2022
Annual Report
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, differentiated electronic and structural
manufacturing and assembly services, and aftermarket
support. The Company supplies proprietary products and
services that deliver meaningful value to our customers
and aspires to contribute to the advancement of the
Aviation, Defense and Space industries. All stakeholders
including our communities are supported in our mission
as we strive for the highest levels of service in every area.
Company Profile
Ducommun Incorporated delivers innovative, value-added
proprietary products and 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
programs and space exploration. For more information,
visit Ducommun.com.
Stephen G. Oswald
Chairman, President and Chief Executive Officer
Dear Fellow Shareholders,
I am happy to report that 2022 was a strong
year for Ducommun, with our best top-line
performance since 2019. It also demonstrated
our operational strength as a company
compared to others in the Aerospace and
Defense industry, managing the supply chain
effectively along with the workforce.
As we moved through 2022, one of the most exciting
developments was our 2027 strategy and vision that
we announced at our Investor Day in December. The
Company is now committed after several tough years
to achieve roughly $950 Million in revenue by 2027 with
significant margin expansion.
Financial Performance
Ducommun posted revenue of $712.5 million in 2022,
a double digit increase of 10% from 2021 along with
solid gross margins of 20.3%. Our operating margins
were 5.6%, delivering $39.8 million of operating income
with a net income of $28.8 million. Adjusted operating
income was $59.0 million or 8.3% in 2022, compared to
$57.8 million or 9.0% in 2021. Adjusted EBITDA generation
was strong in 2022, reaching $94.7 million compared to
$92.8 million in 2021. We also initiated a restructuring in
2022 to drive margin expansion for the Company and
expect the plan to be completed in 2023. We anticipate
these actions will result in total annualized cost savings
of $11.0 million to $13.0 million. A real bright spot as well in
2022 was our overall backlog which grew to $961 million,
led by Commercial Aerospace which increased by 35%,
a great sign that the Commercial Aerospace recovery
will continue for the market and Ducommun.
One area of our business in 2022 that I would like to
highlight is the significant improvement of our
commercial aerospace business within our Structural
Systems segment. Commercial aerospace revenue
within Structural Systems was up 55% over 2021 and
01
Ducommun Incorporated 2022 Annual Report the backlog at the end of 2022 was also 17% higher.
Our Structural Systems business is component-based,
and we strive to produce products from only industry
leading niche technology such as titanium, Hot Form
and Super Plastic Forming.
Acquisitions are part of our growth strategy as well
and we had a great first full year with our most recent
purchase, Magnetic Seal LLC (MagSeal). Another
bright spot during 2022 was the completion of a debt
refinancing at an opportunistic time. Our debt was set
to mature in 2024 and 2025 but with this refinancing,
we upsized our revolving credit facility which allows
for further growth of our Company, and our debt will
now mature in 2027.
2022 Highlights
Ducommun is proud of our contributions towards the
successful launch of Artemis I in 2022, the first flight
of NASA’s Space Launch System and the most powerful
rocket engine ever flown to space. Our Joplin
Performance Center was involved in the production
of most of the harnesses on the flight set, including
48 Ducommun design assist harnesses that ran the
full length of the SLS solid rocket boosters.
In October, we also celebrated the grand opening of
our new facility in Guaymas, Mexico. The ceremony was
attended by valued employees and legacy customers,
including The Boeing Company and Middle River
Aerostructure Systems. The new facility spans 115,000
square feet and has multiple capabilities including
metal bond, VersaCore™ Composites, cable and harness
assembly and hard metal fabrication. Ducommun’s
expanded operations in Mexico will allow the Company
to continue its successful legacy of providing the
highest level of product and process quality, while
delivering maximum competitive value to its OEM
customers.
Ducommun’s Appleton, Wisconsin performance
2022 Net Revenues
2022 Net Revenues
of $712.5 Million
of $712.5 Million
35%
35%
6%
6%
59%
59%
Total Backlog* as of
Total Backlog* as of
December 31, 2022 of $961 Million
December 31, 2022 of $961 Million
47%
47%
5%
5%
48%
48%
COMMERCIAL AEROSPACE
COMMERCIAL AEROSPACE
MILITARY & SPACE
MILITARY & SPACE
INDUSTRIAL
INDUSTRIAL
* 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.
Ducommun Investor Day
Ducommun held an in person Investor Day
in New York City on December 8th, 2022.
Members of our executive team presented
an update on our business strategy,
operations and long-term growth plans.
The event was attended in person and
virtually by 39 representatives from our
investor community.
center alone achieved a record breaking $100 million
Ducommun won several Low Rate Initial Production
in revenue this year. This major milestone is largely
(LRIP) contracts with Raytheon and was identified
attributed to the performance center’s significant
as a strategic supplier of several of Raytheon’s Land
growth, including full program life cycle support of key
Warfare & Air Defense Mission programs with promising
customers such as Raytheon Missiles and Defense and
long-term sales opportunities as the programs progress
Raytheon Intelligence & Space (Raytheon). In 2022,
to full rate production.
02
DRIVING SHAREHOLDER VALUE AND
EXECUTING STRATEGIC ACQUISITIONS
Customer Spotlight: Airbus
Our growing book of business with Airbus is a significant driver of long-term shareholder value. Airbus is a fairly new
customer to the Company and our proven IP technology for hot forming and super plastic forming of highly contoured
complex parts has set us up as a key provider across narrowbody and widebody platforms. Revenues from Airbus
platforms have increased three times from 2017 to 2022, with 20% of our Structures backlog attributed to Airbus.
In recent years, Ducommun earned D2P supplier status with Airbus and was awarded a five-year contract with
additional two-year options for A320 and A330 platforms.
Airbus A350
Airbus A330
Airbus A320
Airbus A220
03
Key Attributes for
Acquisition Candidates are:
Aerospace & Defense | Engineered Products
Sole Source Positions | Aftermarket
Leading Brand | Runway for Growth
M&A Growth Strategy
Mergers and Acquisitions have played a significant
role in Ducommun’s success and will continue to be
a cornerstone for our growth strategy in the coming
years. In 2022, we completed the successful integration
of our latest acquisition, MagSeal. Our team’s extensive
acquisition experience and track record of successful
integrations will allow Ducommun to transition to higher
engineered product content and aftermarket revenues
while continuing to build a portfolio of niche A&D
businesses that are industry leaders in innovation
and customer satisfaction.
Lightning diverter strips
and surge compressors
September 2017 | $60M
Thermoplastic
extruded assemblies
April 2018 | $31M
Ammunition handling systems
October 2019 | $77M
Magnetic seals
December 2021 | $69M
04
Employee Well Being
Our employees’ physical, emotional, and financial health
management system, offering employees free access
has continued to be the top priority at Ducommun. As we
to a library of advanced, interactive e-learning
move out of the COVID-19 pandemic, we have been able
content including courses for career development
to expand our focus from physical health and wellness
and professional certification preparation.
towards unique benefits that improve our employees’
overall well-being.
DCO Scholars Program
Our Employee Stock Purchase Plan (ESPP) continued
to gain momentum in 2022, with a 32% increase in
participants since it was introduced in 2019. Our
employees are taking advantage of the opportunity to
further benefit from the Company’s success through
ownership of Ducommun stock. Additionally, our 401(k)
program grew to a 91% participation rate among eligible
employees in 2022. Ducommun supported employees’
educational goals through reimbursement payments
totaling more than $25,000 for engineering, quality,
supply chain, program management, accounting and
I.T. coursework. We also upgraded our online learning
Ducommun Scholarships are a merit-based, renewable
program available exclusively to our full-time
employees’ children and grandchildren attending a
four-year college or university or a two-year accredited
technical or vocational college. In 2022, we awarded a
record 70 scholarships, including 35 new awards and
35 renewed scholarships. This is a significant increase
from the 48 scholarships awarded in 2021 and 25 in
2020. Through this program, we are able to recognize
the accomplishments of our talented Ducommun family
members and support the education of future generations.
CONGRATULATIONS 2022
DUCOMMUN SCHOLARS
DUCOMMUN AWARDS 35 COLLEGE SCHOLARSHIPS TO ELIGIBLE
CHILDREN & GRANDCHILDREN OF FULL-TIME EMPLOYEES
Ducommun Incorporated (NYSE: DCO)
recognizes the 35 Ducommun Scholars
who will each receive a $2,000 or $3,000
scholarship for college expenses during
the 2022-2023 academic year. Ducommun
Scholarships are a merit-based, renewable
program available exclusively to full-time
employees’ children and grandchildren
attending a four-year college or
university, or a two-year accredited
technical or vocational college.
“ Congratulations to our thirty five
Ducommun Scholarship Recipients
for 2022! I am very pleased that
the company has again grown this
outstanding program in 2022 and
will support these deserving students
as they work towards their dreams.
I also want to take this opportunity
to congratulate the parents,
grandparents, and families of our
awardees! Our scholars have bright
futures ahead and I am thrilled that
these awards will help them in their
educational pursuits and future careers.”
STEPHEN G. OSWALD
Chairman, President
and Chief Executive Officer
GAVIN BARCLAY
Oklahoma State
University
FIELD OF STUDY
Business Marketing
Child of
Aaron Barclay
Tulsa, OK
SIERRA BENSHOOF
University of Arkansas
at Fort Smith
FIELD OF STUDY
Business Administration
Child of
Joshua Benshoof
Huntsville, AR
MAYLENE
DIEP
Chapman University
FIELD OF STUDY
Pre-Pharmacy
Child of
Peter Cong Diep
Monrovia, CA
BYRON FERNANDEZ
California State
Polytechnic University:
Pomona
FIELD OF STUDY
Psychology
Grandchild of
Manuel Sanchez
Monrovia, CA
ANDREA
FIGUEROA
California State University:
Dominguez Hills
FIELD OF STUDY
HR Management
Child of
Luis Figueroa
Monrovia, CA
SKYLER FOX
University of
Wisconsin-Stout
FIELD OF STUDY
Criminal Justice
and Rehabilitation
Child of
Ricky Fox
St. Croix Falls, WI
ALYSSA
GONZALEZ
Bethany College
FIELD OF STUDY
Biology
Grandchild of
Norris Self
Huntsville, AR
GAVIN HIGHT
Salina Area
Technical College
FIELD OF STUDY
Electrical Technology
Grandchild of
David Junken
Parsons, KS
HAVEN KEYS
Crowder College
FIELD OF STUDY
Pre-Veterinary Medicine
Grandchild of
Mary Shockley
Berryville, AR
LINDSEY
LANAVILLE
Missouri Southern
State University
FIELD OF STUDY
Conservation and Ecology
Child of
Suzette Lanaville
Joplin, MO
RONA LOR
University of
Wisconsin-Madison
FIELD OF STUDY
Supply Chain Management
Child of
Sandra Lor
Appleton, WI
GAVIN LUSK
Chippewa Valley
Technical College
FIELD OF STUDY
Mechanical Design
Child of
Timothy Lusk
St. Croix Falls, WI
HADLEY
McCARTY
Pittsburg State University
FIELD OF STUDY
Education
VICTORIA
McGOVERN
Penn State University Park
FIELD OF STUDY
Kinesiology
Grandchild of
Dave Norman
Joplin, MO
Child of
Scott McGovern
Warren, RI
JACOB
MENDOZA
Citrus College
FIELD OF STUDY
Business Management
Child of
Randy Mendoza
Monrovia, CA
ALEXCIA
MIDDLETON
University of Arkansas
Community College
Rich Mountain
FIELD OF STUDY
General Studies
Grandchild of
Roxanne Middleton
Huntsville, AR
ABIGAIL MORROW
University of Pittsburgh
at Greensburg
FIELD OF STUDY
Communications
Child of
Jamie Morrow
Irwin, PA
SANDRA NGO
University of
California: Irvine
FIELD OF STUDY
Biomedical Engineering
Child of
Ken Ngo
Santa Ana, CA
JOELLA NGUYEN
University of
California: Riverside
FIELD OF STUDY
Microbiology
Child of
Steven Nguyen
Carson, CA
CASSIDY O’HAGAN
University of
Wisconsin-La Crosse
FIELD OF STUDY
Biology (Pre-Optometry)
Child of
Sean O’Hagan
Appleton, WI
VALERIA
ORTIZ JAUREGUI
University of Arkansas
FIELD OF STUDY
Architecture
Child of
Eduardo
Encerrado Rocha
Huntsville, AR
DANIEL PADILLA
California State University:
Long Beach
FIELD OF STUDY
Business Administration
Child of
Erika Padilla
Gardena, CA
TIFFANY PHAM
University of Missouri
Kansas City
FIELD OF STUDY
Chemisty/Pre-Pharmacy
Grandchild of
Lang Ngoc Pham
Joplin, MO
JAILYN PIERSON
Labette
Community College
FIELD OF STUDY
Health Science/Nursing
Child of
Korie Cobb
Parsons, KS
COOPER RILEY
University of Arkansas
FIELD OF STUDY
Exercise Science
Child of
Angela Riley
Huntsville, AR
HANNAH
ROBINSON
Missouri Southern
State University
FIELD OF STUDY
Education
Child of
Danny Robinson
Joplin, MO
ILANA ROZZELL
University of Oklahoma
FIELD OF STUDY
Psychology and Pre-Med
Child of
Tatiana Rozzell
Tulsa, OK
PAIGE SHOMBER
Labette
Community College
FIELD OF STUDY
Nursing
Child of
Rodger Shomber
Parsons, KS
COPYRIGHT © 2022 DUCOMMUN INCORPORATED. ALL RIGHTS RESERVED.
AUTUMN ST. CLAIR
Paul Mitchell
FIELD OF STUDY
Cosmetology
TRISTAN TAYLOR
Pittsburg State University
FIELD OF STUDY
Social Work
Child of
Traci St. Clair
Huntsville, AR
Child of
William Taylor
Parsons, KS
MARIO VARGAS
University of California:
Los Angeles
FIELD OF STUDY
Political Science
Child of
Carlos Vargas
Santa Clarita, CA
CHASE WHITFIELD
Oklahoma State
University
FIELD OF STUDY
Aerospace Engineering
Child of
Sandra Whitfield
Tulsa, OK
ANDY YANG
University of
Wisconsin-Oshkosh
FIELD OF STUDY
Accounting
Child of
Yeng Yang
Appleton, WI
VATZI YANG
University of
Wisconsin-Oshkosh
FIELD OF STUDY
Computer Science
Child of
Xee Xiong
Appleton, WI
AMANDA ZHAO
New York University
FIELD OF STUDY
Business Administration
Child of
Steve Zhao
Carson, CA
05
Ducommun Incorporated 2022 Annual Report 06
Community Involvement
& Philanthropy
At Ducommun, we are committed to supporting our local
communities through a variety of philanthropic efforts.
We are proud of the programs and partnerships that we
have developed that allow us to make a significant and
meaningful difference in the lives of our neighbors and
importantly, in the next generation of leaders and
innovators.
STEM on the Sidelines™
In partnership with the Los Angeles Chargers of the
National Football League and the University of
California, Irvine, Ducommun sponsors STEM on the
Sidelines™, a regional competition promoting STEM
(Science Technology Engineering & Mathematics)
education in Los Angeles and Orange County, California
high schools. This year, we celebrated our 5th annual
event with a football launch competition at SoFi Stadium
in Inglewood, CA. A total of 14 teams from 11 schools
showed off their creativity and innovation, with the
winning teams being honored at the Los Angeles
Chargers game on December 18th.
The Ducommun Foundation
The Ducommun Foundation was founded in 2019 and
operates as the philanthropic arm of Ducommun to
address various community and humanitarian needs.
Since its inception, The Ducommun Foundation has
donated more than $1.7 million to support local, regional
and national non-profit and charitable organizations
that make a difference in the communities in which
we operate. Donations were provided to organizations
such as Hire Heroes USA, Fisher House Foundation,
U.S. Veterans Initiative and Wounded Warriors Family
Support. The Ducommun Foundation also contributed to
the World Central Kitchen, UNICEF USA, as well as other
humanitarian causes.
National Manufacturing Day
In October 2022, we held our 2nd Annual National
Manufacturing Day (MFG Day) event. MFG Day,
presented by the National Association of Manufacturers
and The Manufacturing Institute, highlights career
opportunities in the manufacturing industry. Our goal
through this event was to educate high school students
Ducommun Incorporated 2022 Annual Report
07
With just one small
campaign, Ducommun
employees have
contributed almost
$12,000 to non-profit
organizations and
logged over 160
volunteer hours.
on the wide range of opportunities available in
manufacturing and specifically, within Ducommun and
the Aerospace & Defense Industry. Career discussions
cover opportunities for students who plan to transition
from high school directly into the workforce or for
students who plan to pursue a technical or advanced
degree. We highlight success stories of our employees
who began their employment with Ducommun in an
entry level position and advanced into professional
and management careers. For 2022, we held over
19 student presentations and were able to make over
380 student connections.
Ducommun and United Way
Ducommun implemented the Philanthropy Cloud platform
created by Salesforce.org and United Way, which
connects employees with the causes they care most
about and drives support to non-profit organizations
08
Ducommun Incorporated 2022 Annual Report
through employee giving and volunteering. Following a
The American Rocketry Challenge
successful pilot program in 2021, we took the platform
Company-wide at the end of 2022. With just one small
campaign, Ducommun employees have contributed
almost $12,000 to non-profit organizations and logged
over 160 volunteer hours.
Our partnership with United Way does not end there.
Ducommun is proud to have been the Champion Sponsor
for Orange County United Way’s “Rally for Change,”
celebrating Corporate Social Responsibility Champions
in our community. Ducommun team members also
partnered with United Way to complete a beautification
project at a local elementary school, painting murals
and presenting a cash donation to further support the
school and its students.
Ducommun Incorporated is a proud sponsor of The
American Rocketry Challenge, the world’s largest
student rocketry competition with 724 teams from 41
states participating in this year’s event. The National
Championship was awarded to Newport High School
Team 2 of Bellevue, WA. This team represented the
United States at the International Rocketry Challenge
which took place at the Farnborough International
Airshow in the U.K. in July. Team Japan won top honors
in the international competition. The winning team from
Japan marked the first-ever, first-place finish for an
all-female team since the competition began in 2015.
To date, the American Rocketry Challenge has inspired
more than 85,000 middle and high school students to
explore education and careers in STEM fields.
09
Our employment
practices focus on
eliminating barriers
and ensuring
everyone has equal
and fair opportunities
for employment and
career progression
at Ducommun.
Diversity & Inclusion
Our people are our greatest asset and with that in mind,
we place utmost importance on maintaining a diverse
and inclusive workforce. We have continued to enrich
our recruitment efforts through partnerships with
outreach organizations, including those that support
veterans and women. In 2022, 34% of our hires
self-identified as coming from an underrepresented
background, 37% as female, and 7% as protected
veterans. Over the past year, 33% of our total
promotions into leadership roles were earned by
employees from underrepresented backgrounds, an
increase of 10% over 2021. Our employment practices
focus on eliminating barriers and ensuring everyone has
equal and fair opportunities for employment and career
progression at Ducommun.
10
Environmental, Health & Safety
and Sustainability
Employee Safety
Ducommun tracks the number of lost time incidents
and total recordable incidents incurred by our employees
to measure the effectiveness of health and safety
programs. In 2022, our Lost Time Incident Rate
decreased 78% compared to the baseline year of 2019,
or 74% compared to 2021. In addition, our 2022 Total
Recordable Incident Rate decreased 71% compared to
the baseline year of 2019, or 7% compared to 2021.
Furthermore, Ducommun started tracking leading
indicators such as first aid and near-miss incidents
in 2022 to prevent accidents before they occur and to
help reinforce our safety-first culture.
Greenhouse Gas Emissions Reductions
Since publishing our initial ESG report for the 2020
fiscal year, we have continued to review and improve
the scope and transparency of both our program and
ESG disclosures. As depicted in the chart on the right,
there was a 29% decrease in our combined Scope 1
and 2 greenhouse gas emissions in 2022 compared to
2019 baseline levels on an absolute basis. To effectively
manage and address climate risks and reduce future
greenhouse gas emissions, we based our program on
four key pillars: energy efficiency, waste reduction,
wastewater efficiency, and accurate, verifiable, and
auditable ESG data. The first three pillars of our program
Ducommun Incorporated 2022 Annual Report
Lost Time Incident Rate
LOST TIME INCIDENT RATE
0.36
0.33
0.31
0.40
0.30
0.20
0.10
0.08
2019
2020
2021
2022
TOTAL RECORDABLE INCIDENT RATE
2.42
1.52
2.50
2.00
1.50
1.00
0.50
0.74
0.69
2019
2020
2021
2022
Scope 1 and 2
GREENHOUSE GAS EMISSIONS (TONS OF CO2E)
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
Three-Year Average
(2019-2021)
Scope 1 &2
are designed to not only reduce GHG emissions but also
2019
2020
2021
2022
identify cost reduction opportunities to deliver long-term
value to shareholders.
Scope 1: Direct Emissions from Natural Gas, Propane & Fuel
Scope 2: Indirect Emissions from Electricity
Ducommun continues to put significant effort into
managing its hazardous and non-hazardous waste
generation to mitigate harm to the environment by
finding ways to recycle, reuse, and prolong the service
life of materials used in our processes. By recycling
and reusing such materials, we reduce Scope 3 GHG
emissions by decreasing the number of transportation
miles driven by third-party waste haulers, which is why
we worked closely with third-party vendors to properly
understand our waste profile and increase the volume
of hazardous waste eligible for recycling or reclamation
in 2022.
