PART I
ITEM 1. BUSINESS
GENERAL
Ducommun Incorporated (“Ducommun,” “the Company,” “we,” “us” or “our”) is a leading global provider of engineering and manufacturing services for high-performance products and high-cost-of failure applications used primarily in the aerospace and defense (“A&D”), industrial, medical and other industries (collectively, “Industrial”). Ducommun differentiates itself as a full-service solution-based provider, offering a wide range of value-added products and services in our primary businesses of electronics, structures, and integrated solutions. We operate through two primary business segments: Electronic Systems and Structural Systems. We are the successor to a business that was founded in California in 1849 and reincorporated in Delaware in 1970.
ACQUISITIONS
Acquisitions have been an important element of our growth strategy. We have supplemented our organic growth by identifying, acquiring and integrating acquisition opportunities that result in broader, more sophisticated product and service offerings while diversifying and expanding our customer base and markets.
For example, in June 2011, we acquired all of the outstanding stock of LaBarge Inc. (the “LaBarge Acquisition”), a provider of electronics manufacturing services to aerospace, defense and other diverse markets for $325.3 million (net of cash acquired and acquisition costs), funded by internally generated cash, senior unsecured notes and a senior secured term loan totaling $390.0 million. The LaBarge Acquisition positioned us to benefit from customers that are increasingly outsourcing their integrated electronic content on their platforms and consolidating their supplier base to companies with expanded capabilities.
PRODUCTS AND SERVICES
Business Segment Information
We operate through two primary strategic businesses Electronic Systems and Structural Systems, each of which is a reportable segment. The results of operations among our operating segments vary due to differences in competitors, customers, extent of proprietary deliverables and performance. Electronic Systems designs, engineers and manufactures high-reliability electronic and electromechanical products used in worldwide technology-driven markets including A&D and Industrial end-use markets. Electronic Systems’ product offerings primarily range from prototype development to complex assemblies as discussed in more detail below. Structural Systems designs, engineers and manufactures large, complex contoured aerostructure components and assemblies and supplies composite and metal bonded structures and assemblies. Structural Systems’ products are primarily used on commercial aircraft, military fixed-wing aircraft and military and commercial rotary-wing aircraft.
Electronic Systems
Electronic Systems has three major product offerings in electronics manufacturing for diverse, high-reliability applications: complex cable assemblies and interconnect systems, printed circuit board assemblies, and higher-level electronic, electromechanical and mechanical assemblies. Components and assemblies are provided principally for domestic and foreign commercial and military fixed-wing aircraft, military and commercial rotary-wing aircraft and space programs. In addition, we provide select industrial high-reliability applications for the industrial automation and medical and other end-use markets. We build custom, high-performance electronics and electromechanical systems. Our products include sophisticated radar enclosures, aircraft avionics racks and shipboard communications and control enclosures, printed circuit board assemblies, cable assemblies, wire harnesses, and interconnect systems and other high-level complex assemblies. 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, including design, development, and integration and testing of circuit card assemblies and cable assemblies, are provided to a wide range of customers.
In response to customer needs and utilizing our in-depth engineering expertise, Electronic Systems is also considered a leading supplier of engineered products including, illuminated pushbutton switches and panels for aviation and test systems, microwave and millimeter switches and filters for radio frequency systems and test instrumentation, and motors and resolvers for motion control.
Electronic Systems also provides engineering expertise for aerospace system design, development, integration, and testing. We leverage the knowledge base, capabilities, talent, and technologies of this focused capability into direct support of our customers.
Structural Systems
Structural Systems has three major product offerings to support a global customer base: commercial aircraft, military fixed-wing aircraft, and military and commercial rotary-wing aircraft. Our applications include structural components, structural assemblies and bonded (metal and composite) components. In the structural components products, Structural Systems designs, engineers, and manufactures large complex contoured aluminum, titanium and Inconel
®
aerostructure components for the aerospace industry. Structural assembly products include winglets, engine components, and fuselage structural panels for aircraft. Metal and composite bonded structures and assemblies products include aircraft wing spoilers, large fuselage skins, rotor blades on rotary-wing aircraft and components, flight control surfaces and engine components. To support these products, Structural Systems maintains advanced machine milling, stretch-forming, hot-forming, metal bonding, composite layup, and chemical milling capabilities and has an extensive engineering capability to support both design and manufacturing.
