of Contents
Exhibit
No.
Description
*10.23 Employment Letter Agreement dated December 19, 2016 between Ducommun Incorporated and Amy M. Paul.
*10.23 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.
*10.24 Transition Services Letter Agreement dated January 10, 2017 between Ducommun Incorporated and James S. Heiser.
*10.24 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.
*10.25 Separation and Release Agreement dated May 14, 2018 between Ducommun Incorporated and Amy M. Paul.
*10.25 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.
*10.26 Separation and Release Agreement dated June 26, 2019 between Ducommun Incorporated and Douglas L. Groves.
*10.26 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
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File
because its XBRL tags are embedded within the Inline XBRL
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
XBRL Taxonomy Extension Schema
XBRL Taxonomy Extension Calculation Linkbase
XBRL Taxonomy Extension Definition Linkbase
XBRL Taxonomy Extension Label Linkbase
XBRL Taxonomy Extension Presentation Linkbase
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
104
___________________
* Indicates an executive compensation plan or arrangement.
81
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 11, 2021
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 11, 2021.
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
Title
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
Vice President, Chief Financial Officer, Controller and
Treasurer
(Principal Financial and Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
82
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, 2020.
(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. 333-238040, 333-235278, 333-224838, 333-214408, and 333-188460) of Ducommun Incorporated of our report
dated February 11, 2021 relating to the financial statements and 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 11, 2021
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, 2020;
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 11, 2021
/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, 2020;
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 11, 2021
/s/ Christopher D. Wampler
Christopher D. Wampler
Vice President, Chief Financial Officer, Controller and
Treasurer
Certification Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
EXHIBIT 32
In connection with the Annual Report of Ducommun Incorporated (the “Company”) on Form 10-K for the period
ending December 31, 2020, 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 11, 2021
In connection with the Annual Report of Ducommun Incorporated (the “Company”) on Form 10-K for the period
ending December 31, 2020, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I,
Christopher D. Wampler, Vice President, Chief Financial Officer, Controller and Treasurer of the Company, certify pursuant
to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to the best of our knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
By:
/s/ Christopher D. Wampler
Christopher D. Wampler
Vice President, Chief Financial Officer, Controller and Treasurer
February 11, 2021
The foregoing certification is accompanying the Form 10-K solely pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, and is not being filed as part of the Form 10-K or as a separate disclosure document.
Corporate Information
BOARD OF DIRECTORS
Stephen G. Oswald
Chairman, President and Chief executive officer,
ducommun Incorporated
Shirley G. Drazba
Vice President, Product line Strategy and Innovation,
IdeX Corporation (ret.)
Richard A. Baldridge
President and Chief executive officer, Viasat, Inc.
Robert C. Ducommun
Business adviser
Gregory S. Churchill
executive Vice President, International and
Service Solutions, rockwell Collins, Inc. (ret.)
Dean M. Flatt
President, defense and Space,
honeywell International, Inc. (ret.)
OFFICERS
Stephen G. Oswald
Chairman, President and Chief executive officer
Christopher D. Wampler
Vice President, Chief Financial officer,
Controller and treasurer
Jay L. Haberland
Vice President, United technologies Corp. (ret.)
Jerry L. Redondo
Senior Vice President of operations
and head of Structures
Rosalie F. Rogers
Vice President and Chief human resources officer
Rajiv A. Tata
Vice President, General Counsel and Corporate 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.com
SAFE HARBOR STATEMENT
the Company has filed the required certifications
under Section 302 of the Sarbanes-oxley act of 2002
regarding the quality of our public disclosures as
exhibits 31.1 and 31.2 to our annual report on Form 10-K
for the fiscal year ended december 31, 2020. after the
2021 annual Meeting of Shareholders, the Company
intends to file with the New York Stock exchange the
Ceo certification regarding its compliance with the
NYSe’s corporate governance listing standards as
required by NYSe rule 303a.12. last year, the
Company filed this Ceo certification with the NYSe
on or about June 3, 2020.
With the exception of current and historical information, the statements set forth above contain forward-looking statements within the meaning
of Section 27a of the Securities act of 1933, as amended, and Section 21e of the Securities exchange act of 1934, as amended, including, in
particular, statements about the Company’s plans and expected growth in 2021. 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. the Company generally uses the words such as “looking,” “see,” “hope,” “could,” “may,” “believe,” “expect,”
“anticipate,” “estimate,” “expect,” or similar expressions. the Company bases these forward-looking statements on its current views with respect
to future events and financial performance. actual results could differ materially from those projected in the forward-looking statements. these
forward-looking statements are subject to risks, uncertainties and assumptions, including those detailed from time to time in the Company’s
periodic reports filed with the Securities and exchange Commission. You should not put undue reliance on any forward-looking statements. You
should understand that many important factors, including those discussed herein, and could cause the Company’s results to differ materially
from those expressed or suggested in any forward-looking statement. except as required by law, the Company does not undertake any obligation
to update or revise these forward-looking statements to reflect new information or events or circumstances that occur after the date of this
annual report to Shareholders, March 8, 2021, or to reflect the occurrence of unanticipated events or otherwise. readers are advised to review
the Company’s filings with the Securities and exchange Commission (which are available from the SeC’s edGar database at www.sec.gov).
Ducommun Incorporated
200 Sandpointe avenue, Suite 700
Santa ana, Ca 92707-5759
+1 (657) 335-3665
Ducommun.com