11
Recognition
The Road Ahead
For the second consecutive year, Ducommun was
As we move forward out of pandemic related headwinds,
named to the The Orange County Business Journal’s
it was great to see the double digit revenue growth in
“Best Places to Work” list. This program recognizes
2022 and a significant return of Commercial Aerospace
outstanding places of employment in the Orange County,
volume. Our cost actions under the 2022 restructure plan
California community and acknowledges the Company’s
are important as well and expected to deliver savings
leadership and best people practices. Recipients were
later in 2023 and 2024. The Defense business also has a
assessed based on each company’s demographics,
very encouraging runway as we look to 2023 and
policies and practices, and feedback from the
especially 2024 with DOD budget increases, FMS along
independent employee experience survey conducted
with Primes continuing to offload manufacturing. Finally,
by the Workforce Research Group in April.
I want to take this opportunity to recognize and thank our
Additionally, Ducommun was honored to receive the
work and the very good results delivered in 2022!
team members for their continued commitment, hard
Quality Excellence Award from Spirit AeroSystems,
recognizing outstanding quality, performance, and
Sincerely,
overall contribution to the company. This award
was accepted by Jerry Redondo, Sr. Vice President
of Operations, on behalf of Ducommun at Spirit
AeroSystems’ Supplier Symposium in September.
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
_________________________________________________________
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2022
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 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
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.
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 ¨
Large accelerated filer ¨
Accelerated filer
Accelerated filer
x
x
Non-accelerated filer
Non-accelerated filer
¨
¨
Smaller reporting company ☐
Smaller reporting company ☐
Emerging growth 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. ¨
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. x
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. x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes ☐ No x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes ☐ No x
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the
price of which the common equity was last sold, or the average bid and asked price of such common equity, as of the last
business day of the registrant’s most recently completed second fiscal quarter ended July 2, 2022 was $529 million.
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the
price of which the common equity was last sold, or the average bid and asked price of such common equity, as of the last
business day of the registrant’s most recently completed second fiscal quarter ended July 2, 2022 was $529 million.
The number of shares of common stock outstanding on February 6, 2023 was 12,146,494.
The number of shares of common stock outstanding on February 6, 2023 was 12,146,494.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference:
The following documents are incorporated by reference:
(a) Proxy Statement for the 2023 Annual Meeting of Shareholders (the “2023 Proxy Statement”), incorporated
(a) Proxy Statement for the 2023 Annual Meeting of Shareholders (the “2023 Proxy Statement”), incorporated
partially in Part III hereof.
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
Item 1.
Item 1.
Business
Business
Item 1A.
Item 1A.
Risk Factors
Risk Factors
Item 1B.
Item 1B.
Unresolved Staff Comments
Unresolved Staff Comments
Item 2.
Item 2.
Item 3.
Item 3.
Item 4.
Item 4.
Item 5.
Item 5.
Item 6.
Item 6.
Item 7.
Item 7.
Properties
Properties
Legal Proceedings
Legal Proceedings
Mine Safety Disclosures
Mine Safety Disclosures
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
PART II
PART II
[Reserved]
[Reserved]
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 8.
Item 9.
Item 9.
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
Item 9A.
Item 9A.
Controls and Procedures
Controls and Procedures
Item 9B.
Item 9B.
Item 9C.
Item 9C.
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.
Other Information
Other Information
Disclosure Regarding Foreign Jurisdictions That Prevent Inspections
Disclosure Regarding Foreign Jurisdictions That Prevent Inspections
Directors, Executive Officers and Corporate Governance
Directors, Executive Officers and Corporate Governance
Executive Compensation
Executive Compensation
PART III
PART III
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedules
Exhibits and Financial Statement Schedules
PART IV
PART IV
Form 10-K Summary
Form 10-K Summary
Signatures
Signatures
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FORWARD-LOOKING STATEMENTS AND RISK FACTORS
This Annual Report on Form 10-K (“Form 10-K”) contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements may be preceded by, followed by or include words
such as “could,” “may,” “believe,” “expect,” “anticipate,” “plan,” “estimate,” “expect,” “would,” or similar expressions.
These statements are based on the beliefs and assumptions of our management at the time such statements are made.
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, including costs to complete contracts, goodwill impairment evaluations, unrecognized tax
benefits, environmental remediation costs, insurance recoveries, 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.
There can be no assurance that other factors will not affect the accuracy of these forward-looking statements or that our actual
results will not differ materially from the results anticipated in such forward-looking statements. While it is impossible to
identify all such factors, some factors that could cause actual results to differ materially from those estimated by us include,
but are not limited to, those factors or conditions described under Risk Factors contained within Part I, Item 1A of this Form
10-K and the following:
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our ability to manage and otherwise comply with our covenants with respect to our outstanding indebtedness;
our ability to service our indebtedness;
our acquisitions, business combinations, joint ventures, divestitures, or restructuring activities may entail certain
operational and financial risks;
the cyclicality of our end-use markets and the level of new commercial and military aircraft orders;
industry and customer concentration;
production rates for various commercial and military aircraft programs;
the level of U.S. Government defense spending;
compliance with applicable regulatory requirements and changes in regulatory requirements, including
regulatory requirements such as Cybersecurity Maturity Model Certification (“CMMC”), 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, including supply chain issues and rising interest rates;
environmental, social, and governance (“ESG”) developments and their related impact;
pandemics, such as the COVID-19 pandemic, significantly impacting the global economy and most
significantly, the commercial aerospace end-use market;
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disasters, natural or otherwise, damaging or disrupting our operations;
unfavorable developments in the global credit markets;
our ability to operate within highly competitive markets;
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 our inability 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 innovative, value-added proprietary products and
manufacturing solutions to our customers 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 December 2021, we acquired 100% of the outstanding equity interests of Magnetic Seal LLC (f/k/a Magnetic
Seal Corporation, “MagSeal”), a privately-held leading provider of high-impact, military-proven magnetic seals for critical
systems in aerospace and defense applications, offering sealing solutions that are engineered to perform in high-speed, high-
vibration, and other challenging environments for an original purchase price of $69.5 million, net of cash acquired. A portion
of the purchase price was funded by drawing down on our revolving credit facility. This draw down on our revolving credit
facility was paid off by the end of 2021. The acquisition of MagSeal continued to advance our strategy to diversify and offer
more customized, value-driven engineered products with aftermarket opportunities, and was 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.
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Electronic Systems
Electronic Systems has multiple major product offerings in electronics manufacturing for diverse, high-reliability
applications: complex cable assemblies and interconnect systems, printed circuit board assemblies, higher-level electronic,
electromechanical, and mechanical components and assemblies, and lightning diversion systems. Components, assemblies,
and lightning diversion products are provided principally for domestic and foreign commercial and military fixed-wing
aircraft, military and commercial rotary-wing aircraft and space programs. Further, we provide select industrial high-
reliability applications for the industrial, medical, and other end-use markets. We build custom, high-performance electronics
and electromechanical systems. Our products include sophisticated radar enclosures, aircraft avionics racks and shipboard
communications and control enclosures, printed circuit board assemblies, cable assemblies, wire harnesses, and interconnect
systems, lightning diversion strips, surge suppressors, conformal shields and other high-level complex assemblies. Electronic
Systems utilizes a highly-integrated production process, including manufacturing, engineering, fabrication, machining,
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, motors and resolvers for
motion control, and lightning diversion systems.
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, ammunition
handling systems, and magnetic seals. 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, ammunition handling
systems, and magnetic seals. 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 2022. These markets are serviced by suppliers which are stratified, from the highest value provided
to the lowest, 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 Primes 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 with Tier One,
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, geopolitical
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developments, pandemics, supply chain issues, and inflationary forces. Revenues from the commercial aerospace end-use
market represented 35% of our total net revenues for 2022.
The residual effects of the COVID-19 pandemic, geopolitical events including the war in Ukraine, inflationary forces, rising
interest rates, and supply chain issues have and continue to contribute to a general slowdown in the global economy, and
having an adverse impact on demand for civil air travel. The combination of these factors has, in turn, created a significant
challenge for some of our customers and the entire commercial aerospace manufacturing and services sector. As the number
of infections from COVID-19 continues to decline and/or stabilize in various parts of the world, it should result in the steady
increase in consumer confidence on the safety of air travel. Airline financial performance, which also plays a role in the
demand for new capacity, has been adversely impacted by the COVID-19 pandemic and aforementioned issues. According to
the International Air Transport Association (“IATA”), net losses for the airline industry were $42 billion in 2021 and $138
billion in 2020. IATA also forecasts $6.9 billion of losses for the industry globally for 2022, with $9.9 billion of profits in
North America driven by robust domestic market being more than offset by losses in other regions. However, for 2023, IATA
is forecasting $4.6 billion in profits for the industry globally. While the outlook continues to improve, we continue to face a
challenging environment in the near to medium-term as airlines are facing increased fuel and other costs, and the global
economy is experiencing high inflation. The current environment is also affecting the financial viability of some airlines.
In The Boeing Company’s (“Boeing”) 2022 Annual Report on Form 10-K filed with the Securities and Exchange
Commission (the “SEC”), they indicated that domestic travel continues to recover from the lingering effects of the
COVID-19 pandemic and will recover before international travel. The pace of the commercial market recovery remains
impacted by government restrictions related to COVID-19, especially China.
The long-term outlook for the industry remains 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. Boeing’s commercial market outlook forecast projects a three and eight
tenths percent growth rate for passenger and cargo traffic over a 20 year period. Based on long-term global economic growth
projections of two and six tenths percent average annual gross domestic product (“GDP”) growth, Boeing projects demand
for 41,170 new airplanes over the next 20 years. However, the industry remains vulnerable to various developments including
fuel price spikes, credit market fluctuations, acts of terrorism, natural disasters, conflicts, epidemics, pandemics, supply chain
shortages, rising interest rates, and increased global environmental regulations. We believe we are well positioned given our
product capabilities, investment in inventories and contract assets, 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 those
various 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 2022 represented 59% of our total net revenues during 2022.
The FY 2023 National Defense Authorization Act (“NDAA”), enacted by the U.S. President in December 2022, is the annual
policy bill that establishes, continues, or modifies federal programs, and provides the prerequisites for Congress to
appropriate budget authority for defense programs. The FY 2023 NDAA authorized $30 billion more than the U.S. President
originally requested in the FY 2023 budget request. However, there continues to be uncertainty with respect to future
program-level appropriations for the U.S. Department of Defense (“U.S. DoD”) and other government agencies for fiscal
year 2024 and beyond. 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”).
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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
2022.
We believe our business in these markets in the long-term, is stable and we are well positioned in these markets even though
the residual effects of the COVID-19 pandemic and the related inflationary forces, rising interest rates, and supply chain
issues has had and will continue to have an impact on our business.
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. Due to the continuing COVID-19 pandemic, while both major large aircraft
manufacturers, Boeing and Airbus SE (“Airbus”), have announced improved build rates, it will take longer to reach pre-
COVID-19 pandemic levels. 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 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 2022 and 2021 were as follows:
2022 Net Revenues
of $712.5 Million
2021 Net Revenues
of $645.4 Million
35%
6%
59%
24%
6%
70%
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
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ways to provide greater value to the customer, and allow us to be designated early in the design process for various products
and/or high volume products.
SEASONALITY
The timing of our revenues is governed by the purchasing patterns of our customers, and, as a result, we may not generate
revenues equally during the year. However, no material portion of our business is considered to be seasonal.
MAJOR CUSTOMERS
We currently generate the majority of our revenues from the aerospace and defense industries. As a result, we have
significant revenues from certain customers. Boeing and Raytheon Technologies Corporation (“Raytheon”) were our largest
customers, with Boeing generating 7% and Raytheon generating 22% of our 2022 net revenues. Revenues from our top 10
customers, including Boeing and Raytheon, were 61% of total net revenues during 2022. Net revenues by major customer for
2022 and 2021 were as follows:
2022 Net Revenues by Major Customer
2021 Net Revenues by Major Customer
Boeing: 7%
General Dynamics: 6%
Northrop: 6%
Raytheon: 22%
Spirit: 6%
Viasat: 5%
Next Top Four Customers: 9%
All Other Customers: 39%
Boeing: 8%
General Dynamics: 3%
Northrop: 7%
Raytheon: 24%
Spirit: 4%
Viasat: 3%
Next Top Four Customers: 12%
All Other Customers: 39%
Net revenues from our customers, except the U.S. Government, are diversified over a number of different military and space,
commercial aerospace, industrial, medical and other products. For additional information on revenues from major customers,
see Note 16 to our consolidated financial statements included in Part IV, Item 15(a) of this Form 10-K.
RESEARCH AND DEVELOPMENT
We perform concurrent engineering with our customers and product development activities under our self-funded programs,
as well as under contracts with others. Concurrent engineering and product development activities are performed for
commercial, military and space applications.
RAW MATERIALS AND COMPONENTS
Raw materials and components used in the manufacturing of our products include aluminum, titanium, steel and carbon
fibers, as well as a wide variety of electronic interconnect and circuit card assemblies and components. These raw materials
are generally available from a number of suppliers and are generally in adequate supply. However, from time to time, and
exacerbated by the COVID-19 pandemic, we have experienced increases in lead times and limited availability of various
items including 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
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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.
REMAINING PERFORMANCE OBLIGATIONS AND BACKLOG
We define performance obligations as customer placed purchase orders (“POs”) with firm fixed price and firm delivery dates.
The majority of the long-term agreements (“LTAs”) we enter into 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. Revenue based on remaining performance obligations is subject to delivery delays or
program cancellations, which are beyond our control. Remaining performance obligations were $853.0 million at
December 31, 2022. We anticipate recognizing an estimated 70% or $597.0 million of our remaining performance obligations
during 2023.
We define backlog as potential revenue that is based on customer placed POs and LTAs with firm fixed price and expected
delivery dates of 24 months or less. Backlog is subject to delivery delays or program cancellations, which are beyond our
control. Backlog is affected by timing differences in the placement of customer orders, and tends to be concentrated in
several programs to a greater extent, than our net revenues. 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 $960.8 million at December 31, 2022, compared to
$905.2 million at December 31, 2021. The increase in backlog was primarily in the commercial aerospace end-use markets,
partially offset by a decrease in the military and space end-use markets.
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 could be or have been released into 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 currently do not expect such expenditures to be material in 2023 and the near
term.
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, 2022 for our estimated liabilities related to
these sites. For further information, see Note 15 in the accompanying notes to consolidated financial statements included in
Part IV, Item 15(a) of this Form 10-K. In addition, see Risk Factors contained within Part I, Item 1A of this Form 10-K for
certain risks related to environmental matters.
HUMAN CAPITAL
Our employees are critical to our success. We promote a culture of honesty, respect, trust, and teamwork through our Code of
Business Conduct. Also, we have been engaged in a number of social matters and issues, both within the Company in our
management of human capital, and externally with our community based initiatives.
Employee Safety and Health
The safety of our workforce remains our highest priority as evidenced by our initial and continuing response to the
COVID-19 pandemic. To this end, we continue to focus on protecting the health and safety of our employees and maintaining
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a safe work environment by following the COVID-19 safety guidelines provided by state and local governments and the
Centers for Disease Control and Prevention at all of our facilities.
We implemented the use of employee health and safety key performance indicators (“KPIs”) that are regularly communicated
to our employees by senior management to improve safety outcomes. In 2022, we continued to invest in infrastructure to
improve internal safety protocols related to key processes and refined our health and safety software tools to track and engage
our performance centers to further reduce our lost time and total recordable incident rates.
Diversity and Inclusion
Diversity and inclusion has been and will continue to be important to our success. As part of our continuing improvement in
this area, we implemented diversity and inclusion initiatives in 2019 to help accelerate the process of developing a diverse
talent pool. To that end, we are seeing an increase in the number of women and individuals from underrepresented
communities being promoted into leadership roles. In 2020, we partnered with the Fund II Foundation to utilize its innovative
internX platform to provide access to highly qualified and diverse science, technology, engineering and math (“STEM”)
students. We believe a diverse hiring process at the intern level will result in inclusive hiring going forward and help us
develop a diverse leadership team as our interns continue in their careers.
Talent Acquisition, Retention, and Development
We attract, develop, and retain employee talent by offering competitive compensation packages and fostering a culture of
care about their well-being. 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 one of the key retention mechanisms for our human capital.
Workforce Demographics
As of December 31, 2022, we had a highly skilled workforce of 2,465 employees, of which 435 are subject to collective
bargaining agreements expiring in April 2025 and June 2024. However, the Monrovia, California performance center that
employs 130 of our collective bargaining employees that are covered by an agreement expiring in June 2024 will be ceasing
production and the facility will close by the middle of 2023. See Note 3 to our consolidated financial statements included in
Part IV, Item 15(a) of this Annual Report on Form 10-K for further discussion. Historically, we have been successful in
negotiating renewals to expiring agreements without material disruption of operating activities, and 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 Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports, if any, are available free of charge
on our website as soon as reasonably practicable after they are filed with or furnished to the SEC. Information included on
our website is not incorporated by reference in this 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.
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CAPITAL STRUCTURE RISKS
Our indebtedness could limit our financing options, adversely affect our financial condition, and prevent us from
fulfilling our debt obligations.
On July 14, 2022, we completed a refinancing of all our existing debt by entering into a new term loan (“2022 Term Loan”)
and a new revolving credit facility (“2022 Revolving Credit Facility”). The 2022 Term Loan is a $250.0 million senior
secured loan that matures on July 14, 2027. The 2022 Revolving Credit Facility is a $200.0 million senior secured revolving
credit facility that matures on July 14, 2027. The 2022 Term Loan and 2022 Revolving Credit Facility, collectively are the
new credit facilities (“2022 Credit Facilities”). The terms of the 2022 Term Loan require us to make installment payments of
0.625% of the initial outstanding principal balance on a quarterly basis during years one and two, 1.250% during years three
and four, and 1.875% during year five, on the last business day of each calendar quarter. In addition, the undrawn portion of
the commitment of the 2022 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.
At December 31, 2022, we had a total of $248.4 million of outstanding long-term debt under the 2022 Credit Facilities. The
total long-term debt was primarily the result of our acquisitions, including Lightning Diversion Systems, LLC (“LDS”) in
September 2017, Certified Thermoplastics Co., LLC (“CTP”) in April 2018, and Nobles Worldwide, Inc. (“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:
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limit our ability to obtain additional financing to fund capital expenditures, investments or acquisitions or other
general corporate requirements;
require a portion of our cash flows to be dedicated to debt service payments instead of other purposes, thereby
reducing the amount of cash flows available for working capital, capital expenditures, investments or
acquisitions or other general corporate purposes;
increase our vulnerability to adverse changes in general economic, industry and competitive conditions;
place us at a disadvantage compared to other, less leveraged competitors;
expose us to the risk of increased borrowing costs and higher interest rates as all of our current borrowings
under our 2022 Credit Facilities bear interest at variable rates (our interest rate swaps, with an aggregate total
notional amount of $150.0 million and seven year tenor, will not take effect until January 1, 2024), 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 2022 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.
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The terms of the 2022 Term Loan require us to make installment payments of 0.625% of the initial outstanding principal
balance on a quarterly basis during years one and two, 1.250% during years three and four, and 1.875% during year five, on
the last business day of each calendar quarter. In addition, the undrawn portion of the commitment of the 2022 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 December 2021, we entered into a sale-leaseback transaction for the building and related land for our Gardena
performance center located in Carson, California (“Sale-Leaseback Agreement”). The building and related land was sold for
$143.1 million and we recognized a gain of $132.5 million. See Note 6 to our consolidated financial statements included in
Part IV, Item 15(a) of this Annual Report on Form 10-K for further discussion. Also in December 2021, we acquired 100% of
the outstanding equity interests of MagSeal for an original purchase price of $69.5 million, net of cash acquired, all payable
in cash. A portion of the proceeds from the sale-leaseback transaction was subsequently utilized to pay down the amount
drawn on the 2019 Revolving Credit Facility to close the MagSeal acquisition. 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 discussion.
On July 14, 2022, as a result of completing a refinancing of our existing debt, we were required to complete an amendment of
all the forward interest rate swaps (“Amended Forward Interest Rate Swaps”) we entered into in November 2021 that were
based on U.S. dollar-one month London Interbank Offered Rate (“LIBOR”) to be based on one month Term Secured
Overnight Financing Rate (“SOFR”) as borrowings can only be based on SOFR. The weighted average fixed rate of the
Amended Forward Interest Rate Swaps was 1.7%. In November 2021, we entered into U.S. dollar-one month LIBOR
forward interest rate swaps, all with an effective date of January 1, 2024, for an aggregate total notional amount of $150.0
million, weighted average fixed rate of 1.8%, and all terminating on January 1, 2031 (“Forward Interest Rate Swaps”). 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, 2022, the outstanding balance on the 2022 Credit Facilities
was $248.4 million with an average interest rate of 4.36%. Should interest rates increase significantly, our debt service cost
will increase as all of our current debt borrowings under the 2022 Credit Facilities bear interest at variable rates. Any inability
to generate sufficient cash flow could have a material adverse effect on our financial condition or results of operations. See
Note 1 and Note 9 to our consolidated financial statements included in Part IV, Item 15(a) of this Annual Report on Form 10-
K for further discussion.
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 reduce the debt outstanding under our 2022 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
2022 Credit Facilities. Our ability to make such prepayments will depend upon our ability to generate significant cash in the
future. We cannot ensure that our business will generate sufficient cash flow from operations to fund any such prepayments.
The covenants in 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 2022 Credit Facilities. 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, 2022, we were in compliance with the leverage covenant under the 2022 Credit Facilities. However, there is
no assurance that we will continue to be in compliance with the leverage covenant in future periods.
The 2022 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, to make certain 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
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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 2022 Credit Facilities could result in a default under the 2022 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.