AEROSPACE AND DEFENSE END-USE MARKETS OVERVIEW
Our largest end-use markets are the aerospace and defense markets and our revenues from these markets represented
89%
of our total net revenues in
2016
. These markets are serviced by suppliers which are stratified, from the lowest value provided to the highest, into four tiers: Tier 3, Tier 2, Tier 1 and original equipment manufacturers (“OEMs”). The OEMs provide the highest value and are also known as prime contractors (“Primes”). We derive a significant portion of our revenues from subcontracts with OEMs. As the prime contractor for various programs and platforms, the OEMs sell to their customers, who may include, depending upon the application, the U.S. Federal Government, foreign, state and local governments, global commercial airline carriers, regional jet carriers and various other customers. The OEMs also sell to global leasing companies that lease commercial aircraft. A significant portion of our revenues is earned from subcontracts with the Primes. Tier 3 suppliers principally provide components or detailed parts. Tier 2 suppliers provide more complex, value-added parts and may also assume more design risk, manufacturing risk, supply chain risk and project management risk than Tier 3 suppliers. Tier 1 suppliers manufacture aircraft sections and purchase assemblies. We currently compete primarily with Tier 2 and Tier 3 suppliers. Our business growth strategy is to differentiate ourselves from competitors by providing more complex assemblies to our customers as a Tier 2 supplier.
Commercial Aerospace End-Use Market
The commercial aerospace end-use market is highly cyclical and is impacted by the level of global air passenger traffic in general, which in turn is influenced by global economic conditions, fleet fuel and maintenance costs and geopolitical developments. Revenues from the commercial aerospace end-use market represented
48%
of our total net revenues for
2016
.
Passenger traffic growth was estimated at approximately 6% in 2016. Although growth was strong across all major world regions, there continues to be significant variation between regions and airline business models. Airlines operating in the Middle East and Asia Pacific regions, as well as low-cost-carriers globally, are currently leading passenger growth.
In addition, airline financial performance also plays a role in the demand for new capacity. Airlines continue to focus on increasing revenues through alliances, partnerships, new marketing initiatives, and effective leveraging of ancillary services and related revenues. Airlines are also relentlessly focusing on reducing costs by renewing fleets to leverage more efficient airplanes and in
2016
, continued to benefit significantly from lower fuel costs. As a result, market acceptance is growing for these types of more fuel efficient aircraft from The Boeing Company (“Boeing”) and Airbus Group, formerly known as the European Aeronautic, Defense & Space Company (“EADS”), through their wholly owned subsidiary Airbus (“Airbus”).
Further, the availability of internal or external funding impacts commercial aircraft build rates. Failure of our customers to obtain financing may result in cancellation or deferral of orders.
The long-term outlook for the industry continues to remain positive due to the fundamental drivers of air travel growth: economic growth and the increasing propensity to travel due to increased trade, globalization, and improved airline services driven by liberalization of air traffic rights between countries. Boeing’s 20 year forecast projections in their
2016
Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) estimate a long-term average growth rate of almost 5% per year for passenger traffic and more than 4% per year for cargo traffic. This is based on long term global economic growth projections of almost 3% average annual gross domestic product (“GDP”) growth. We believe we are well positioned given our product capabilities to participate in the steady projected growth rate for commercial air traffic and build rates for large commercial aircraft for the airframe manufacturing industry.
Defense End-Use Market
Our defense end-use market includes products used in military and space, including technologies and structures applications. The defense end-use market is highly cyclical and is impacted by the level of government defense spending. Government defense spending is impacted by national defense policies and priorities, political climates, fiscal budgetary constraints, U.S. Federal budget deficits, projected economic growth and the level of global military or security threats, or other conflicts. Revenues from the military and space end-use market in
2016
represented
41%
of our total net revenues during
2016
.