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, supply chain shortages, rising interest
rates and other developments affecting our end-use markets and the customers served. Consequently, results of operations in
any period should not be considered indicative of the operating results that may be experienced in any future period.
We depend upon a select base of industries and customers, which subjects us to unique risks which may adversely
affect us.
We currently generate the 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”), Spirit AeroSystems Holdings, Inc. (“Spirit”), and Viasat, Inc.
(“Viasat”) 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 General Dynamics Corporation (“GD”),
Northrop Grumman Corporation (“Northrop”), and Raytheon Technologies Corporation (“Raytheon”) in 2022 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 2022 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 one of our largest customers in 2022, and the 737 MAX was one of our highest commercial end use market
revenue platforms. In late 2020, Boeing began receiving regulatory approval for its 737 MAX to return to service from some
of the major civil aviation regulators around the world and thus, we have been seeing an increase in our production rates.
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However, they are still below pre-COVID-19 pandemic levels. Revenue growth with our other commercial customers,
including Airbus SE (“Airbus”), and continued solid demand from defense OEMs (also known as prime contractors) have
helped to mitigate a significant portion of this risk for the time being. However, the residual effects of the COVID-19
pandemic along with inflationary forces and supply chain issues continues to dampen civil air travel demand in various
segments and markets, and if traveler demand 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. While the FY
2023 NDAA authorized $30 billion more than the U.S. President originally requested in the FY 2023 budget request, there
continues to be uncertainty with respect to future program-level appropriations for the U.S. DoD and other government
agencies for fiscal year 2024 and beyond. 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:
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terminate existing contracts, in whole or in part, for convenience, as well as for default, or if funds for contract
performance for any subsequent year become unavailable;
terminate existing contracts if we are suspended or debarred from doing business with the federal government
or with a governmental agency;
prohibit future procurement awards with a particular agency as a result of a finding of an organizational conflict
of interest based upon prior related work performed for the agency that would give a contractor an unfair
advantage over competing contractors; and
claim rights in products and systems produced by us.
If the U.S. Government terminates a contract for convenience, the counterparty with whom we have contracted on a
subcontract may terminate its contract with us. As a result of any such termination, whether on a direct government contract
or subcontract, we may recover only our incurred or committed costs, settlement expenses and profit on work completed prior
to the termination. If the U.S. Government terminates a direct contract with us for default, we may not even recover those
amounts and instead may be liable for excess costs incurred by the U.S. Government in procuring undelivered items and
services from another source.
In addition, the U.S. Government is typically required to open all programs to competitive bidding and, therefore, may not
automatically renew any of its prime contracts. If one or more of our customers’ government prime or subcontracts is
terminated or canceled, our failure to replace sales generated from such contracts would result in lower sales and could have
an adverse effect on our business, results of operations and financial condition.
Further consolidation in the aerospace industry could adversely affect our business and financial results.
The aerospace and defense industry is experiencing significant consolidation, including our customers, competitors and
suppliers. Consolidation among our customers may result in delays in the awarding of new contracts and losses of existing
business. Consolidation among our competitors may result in larger competitors with greater resources and market share,
which could adversely affect our ability to compete successfully. Consolidation among our suppliers may result in fewer
sources of supply and increased cost to us.
Our growth strategy includes evaluating selected acquisitions, which entails certain risks to our business and financial
performance.
We have historically achieved a portion of our growth through acquisitions and expect to evaluate selected future acquisitions
as part of our strategy for growth. Any acquisition of another business entails risks and it is possible that we may not realize
the expected benefits from an acquisition or that an acquisition could adversely affect our existing operations. Acquisitions
entail certain risks, including:
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difficulty in integrating the operations and personnel of the acquired company within our existing operations or
in maintaining uniform standards;
loss of key employees or customers of the acquired company;
the failure to achieve anticipated synergies;
unrecorded liabilities of acquired companies that we fail to discover during our due diligence investigations or
that are not subject to indemnification or reimbursement by the seller; and
management and other personnel having their time and resources diverted to evaluate, negotiate and integrate
acquisitions.
We may not be successful in achieving expected operating efficiencies and sustaining or improving operating expense
reductions, and may experience business disruptions associated with restructuring, 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
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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 that we lease in Thailand and Mexico and also derive a portion of our net revenues from
direct foreign sales. Further, our customers may derive portions of their revenues from non-U.S. customers. As a result, we
are subject to the risks of conducting and operating our business internationally, including:
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political instability;
economic and geopolitical developments and conditions;
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
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 2023 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
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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 2023 and 2032. 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
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,
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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, such as Cybersecurity Maturity Model Certification (“CMMC”).
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
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 15 to
our consolidated financial statements included in Part IV, Item 15(a) of this Form 10-K for further information.
We may be subject to litigation, other legal proceedings and indemnity claims, and, if any of these are resolved
adversely against us, it could have a material adverse effect on our business, financial condition, and results of
operations.
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. Any litigation, other legal proceedings or indemnity claims could result in an unfavorable judgment
that may not be reversed upon appeal or in payments of substantial monetary damages or fines, or we may decide to settle on
similarly unfavorable terms, any of which could adversely affect our business, financial condition, and results of operations.
We could also suffer an adverse impact on our reputation and a diversion of management’s attention and resources, which
could have a material adverse effect on our business, financial condition, and results of operations. See Note 13 and Note 15
to our consolidated financial statements included in Part IV, Item 15(a) of this Form 10-K for further information.
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.
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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, 2022 were $330.6 million, or 32% 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.
See “Goodwill and Other Intangible Assets” in Note 7 of our consolidated financial statements included in Part IV,
Item 15(a) of this Form 10-K for further information.
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. 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
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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, 2022, we employed 2,465 people. Two of our performance centers are parties to collective bargaining
agreements, covering 130 full time hourly employees in one of those performance centers and 305 full time hourly employees
in the other performance center, which will expire in June 2024 and April 2025, respectively. However, the Monrovia,
California performance center that employs 130 of our collective bargaining employees that are covered by an agreement that
expires in June 2024 will be ceasing production and the facility will close by the middle of 2023. See Note 3 to our
consolidated financial statements included in Part IV, Item 15(a) of this Form 10-K for further information. 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
source or certain suppliers. Many of our suppliers are small companies with limited financial resources and manufacturing
capabilities. We do not currently have the ability to manufacture these components ourselves. These and other factors,
including the impact from the COVID-19 pandemic, 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, and continues to have, a material adverse effect on our business, results of
operations, and financial condition.
The COVID-19 pandemic has caused, and continues to cause, a significant adverse impact on our employees, operations,
businesses of our customers, suppliers and distribution partners, and volatility in the financial markets. Changes in our
operations in response to the COVID-19 pandemic or employee illnesses resulting from the pandemic, has resulted in and
may continue to 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 long-term impact to our business
remains unknown. This is due to the numerous uncertainties that have risen from the pandemic, including the severity of the
disease, the duration of the outbreak, the likelihood of resurgences of the outbreak, including the emergence and spread of
variants, actions that may be taken by governmental authorities in response to the disease, the timing, distribution, efficacy
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and public acceptance of vaccines, long-term impact from COVID-19 infection or vaccines, and the related unintended or
unanticipated consequences.
The commercial aerospace industry, in particular, has been significantly disrupted, both domestically and internationally, by
the pandemic. Governments around the world implemented stringent measures to help control the spread of the pandemic,
including quarantines, shelter in place or stay at home orders, travel restrictions, business curtailments and other measures.
As a result, demand for travel declined at a rapid pace beginning in mid-2020 and overall global travel still remains below
pre-pandemic levels. However, commercial air travel has increasingly shown signs of recovery recently with increasing air
traffic, primarily in domestic markets. The recovery in international commercial air travel has been slower with international
travel still below pre-COVID-19 pandemic levels. The exact pace and timing of the overall commercial air travel recovery
remains uncertain and is expected to continue to be uneven depending on factors such as trends in the number of COVID-19
infections (i.e., impact of new variants of COVID-19 surfacing) and the timing, distribution, efficacy, and public acceptance
of vaccines, among other factors. 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 2023 and beyond.
Our ability to continue to manufacture products is highly dependent on our ability to maintain the safety and health of our
performance center employees. While we are following the guidelines and requirements of governmental authorities and
taking preventive and protective measures to prioritize the safety and well-being of our employees, these measures are not
always successful. Thus far, the ability of our employees to work has not been significantly impacted by individuals
contracting or being exposed to COVID-19. However, if an outbreak of COVID-19 or other viruses does occur at any of our
performance centers, it may disrupt our ability to manufacture products and thus, have a material and adverse impact on our
business, financial condition, and results of operations.
Increased scrutiny from investors, lenders, and other market participants regarding our environmental, social, and
governance, or sustainability responsibilities could expose us to additional costs and adversely impact our liquidity,
results of operations, reputation, employee retention, and stock price.
There is an increasing focus from certain investors, customers, and other key stakeholders concerning corporate
responsibility, specifically related to environmental, social, and governance (“ESG”) factors. Some investors may use ESG
criteria to guide their investment strategies and, in some cases, may choose not to invest in us if they believe our policies
relating to corporate responsibilities are inadequate. Lenders may also use ESG criteria to guide their lending practices and, in
some cases, may choose not to lend to us.
The ESG factors by which companies’ corporate responsibility practices are assessed may change. This could result in greater
expectations of us and cause us to undertake costly initiatives to satisfy such new criteria. If we are unable to satisfy the new
corporate responsibility criteria, investors may view our policies related to corporate responsibility as inadequate. We risk
damage to our reputation in the event our corporate responsibility procedures or goals do not meet the standards or goals set
by various constituencies. In addition, if our competitors’ corporate responsibility performance is perceived to be greater than
ours, potential or current investors may elect to invest in our competitors instead. Further, in the event we communicate
certain initiatives or goals related to ESG, we could fail, or be perceived to have failed, in our achievement of such initiatives
or goals. If we fail to satisfy the expectations of investors and other key stakeholders, or our initiatives are not executed as
planned, our reputation, employee retention, and willingness of our customers and suppliers to do business with us, financial
results, and stock price could be materially and adversely affected.
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
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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
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 $180.5 million in net revenues during 2022. 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 in June 2020 which severely damaged our Guaymas,
Mexico performance center in Note 15 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
Our headquarters are located in Santa Ana, California. As of December 31, 2022, we owned or leased facilities and land for
corporate functions and manufacturing at locations throughout the United States and various places outside the United States.
We believe our existing facilities are suitable and adequate for our present purposes. Each of our reportable segments uses
each of these facilities.
ITEM 3. LEGAL PROCEEDINGS
See Note 15 to our consolidated financial statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K for
a description of our legal proceedings.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is listed on the New York Stock Exchange under the symbol DCO. As of December 31, 2022, we had 142
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 2023 Proxy Statement peers (“Median of Peers”) over a five year
period, 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 2022
$350
$325
$300
$275
$250
$225
$200
$175
$150
$125
$100
$75
$50
$25
$0
$100
$176
$122
$83
2017
2018
2019
2020
2021
2022
Ducommun Inc.
Russell 2000 Index
Median of Peers
ITEM 6. [Reserved]
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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
Ducommun Incorporated (“Ducommun,” “the Company,” “we,” “us” or “our”) is a leading global provider of engineering
and manufacturing services for high-performance products and high-cost-of failure applications used primarily in the
aerospace and defense (“A&D”), industrial, medical, and other industries (“Industrial”). 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, 2022. 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.
The safety of our employees remains our highest priority. The well-being and safety protocols that were already in place at all
of our facilities were further enhanced at the onset of the COVID-19 pandemic. We continue to follow safety protocols
consistent with guidelines provided by state and local governments and the Centers for Disease Control and Prevention
(“CDC”). These measures included 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
provided frequent updates to ensure our workforce is kept apprised of evolving regulations and safety measures.
In March 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 was required to be paid and was paid by December 31, 2021,
and the remaining 50% was required to be paid and was paid by December 31, 2022. Thus, there was no accrued liabilities on
the consolidated balance sheets related to this item as of December 31, 2022.
The COVID-19 pandemic and the resulting inflation, rising interest rates, supply chain issues, and other events including the
war in Ukraine have and continues to contribute to a general slowdown in the global economy and most significantly, the
commercial aerospace end-use market. While both major large aircraft manufacturers, The Boeing Company (“Boeing”) and
Airbus SE, have announced increases in build rates for 2023, the ramp up is slower than expected and below pre-pandemic
levels. In its 2022 Annual Report on Form 10-K, Boeing indicated that domestic travel continues to recover from the
lingering effects of the COVID-19 pandemic and will recover before international travel. However, the pace of the
commercial market recovery remains impacted by government restrictions related to COVID-19, especially China. 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 2023 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, 2022:
•
•
•
Net revenues of $712.5 million
Net income of $28.8 million, or $2.33 per diluted share
Adjusted EBITDA of $94.7 million
Non-GAAP Financial Measures
Adjusted earnings before interest, taxes, depreciation, amortization, stock-based compensation expense, restructuring
charges, Guaymas fire related expenses, insurance recoveries related to business interruption, inventory purchase accounting
adjustments, loss on extinguishment of debt, other debt refinancing costs, gain on sale-leaseback, and success bonus related
to the completion of sale-leaseback transaction (“Adjusted EBITDA”) was $94.7 million and $92.8 million for years ended
December 31, 2022 and December 31, 2021, respectively.
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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 that clarifies and enhances the understanding of the factors and trends affecting our past performance and future
prospects. We define Adjusted EBITDA, explain how it is calculated, and provide a reconciliation to the most comparable
GAAP measure in the table below. Adjusted EBITDA and the related financial ratios, as presented in this 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 as a non-GAAP operating performance measure internally as a complementary financial measure
to evaluate the performance and trends of our businesses. We also 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 include:
•
•
•
•
•
•
•
It does not reflect our cash expenditures, future requirements for capital expenditures or contractual
commitments;
It does not reflect changes in, or cash requirements for, our working capital needs;
It does 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;
It is not adjusted for all non-cash income or expense items that are reflected in our statements of cash flows;
It does not reflect the impact on earnings or 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.
As a result 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.
Even with the limitations above, we believe that Adjusted EBITDA is useful to an investor in evaluating our results of
operations as this measure:
•
•
•
Is 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;
Helps 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
Is 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;
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•
•
•
•
•
•
•
•
•
•
•
•
Income tax expense may be useful to investors because it represents the taxes which may be payable for the
period and the change in deferred taxes during the period, and may reduce cash flow available for use in our
business;
Depreciation may be useful to investors because it generally represents the wear and tear on our property and
equipment used in our operations;
Amortization expense may be useful to investors because it represents the estimated attrition of our acquired
customer base and the diminishing value of product rights;
Stock-based compensation 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;
Insurance recoveries related to business interruption 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;
Other debt refinancing costs may be useful to our investors in evaluating our core operating performance;
Gain on sale-leaseback may be useful to our investors in evaluating our core operating performance; and
Success bonus related to completion of sale-leaseback transaction may be useful to our investors in evaluating
our core operating performance.
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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 (1)
Restructuring charges (2)
Guaymas fire related expenses
Insurance recoveries related to business interruption
Inventory purchase accounting adjustments (3)
Loss on extinguishment of debt
Other debt refinancing costs
Gain on sale-leaseback
Success bonus related to completion of sale-leaseback transaction (4)
Adjusted EBITDA
$
$
(Dollars in thousands)
Years Ended December 31,
2022
28,789
11,571
4,533
14,535
16,886
10,744
6,686
4,466
(5,400)
1,381
295
224
—
—
94,710
$
$
2021
135,536
11,187
34,948
14,051
14,338
11,212
—
2,486
—
106
—
—
(132,522)
1,451
92,793
$
$
2020
29,174
13,653
2,807
13,824
15,026
9,299
2,424
1,704
—
—
—
—
—
—
87,911
% of net revenues
13.3 %
14.4 %
14.0 %
(1) 2022 included $1.2 million of stock-based compensation expense for awards with both performance and market
conditions that will be settled in cash.
(2) 2022 included $0.5 million of restructuring charges that were recorded as cost of sales.
(3) 2022 and 2021 included inventory purchase accounting adjustments of inventory that was stepped up as part of our
purchase price allocation from our acquisition of Magnetic Seal LLC (f/k/a Magnetic Seal Corporation, “MagSeal”)
in December 2021 and is a part of our Structural Systems operating segment.
(4) 2021 included $1.3 million of success bonus related to the completion of the sale-leaseback transaction that was
recorded as part of cost of sales.
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RESULTS OF OPERATIONS
2022 Compared to 2021
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
Gain on Sale-Leaseback
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,
2022
712,537
568,240
144,297
98,351
6,158
39,788
(11,571)
(295)
—
5,400
33,322
4,533
28,789
%
of Net Revenues
100.0 % $
79.7 %
20.3 %
13.8 %
0.9 %
5.6 %
(1.6) %
— %
— %
0.7 %
4.7 %
nm
4.0 % $
2021
645,413
502,953
142,460
93,579
—
48,881
(11,187)
—
132,522
268
170,484
34,948
135,536
13.6 %
2.33
nm
nm $
20.5 %
11.06
$
$
$
%
of Net Revenues
100.0 %
77.9 %
22.1 %
14.5 %
— %
7.6 %
(1.7) %
— %
20.5 %
— %
26.4 %
nm
21.0 %
nm
nm
Net Revenues by End-Use Market and Operating Segment
Net revenues by end-use market and operating segment during 2022 and 2021, respectively, were as follows:
Consolidated Ducommun
Military and space
Commercial aerospace
Industrial
Total
Electronic Systems
Military and space
Commercial aerospace
Industrial
Total
Structural Systems
Military and space
Commercial aerospace
Total
(Dollars in thousands)
Years Ended December 31,
% of Net Revenues
Change
2022
2021
2022
2021
(33,147) $
91,778
8,493
67,124 $
420,701 $
247,509
44,327
712,537 $
453,848
155,731
35,834
645,413
(13,730) $
33,227
8,493
27,990 $
314,181 $
82,130
44,327
440,638 $
327,911
48,903
35,834
412,648
59.1 %
34.7 %
6.2 %
100.0 %
71.3 %
18.6 %
10.1 %
100.0 %
70.3 %
24.1 %
5.6 %
100.0 %
79.5 %
11.8 %
8.7 %
100.0 %
(19,417) $
58,551
39,134 $
106,520 $
165,379
271,899 $
125,937
106,828
232,765
39.2 %
60.8 %
100.0 %
54.1 %
45.9 %
100.0 %
$
$
$
$
$
$
28
Table of Contents
Net revenues for 2022 were $712.5 million compared to $645.4 million for 2021. The year-over-year increase was primarily
due to the following:
•
•
$91.8 million higher revenues in our commercial aerospace end-use markets due to higher build rates on large
aircraft platforms, other commercial aerospace platforms, and regional and business aircraft platforms; partially
offset by
$33.1 million lower revenues in our military and space end-use markets due to lower build rates on military
rotary-wing aircraft platforms and military fixed-wing aircraft platforms.
Net Revenues by Major Customers
A significant portion of our net revenues are from our top ten customers as follows:
Boeing Company
General Dynamics Corporation
Lockheed Martin Corporation
Northrop Grumman Corporation
Raytheon Technologies Corporation
Spirit AeroSystems Holdings, Inc.
Viasat, Inc.
Top ten customers(1)
Years Ended December 31,
2022
2021
6.7 %
5.7 %
3.5 %
5.7 %
21.6 %
5.7 %
5.4 %
61.4 %
7.8 %
3.0 %
4.4 %
7.1 %
24.4 %
3.8 %
2.6 %
61.1 %
(1) Includes The Boeing Company (“Boeing”), General Dynamics Corporation (“GD”), Lockheed Martin Corporation
(“Lockheed Martin”), Northrop Grumman Corporation (“Northrop”), Raytheon Technologies Corporation (“Raytheon”),
Spirit AeroSystems Holdings, Inc. (“Spirit”), and Viasat, Inc. (“Viasat”).
The revenues from Boeing, GD, Lockheed Martin, Northrop, Raytheon, Spirit, and Viasat are diversified over a number of
commercial, military and space programs and some of which 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 decreased
to 20.3% in 2022 compared to 22.1% in 2021 primarily due to unfavorable product mix, partially offset by favorable
manufacturing volume and lower compensation and benefits costs.
Selling, General and Administrative (“SG&A”) Expenses
SG&A expenses increased $4.8 million in 2022 compared to 2021 primarily due to higher other general administrative
expenses of $4.0 million and higher compensation and benefits costs of $2.8 million, partially offset by lower professional
services fees of $2.0 million.
Restructuring Charges
Restructuring charges increased $6.2 million in 2022 compared to 2021 primarily due to the restructuring plan that was
approved and commenced in April 2022 that is expected to better position us for stronger performance. See Note 3 to our
consolidated financial statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K for further information.
Interest Expense
Interest expense increased in 2022 compared to 2021 primarily due to higher interest rates, partially offset by a lower
outstanding debt balance. See Note 9 to our consolidated financial statements included in Part IV, Item 15(a) of this Annual
Report on Form 10-K for further information on our long-term debt.
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Table of Contents
Gain on Sale-Leaseback
Gain on sale-leaseback decreased in 2022 compared to 2021 due to a lack of sale-leaseback during 2022. See Note 6 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 sale-leaseback transaction.
Income Tax Expense
We recorded an income tax expense of $4.5 million (an effective tax rate of 13.6%) in 2022, compared to $34.9 million (an
effective tax rate of 20.5%) in 2021. The decrease in the effective tax rate for 2022 compared to 2021 was primarily due to
lower pre-tax income for 2022 compared to 2021, which included the gain on the sale-leaseback transaction we entered into
in December 2021. The lower pre-tax income in 2022 caused the research and development tax credits to have a higher
income tax benefit impact on the effective tax rate. The higher income tax benefit on the effective tax rate was partially offset
by higher income tax expense related to non-deductible book compensation expenses.
Our unrecognized tax benefits were $4.9 million and $4.4 million in 2022 and 2021, 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, 2022 and 2021 were not significant. If recognized, $2.5
million would affect the effective income tax rate. As a result of statute of limitations set to expire in 2023, we expect
decreases to our unrecognized tax benefits of approximately $0.6 million in the next twelve months.
We file U.S. Federal and state income tax returns. We are subject to examination by the Internal Revenue Service (“IRS”) for
tax years after 2018 and by state taxing authorities for tax years after 2017. 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.
In March 2020, the U.S. enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) that provided 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 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 above. As such, as of December
31, 2020, we deferred payment of income tax deductions related to payroll taxes of $6.1 million and recorded the related
deferred tax asset of $1.4 million, which was included as part of the net deferred income taxes on the consolidated balance
sheet. We were required to and made the payments for 50% of the deferred payroll taxes by December 31, 2021. We were
required to and made the payments for the remaining 50% of the deferred payroll taxes by December 31, 2022.
The Tax Cuts and Jobs Act of 2017 (“TCJA”), which was signed into U.S. law in December 2017, eliminated the option to
immediately deduct research and development expenditures in the year incurred under Section 174 effective January 1, 2022.
The amended provision under Section 174 requires us to capitalize and amortize these expenditures over five years (for U.S.-
based research). As of December 31, 2022, we recorded an increase to income taxes payable of $10.6 million and a decrease
to net deferred tax liabilities of a similar amount. We are monitoring legislation for any further changes to Section 174 and
the potential impact to our financial statements in 2023.
On August 16, 2022, the U.S. enacted the Inflation Reduction Act of 2022 (“IRA”) which aims to curb inflation by reducing
the deficit, lowering prescription drug prices, and investing in domestic energy production while promoting clean energy. We
considered the provisions in the IRA and determined they have no or minimal impact to our overall income taxes.
On August 9, 2022, the U.S. enacted the Creating Helpful Incentives to Produce Semiconductors Act of 2022 (“CHIPS Act”)
which provides new funding to boost domestic research and manufacturing of semiconductors in the United States. We are
evaluating the provisions in the CHIPS Act. Any impact to our overall income taxes would be for 2023 and thereafter.
Net Income and Earnings per Diluted Share
Net income and earnings per diluted share for 2022 were $28.8 million, or $2.33 per diluted share, compared to net income
and earnings per diluted share for 2021 of $135.5 million, or $11.06 per diluted share. The decrease in net income in 2022
compared to 2021 was primarily due to a lack of gain on sale-leaseback of $132.5 million, higher restructuring charges of
$6.7 million ($0.5 million was recorded as cost of sales), and higher SG&A expenses of $4.8 million, partially offset by
lower income tax expense of $30.4 million and higher other income, net of $5.1 million.
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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 2022 and 2021:
31
Table of Contents
Net Revenues
Electronic Systems
Structural Systems
Total Net Revenues
Segment Operating Income
Electronic Systems
Structural Systems
Corporate General and Administrative Expenses (1)
Total Operating Income
Adjusted EBITDA
Electronic Systems
Operating Income
Other Income
Depreciation and Amortization
Restructuring Charges
Success Bonus Related to Completion of Sale-
Leaseback Transaction (2)
Structural Systems
Operating Income
Other Income
Depreciation and Amortization
Restructuring Charges
Inventory Purchase Accounting Adjustments
Guaymas Fire Related Expenses
Success Bonus Related to Completion of Sale-
Leaseback Transaction (2)
Corporate General and Administrative Expenses (1)
Operating Loss
Depreciation and Amortization
Stock-Based Compensation Expense
Other Debt Refinancing Costs
Success Bonus Related to Completion of Sale-
Leaseback Transaction (2)
Adjusted EBITDA
Capital Expenditures
Electronic Systems
Structural Systems
Corporate Administration
Total Capital Expenditures
%
Change
(Dollars in thousands)
Years Ended December 31,
2022
2021
%
of Net
Revenues
2022
%
of Net
Revenues
2021
6.8 % $ 440,638 $ 412,648
16.8 %
232,765
271,899
10.4 % $ 712,537 $ 645,413
61.8 %
38.2 %
100.0 %
63.9 %
36.1 %
100.0 %
$
49,876 $ 57,629
17,225
67,101
20,234
77,863
(27,313)
(28,982)
$
39,788 $ 48,881
11.3 %
6.3 %
14.0 %
8.7 %
(3.8) %
5.6 %
(4.5) %
7.6 %
$
49,876 $ 57,629
—
13,974
3,786
—
196
13,823
—
970
67,636
72,618
15.3 %
17.6 %
17,225
20,234
—
72
17,212
14,331
2,900
1,381
4,466
—
106
2,486
—
475
43,184
37,704
15.9 %
16.2 %
(27,313)
(28,982)
235
235
10,744
11,212
224
—
—
6
(16,110)
(17,529)
$
94,710 $ 92,793
13.3 %
14.4 %
$
10,717 $
8,834
—
7,471
8,463
—
$
19,551 $ 15,934
32
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(1) Includes costs not allocated to either the Electronic Systems or Structural Systems operating segments.
(2) 2021 included $1.3 million of success bonus related to the completion of the sale-leaseback transaction that was
recorded as part of cost of sales.
Electronic Systems
Electronic Systems’ net revenues in 2022 compared to 2021 increased $28.0 million primarily due to the following:
•
•
$33.2 million higher revenues in our commercial aerospace end-use markets due to higher build rates on other
commercial aerospace platforms, regional and business aircraft platforms, and large aircraft platforms; partially
offset by
$13.7 million lower revenues in our military and space end-use markets due to lower build rates on military
rotary-wing aircraft platforms and various missile platforms, partially offset by higher build rates on military
fixed-wing aircraft platforms.
Electronic Systems segment operating income in 2022 compared to 2021 decreased $7.8 million primarily due to unfavorable
product mix and restructuring charges, partially offset by favorable manufacturing volume and lower compensation and
benefits costs.
Structural Systems
Structural Systems’ net revenues in 2022 compared to 2021 increased $39.1 million primarily due to the following:
•
•
$58.6 million higher revenues in commercial aerospace end-use markets due to higher build rates on large
aircraft platforms, other commercial aerospace platforms, and regional and business aircraft platforms; partially
offset by
$19.4 million lower revenues in military and space end-use markets due to lower build rates on various missile
platforms.
The Structural Systems operating income in 2022 compared to 2021 decreased $3.0 million primarily due to unfavorable
product mix and restructuring charges, partially offset by favorable manufacturing volume and lower compensation and
benefits costs.
In June 2020, a fire severely damaged our performance center in Guaymas, Mexico, which is part of our Structural Systems
segment. We have insurance coverage and up to a capped amount, expect the damaged 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. The loss of production from the Guaymas performance center was being absorbed by our
other existing performance centers, however, we have reestablished and are in the process of ramping up our manufacturing
capabilities in a different leased facility in Guaymas. 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. If we are
ultimately deemed to be responsible or partly responsible, it is possible we could incur a loss in excess of our insurance
coverage limits, which could be material to our cash flow, liquidity, or financial results. See Note 13 and Note 15 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 2022 compared to 2021 decreased $1.7 million primarily due to lower professional services fees of $1.5
million and lower compensation and benefits costs of $0.8 million.
Backlog
We define backlog as customer placed purchase orders (“POs”) and long-term agreements (“LTAs”) with firm fixed price
and expected delivery dates of 24 months or less. The majority of the LTAs do not meet the definition of a contract under
ASC 606 and thus, the backlog amount disclosed below is greater than the remaining performance obligations amount
disclosed in Note 1 to our consolidated financial statements included in Part IV, Item 15(a) of this Annual Report on Form
10-K. Backlog is subject to delivery delays or program cancellations, which are beyond our control. Backlog is affected by
timing differences in the placement of customer orders and tends to be concentrated in several programs to a greater extent
33
Table of Contents
than our net revenues. As a result of these factors, trends in our overall level of backlog may not be indicative of trends in our
future net revenues.
The increase in backlog was primarily in the commercial aerospace end-use markets; partially offset by a decrease in the
military and space end-use markets. $655.0 million of total backlog is expected to be delivered over the next 12 months. The
following table summarizes our backlog for 2022 and 2021:
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
2021 Compared to 2020
(Dollars in thousands)
December 31,
Change
2022
2021
$
$
$
$
$
$
(62,924) $
116,985
1,572
55,633 $
457,354 $
450,092
53,374
960,820 $
(38,420) $
68,780
1,572
31,932 $
361,582 $
125,590
53,374
540,546 $
520,278
333,107
51,802
905,187
400,002
56,810
51,802
508,614
(24,504) $
48,205
23,701 $
95,772 $
324,502
420,274 $
120,276
276,297
396,573
See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2021 Annual
Report on Form 10-K filed with the SEC on February 23, 2022, 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,
2022
2021
$
$
$
248.4
4.36 %
4.24 %
46.2
199.8
$
$
$
287.7
3.27 %
3.22 %
76.3
99.8
On July 14, 2022, we completed a refinancing of all our existing debt by entering into a new term loan (“2022 Term Loan”)
and a new revolving credit facility (“2022 Revolving Credit Facility”). The 2022 Term Loan is a $250.0 million senior
secured loan that matures on July 14, 2027. The 2022 Revolving Credit Facility is a $200.0 million senior secured revolving
credit facility that matures on July 14, 2027. The 2022 Term Loan and 2022 Revolving Credit Facility, collectively are the
new credit facilities (“2022 Credit Facilities”). In conjunction with the closing of the 2022 Credit Facilities, we utilized the
entire $250.0 million of proceeds from the 2022 Term Loan plus our existing cash on hand to pay off our entire debt balance
outstanding of $254.2 million under prior credit facilities. At the same leverage ratio, the interest rate spread in the 2022
Credit Facilities is lower than the interest rate spread under our prior credit facilities. Interest payments are typically paid on a
quarterly basis, on the last business day each quarter. In addition, the 2022 Term Loan requires quarterly amortization
34
Table of Contents
payments of 0.625% during year one and year two, 1.250% during year three and year four, and 1.875% during year five of
the original outstanding principal balance of the 2022 Term Loan amount, on the last business day each quarter. Further, the
undrawn portion of the commitment of the 2022 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, typically paid on a quarterly basis, on the
last business day each quarter. However, the 2022 Revolving Credit Facility does not require any principal installment
payments. As of December 31, 2022, we were in compliance with all covenants required under the 2022 Credit Facilities. See
Note 9 to our consolidated financial statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K for
further information.
During 2022, we paid down our existing debt an aggregate total of $34.2 million. We also made the mandatory quarterly
amortization payment of $1.6 million on the 2022 Term Loan and $3.5 million on our existing term loan described below
during 2022.
In December 2019, we completed the refinancing of a portion of our then existing debt and entered into a new revolving
credit facility (“2019 Revolving Credit Facility”) to replace the then existing revolving credit facility that was entered into in
November 2018 (“2018 Revolving Credit Facility”) and entered into a new term loan (“2019 Term Loan”). The 2019
Revolving Credit Facility was a $100.0 million senior secured revolving credit facility that would have matured on December
20, 2024 and replaced the $100.0 million 2018 Revolving Credit Facility that would have matured on November 21, 2023.
The 2019 Term Loan was a $140.0 million senior secured term loan that would have matured on December 20, 2024. We
also had a then existing $240.0 million senior secured term loan that was entered into in November 2018 that would have
matured on November 21, 2025 (“2018 Term Loan”). The original amounts available under the 2019 Revolving Credit
Facility, 2019 Term Loan, and 2018 Term Loan (collectively, the “Credit Facilities”) in aggregate, totaled $480.0 million at
that time. We were required to make installment payments of 1.25% of the original outstanding principal balance of the 2019
Term Loan amount on a quarterly basis, on the last day of the calendar quarter and thus, paid $3.5 million during 2022. In
addition, if we met the annual excess cash flow threshold, we were required to make an annual additional principal payment
based on the consolidated adjusted leverage ratio. We did not exceed the annual excess cash flow threshold for 2021 and thus,
no annual excess cash flow payment was required to be paid during the first quarter of 2022. Further, the undrawn portion of
the commitment of the 2019 Revolving Credit Facility was subject to a commitment fee ranging from 0.175% to 0.275%,
based upon the consolidated total net adjusted leverage ratio.
In the first quarter of 2020, we drew down $50.0 million on the 2019 Revolving Credit Facility to hold as cash on hand, $25.0
million of which was repaid during the fourth quarter of 2020 with the remaining $25.0 million repaid during 2021, thus, we
made no net aggregate voluntary prepayments during 2021.
In April 2022, management approved and commenced a restructuring plan that will position us for stronger performance. The
restructuring plan will mainly reduce headcount and consolidate facilities. As a result of this restructuring plan, we analyzed
the need to write-down inventory and impair long-lived assets, including operating lease right-of-use assets. As of
December 31, 2022, we estimate the remaining amount of charges related to this initiative to be $12.0 million to
$16.0 million in total pre-tax restructuring charges through 2023. Of these charges, we estimate $9.0 million to $12.0 million
to be cash payments for employee separation and other facility consolidation related expenses, and $3.0 million to
$4.0 million to be non-cash charges for impairment of long-lived assets. On an annualized basis, we anticipate these
restructuring actions will result in total cost savings of $11.0 million to $13.0 million. See Note 3 to our consolidated
financial statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K for further information.
In November 2021, we entered into derivative contracts, U.S. dollar-one month LIBOR forward interest rate swaps
designated as cash flow hedges, all with an effective date of January 1, 2024, for an aggregate total notional amount of
$150.0 million, weighted average fixed rate of 1.8%, and all terminating on January 1, 2031 (“Forward Interest Rate Swaps”).
The Forward Interest Rate Swaps mature on a monthly basis, with fixed amount payer payment dates on the first day of each
calendar month, commencing on February 1, 2024 through January 1, 2031. See Note 1 and Note 9 to our consolidated
financial statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K for further information.
On July 14, 2022, as a result of completing a refinancing of our existing debt, we were required to complete an amendment of
the Forward Interest Rate Swaps (“Amended Forward Interest Rate Swaps”). The Forward Interest Rate Swaps were based on
U.S. dollar-one month LIBOR and were amended to be based on one month Term SOFR as borrowings using LIBOR are no
longer available under the 2022 Credit Facilities. The Amended Forward Interest Rate Swaps weighted average fixed rate is
1.7%, as a result of the difference between U.S. dollar-one month LIBOR and one month Term SOFR. See Note 1 and Note 9
to our consolidated financial statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K for further
information.
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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, totaled $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 and Note 9 to our consolidated financial statements included in Part IV, Item 15(a) of this
Annual Report on Form 10-K for further information.
In December 2021, we acquired MagSeal for an original purchase price of $69.5 million, net of cash acquired, all payable in
cash. Upon the closing of the transaction, we paid a gross total aggregate of $71.3 million in cash, a portion of which was by
drawing down on our revolving credit facility. This draw down on our revolving credit facility was paid off by December 31,
2021. 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.
In December 2021, we entered into a sale-leaseback transaction for the building and related land for our Gardena
performance center located in Carson, California (“Sale-Leaseback Agreement”). The building and related land was sold for
$143.1 million and we recognized a gain of $132.5 million. As part of the Sale-Leaseback Agreement, we entered into an
initial five year lease for the usage of the just sold building and related land. The future minimum base monthly lease
payments during the initial five year period in aggregate totaled $19.6 million. See Note 6 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 $17.0 million to $19.0 million for capital expenditures in 2023, 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 2023 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 2022 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
2022 Compared to 2021
Net cash provided by operating activities during 2022 was $32.7 million, compared to net cash used by operating activities of
$0.6 million during 2021. The higher cash provided by operating activities during 2022 was primarily due to higher accounts
payable and accrued liabilities, partially offset by lower net income, higher accounts receivable, higher inventories, and
higher contract assets.
Net cash used in investing activities during 2022 was $19.2 million compared to net cash provided by investing activities of
$57.8 million during 2021. The higher cash used in investing activities during 2022 was primarily due to the lack of proceeds
from sale-leaseback, partially offset by the lack of payments for acquisition.
Net cash used in financing activities during 2022 was $43.5 million compared to $37.3 million during 2021. The higher cash
used in financing activities during 2022 was primarily due to the net pay down on term loans.
2021 Compared to 2020
See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2021 Annual
Report on Form 10-K filed with the SEC on February 23, 2022, which is incorporated by reference herein.
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
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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 AND ESTIMATES
Critical accounting policies and estimates are those accounting policies and estimates that can have a significant impact on
the presentation of our financial condition and results of operations and that require the use of subjective estimates based
upon past experience and management’s judgment. Because of the uncertainty inherent in such estimates, actual results may
differ from these estimates. Below are those policies applied in preparing our financial statements that management believes
are the most dependent on the application of estimates and assumptions. See Note 1 to our consolidated financial statements
included in Part IV, Item 15(a) of this Annual Report on Form 10-K for additional accounting policies.
Revenue Recognition
Our customers typically engage us to manufacture products based on designs and specifications provided by the end-use
customer. This requires the building of tooling and manufacturing first article inspection products (prototypes) before volume
manufacturing. Contracts with our customers generally include a termination for convenience clause.
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 Accounting Standards
Codification 606, “Revenue from Contracts with Customers” (“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. 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 meet 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 to satisfy another
customer’s order. 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 determine 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 progress completed (and related profitability) on
our contracts, we review and update our contract-related estimates on a regular basis. We recognize such adjustments under
the cumulative catch-up method. Under this method, the impact of the adjustment is recognized in the period the adjustment
is identified. Revenue and profit in future periods of contract performance is recognized using the adjusted estimate.
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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 2022 and 2021.
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.
When a contract liability and a contract asset exist on the same contract, we report it on a net basis.
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.
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.
Business Combinations
When a business is acquired, we allocate the purchase price by recording the assets acquired and liabilities assumed at their
estimated fair values as of the acquisition date, with the excess cost recorded as goodwill. A preliminary fair value is
determined once a business is acquired, with the final determination of fair value be completed no later than one year from
the date of acquisition.
To determine the estimated fair value of assets acquired and liabilities assumed requires significant judgment and estimates,
including the selection of valuation methodologies, estimates of future revenues, costs and cash flows, discount rates, and
selection of comparable companies. We engage the assistance of valuation specialists in concluding on fair value
measurements in determining the fair value of assets acquired and liabilities assumed in business combinations.
The fair value of the intangible assets is estimated using several valuation methodologies, including the income based or
market based approaches, which represent Level 3 fair value measurements. Inputs to fair value analyses and other aspects of
the allocation of the purchase price require judgment. The value for customer relationships is typically estimated based on a
multi-period excess earnings approach. The more significant inputs used in the customer relationships intangible asset
valuation include (i) future revenue growth rates, (ii) projected gross margins, (iii) the customer attrition rate, and (iv) the
discount rate. The useful lives are estimated based on the underlying agreements or the future economic benefit expected to
be received from the assets.
Acquisition related costs are not included as components of consideration transferred but instead, expensed as incurred and
are included in selling, general and administrative expenses in our consolidated statements of income. See Note 2 to our
consolidated financial statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K.
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 is performed 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 the income approach
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(which is based on a 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. If any of these assumptions are incorrect, it will impact the estimated fair
value of a reporting unit. The market approach also requires management judgment in selecting comparable business
acquisitions and the transaction values observed and its related control premiums.
In the fourth quarter of 2022, 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 $86.0 million, respectively.
As of the date of our 2022 annual evaluation for goodwill impairment for the Structural Systems segment, which is also our
reporting unit, we performed a step one goodwill impairment analysis as of the first day of the fourth quarter of 2022. The
fair value of our Structural Systems segment exceeded its carrying value and thus, was not deemed impaired.
As of the date of our 2022 annual evaluation for goodwill impairment for the Electronic Systems segment, which is also our
reporting unit, we performed a qualitative assessment as of the first day of the fourth quarter of 2022, which considered each
of the following: 1) margin of passing most recent step one analysis, 2) actual operating results as compared to prior
forecasts, 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 2
years to 19 years, generally using the straight-line method. The value of other intangibles acquired through business
combinations has been estimated using present value techniques which involve estimates of future cash flows. We evaluate
other intangible assets for recoverability considering undiscounted cash flows, when significant changes in conditions occur,
and recognize impairment losses, if any, based upon the estimated fair value of the assets.
Accounting for Stock-Based Compensation
We measure and recognize compensation expense for share-based payment transactions to our employees and non-employees
at their estimated fair value. The expense is measured at the grant date, based on the calculated fair value of the share-based
award, and is recognized over the requisite service period (generally the vesting period of the equity award). The fair value of
stock options are determined using the Black-Scholes-Merton (“Black-Scholes”) valuation model, which requires
assumptions and judgments regarding stock price volatility, risk-free interest rates, and expected options terms.
Management’s estimates could differ from actual results. The fair value of unvested stock awards is determined based on the
closing price of the underlying common stock on the date of grant except for market condition awards for which the fair
value was based on a Monte Carlo simulation model.
Inventories
Inventories are stated at the lower of cost or net realizable value with cost being determined using a moving average cost
basis for raw materials and actual cost for work-in-process and finished goods. The majority of our inventory is charged to
cost of sales as raw materials are placed into production. 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.
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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 interest rates on our outstanding long-term debt. At December 31, 2022,
we had borrowings of $248.4 million under our 2022 Credit Facilities.