The new U.S. administration and key members of the 115th Congress have expressed a general desire to reverse the effects of the budgetary reductions of the past several years. However, the Budget Control Act of 2
011 (“2011 Act”), which mandated limits on U.S. government discretionary spending, remains in effect through the 2021 government fiscal year causing budget uncertainty and continue risk of future sequestration cuts.
In addition, there continues to be uncertainty related to program-level appropriations for the U.S. Department of Defense (“U.S. DoD”) and other government agencies within the overall budgetary framework described above. Future budget cuts or investment priority changes could result in reductions, cancellations and/or delays of existing contracts or programs. Any of these events could have a material effect on the results of our operations, financial position and/or cash flows.
In addition to the risks described above, if Congress is unable to pass appropriations bills in a timely manner, a government shutdown could occur and the impact may be above and beyond those resulting from budget cuts, sequestration, or program-level appropriations. For example, requirements to furlough employees in the U.S. DoD or other government agencies could result in payment delays, impair our ability to perform work on existing contracts, and/or negatively impact future orders. For additional information related to our revenues from customers whose principal sales are to the U.S. Government and our direct sales to the U.S. Government, see “Risk Factors” contained within Part I, Item 1A of this Annual Report on Form 10-K (“Form 10-K”).
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
11%
of our total net revenues during
2016
.
We believe our business in these markets has stabilized and we are well positioned for these markets.
SALES AND MARKETING
Our commercial revenues are substantially dependent on airframe manufacturers’ production rates of new aircraft. Deliveries of new aircraft by airframe manufacturers are dependent on the financial capacity of its customers, primarily airlines and leasing companies, to purchase the aircraft. Thus, revenues from commercial aircraft could be affected as a result of changes in new aircraft orders, or the cancellation or deferral by airlines of purchases of ordered aircraft. Further, our revenues from commercial aircraft programs could be affected by changes in our customers’ inventory levels and changes in our customers’ aircraft production build rates. In recent years, both major large aircraft manufacturers, Boeing and Airbus, have announced higher build rates due to increases in production of existing programs, including more fully-developed models, and by the introduction of new platforms.
Military components manufactured by us are employed in many of the country’s front-line fighters, bombers, rotary-wing aircraft and support aircraft, as well as land and sea-based applications. Our defense business is diversified among a number of military manufacturers and programs. In the space sector, we continue to support various unmanned launch vehicle and satellite programs.
Our sales into the Industrial end-use markets are customer focused in the various markets and driven primarily by their capital spending and manufacturing outsourcing demands.
We continue to broaden and diversify our customer base in the end-use markets we serve by providing innovative product and service solutions through drawing on our core competencies, experience and technical expertise. Net revenues related to military and space (defense technologies and defense structures), commercial aerospace, and Industrial end-use markets in
2016
and
2015
were as follows:
Many of our contracts are fixed price contracts subject to termination at the convenience of the customer (as well as for default). In the event of termination for convenience, the customer generally is required to pay the costs we have incurred and certain other fees through the date of termination. Larger, long-term government subcontracts may have provisions for milestone payments, progress payments or cash advances for purchase of inventory.
Our marketing efforts primarily consist of developing strong, long-term relationships with our customers, which provide the basis for future sales. These close relationships allow us to gain a better insight into each customer’s business needs, identify ways to provide greater value to the customer, and allow us to be designed in early in various products and/or high volume products.
SEASONALITY
The timing of our revenues is governed by the purchasing patterns of our customers, and, as a result, we may not generate revenues equally during the year. However, no material portion of our business is considered to be seasonal.
MAJOR CUSTOMERS
We currently generate the majority of our revenues from the aerospace and defense industries. As a result, we have significant revenues from certain customers. Boeing was greater than ten percent and Raytheon Company (“Raytheon”), Spirit AeroSystems Holdings, Inc. (“Spirit”), and United Technologies Corporation (“United Technologies”) each were greater than five percent of our
2016
net revenues. Revenues from our top ten customers, including Boeing, Raytheon, Spirit, and United Technologies, were
59%
of total net revenues during
2016
. Net revenues by major customer for
2016
and
2015
were as follows:
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 17 to our consolidated financial statements included in Part IV, Item 15(a) of this Form 10-K.