The 2022 Term Loan bears interest, at our option, at a rate equal to either (i) Term Secured Overnight Financing Rate (“Term
SOFR”) plus an applicable margin ranging from 1.375% to 2.375% per year or (ii) Base Rate (defined as the highest of [a]
Federal Funds Rate plus 0.50%, [b] Bank of America’s prime rate, and [c] Term SOFR plus 1.00%, and if the Base Rate is
less than zero percent, it will be deemed zero percent) plus an applicable margin ranging from 0.375% to 1.375% per year, in
each case based upon the consolidated total net adjusted leverage ratio.
The 2022 Revolving Credit Facility bears interest, at our option, at a rate equal to either (i) Term SOFR plus an applicable
margin ranging from 1.375% to 2.375% per year or (ii) Base Rate (defined as the highest of [a] Federal Funds Rate plus
0.50%, [b] Bank of America’s prime rate, and [c] Term SOFR plus 1.00%, and if the Base Rate is less than zero percent, it
will be deemed zero percent) plus an applicable margin ranging from 0.375% to 1.375% per year, in each case based upon the
consolidated total net adjusted leverage ratio.
A hypothetical 10% increase or decrease in the interest rate would have an immaterial impact on our financial condition and
results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data together with the report thereon of PricewaterhouseCoopers LLP included
in Part IV, Item 15(a) 1 and 2 of this Annual Report on Form 10-K are included herein by reference.
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, 2022.
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
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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, 2022. 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, 2022.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2022 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, 2022.
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors of the Registrant
The information under the caption “Directors’ Backgrounds and Qualifications” in the 2023 Proxy Statement is incorporated
herein by reference.
Executive Officers of the Registrant
The information under the caption “Named Executive Officers” in the 2023 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 2023 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 2023 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 2023 Proxy Statement is incorporated
herein by reference.
Changes to Procedures to Recommend Nominees
The information under the caption “Nominating Process” in the 2023 Proxy Statement is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information under the captions “2022 Compensation Discussion and Analysis” and “Compensation of Directors” in the
2023 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 2023 Proxy
Statement is incorporated herein by reference.
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Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information about our compensation plans under which equity securities are authorized for
issuance:
Number of Securities
to be Issued Upon
Exercise of
Outstanding
Options,
Warrants and Rights
(a)
Weighted-Average
Exercise Price of
Outstanding
Options,
Warrants and Rights
(b)
702,425 $
36.89
—
—
702,425
—
—
Number of Securities
Remaining
Available for
Future Issuance
Under Equity
Compensation Plans
(Excluding Securities
Reflected
in Column
(a))(c)(3)
338,061
549,977
—
888,038
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 Amended and Restated 2020 Stock Incentive Plan. The number of securities to be issued consists of
199,276 for stock options, 201,795 for restricted stock units and 301,354 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 11 to our consolidated financial statements included in Part IV, Item 15(a) of this Annual Report
on Form 10-K.
(3) Awards are not restricted to any specified form or structure and may include, without limitation, sales or bonuses of
stock, restricted stock, stock options, reload stock options, stock purchase warrants, other rights to acquire stock,
securities convertible into or redeemable for stock, stock appreciation rights, limited stock appreciation rights,
phantom stock, dividend equivalents, performance units or performance shares, and an award may consist of one such
security or benefit, or two or more of them in tandem or in alternative.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information under the caption “Certain Relationships and Related Transactions” and “Director Independence” in the
2023 Proxy Statement is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information under the caption “Principal Accountant Fees and Services” and “Policy for Pre-Approval of Independent
Accountant Services” contained in the 2023 Proxy Statement is incorporated herein by reference.
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ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
1. Financial Statements
PART IV
The following consolidated financial statements of Ducommun Incorporated and subsidiaries, are incorporated by
reference in Item 8 of this report.
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID: 238)
Report of Independent Registered Public Accounting Firm (PCAOB ID: 238)
Consolidated Balance Sheets - December 31, 2022 and 2021
Consolidated Balance Sheets - December 31, 2022 and 2021
Consolidated Statements of Income - Years Ended December 31, 2022, 2021, and 2020
Consolidated Statements of Income - Years Ended December 31, 2022, 2021, and 2020
Consolidated Statements of Comprehensive Income - Years Ended December 31, 2022, 2021, and
Consolidated Statements of Comprehensive Income - Years Ended December 31, 2022, 2021, and
2020
2020
Consolidated Statements of Changes in Shareholders’ Equity - Years Ended December 31, 2022,
Consolidated Statements of Changes in Shareholders’ Equity - Years Ended December 31, 2022,
2021, and 2020
2021, and 2020
Consolidated Statements of Cash Flows - Years Ended December 31, 2022, 2021, and 2020
Consolidated Statements of Cash Flows - Years Ended December 31, 2022, 2021, and 2020
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
2. Financial Statement Schedule
The following schedule for the years ended December 31, 2022, 2021 and 2020 is filed herewith:
Schedule II - Consolidated Valuation and Qualifying Accounts
All other schedules have been omitted because they are not applicable, not required, or the
information has been otherwise supplied in the financial statements or notes thereto.
3. Exhibits
See Item 15(b) for a list of exhibits.
ITEM 16. FORM 10-K SUMMARY
Signatures
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48
49
49
50
50
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52
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84
84
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Ducommun Incorporated
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Ducommun Incorporated and its subsidiaries (the
“Company”) as of December 31, 2022 and 2021, 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,
2022, 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, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2022 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, 2022, based on criteria established in Internal Control - Integrated Framework
(2013) issued by the COSO.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting,
included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility
is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over
financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting
Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance
with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material
misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in
all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material
misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond
to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our
audit of internal control over financial reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
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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 7 to the consolidated financial statements, the Company’s consolidated goodwill balance was
$203.4 million as of December 31, 2022, and the goodwill associated with the Structural Systems reporting unit was $86.0
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. 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 (which is based on a 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 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 developing the fair value estimate of the Structural Systems reporting unit based on a discounted cash flow model; (ii) a
high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant
assumption related to the estimate of gross margins; 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 Structural Systems reporting
unit. These procedures also included, among others (i) testing management’s process for developing the fair value estimate of
the Structural Systems reporting unit based on a discounted cash flow model; (ii) evaluating the appropriateness of the
discounted cash flow model; (iii) testing the completeness and accuracy of underlying data used in the discounted cash flow
model; and (iv) evaluating the reasonableness of the significant assumption used by management related to the estimate of
gross margins. Evaluating management’s assumption related to the estimate of gross margins involved evaluating whether the
assumption used by management was reasonable considering (i) the current and past performance of the Structural Systems
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 appropriateness of the discounted cash flow model.
/s/ PricewaterhouseCoopers LLP
Irvine, California
February 16, 2023
We have served as the Company’s auditor since 1989.
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Assets
Current Assets
Ducommun Incorporated and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except share and per share data)
Cash and cash equivalents
Accounts receivable (net of allowance for credit losses of $589 and $1,098 at
December 31, 2022 and 2021, 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
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 13, 15)
Shareholders’ Equity
Common stock - $0.01 par value; 35,000,000 shares authorized; 12,106,285 and
11,925,087 shares issued and outstanding at December 31, 2022 and 2021,
respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Total Shareholders’ Equity
Total Liabilities and Shareholders’ Equity
December 31,
2022
2021
$
46,246 $
76,316
103,958
191,290
171,211
5,693
8,938
527,336
106,225
34,632
203,407
127,201
22,705
1,021,506 $
90,143 $
47,068
48,820
7,155
6,250
199,436
240,595
28,841
13,953
12,721
495,546
72,261
176,405
150,938
8,024
8,625
492,569
102,419
33,265
203,694
141,764
5,024
978,735
66,059
42,077
41,291
6,133
7,000
162,560
279,384
28,074
18,727
15,388
504,133
121
112,042
406,052
7,745
525,960
1,021,506 $
119
104,253
377,263
(7,033)
474,602
978,735
$
$
$
See accompanying notes to consolidated financial statements.
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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
Gain on Sale-Leaseback
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,
2022
2021
2020
712,537 $
568,240
144,297
98,351
6,158
39,788
(11,571)
(295)
—
5,400
33,322
4,533
28,789 $
645,413 $
502,953
142,460
93,579
—
48,881
(11,187)
—
132,522
268
170,484
34,948
135,536 $
2.38 $
2.33 $
11.41 $
11.06 $
12,074
12,366
11,879
12,251
628,941
491,203
137,738
89,808
2,424
45,506
(13,653)
—
—
128
31,981
2,807
29,174
2.50
2.45
11,676
11,932
See accompanying notes to consolidated financial statements.
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Table of Contents
Ducommun Incorporated and Subsidiaries
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
Net Income
Other Comprehensive Income (Loss), Net of Tax:
Pension Adjustments:
Amortization of actuarial losses and prior service costs, net of tax
of $143, $309, and $236 for 2022, 2021, and 2020, respectively
Actuarial gains (losses) arising during the period, net of tax of
$722, $902, and $701 for 2022, 2021, and 2020, respectively
Years Ended December 31,
2022
2021
2020
$
28,789 $
135,536 $
29,174
442
976
757
2,259
2,859
(2,251)
Change in net unrealized (losses) gains on cash flow hedges, net of
tax of $3,753, $391, and $57 for 2022, 2021, and 2020, respectively
Other Comprehensive Income (Loss), Net of Tax
Comprehensive Income, Net of Tax
12,077
14,778
43,567 $
(1,268)
2,567
138,103 $
162
(1,332)
27,842
$
See accompanying notes to consolidated financial statements.
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Table of Contents
Ducommun Incorporated and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
(Dollars in thousands, except share data)
Shares
Outstanding
Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
Shareholders’
Equity
11,572,668 $
116 $
88,399 $ 212,553 $
(8,268) $ 292,800
29,174
—
29,174
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
Net income
Other comprehensive income, 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, 2021
Net income
Other comprehensive income, 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, 2022
—
—
57,285
54,063
—
—
1
1
—
—
2,193
1,563
(95,411)
(2)
(4,363)
139,607
—
11,728,212
—
—
56,524
48,769
1
—
117
—
—
1
1
(1)
9,299
97,090
—
—
2,903
1,732
(155,653)
(2)
(8,682)
247,235
—
11,925,087
—
—
59,693
109,186
2
—
119
—
—
1
1
(2)
11,212
104,253
—
—
2,230
3,474
(151,213)
(2)
(7,457)
—
—
—
—
—
—
241,727
135,536
—
—
—
—
—
—
377,263
28,789
—
—
—
—
—
163,532
—
12,106,285 $
2
(2)
—
121 $ 112,042 $ 406,052 $
9,544
—
(1,332)
(1,332)
—
—
—
—
—
(9,600)
—
2,567
—
—
—
—
2,194
1,564
(4,365)
—
9,299
329,334
135,536
2,567
2,904
1,733
(8,684)
—
—
(7,033)
11,212
474,602
—
14,778
—
—
—
—
28,789
14,778
2,231
3,475
(7,459)
—
—
9,544
7,745 $ 525,960
See accompanying notes to consolidated financial statements.
50
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 (Used in) Operating Activities:
Depreciation and amortization
Non-cash operating lease cost
Inventory write-down and property and equipment impairment due to
restructuring
Stock-based compensation expense
Deferred income taxes
(Recovery of) provision for credit losses
Noncash loss on extinguishment of debt
Insurance recoveries related to loss on operating assets
Gain on sale-leaseback
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 (Used in) Operating Activities
Cash Flows from Investing Activities
Purchases of property and equipment
Proceeds from sale-leaseback
Proceeds from sale of assets
Insurance recoveries related to property and equipment
Proceeds from life insurance
Post closing cash received from (payments for acquisition of) Magnetic Seal
LLC, net of cash acquired
Post closing cash received from the acquisition of Nobles Worldwide, Inc.,
net
Net Cash (Used in) Provided by 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 (Used in) Provided by Financing Activities
Net (Decrease) Increase in Cash and Cash Equivalents
Cash and Cash Equivalents at Beginning of Year
Cash and Cash Equivalents at End of Year
Years Ended December 31,
2022
2021
2020
$
28,789 $
135,536 $
29,174
31,421
7,267
1,610
10,744
(9,392)
(509)
295
—
—
1,060
(31,188)
(14,885)
(20,841)
8
(1,354)
24,222
4,991
(6,473)
6,915
32,680
(19,689)
—
82
—
—
28,389
3,349
—
11,212
1,768
(454)
—
—
(132,522)
(505)
(11,689)
(22,377)
(17,129)
(2,311)
(4,902)
2,793
13,813
(3,531)
(2,005)
(565)
(16,863)
143,100
553
—
439
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
365
(69,479)
—
—
(19,242)
4,000
(4,000)
250,000
(289,274)
(344)
(2,511)
(1,379)
(43,508)
(30,070)
—
57,750
96,000
(121,000)
—
(7,926)
(362)
—
(4,047)
(37,335)
19,850
76,316
46,246 $
56,466
76,316 $
$
190
(5,472)
65,900
(40,900)
—
(14,362)
(288)
—
(607)
9,743
16,882
39,584
56,466
See accompanying notes to consolidated financial statements.
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DUCOMMUN INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Description of Business
We are a leading global provider of innovative, value-added proprietary products and manufacturing solutions 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 (“Electronic Systems”) and Structural Systems segment (“Structural Systems”), 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 on December 31 for our fourth fiscal quarter. As a result of using fiscal quarters for the first three
quarters combined with leap years, our first and fourth fiscal quarters can range between 12 1/2 weeks to 13 1/2 weeks while
the second and third fiscal quarters remain at a constant 13 weeks per fiscal quarter.
Use of Estimates
Certain amounts and disclosures included in the consolidated financial statements required management to make estimates
and judgments that affect the amount of assets, liabilities (including forward loss reserves), revenues and expenses, and
related disclosures of contingent assets and liabilities. These estimates are based on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results
could differ from these estimates.
Reclassifications
Certain prior period amounts have been reclassified to conform to current year’s presentation.
Supplemental Cash Flow Information
Interest paid
Taxes paid, net
Non-cash activities:
Purchases of property and equipment not paid
(Dollars in thousands)
Years Ended December 31,
2022
2021
2020
10,983
3,825
$
$
10,135
32,934
$
$
11,859
3,810
1,195
$
1,333
$
2,477
$
$
$
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Fair Value
Assets and liabilities that are measured, recorded or disclosed at fair value on a recurring basis are categorized using the fair
value hierarchy. The fair value hierarchy has three levels based on the reliability of the inputs used to determine the fair
value. Level 1, the highest level, refers to the values determined based on quoted prices in active markets for identical assets.
Level 2 refers to fair values estimated using significant observable inputs. Level 3, the lowest level, includes fair values
estimated using significant unobservable inputs.
We have money market funds and they are included as cash and cash equivalents. We also have forward interest rate swap
agreements and had interest rate cap hedge agreements and the fair value of the forward interest rate swap agreements and
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 both December 31, 2022 and December 31, 2021.
There were no transfers between Level 1, Level 2, or Level 3 financial instruments in either 2022 or 2021.
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 condensed 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. In November 2021, we entered into
forward interest rate swap agreements with an aggregate notional amount of $150.0 million, all with an effective date of
January 1, 2024 (“Forward Interest Rate Swaps”) to manage our exposure to interest rate movements on a portion of our debt.
As such, at the time we entered into the Forward Interest Rate Swaps, there was a high probability of forecasted interest
payments on our debts occurring and the swaps are highly effective in offsetting those interest payments and therefore, we
elected to apply cash flow hedge accounting. On July 14, 2022, as a result of refinancing all our existing debt, which allows
borrowing based on a Secured Overnight Financing Rate (“SOFR”), we were required to complete an amendment of the
Forward Interest Rate Swaps from One Month London Interbank Offered Rate (“LIBOR”) to One Month Term SOFR
(“Amended Forward Interest Rate Swaps”), which occurred on the same day. After the transition of the Forward Interest Rate
Swaps and debt to SOFR was completed, we determined the hedging relationship was still highly effective as of the
amendment date. See Note 9. As of December 31, 2022, all of our derivative instruments were designated as cash flow
hedges.
We record changes in the fair value of a derivative instrument that is highly effective and that is designated and qualifies as a
cash flow hedge in other comprehensive income (loss), net of tax until our earnings are affected by the variability of cash
flows of the underlying hedged item. We report changes in the fair values of derivative instruments that are not designated or
do not qualify for hedge accounting in current period earnings. We classify cash flows from derivative instruments in the
condensed consolidated statements of cash flows in the same category as the item being hedged or on a basis consistent with
the nature of the instrument. Since the Amended Forward Interest Rate Swaps are not effective until January 1, 2024, we only
record the changes in fair value of the derivative instruments that were highly effective and that were designated and
qualified as cash flow hedges. As such, during 2022, we recorded changes of $15.8 million to other assets, deferred income
taxes, and accumulated other comprehensive income (loss). During the fourth quarter of 2022, we recorded an adjustment of
$6.7 million to correct an understatement of the hedge asset balance as of the end of the third quarter of 2022, with a
corresponding increase of $5.1 million to other comprehensive income, net of tax of $1.6 million. There was no impact to net
income.
When we determine that a derivative instrument is not highly effective as a hedge, we discontinue hedge accounting
prospectively. In all situations in which we discontinue hedge accounting and the derivative instrument remains outstanding,
we will carry the derivative instrument at its fair value on our condensed consolidated balance sheets and recognize
subsequent changes in its fair value in our current period earnings.
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
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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. 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.
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.
Business Combinations
When a business is acquired, we allocate the purchase price by recording the assets acquired and liabilities assumed at their
estimated fair values as of the acquisition date, with the excess cost recorded as goodwill. A preliminary fair value is
determined once a business is acquired, with the final determination of fair value be completed no later than one year from
the date of acquisition.
To determine the estimated fair value of assets acquired and liabilities assumed requires significant judgment and estimates,
including the selection of valuation methodologies, estimates of future revenues, costs and cash flows, discount rates, and
selection of comparable companies. We engage the assistance of valuation specialists in concluding on fair value
measurements in determining the fair value of assets acquired and liabilities assumed in business combinations.
The fair value of the intangible assets is estimated using several valuation methodologies, including the income based or
market based approaches, which represent Level 3 fair value measurements. Inputs to fair value analyses and other aspects of
the allocation of the purchase price require judgment. The value for customer relationships is typically estimated based on a
multi-period excess earnings approach. The more significant inputs used in the customer relationships intangible asset
valuation include (i) future revenue growth rates, (ii) projected gross margins, (iii) the customer attrition rate, and (iv) the
discount rate. The useful lives are estimated based on the underlying agreements or the future economic benefit expected to
be received from the assets.
Acquisition related costs are not included as components of consideration transferred but instead, expensed as incurred and
are included in selling, general and administrative expenses in our consolidated statements of income. See Note 2.
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 is performed 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 the income approach
(which is based on a discounted cash flow model) and the market approach. Management’s cash flow projections include
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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 management judgment in selecting comparable business
acquisitions and the transaction values observed and its related control premiums.
In the fourth quarter of 2022, 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 $86.0 million, respectively.
We acquired 100% of the equity interests of Magnetic Seal LLC (f/k/a Magnetic Seal Corporation, “MagSeal”) in December
2021, for an original purchase price of $69.5 million, net of cash acquired. We recorded goodwill of $32.6 million in our
Structural Systems segment, which is also our reporting unit. See Note 2.
As our commercial aerospace end-use market business continues to be negatively impacted by the COVID-19 pandemic, we
performed a step one goodwill impairment test for our Structural Systems reporting unit as of the first day of the fourth
quarter of 2022. The fair value of our Structural Systems segment exceeded its carrying value and thus, was not deemed
impaired.
As of the date of our 2022 annual evaluation for goodwill impairment for the Electronic Systems segment, which is also our
reporting unit, we performed a qualitative assessment as of the first day of the fourth quarter of 2022, which considered each
of the following: 1) margin of passing most recent step one analysis, 2) actual operating results as compared to prior
forecasts, 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 2
to 19 years, generally using the straight-line method. The value of other intangibles acquired through business combinations
has been estimated using present value techniques which involve estimates of future cash flows. We evaluate other intangible
assets for recoverability considering undiscounted cash flows when significant changes in conditions occur, and recognize
impairment losses, if any, based upon the estimated fair value of the assets.
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss, as reflected on the consolidated balance sheets under the equity section, was
comprised of cumulative pension and retirement liability adjustments, net of tax, and change in net unrealized gains and
losses on cash flow hedges, net of tax.
Revenue Recognition
Our customers typically engage us to manufacture products based on designs and specifications provided by the end-use
customer. This requires the building of tooling and manufacturing first article inspection products (prototypes) before volume
manufacturing. Contracts with our customers generally include a termination for convenience clause.
We have a significant number of contracts that are started and completed within the same year, as well as contracts derived
from long-term agreements and programs that can span several years. We recognize revenue under ASC 606, “Revenue from
Contracts with Customers” (“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
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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 progress completed (and related profitability) on
our contracts, we review and update our contract-related estimates on a regular basis. We recognize such adjustments under
the cumulative catch-up method. Under this method, the impact of the adjustment is recognized in the period the adjustment
is identified. Revenue and profit in future periods of contract performance is recognized using the adjusted estimate.
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 both years ended December 31, 2022 and
December 31, 2021.
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 and have met the shipping terms, a contract liability is created for the
advance or progress payment. When a contract liability and a contract asset exist on the same contract, we report it on a net
basis.
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, 2022 and 2021, provision for estimated
losses on contracts were $3.9 million and $2.8 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, 2022 and 2021, production costs of contracts were $5.7 million and $8.0
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
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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. When a contract liability and a contract
asset exist on the same contract, we report it on a net basis.
Contract assets and contract liabilities from revenue contracts with customers are as follows:
(Dollars in thousands)
Contract assets
Contract liabilities
December 31,
2022
191,290 $
47,068 $
December 31,
2021
176,405
42,077
$
$
The increase in our contract assets as of December 31, 2022 compared to December 31, 2021 was primarily due to a net
increase of products in work in process.
The increase in our contract liabilities as of December 31, 2022 compared to December 31, 2021 was primarily due to a net
increase of advance or progress payments received from our customers in the current year. We recognized $32.7 million of
the contract liabilities as of December 31, 2021 as revenues during the year ended December 31, 2022.
Performance obligations are defined as customer placed purchase orders (“POs”) with firm fixed price and firm delivery
dates. Our remaining performance obligations as of December 31, 2022 totaled $853.0 million. We anticipate recognizing an
estimated 70% of our remaining performance obligations as revenue during the next 12 months with the remaining
performance obligations being recognized in 2024 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:
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
2022
2021
2022
2021
(33,147) $
91,778
8,493
67,124 $
420,701 $
247,509
44,327
712,537 $
453,848
155,731
35,834
645,413
(13,730) $
33,227
8,493
27,990 $
314,181 $
82,130
44,327
440,638 $
327,911
48,903
35,834
412,648
59.1 %
34.7 %
6.2 %
100.0 %
71.3 %
18.6 %
10.1 %
100.0 %
70.3 %
24.1 %
5.6 %
100.0 %
79.5 %
11.8 %
8.7 %
100.0 %
(19,417) $
58,551
39,134 $
106,520 $
165,379
271,899 $
125,937
106,828
232,765
39.2 %
60.8 %
100.0 %
54.1 %
45.9 %
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.
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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
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.
Government Grant
In November 2021, we were awarded an Aviation Manufacturing Jobs Protection Program grant from the U.S. Department of
Transportation of $4.0 million. As part of the award, we had to meet, and did complete, certain requirements over a six month
performance period from November 15, 2021 to May 14, 2022. As of December 31, 2022, we have received the entire
$4.0 million grant balance, $2.0 million of which was received during 2021. We recorded $2.7 million and $0.3 million as a
reduction of cost of sales and selling, general and administrative expenses, respectively, during 2022 and $0.9 million and
$0.1 million as a reduction of cost of sales and selling, general and administrative expenses, respectively, during 2021.
Charitable Contributions
We contributed $0.1 million to the Ducommun Foundation during 2022.
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.
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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,
2022
2021
2020
$
28,789 $
135,536 $
29,174
12,074
292
12,366
11,879
372
12,251
$
$
2.38 $
2.33 $
11.41 $
11.06 $
11,676
256
11,932
2.50
2.45
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 2022
(In thousands)
Years Ended December 31,
2022
2021
2020
52
3
254
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 was our interim period beginning January 1, 2022. The
adoption of this standard did not have a material impact on our consolidated financial statements.
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. Prior to the adoption of this
standard, during the three months ended October 1, 2022, we had made the following elections related to our current cash
flow hedging relationships as our current term loans mature before the expiration of the Forward Interest Rate Swaps: 1)
Probability of forecasted transactions, and 2) Assessment of effectiveness. The adoption of this standard during the three
months ended October 1, 2022, did not have a material impact on our consolidated financial statements. See Note 9.
Recently Issued Accounting Standards
In December 2022, the FASB issued ASU 2022-06, “Reference Rate Reform (Topic 848), Deferral of the Sunset Date of
Topic 848” (“ASU 2022-06”), which defers the sunset date of Topic 848 from December 31, 2022, to December 31, 2024,
after which entities will no longer be permitted to apply the relief in Topic 848. Since we adopted ASU 2020-04 during 2022,
ASU 2022-06 will not have a material impact on our consolidated financial statements. See Note 9.
Note 2. Business Combinations
In December, 2021, we acquired 100.0% of the outstanding equity interests of Magnetic Seal LLC (f/k/a Magnetic Seal
Corporation, “MagSeal”), a privately-held leading provider of high-impact, military-proven magnetic seals for critical
systems in aerospace and defense applications, offering sealing solutions that are engineered to perform in high-speed, high-
vibration, and other challenging environments. MagSeal is located in Warren, Rhode Island. The acquisition of MagSeal will
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continue to advance our strategy to diversify and offer more customized, value-driven engineered products with aftermarket
opportunities.
The original purchase price for MagSeal was $69.5 million, net of cash acquired, all payable in cash. We paid a gross
aggregate of $71.3 million in cash upon the closing of the transaction. Subsequent to the closing of the transaction, during the
second quarter of 2022, as part of finalizing the working capital adjustment, we received $0.4 million back from the seller
which lowered the purchase price to $69.1 million, net of cash acquired. We allocated the final gross purchase price of
$70.9 million to the assets acquired and liabilities assumed at their 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
Operating lease right-of-use assets
Intangible assets
Goodwill
Total assets acquired
Current liabilities
Other non-current liabilities
Total liabilities assumed
Total purchase price allocation
Intangible assets:
Customer relationships
Backlog
Trade name
Estimated
Fair Value
1,821
2,093
4,546
98
482
1,533
30,100
32,577
73,250
(907)
(1,408)
(2,315)
70,935
$
$
Useful Life
(In years)
19
2
Indefinite
Estimated
Fair Value
(In thousands)
$
$
24,800
600
4,700
30,100
The intangible assets acquired of $30.1 million were determined based on the estimated fair values using valuation techniques
consistent with the income approach to measure fair value, which represented Level 3 fair value measurements. The useful
lives were estimated based on the underlying agreements or the future economic benefit expected to be received from the
assets. The value for customer relationships and backlog were estimated based on a multi-period excess earnings approach,
while the value for trade name was assessed using the relief from royalty methodology. Inputs to the income approach models
and other aspects of the allocation of the purchase price require judgment. The more significant inputs used in the customer
relationships intangible asset valuation include (i) future revenue growth rates, (ii) projected gross margins, (iii) the customer
attrition rate, and (iv) the discount rate.
The goodwill of $32.6 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 MagSeal acquisition, for tax purposes, is deemed an asset acquisition and thus, is deductible for
income tax purposes.
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 $0.9 million during 2021 and charged to selling,
general and administrative expenses.
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MagSeal’s results of operations have been included in our consolidated statements of income since the date of acquisition as
part of the Structural Systems segment and were immaterial since the date of acquisition. Pro forma results of operations of
the MagSeal acquisition have not been presented as the effect of the MagSeal acquisition was not material to our financial
results for both 2022 and 2021.
Note 3. Restructuring Activities
Summary of 2022 Restructuring Plan
In April 2022, management approved and commenced a restructuring plan that will better position us for stronger
performance. The restructuring plan will mainly reduce headcount and consolidate facilities. As a result of this restructuring
plan, we analyzed the need to write-down inventory and impair long-lived assets, including operating lease right-of-use
assets. During the year ended December 31, 2022, we recorded total charges of $6.7 million. As of December 31, 2022, we
estimate the remaining amount of charges related to this initiative will be $12.0 million to $16.0 million in total pre-tax
restructuring charges during 2023. Of these charges, we estimate $9.0 million to $12.0 million to be cash payments for
employee separation and other facility consolidation related expenses, and $3.0 million to $4.0 million to be non-cash charges
for impairment of long-lived assets.
In the Electronics Systems segment, we recorded $3.5 million and $0.3 million during the year ended December 31, 2022,
for severance and benefits that were classified as restructuring charges and accelerated depreciation of property and
equipment that was classified as restructuring charges, respectively.
In the Structural Systems segment, we recorded $0.5 million, $1.6 million, $0.5 million, and $0.3 million during the year
ended December 31, 2022 for inventory write down that was classified as cost of sales, severance and benefits that were
classified as restructuring charges, accelerated depreciation of property and equipment that was classified as restructuring
charges, and impairment of property and equipment that was classified as restructuring charges, respectively.
Our restructuring activities for 2022 were as follows (in thousands):
Severance and benefits
Property and equipment accelerated
depreciation due to restructuring
Property and equipment impairment due to
restructuring
Inventory write down
Ending balance
December 31,
2021
2022
December 31,
2022
Balance
Charges
Cash
Payments
Non-Cash
Payments
Change in
Estimates
Balance
$
— $
5,076 $
(2,277) $
— $
— $
2,799
—
778
—
(778)
—
—
—
—
— $
304
528
6,686 $
—
—
(2,277) $
(304)
(528)
(1,610) $
—
—
— $
—
—
2,799
$
The restructuring activities accrual for severance and benefits of $2.8 million as of December 31, 2022 was included as part
of accrued and other liabilities.
Note 4. Inventories
Inventories consisted of the following:
Raw materials and supplies
Work in process
Finished goods
Total
(In thousands)
December 31,
2022
2021
$
$
143,495 $
23,799
3,917
171,211 $
125,334
20,609
4,995
150,938
61
Note 5. 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,
2022
2021
10,494 $
51,110
179,606
17,977
18,545
277,732
171,507
106,225 $
10,494
49,699
180,761
19,017
10,580
270,551
168,132
102,419
$
$
Range of
Estimated
Useful Lives
5 - 40 Years
2 - 20 Years
2 - 10 Years
Depreciation expense was $14.5 million, $14.1 million, and $13.8 million, for the years ended December 31, 2022, 2021 and
2020, respectively.
Note 6. Leases
Sale-Leaseback Transaction
In December 2021, we entered into a sale-leaseback transaction for the building and related land for our Gardena
performance center located in Carson, California (“Sale-Leaseback Agreement”). The building and related land was sold for
$143.1 million and we had no continuing involvement. The carrying value of the building and related land was $9.4 million
and we recognized a gain of $132.5 million. As part of the Sale-Leaseback Agreement, we entered into an initial five year
lease for the usage of the just sold building and related land, with three options to renew in five year increments. The lease
was classified as an operating lease and the future minimum base monthly lease payments during the initial five year period
in aggregate total $19.6 million.
All 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).
We have operating and finance leases for manufacturing facilities, corporate offices, and various equipment. Our leases have
remaining lease terms of 1 to 10 years, some of which include options to extend the leases for up to 15 years, and some of
which include options to terminate the leases within 1 year.
62
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,
2022
December 31,
2021
10,521
4,283
343
53
396 $
356
62
418
$
$
$
Short term and variable lease expenses for the year ended December 31, 2022 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,
2022
December 31,
2021
$
$
$
$
$
7,669 $
53 $
346 $
5,150
61
363
8,332 $
245 $
23,317
401
(In years)
December 31,
2022
5
6
December 31,
2021
5
6
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. After
we completed a financing of all our existing debt on July 14, 2022, the interest rate on our term loan was based on Term
Secured Overnight Financing Rate (“Term SOFR”) plus an applicable margin. Prior to the refinancing, the interest rate on our
term loans were based on London Interbank Offered Rate (“LIBOR”) plus an applicable margin.
The weighted average discount rates were as follows:
Operating leases
Finance leases
Years Ended
December 31,
2022
3.0%
3.6%
December 31,
2021
3.1%
3.6%
63
Maturity of operating and finance lease liabilities are as follows:
2023
2024
2025
2026
2027
Thereafter
Total lease payments
Less imputed interest
Total
(In thousands)
Operating Leases
Finance Leases
$
$
8,081 $
7,956
7,924
7,595
2,323
5,102
38,981
2,985
35,996 $
388
321
262
208
175
310
1,664
161
1,503
Operating lease payments related to options to extend lease terms that are reasonably certain of being exercised are $3.3
million. As of December 31, 2022, 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, 2022, there are no legally binding minimum lease payments for leases signed but not yet
commenced.
Note 7. Goodwill and Other Intangible Assets
Goodwill
The carrying amounts of goodwill, by operating segment, for the years ended December 31, 2022 and 2021 were as
follows:
Gross goodwill
Accumulated goodwill impairment
Balance at December 31, 2021
Purchase price allocation refinements
Balance at December 31, 2022
Electronic
Systems
(In thousands)
Structural
Systems
Consolidated
Ducommun
$
$
199,157 $
(81,722)
117,435
—
117,435 $
86,259 $
—
86,259
(287)
85,972 $
285,416
(81,722)
203,694
(287)
203,407
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 the income approach
(which is based on 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 management judgment in selecting comparable business
acquisitions and the transaction values observed and its related control premiums.
64
Our most recent step one goodwill impairment test for our Electronic Systems reporting unit was 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. No material
adverse factors/changes have occurred since the fourth quarter of 2019 and thus, for our annual goodwill impairment test of
our Electronic Systems reporting unit as of the first day of the fourth quarter of 2022, 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. As our
commercial aerospace end-use market business continues to be negatively impacted by the COVID-19 pandemic, we
performed a step one goodwill impairment test for our Structural Systems reporting unit as of the first day of the fourth
quarter of 2022, where the fair value of our Structural Systems reporting unit exceeded its carrying value. Thus, the
respective goodwill amounts were not deemed impaired.
In December 2021, we acquired 100% of the outstanding equity of Magnetic Seal LLC (f/k/a Magnetic Seal Corporation,
“MagSeal”) for an original purchase price of $69.5 million, net of cash acquired. We allocated the final gross purchase price
of $70.9 million to the assets acquired and the liabilities assumed at their estimated fair values. The excess of the purchase
price over the aggregate fair values was recorded as goodwill within the Structural Systems reporting unit. See Note 2.
Other Intangible Assets
Other intangible assets are related to acquisitions, including MagSeal, 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 2 to 19
years. Intangible assets are as follows:
Wtd.
Avg
Life
(Yrs)
17
14
14
15
2
Finite-lived assets
Customer relationships
Trade names and trademarks
Contract renewal
Technology
Backlog
Total finite-lived assets
Indefinite-lived assets
Trade names and trademarks
Total
December 31, 2022
December 31, 2021
(In thousands)
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
$ 246,300 $ 127,999 $ 118,301 $ 246,300 $ 114,169 $ 132,131
4,237
—
109
587
137,064
5,500
1,845
400
600
254,645
5,500
1,845
400
600
254,645
3,830
—
82
288
122,501
1,263
1,845
291
13
117,581
1,670
1,845
318
312
132,144
4,700
4,700
$ 259,345 $ 132,144 $ 127,201 $ 259,345 $ 117,581 $ 141,764
4,700
4,700
—
—
The carrying amount of other intangible assets by operating segment as of December 31, 2022 and 2021 was as follows:
Other intangible assets
Electronic Systems
Structural Systems
Total
(In thousands)
December 31, 2022
December 31, 2021
Gross
Accumulated
Amortization
Net
Carrying
Value
Gross
Accumulated
Amortization
Net
Carrying
Value
$ 164,545 $
99,479 $
65,066 $ 164,545 $
90,191 $
74,354
94,800
32,665
62,135
94,800
27,390
67,410
$ 259,345 $ 132,144 $ 127,201 $ 259,345 $ 117,581 $ 141,764
65
Amortization expense of other intangible assets was $14.6 million, $13.1 million and $13.2 million for the years ended
December 31, 2022, 2021 and 2020, respectively. Future amortization expense by operating segment is expected to be as
follows:
2023
2024
2025
2026
2027
Thereafter
(In thousands)
Electronic
Systems
Structural
Systems
Consolidated
Ducommun
$
$
9,288 $
9,288
9,288
9,288
9,288
18,626
65,066 $
5,196 $
4,673
4,673
4,649
4,647
33,597
57,435 $
14,484
13,961
13,961
13,937
13,935
52,223
122,501
Note 8. Accrued and Other Liabilities
The components of accrued and other liabilities consisted of the following:
Accrued compensation
Accrued income tax and sales tax
Other
Total
Note 9. Long-Term Debt
Long-term debt and the current period interest rates were as follows:
Term loans
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.
(In thousands)
December 31,
2022
2021
28,785 $
10,478
9,557
48,820 $
24,391
926
15,974
41,291
(In thousands)
December 31,
2022
248,438
248,438
6,250
242,188
(1,593)
240,595
2,265
4.36 %
$
$
$
2021
287,712
287,712
7,000
280,712
(1,328)
279,384
1,136
3.27 %
$
$
$
$
$
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Future long-term debt payments at December 31, 2022 were as follows:
2023
2024
2025
2026
2027
Thereafter
Total
(In thousands)
6,250
7,813
12,500
14,063
207,812
—
248,438
$
$
On July 14, 2022, we completed a refinancing of all our existing debt by entering into a new term loan (“2022 Term Loan”)
and a new revolving credit facility (“2022 Revolving Credit Facility”). The 2022 Term Loan is a $250.0 million senior
secured loan that matures on July 14, 2027. The 2022 Revolving Credit Facility is a $200.0 million senior secured revolving
credit facility that matures on July 14, 2027. The 2022 Term Loan and 2022 Revolving Credit Facility, collectively are the
new credit facilities (“2022 Credit Facilities”).
The 2022 Term Loan bears interest, at our option, at a rate equal to either (i) Term Secured Overnight Financing Rate (“Term
SOFR”) plus an applicable margin ranging from 1.375% to 2.375% per year or (ii) Base Rate (defined as the highest of [a]
Federal Funds Rate plus 0.50%, [b] Bank of America’s prime rate, and [c] Term SOFR plus 1.00%, and if the Base Rate is
less than zero percent, it will be deemed zero percent) plus an applicable margin ranging from 0.375% to 1.375% per year, in
each case based upon the consolidated total net adjusted leverage ratio. Interest payments are typically paid on a quarterly
basis, on the last business day each quarter. In addition, the 2022 Term Loan requires quarterly amortization payments of
0.625% during year one and year two, 1.250% during year three and year four, and 1.875% during year five of the original
outstanding principal balance of the 2022 Term Loan amount, on the last business day each quarter. The first quarterly
amortization payment of $1.6 million was required to be paid and was paid during the fourth quarter of 2022.
The 2022 Revolving Credit Facility bears interest, at our option, at a rate equal to either (i) Term SOFR plus an applicable
margin ranging from 1.375% to 2.375% per year or (ii) Base Rate (defined as the highest of [a] Federal Funds Rate plus
0.50%, [b] Bank of America’s prime rate, and [c] Term SOFR plus 1.00%, and if the Base Rate is less than zero percent, it
will be deemed zero percent) plus an applicable margin ranging from 0.375% to 1.375% per year, in each case based upon the
consolidated total net adjusted leverage ratio. Interest payments are typically paid on a quarterly basis, on the last business
day each quarter. The undrawn portion of the commitment of the 2022 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, typically paid on a
quarterly basis, on the last business day each quarter. However, the 2022 Revolving Credit Facility does not require any
principal installment payments.
In conjunction with the closing of the 2022 Credit Facilities, we utilized the entire $250.0 million of proceeds from the 2022
Term Loan plus our existing cash on hand to pay off our entire debt balance outstanding of $254.2 million under prior credit
facilities (described below).
As of December 31, 2022, we were in compliance with all covenants required under the 2022 Credit Facilities.
In December 2019, we completed the refinancing of a portion of our then existing debt by entering into a new revolving
credit facility (“2019 Revolving Credit Facility”) to replace the then existing revolving credit facility that was entered into in
November 2018 (“2018 Revolving Credit Facility”) and entered into a new term loan (“2019 Term Loan”). The 2019
Revolving Credit Facility was a $100.0 million senior secured revolving credit facility that would have matured on December
20, 2024 and replaced the $100.0 million 2018 Revolving Credit Facility that would have matured on November 21, 2023.
The 2019 Term Loan was a $140.0 million senior secured term loan that would have matured on December 20, 2024. We
also had a then existing $240.0 million senior secured term loan that was entered into in November 2018 that would have
matured on November 21, 2025 (“2018 Term Loan”). The original amounts available under the 2019 Revolving Credit
Facility, 2019 Term Loan, and 2018 Term Loan (collectively, the “Existing Credit Facilities”) in aggregate, totaled $480.0
million at that time.
The 2019 Term Loan bore 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
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net adjusted leverage ratio, typically payable quarterly. In addition, the 2019 Term Loan required amortization payments of
1.25% of the original outstanding principal balance of the 2019 Term Loan amount on a quarterly basis, on the last day of the
calendar quarter. During 2022, we made the required quarterly payments on the 2019 Term Loan before it was refinanced, in
aggregate totaling $3.5 million.
The 2019 Revolving Credit Facility bore 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 2019 Revolving Credit Facility was subject to a
commitment fee ranging from 0.175% to 0.275%, based upon the consolidated total net adjusted leverage ratio. However, the
2019 Revolving Credit Facility did not require any principal installment payments.
The 2018 Term Loan bore 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 amortization payments of 0.25% of the outstanding principal
balance of the 2018 Term Loan amount on a quarterly basis.
Further, under the then Existing Credit Facilities, if we exceeded the annual excess cash flow threshold, we were required to
make an annual additional principal payment based on the consolidated adjusted leverage ratio. The annual mandatory excess
cash flow payment was 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 was 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 was less than
or equal to 2.50 to 1.0. We did not exceed the annual excess cash flow threshold for 2021 and thus, no annual excess cash
flow payment was required to be paid during the first quarter of 2022.
We drew down $50.0 million on the 2019 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. The remaining $25.0 million was repaid during 2021.
In addition, since we were paying down on the term loans during the first quarter of 2022, we were required to pay down on
the 2019 Term Loan and 2018 Term Loan on a pro-rata basis and thus, we paid down $13.0 million and $17.0 million on the
2019 Term Loan and 2018 Term Loan, respectively, for an aggregate total pay down of $30.0 million.
As of December 31, 2022, we had $199.8 million of unused borrowing capacity under the 2022 Revolving Credit Facility,
after deducting $0.2 million for standby letters of credit.
The 2022 Term Loan was considered a modification of debt for some lenders and an extinguishment of debt for other lenders,
and thus, a loss of $0.2 million was recorded related to the extinguishment. In addition, the new fees incurred of $0.8 million
were capitalized and will be amortized over the life of the 2022 Term Loan. Further, the remaining debt issuance costs related
to the 2019 Term Loan and 2018 Term Loan of $1.0 million as of the modification date will be amortized over the life of the
2022 Term Loan, using the effective interest method.
The 2022 Revolving Credit Facility that replaced the 2019 Revolving Credit Facility was considered a modification of debt
except for the portion related to the creditor that is no longer a part of the 2022 Revolving Credit Facility and in which case, it
was considered an extinguishment of debt. As a result, we expensed the portion of the unamortized debt issuance costs
related to the 2019 Revolving Credit Facility that was considered an extinguishment of debt of $0.1 million. In addition, the
new fees incurred of $1.7 million as part of the 2022 Revolving Credit Facility were capitalized and will be amortized over
the life of the 2022 Revolving Credit Facility. Further, the remaining debt issuance costs related to the 2019 Revolving Credit
Facility of $0.8 million as of the modification date will also be amortized over the life of the 2022 Revolving Credit Facility.
The 2019 Term Loan and 2018 Term Loan were considered a modification of debt in 2019 and thus, no gain or loss was
recorded at that time. Instead, the new fees paid to the lenders at that time of $0.6 million were capitalized and were being
amortized over the life of the 2019 Term Loan. The remaining debt issuance costs related to the 2018 Term Loan of $1.5
million as of the modification date in 2019 were being amortized over its remaining life.
The 2019 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 2019 Revolving Credit Facility and the 2018
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Revolving Credit Facility and in which case, it was considered a modification of debt in 2019. 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 2019. In addition, the new fees paid to the lenders of $0.5 million as part of the
2019 Revolving Credit Facility were capitalized and were being amortized over its remaining life. Further, the remaining debt
issuance costs related to the 2018 Revolving Credit Facility of $1.1 million were also being amortized over its remaining life.
In December 2021, we acquired 100.0% of the outstanding equity interests of Magnetic Seal LLC (f/k/a Magnetic Seal
Corporation, “MagSeal”) for an original purchase price of $69.5 million, net of cash acquired, all payable in cash. Upon the
closing of the transaction, we paid a gross total aggregate of $71.3 million in cash, $65.0 million of which was from drawing
down on the 2019 Revolving Credit Facility. This draw down on the 2019 Revolving Credit Facility was paid off by
December 31, 2021. See Note 2.
Also in December 2021, we entered into a sale-leaseback transaction for the building and related land for our Gardena
performance center located in Carson, California, for a sale price of $143.1 million. A portion of the net proceeds were used
to pay down on the $65.0 million that was drawn on the 2019 Revolving Credit Facility for the MagSeal acquisition. See
Note 5.
The 2022 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 2022 Credit Facilities. The Parent Company has no independent assets or operations and therefore, no
consolidating financial information for the Parent Company and its subsidiaries is presented.
In November 2021, we entered into derivative contracts, U.S. dollar-one month LIBOR forward interest rate swaps
designated as cash flow hedges, all with an effective date of January 1, 2024, for an aggregate total notional amount of
$150.0 million, weighted average fixed rate of 1.8%, and all terminating on January 1, 2031 (“Forward Interest Rate Swaps”).
The Forward Interest Rate Swaps mature on a monthly basis, with fixed amount payer payment dates on the first day of each
calendar month, commencing on February 1, 2024 through January 1, 2031. The Forward Interest Rate Swaps were deemed
to be highly effective upon entering into the derivative contracts and thus, hedge accounting treatment was utilized. Since the
Forward Interest Rate Swaps are not effective until January 1, 2024, we only recorded the changes in the fair value of the
Forward Interest Rate Swaps and recorded in other assets, deferred income taxes, and accumulated other comprehensive
income (loss) of $15.8 million during December 31, 2022. See Note 1 for further information.
On July 14, 2022, as a result of completing a refinancing of our existing debt, we were required to complete an amendment of
the Forward Interest Rate Swaps (“Amended Forward Interest Rate Swaps”). The Forward Interest Rate Swaps were based on
U.S. dollar-one month LIBOR and were amended to be based on one month Term SOFR as borrowings using LIBOR are no
longer available under the 2022 Credit Facilities. Since this was an amendment of just the reference rate as a result of the
cessation of LIBOR, utilizing the guidance under ASU 2020-04, we determined the Amended Forward Interest Rate Swaps
as of the amendment date to continue to be highly effective. The Amended Forward Interest Rate Swaps weighted average
fixed rate is 1.7%, as a result of the difference between U.S. dollar-one month LIBOR and one month Term SOFR.
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 10. Shareholders’ Equity
We are authorized to issue five million shares of preferred stock. At December 31, 2022 and 2021, no preferred shares were
issued or outstanding.
Note 11. Stock-Based Compensation
Stock Incentive Compensation Plans
We currently have two active stock incentive plans: i) the Amended and Restated 2020 Stock Incentive Plan (the “2020
Plan”), which expires on April 20, 2032, 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 in May 2020 and any remaining shares
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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 in May 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 1,031,162 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, 2022, shares
available for future grant under the 2020 Plan are 338,061. 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, 2022, there are 549,977 shares
available for future award grants.
Stock Options
In the years ended December 31, 2022, 2021, and 2020, we granted stock options to our officers and key employees of zero,
zero, and 8,000, respectively, with weighted-average grant date fair values of zero, zero, and $16.48, respectively. Stock
options have been granted with an exercise price equal to the fair market value of our stock on the date of grant and expire
not more than ten years from the date of grant. The stock options typically vest over a period of three or four years from the
date of grant. The option price and number of shares are subject to adjustment under certain dilutive circumstances. If an
employee terminates employment, the non-vested portion of the stock options will not vest and all rights to the non-vested
portion will terminate completely.
Stock option activity for the year ended December 31, 2022 were as follows:
Number
of Stock
Options
317,779 $
— $
(109,186) $
(2,150) $
(7,167) $
199,276 $
199,276 $
Weighted-
Average
Exercise
Price Per
Share
35.30
—
31.82
39.75
42.88
36.89
36.89
Weighted-
Average
Remaining
Contractual
Life (Years)
Aggregate
Intrinsic Value
(in thousands)
5.4 $
5.4 $
2,537
2,537
Outstanding at January 1, 2022
Granted
Exercised
Expired
Forfeited
Outstanding at December 31, 2022
Exerciseable at December 31, 2022
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Changes in nonvested stock options for the year ended December 31, 2022 were as follows:
Nonvested at January 1, 2022
Granted
Vested
Forfeited
Nonvested at December 31, 2022
Weighted-
Average
Grant
Date Fair
Value
Number of
Stock Options
59,605 $
— $
(52,438) $
(7,167) $
— $
15.93
—
15.90
16.10
—
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, 2022, 2021 and 2020 was $2.0 million, $1.0 million, and $0.9 million, respectively. Cash received from stock
options exercised for the years ended December 31, 2022, 2021 and 2020 was $3.5 million, $1.7 million, and $1.6 million,
respectively, with related tax benefits of $0.8 million, $0.4 million, and $0.4 million, respectively. The total amount of stock
options vested and expected to vest in the future is 199,276 shares with a weighted-average exercise price of $36.89 and an
aggregate intrinsic value of $2.5 million. These stock options have a weighted-average remaining contractual term of 5.4
years.
The share-based compensation cost expensed for stock options for the years ended December 31, 2022, 2021, and 2020
(before tax benefits) was $0.3 million, $1.2 million, and $1.8 million, respectively, and is included in selling, general and
administrative expenses on the consolidated income statements. At December 31, 2022, there was no remaining unrecognized
compensation cost related to stock options. The total fair value of stock options vested during the years ended December 31,
2022, 2021, and 2020 was $0.8 million, $1.7 million, and $2.0 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 2020 Stock Incentive Plan for years ended December 31, 2022, 2021, and 2020 were as follows:
Risk-free interest rate
Expected volatility
Expected dividends
Expected term (in months)
Years Ended December 31,
2022
N/A
N/A
N/A
N/A
2021
N/A
N/A
N/A
N/A
2020
1.59 %
37.75 %
—
66
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 118,847,
118,995, and 118,835 RSUs during the years ended December 31, 2022, 2021, and 2020, respectively, with weighted-average
grant date fair values (equal to the fair market value of our stock on the date of grant) of $51.76, $55.92, and $27.62 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 33.3%, 33.3% and 33.4% 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.
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Restricted stock unit activity for the year ended December 31, 2022 was as follows:
Number of
Restricted
Stock Units
Outstanding at January 1, 2022
Granted
Vested
Forfeited
Outstanding at December 31, 2022
Weighted-
Average
Grant
Date Fair Value
44.85
51.76
44.28
50.72
47.81
202,282 $
118,847 $
(74,222) $
(45,112) $
201,795 $
The share-based compensation cost expensed for RSUs for the years ended December 31, 2022, 2021, and 2020 (before tax
benefits) was $3.8 million, $4.1 million, and $2.6 million respectively, and is included in selling, general and administrative
expenses on the consolidated income statements. At December 31, 2022, total unrecognized compensation cost (before tax
benefits) related to RSUs of $5.7 million is expected to be recognized over a weighted average period of 1.6 years. The total
fair value of RSUs vested for the years ended December 31, 2022, 2021, and 2020 was $3.5 million, $4.2 million, and $2.3
million, respectively. The tax benefit realized from vested RSUs for the years ended December 31, 2022, 2021, and 2020 was
$0.8 million, $1 million, and $0.5 million, respectively.
Performance Stock Units
We granted performance stock awards (“PSUs”) to certain key employees of 111,654, 182,886, and 159,136 PSUs during the
years ended December 31, 2022, 2021, and 2020, respectively, with weighted-average grant date fair values of $48.18,
$49.76, and $29.65 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.
Performance stock activity for the year ended December 31, 2022 was as follows:
Outstanding at January 1, 2022
Granted
Vested
Forfeited
Outstanding at December 31, 2022
Number of
Performance
Stock Units
Weighted-
Average
Grant
Date Fair
Value
299,563 $
111,654 $
(89,309) $
(20,554) $
301,354 $
41.16
48.18
44.65
45.61
42.42
The share-based compensation cost expensed for PSUs for the years ended December 31, 2022, 2021, and 2020 (before tax
benefits) was $5.1 million, $5.9 million and $4.9 million, respectively, and is included in selling, general and administrative
expenses on the consolidated income statements. At December 31, 2022, total unrecognized compensation cost (before tax
benefits) related to PSUs of $5.5 million is expected to be recognized over a weighted-average period of 1.4 years. The total
fair value of PSUs vested during the years ended December 31, 2022, 2021, and 2020, was $4.4 million, $9.6 million, and
$3.7 million, respectively. The tax benefit realized from PSUs for the years ended December 31, 2022, 2021, and 2020 were
$1.1 million, $2.3 million, and $0.9 million, respectively.
Performance-Based With Market Condition Cash Settled Long-Term Incentive Awards
As permitted under the 2020 Plan, performance-based with market condition cash settled long-term incentive awards
(“Performance-Based Cash LTIPs”) were granted in 2022. Performance-Based Cash LTIPs will be settled in cash and are
subject to the attainment of performance goals established by the Compensation Committee (including achievement of
relative total shareholder return market condition), the periods during which performance is to be measured, and all other
limitations and conditions applicable to the Performance-Based Cash LTIPs’ values. Performance goals are based on a pre-
established objective formula that specifies the manner of determining the value of the Performance-Based Cash LTIPs that
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will be issued if performance goals are attained. If an employee terminates employment, their non-vested portion of the
Performance-Based Cash LTIPs will not vest and all rights to the non-vested portion of the Performance-Based Cash LTIPs
will terminate. The Compensation Committee administers the Performance-Based Cash LTIPs. The share-based
compensation expense recorded for the Performance-Based Cash LTIPs for the years ended December 31, 2022, 2021, and
2020 (before tax benefits) was $1.2 million, zero, and zero, respectively.
Note 12. Employee Benefit Plans
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, 2022, 2021, and 2020 was $2.9 million, $2.8 million,
and $2.6 million, respectively.
Pension Plan and LaBarge Retirement Plan
We have a defined benefit pension plan covering certain hourly employees of a subsidiary (the “Pension Plan”). Pension Plan
benefits are generally determined on the basis of the retiree’s age and length of service. Assets of the Pension Plan are
composed primarily of fixed income and equity securities. We also have a retirement plan covering certain current and retired
employees (the “LaBarge Retirement Plan”).
The consolidation of one of our performance centers as part of the 2022 Restructuring Plan as discussed in Note 2 resulted in
the curtailment of the Pension Plan during the fourth quarter of 2022, but it had an immaterial impact on our consolidated
financial statements.
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,
2022
2021
2020
$
$
625 $
1,089
(2,081)
585
218 $
676 $
1,010
(1,895)
1,285
1,076 $
622
1,209
(1,761)
993
1,063
The components of the reclassifications of net actuarial losses from accumulated other comprehensive loss to net income for
2022 were as follows:
Amortization of actuarial loss - total before tax (1)
Tax benefit
Net of tax
(In thousands)
Year Ended
December 31,
2022
$
$
585
(143)
442
(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 2023 is $0.6 million.
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The obligations, fair value of plan assets, and funded status of both plans are as follows:
Change in benefit obligation(1)
Beginning benefit obligation (January 1)
Service cost
Interest cost
Actuarial gain
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
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,
2022
2021
$
$
$
$
$
$
$
$
$
39,805 $
625
1,089
(9,714)
(1,468)
30,337 $
33,698 $
(4,652)
1,702
(1,468)
29,280 $
(1,057) $
416 $
641 $
7,573 $
(582)
(9,714)
6,734
4,011
(970)
3,041 $
42,804
676
1,010
(2,537)
(2,148)
39,805
30,632
3,122
2,095
(2,151)
33,698
(6,107)
427
5,680
12,620
(1,282)
(2,537)
(1,228)
7,573
(1,827)
5,746
(1) Projected benefit obligation equals the accumulated benefit obligation for the plans.
On December 31, 2022, our annual measurement date, the accumulated benefit obligation exceeded the fair value of the plans
assets by $1.1 million. Such excess is referred to as an unfunded accumulated benefit obligation. We recorded an
unrecognized loss included in accumulated other comprehensive loss, net of tax at December 31, 2022 and 2021 of $3.0
million and $5.7 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, 2022 and 2021, by asset category, were as follows:
Equity securities
Cash and equivalents
Debt securities
Total(1)
December 31,
2022
61%
4%
35%
100%
2021
69%
1%
30%
100%
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(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, 2022
Level 1
Level 2
Level 3
Total
1,078 $
4,622
12,591
1,033
19,324 $
— $
—
—
—
— $
— $
—
—
—
—
$
1,078
4,622
12,591
1,033
19,324
9,956
29,280
(In thousands)
Year Ended December 31, 2021
Level 1
Level 2
Level 3
Total
414 $
3,648
7,446
1,199
12,707 $
— $
—
—
—
— $
— $
—
—
—
—
$
414
3,648
7,446
1,199
12,707
20,991
33,698
(1) Represents mutual funds and commingled accounts which invest primarily in equities, but may also hold fixed
income securities, cash and other investments. Commingled funds with publicly quoted prices and actively traded are
classified as Level 1 investments.
Pooled funds are measured using the net asset value (“NAV”) as a practical expedient for fair value as permissible under the
accounting standard for fair value measurements and have not been categorized in the fair value hierarchy in accordance with
ASU 2015-07, “Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net
Asset Value per Share (or Its Equivalent).” Pooled fund NAVs are provided by the trustee and are determined by reference to
the fair value of the underlying securities of the trust, less its liabilities, which are valued primarily through the use of directly
or indirectly observable inputs. Depending on the pooled fund, underlying securities may include marketable equity securities
or fixed income securities.
The assumptions used to determine the benefit obligations and expense for our two plans are presented in the tables below.
The expected long-term return on assets, noted below, represents an estimate of long-term returns on investment portfolios
consisting of a mixture of fixed income and equity securities. The estimated cash flows from the plans for all future years are
determined based on the plans’ population at the measurement date. We used the expected benefit payouts from the plans for
each year into the future and discounted them back to the present using the Wells Fargo yield curve rate for that duration.
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The weighted-average assumptions used to determine the net periodic benefit costs under the two plans were as follows:
Discount rate used to determine pension expense
Pension Plan
LaBarge Retirement Plan
Years Ended December 31,
2022
2021
2020
2.85%
2.35%
2.50%
1.85%
3.22%
2.85%
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
2022
5.11%
5.00%
6.25%
December 31,
2021
2.85%
2.35%
6.25%
2020
2.50%
1.85%
6.25%
The following benefit payments under both plans, which reflect expected future service, as appropriate, are expected to be
paid:
2023
2024
2025
2026
2027
2028 - 2032
(In thousands)
LaBarge
Retirement
Plan
Pension Plan
$
$
$
$
$
$
1,379 $
1,481 $
1,555 $
1,639 $
1,712 $
9,156 $
416
397
378
359
341
1,435
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 $0.8 million to the plans in 2023.
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 were both zero at December 31, 2022, and both zero at December 31, 2021. The accumulated benefit
obligations of the first two plans at December 31, 2022 and December 31, 2021 were both $0.3 million, and are included in
accrued liabilities.
Note 13. Indemnifications
We have made guarantees and indemnities under which we may be required to make payments to a guaranteed or
indemnified party, in relation to certain transactions, including revenue transactions in the ordinary course of business.
Additionally, we indemnify our directors and officers to the maximum extent permitted under the laws of the State of
Delaware and 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. Moreover, in connection with certain
performance center leases, we have indemnified our lessors for certain claims arising from the performance center or the
lease.
The duration of the guarantees and indemnities varies and, in many cases is indefinite but subject to applicable statutes of
limitations. The majority of guarantees and indemnities do not provide any limitations on the maximum potential future
payments we could be obligated to make. Historically, payments related to these guarantees and indemnities have been
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immaterial. We estimate the fair value of our indemnification obligations as insignificant based on this history and insurance
coverage and have, therefore, not recorded any liability for these guarantees and indemnities in the accompanying
consolidated balance sheets.
Note 14. Income Taxes
Our pre-tax income attributable to foreign operations was not material. The provision for income tax expense consisted of the
following:
Current tax expense
Federal
State
Deferred tax (benefit) expense
Federal
State
Income tax expense
(In thousands)
Years Ended December 31,
2022
2021
2020
$
$
12,902 $
1,023
13,925
(8,624)
(768)
(9,392)
4,533 $
31,171 $
2,829
34,000
107
841
948
34,948 $
2,525
(459)
2,066
1,294
(553)
741
2,807
We recognized net income tax benefits from deductions of share-based payments in excess of compensation cost recognized
for financial reporting purposes of $0.2 million, $0.9 million, and $0.4 million for the years ended December 31, 2022, 2021,
and 2020, respectively.
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Deferred tax (liabilities) assets were comprised of the following:
Deferred tax assets:
Accrued expenses
Allowance for doubtful accounts
Contract overrun reserves
Deferred compensation
Deferred revenue
Employment-related accruals
Environmental reserves
Federal tax credit carryforwards
Inventory reserves
Operating lease liabilities
Pension obligation
Federal and state net operating loss carryforwards
Research expenses
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:
Depreciation
Goodwill
Intangibles
Interest rate hedge
Operating lease right-of-use assets
Prepaid insurance
Other
Total gross deferred tax liabilities
Net deferred tax liabilities
(In thousands)
December 31,
2022
2021
$
$
627 $
152
952
234
943
3,932
501
133
3,572
8,672
28
3,397
10,620
6,974
2,420
1,525
44,682
(7,548)
37,134
(11,286)
(8,630)
(18,310)
(3,359)
(8,346)
(609)
(547)
(51,087)
(13,953) $
620
269
680
272
1,570
4,028
499
133
2,957
8,145
1,550
4,243
—
7,123
2,584
2,503
37,176
(7,718)
29,458
(11,986)
(6,557)
(20,337)
—
(7,931)
(534)
(840)
(48,185)
(18,727)
We have federal and state tax net operating losses of $11.4 million and $17.3 million, respectively, as of December 31, 2022.
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 2036. The state net operating loss carryforwards include $10.6 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 2038.
We have federal and state tax credit carryforwards of $0.1 million and $10.9 million, respectively, as of December 31, 2022.
A valuation allowance of $8.8 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 2023 and 2037.
We believe it is more likely than not that we will generate sufficient taxable income to realize the benefit of the remaining
deferred tax assets.
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The principal reasons for the variation between the statutory and effective tax rates were as follows:
Years Ended December 31,
Statutory federal income tax rate
State income taxes (net of federal benefit)
Foreign derived intangible income deduction
Stock-based compensation expense
Research and development tax credits (1)
Other tax credits
Changes in valuation allowance
Non-deductible book compensation expenses
Changes in deferred tax assets
Changes in tax reserves
Other
Effective income tax rate
2022
21.0%
4.0
(0.9)
(0.6)
(14.8)
(0.1)
(0.5)
4.4
(0.2)
—
1.3
13.6%
2021
21.0%
3.1
—
(0.5)
(3.0)
—
(1.0)
0.7
—
0.2
—
20.5%
2020
21.0%
4.6
(0.4)
(1.4)
(13.8)
(0.3)
(0.4)
3.3
(0.2)
(4.6)
1.0
8.8%
(1) For 2020, (3.4)% is additional research and development tax credits related to 2019.
Our total amount of unrecognized tax benefits was $4.9 million, $4.4 million, and $4.1 million at December 31, 2022, 2021,
and 2020, 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, 2022,
2021, and 2020 were not significant. If recognized, $2.5 million would affect the effective income tax rate. As a result of
statute of limitations set to expire in 2023, we expect decreases to our unrecognized tax benefits of approximately
$0.6 million in the next twelve months.
A reconciliation of the beginning and ending amount of unrecognized tax benefits was as follows:
Balance at January 1,
Additions for tax positions related to the current year
Additions for tax positions related to prior years
Reductions for tax positions related to prior years
Reductions for lapse of statute of limitations
Balance at December 31,
(In thousands)
Years Ended December 31,
2022
2021
2020
$
$
4,435 $
1,177
15
(13)
(670)
4,944 $
4,069 $
562
180
—
(376)
4,435 $
5,663
418
157
—
(2,169)
4,069
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 2018 and by state taxing authorities for tax years after 2017. 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.
In March 2020, the U.S. enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) that provided 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 on our overall income taxes. We 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. As such, as of December 31, 2020, we deferred payment of income tax
deductions related to payroll taxes of $6.1 million and recorded the related deferred tax asset of $1.4 million, which was
included as part of the net deferred income taxes on the consolidated balance sheet. We were required to and made the
payments for 50% of the deferred payroll taxes by December 31, 2021. We were required to and made the payments for the
remaining 50% of the deferred payroll taxes by December 31, 2022.
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The Tax Cuts and Jobs Act of 2017 (“TCJA”), which was signed into U.S. law in December 2017, eliminated the option to
immediately deduct research and development expenditures in the year incurred under Section 174 effective January 1, 2022.
The amended provision under Section 174 requires us to capitalize and amortize these expenditures over five years (for U.S.-
based research). As of December 31, 2022, we recorded an increase to income taxes payable of approximately $10.6 million
and a decrease to net deferred tax liabilities of a similar amount. We are monitoring legislation for any further changes to
Section 174 and the potential impact to our financial statements in 2023.
On August 16, 2022, the U.S. enacted the Inflation Reduction Act of 2022 (“IRA”) which aims to curb inflation by reducing
the deficit, lowering prescription drug prices, and investing in domestic energy production while promoting clean energy. We
considered the provisions in the IRA and determined they have no or minimal impact to our overall income taxes.
On August 9, 2022, the U.S. enacted the Creating Helpful Incentives to Produce Semiconductors Act of 2022 (“CHIPS Act”)
which provides new funding to boost domestic research and manufacturing of semiconductors in the United States. We are
evaluating the provisions in the CHIPS Act. Any impact to our overall income taxes would be for 2023 and thereafter.
Note 15. Commitments and Contingencies
In December 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 in
January 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 vigorously refuted and defended these claims, and reached a tentative
settlement of $0.8 million during the fourth quarter 2021, which was subject to court approval. Thus, we recorded accrued
liabilities of $0.8 million as of December 31, 2021. During the second quarter of 2022, additional factual information was
identified resulting in an increase in the amount of the tentative settlement to $0.9 million. Therefore, we recorded an
additional accrued liabilities of $0.1 million for a total accrued liabilities amount of $0.9 million as of the end of the second
quarter of 2022 and remained unchanged as of December 31, 2022 as we were awaiting final court approval of this
settlement. Subsequent to December 31, 2022, we received final court approval and paid the $0.9 million on January 17,
2023.
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 as of both December 31, 2022 and December 31, 2021, which is reflected in other long-term liabilities on our
consolidated balance sheets.
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 as of both December 31, 2022 and
December 31, 2021, which is reflected in other long-term liabilities on our consolidated balance sheets. 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.
In June 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, up to a capped amount, 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
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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 were reversed for revenue previously recognized using the over time method 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. During the year ended December 31, 2022, we received insurance recoveries in aggregate total
of $5.4 million for business interruption and since the contingencies related to this amount are deemed to be resolved, we
recorded this amount as other income. In addition, during the year ended December 31, 2022, we received insurance
recoveries of $1.0 million for property and equipment and tooling damage and since the contingencies related to property and
equipment and tooling were not deemed to be resolved, we did not recognize it as other income during the year ended
December 31, 2022. Further, as of December 31, 2022, we have received $13.5 million of general insurance recoveries, all
during 2020. The timing of and the remaining amounts of insurance recoveries, including for business interruption, are not
known at this time.
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 in the ordinary course of business. While it is not feasible to predict the outcome of these matters,
Ducommun does not presently expect that any sum it may be required to pay in connection with these matters would have a
material adverse effect on its consolidated financial position, results of operations or cash flows.
Note 16. Major Customers and Concentrations of Credit Risk
We provide proprietary products and services to the Department of Defense and various United States Government agencies,
and most of the aerospace and aircraft manufacturers who receive contracts directly from the U.S. Government as an original
equipment manufacturer (“Primes”). In addition, we also service technology-driven markets in the industrial, medical and
other end-use markets. As a result, we have significant net revenues from certain customers. Accounts receivable were
diversified over a number of different commercial, military and space programs and were made by both operating segments.
Net revenues from our top ten customers, including The Boeing Company (“Boeing”), General Dynamics Corporation
(“GD”), Lockheed Martin Corporation (“Lockheed Martin”), Northrop Grumman Corporation (“Northrop”), Raytheon
Technologies Corporation (“Raytheon”), Spirit AeroSystems Holdings, Inc. (“Spirit”), and Viasat, Inc. (“Viasat”),
represented the following percentages of total net revenues:
Boeing
GD
Lockheed Martin
Northrop
Raytheon
Spirit
Viasat
Top ten customers (1)
Years Ended December 31,
2022
2021
2020
6.7 %
5.7 %
3.5 %
5.7 %
21.6 %
5.7 %
5.4 %
61.4 %
7.8 %
3.0 %
4.4 %
7.1 %
24.4 %
3.8 %
2.6 %
61.1 %
10.5 %
2.5 %
5.0 %
9.1 %
20.9 %
3.3 %
1.7 %
61.1 %
(1) Includes Boeing, GD, Lockheed Martin, Northrop, Raytheon, and Spirit for 2022, 2021, and 2020, and Viasat for 2022
and 2021.
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Boeing, GD, Lockheed Martin, Northrop, Raytheon, Spirit, and Viasat represented the following percentages of total
accounts receivable:
Boeing
GD
Lockheed Martin
Northrop
Raytheon
Spirit
Viasat
December 31,
2022
2021
3.8 %
3.4 %
1.0 %
13.0 %
16.2 %
1.0 %
10.3 %
3.5 %
4.0 %
0.4 %
10.9 %
17.8 %
0.7 %
4.3 %
In 2022, 2021 and 2020, net revenues from foreign customers based on the location of the customer were $60.7 million,
$43.6 million and $58.5 million, respectively. No net revenues from a foreign country were greater than 3.0% of total net
revenues in 2022, 2021, and 2020. 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 2022, 2021, and 2020. We are
not subject to any significant foreign currency risks as all our sales are made in United States dollars.
Note 17. Business Segment Information
We supply products and services primarily to the aerospace and defense industries. Our subsidiaries are organized into two
strategic businesses, Electronic Systems and Structural Systems, each of which is an operating segment as well as a
reportable segment.
Financial information by reportable segment was as follows:
Net Revenues
Electronic Systems
Structural Systems
Total Net Revenues
Segment Operating Income (Loss) (1)
Electronic Systems
Structural Systems
Corporate General and Administrative Expenses (2)
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,
2022
2021
2020
$
$
$
$
$
$
$
$
440,638 $
271,899
712,537 $
49,876 $
17,225
67,101
(27,313)
39,788 $
13,974 $
17,212
235
31,421 $
10,717 $
8,834
—
19,551 $
412,648 $
232,765
645,413 $
57,629 $
20,234
77,863
(28,982)
48,881 $
13,823 $
14,331
235
28,389 $
7,471 $
8,463
—
15,934 $
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
82
Table of Contents
(1) The results for 2021 include MagSeal’s results of operations which have been included in our consolidated statements
of income since the date of acquisition as part of the Structural Systems segment. See Note 2.
(2) Includes costs not allocated to either the Electronic Systems or Structural Systems operating segments.
Segment assets include assets directly identifiable with each segment. Corporate assets include assets not specifically
identified with a business segment, including cash. The following table summarizes our segment assets for 2022 and 2021:
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,
2022
2021
$
$
$
$
543,298 $
410,565
67,643
1,021,506 $
182,501 $
148,107
330,608 $
490,814
408,118
79,803
978,735
191,789
153,669
345,458
In December 2021, we acquired 100.0% of the outstanding equity interests of MagSeal for an original purchase price of $69.5
million, net of cash acquired. We allocated the final gross purchase price of $70.9 million to the assets acquired and liabilities
assumed at their 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.
83
Table of Contents
SCHEDULE II
Description
2022
DUCOMMUN INCORPORATED AND SUBSIDIARIES
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2022, 2021, AND 2020
(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
2021
Allowance for Credit Losses
Valuation Allowance on Deferred Tax Assets
2020
Allowance for Credit Losses
Valuation Allowance on Deferred Tax Assets
$
$
$
$
$
$
1,098 $
(74) $
435 $
— $
589
7,718 $
(170) $
— $
— $
7,548
1,552 $
227 $
681 $
— $
1,098
9,330 $
(1,612) $
— $
— $
7,718
1,321 $
231 $
— $
— $
1,552
9,375 $
(111) $
— $
66 $
9,330
(1) Includes opening balance of Nobles Worldwide, Inc. acquired in October 2019.
84
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.
2.3 Equity Purchase Agreement dated December 15, 2021, by and between Ducommun LaBarge Technologies, Inc., Mag
2.3 Equity Purchase Agreement dated December 15, 2021, by and between Ducommun LaBarge Technologies, Inc., Mag
Parent, Inc. and Thomas B. Colby and Lyman J. Colby. Incorporated by reference to Exhibit 2.1 to Form 8-K filed on
Parent, Inc. and Thomas B. Colby and Lyman J. Colby. Incorporated by reference to Exhibit 2.1 to Form 8-K filed on
December 16, 2021.
December 16, 2021.
2.4 Agreement of Purchase and Sale and Agreement to Enter into Lease dated as of December 16, 2021 by and among
2.4 Agreement of Purchase and Sale and Agreement to Enter into Lease dated as of December 16, 2021 by and among
Ducommun Aerostructures, Inc. and Centerpoint 268 Gardena LLC. Incorporated by reference to Exhibit 2.1 to Form 8-
Ducommun Aerostructures, Inc. and Centerpoint 268 Gardena LLC. Incorporated by reference to Exhibit 2.1 to Form 8-
K filed on December 20, 2021.
K filed on December 20, 2021.
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 Amended and Restated Bylaws of Ducommun Incorporated, dated as of November 4, 2022.
3.3 Amended and Restated Bylaws of Ducommun Incorporated, dated as of November 4, 2022.
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 Second Amendment to Amended and Restated Credit Agreement entered into on March 20, 2020.
10.1 Second Amendment to Amended and Restated Credit Agreement entered into on March 20, 2020.
10.2 Incremental Term Loan Lender Joinder Agreement and Additional Credit Extension Amendment, dated as of December
10.2 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.
10.3 Credit Agreement, dated as of November 21, 2018, among Ducommun Incorporated, certain of its subsidiaries, Bank of
10.3 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.
*10.4 2013 Stock Incentive Plan (Amended and Restated May 2, 2018). Incorporated by reference to Appendix A of
*10.4 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.
*10.5 2020 Employee Stock Incentive Plan. Incorporated by reference to Appendix A of Definitive Proxy Statement on
*10.5 2020 Employee Stock Incentive 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.
*10.6 2018 Employee Stock Purchase Plan. Incorporated by reference to Appendix B of Definitive Proxy Statement on
*10.6 2018 Employee Stock Purchase Plan. Incorporated by reference to Appendix B of Definitive Proxy Statement on
Schedule 14a, filed on March 23, 2018.
Schedule 14a, filed on March 23, 2018.
*10.7 2020 Employee Stock Purchase Plan. Incorporated by reference to Appendix A of Definitive Proxy Statement on
*10.7 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.
*10.8 Form of Stock Option Agreement for 2016 and earlier. Incorporated by reference to Exhibit 10.8 to Form 10-K for the
*10.8 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.
*10.9 Form of Stock Option Agreement for 2017. Incorporated by reference to Exhibit 10.5 to Form 10-K for the year ended
*10.9 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.
*10.10 Form of Stock Option Agreement for 2018 and after. Incorporated by reference to Exhibit 4.7 to Form S-8, filed on
*10.10 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.
*10.11 Form of Restricted Stock Unit Agreement for 2017 through 2019. Incorporated by reference to Exhibit 10.9 to Form
*10.11 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.
85
Table of Contents
Exhibit
No.
Description
*10.12 Performance Restricted Stock Unit Agreement dated January 23, 2017 between Ducommun Incorporated and Stephen
*10.12 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.
G. Oswald. Incorporated by reference to Exhibit 10.11 to Form 10-K for the year ended December 31, 2016.
*10.13 Form of Performance Stock Unit Agreement for 2020 and after. Incorporated by reference to Exhibit 10.18 to Form
*10.13 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.
*10.14 Form of Restricted Stock Unit Agreement for Non-Qualified Deferred Compensation Plan Participants for 2020 and
*10.14 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.
*10.15 Form of Restricted Stock Unit Agreement for 2020 and after. Incorporated by reference to Exhibit 10.20 to Form 10-
*10.15 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.
*10.16 Form of Stock Option Agreement for 2020 and after. Incorporated by reference to Exhibit 10.21 to Form 10-Q for the
*10.16 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.
*10.17 Form of Performance Restricted Stock Unit Agreement for 2020. Incorporated by reference to Exhibit 10.22 to Form
*10.17 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.
*10.18 Form of Performance Stock Unit Cash-Based Long-Term Incentive Award Agreement for 2022 and after.
*10.18 Form of Performance Stock Unit Cash-Based Long-Term Incentive Award Agreement for 2022 and after.
Incorporated by reference to Exhibit 10.20 to Form 10-Q for the period ended July 2, 2022.
Incorporated by reference to Exhibit 10.20 to Form 10-Q for the period ended July 2, 2022.
*10.19 Form of Performance Restricted Stock Unit Cash-Based Long-Term Incentive Award Agreement for 2022 and after.
*10.19 Form of Performance Restricted Stock Unit Cash-Based Long-Term Incentive Award Agreement for 2022 and after.
Incorporated by reference to Exhibit 10.21 to Form 10-Q for the period ended July 2, 2022.
Incorporated by reference to Exhibit 10.21 to Form 10-Q for the period ended July 2, 2022.
*10.20 Directors’ Deferred Compensation and Retirement Plan, as amended and restated February 2, 2010. Incorporated by
*10.20 Directors’ Deferred Compensation and Retirement Plan, as amended and restated February 2, 2010. 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.
*10.21 Non Qualified Deferred Compensation. Incorporated by reference to Exhibit 4.6 to Form S-8 dated November 26,
*10.21 Non Qualified Deferred Compensation. Incorporated by reference to Exhibit 4.6 to Form S-8 dated November 26,
2019.
2019.
*10.22 Key Executive Severance Agreement between Ducommun Incorporated and Stephen G. Oswald dated January 23,
*10.22 Key Executive Severance Agreement between Ducommun Incorporated and Stephen G. Oswald dated 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.
*10.23 Form of Key Executive Severance Agreement between Ducommun Incorporated and each of the individuals listed
*10.23 Form of Key Executive Severance Agreement between Ducommun Incorporated and each of the individuals listed
below. Incorporated by reference to Exhibit 99.2 to Form 8-K dated January 27, 2017. All of the Key Executive
below. Incorporated by reference to Exhibit 99.2 to Form 8-K dated January 27, 2017. All of the Key Executive
Severance Agreements are identical except for the name of the person, the address for notice, and the date of the
Severance Agreements are identical except for the name of the person, the address for notice, and the date of the
Agreement:
Agreement:
Executive Officer
Laureen S. Gonzalez
Jerry L. Redondo
Rajiv A. Tata
Christopher D. Wampler
Date of Agreement
September 20, 2022
January 23, 2017
January 24, 2020
January 23, 2017
*10.24 Employment Letter Agreement dated January 3, 2017 between Ducommun Incorporated and Stephen G. Oswald.
*10.24 Employment Letter Agreement dated January 3, 2017 between Ducommun Incorporated and Stephen G. Oswald.
Incorporated by reference to Exhibit 99.1 to Form 8-K dated January 9, 2017.
Incorporated by reference to Exhibit 99.1 to Form 8-K dated January 9, 2017.
*10.25 Retirement and Release Agreement dated November 29, 2021 between Ducommun Incorporated and Rosalie F.
*10.25 Retirement and Release Agreement dated November 29, 2021 between Ducommun Incorporated and Rosalie F.
Rogers. Incorporated by reference to Exhibit 10.24 to Form 10-K for the year ended December 31, 2021.
Rogers. Incorporated by reference to Exhibit 10.24 to Form 10-K for the year ended December 31, 2021.
86
Table of Contents
Exhibit
No.
Description
10.26 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
Shirley G. Drazba
Robert C. Ducommun
Dean M. Flatt
Laureen S. Gonzalez
Jay L. Haberland
Sheila G. Kramer
Stephen G. Oswald
Jerry L. Redondo
Samara A. Strycker
Rajiv A. Tata
Christopher D. Wampler
Date of Agreement
March 19, 2013
October 18, 2018
December 31, 1985
November 5, 2009
September 20, 2022
February 2, 2009
June 1, 2021
January 23, 2017
October 1, 2015
December 30, 2021
January 24, 2020
January 1, 2016
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.
87
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 16, 2023
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 16, 2023.
Signature
/s/ Stephen G. Oswald
Stephen G. Oswald
/s/ Christopher D. Wampler
Christopher D. Wampler
/s/ Richard A. Baldridge
Richard A. Baldridge
/s/ Shirley G. Drazba
Shirley G. Drazba
/s/ Robert C. Ducommun
Robert C. Ducommun
/s/ Dean M. Flatt
Dean M. Flatt
/s/ Jay L. Haberland
Jay L. Haberland
/s/ Sheila G. Kramer
Sheila G. Kramer
/s/ Samara A. Strycker
Samara A. Strycker
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
Director
88
Following is a list of the subsidiaries of the Company(1):
SUBSIDIARIES OF THE REGISTRANT
Name of Subsidiary
Jurisdiction of Incorporation
EXHIBIT 21
Certified Thermoplastics Co., 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) Co., Ltd.
LaBarge Acquisition Company, Inc.
LaBarge/STC, Inc.(2)
Lightning Diversion Systems, LLC
LS Holdings Company, LLC
Magnetic Seal LLC
Nobles Holdings Inc.
Nobles Parent Inc.
Nobles Worldwide, Inc.
(1) As of December 31, 2022.
(2) Inactive.
Delaware
California
Delaware
Delaware
Delaware
New York
England
Arizona
Delaware
Thailand
Missouri
Texas
Delaware
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. 333-268218) and Form
S-8 (Nos. 333-264389, 333-238040, 333-235278, 333-224838, 333-214408, and 333-188460) of Ducommun Incorporated of
our report dated February 16, 2023 relating to the financial statements, 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 16, 2023
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, 2022;
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 16, 2023
/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, 2022;
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 16, 2023
/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, 2022, 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 16, 2023
In connection with the Annual Report of Ducommun Incorporated (the “Company”) on Form 10-K for the period
ending December 31, 2022, 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 16, 2023
The foregoing certification is accompanying the Form 10-K solely pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, and is not being filed as part of the Form 10-K or as a separate disclosure document.
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Corporate Information
Board of Directors
Stephen G. Oswald
Chairman, President and Chief Executive Officer
Ducommun Incorporated
Richard A. Baldridge
Vice Chairman
Viasat, Inc.
Shirley G. Drazba
Corporate Vice President,
Dean M. Flatt
President, Defense & Space
Honeywell International, Inc. (Ret.)
Jay L. Haberland
Vice President
United Technologies Corporation (Ret.)
Sheila G. Kramer
Vice President, Chief Human Resources Officer
Product Line Strategy & Innovation
Donaldson Company, Inc.
IDEX Corporation (Ret.)
Robert C. Ducommun
Business Advisor
Officers
Samara A. Strycker
Senior Vice President, Corporate Controller and Treasurer
Navistar International Corporation
Stephen G. Oswald
Chairman, President and Chief Executive Officer
Laureen S. Gonzalez
Vice President and Chief Human Resources Officer
Christopher D. Wampler
Vice President, Chief Financial Officer,
Controller and Treasurer
Jerry L. Redondo
Senior Vice President of Operations and Head of Structures
Rajiv A. Tata
Vice President, General Counsel and Corporate Secretary
Common Stock
Ducommun Incorporated common stock is listed
Certifications
The Company has filed the required certifications under
on the New York Stock Exchange (Symbol: DCO).
Section 302 of the Sarbanes-Oxley Act of 2002 regarding
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
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, 2022. After the 2023 Annual Meeting
of Shareholders, the Company intends to file with the
New York Stock Exchange its Annual Written Affirmation
and 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 its Annual Written Affirmation and CEO certification
with the NYSE on or about May 17, 2022.
Forward-Looking Statements
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
expected top-line growth and margin expansion, the Company’s inorganic growth strategy, the expected timing of completion and results of the Company’s
restructuring plan, the results of the Company’s expanded operations in Mexico, the Company’s expectations relating to defense budgetary environments and
offloading by defense primes, the expected commercial aerospace industry recovery, the expected increase in the Company’s engineered product content and
aftermarket revenues, and the Company’s expectations regarding the results of its sustainability and greenhouse gas reduction initiatives. 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,”
”continue,” “committed,” “estimate,” 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, 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 14, 2023, 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 sec.gov).
Ducommun Incorporated
200 Sandpointe Avenue, Suite 700
Santa Ana, CA 92707-5759
+1 (657) 335-3665
Ducommun.com