RESEARCH AND DEVELOPMENT
We perform concurrent engineering with our customers and product development activities under our self-funded programs, as well as under contracts with others. Concurrent engineering and product development activities are performed for commercial, military and space applications.
RAW MATERIALS AND COMPONENTS
Raw materials and components used in the manufacturing of our products include aluminum, titanium, steel and carbon fibers, as well as a wide variety of electronic interconnect and circuit card assemblies and components. These raw materials are generally available from a number of suppliers and are generally in adequate supply. However, from time to time, we have experienced increases in lead times for and limited availability of, aluminum, titanium and certain other raw materials and/or components. Moreover, certain components, supplies and raw materials for our operations are purchased from single source suppliers and occasionally, directed by our customers. In such instances, we strive to develop alternative sources and design modifications to minimize the potential for business interruptions.
COMPETITION
The markets we serve are highly competitive, and our products and services are affected by varying degrees of competition. We compete worldwide with domestic and international companies in most markets. These companies may have competitive advantages as a result of greater financial resources, economies of scale and bundled products and services that we do not offer. Additional information related to competition is discussed in Risk Factors contained within Part I, Item 1A of this Form 10-K. Our ability to compete depends principally upon the breadth of our technical capabilities, the quality of our goods and services, competitive pricing, product performance, design and engineering capabilities, new product innovation, the ability to solve specific customer needs, and customer relationships.
PATENTS AND LICENSES
We have several patents, but we do not believe that our operations are dependent upon any single patent or group of patents. In general, we rely on technical superiority, continual product improvement, exclusive product features, superior lead time, on-time delivery performance, quality, and customer relationships to maintain our competitive advantage.
BACKLOG
Backlog is subject to delivery delays or program cancellations, which are beyond our control. Backlog is affected by timing differences in the placement of customer orders and tends to be concentrated in certain programs and customers. As a result, trends in our overall level of backlog may not be indicative of trends in our future revenues. Backlog was
$600.3 million
at
December 31, 2016
, compared to
$574.4 million
at
December 31, 2015
. The net increase in backlog was primarily in the military and space end-use markets and commercial aerospace end-use markets, partially offset by a decrease in the industrial end use markets.
$480.2
million of total backlog is expected to be delivered during 2017.
ENVIRONMENTAL MATTERS
Our business, operations and facilities are subject to numerous stringent federal, state and local environmental laws and regulations issued by government agencies, including the Environmental Protection Agency (“EPA”). Among other matters, these regulatory authorities impose requirements that regulate the emission, discharge, generation, management, transport and disposal of hazardous materials, pollutants and contaminants. These regulations govern public and private response actions to hazardous or regulated substances that threaten to release, or have been released to the environment, and they require us to obtain and maintain licenses and permits in connection with our operations. We may also be required to investigate and remediate the effects of the release or disposal of materials at sites associated with past and present operations. Additionally, this extensive regulatory framework imposes significant compliance burdens and risks on us. We anticipate that capital expenditures will continue to be required for the foreseeable future to upgrade and maintain our environmental compliance efforts, however, we do not expect such expenditures to be material in 2017 and the foreseeable future.
Structural Systems has been directed by California environmental agencies to investigate and take corrective action for groundwater contamination at its facilities located in Adelanto (a.k.a., El Mirage) and Monrovia, California. Based on currently available information, we have accrued
$1.5 million
for our estimated liabilities related to these sites. For further information, see Note 16 in the accompanying notes to consolidated financial statements included in Part IV, Item 15(a) of this Form 10-K. In addition, see Risk Factors contained within Part I, Item 1A of this Form 10-K for certain risks related to environmental matters.
EMPLOYEES
As of
December 31, 2016
, we employed
2,700
people, of which
400
are subject to collective bargaining agreements expiring in
June 2018
and
January 2019
. We believe our relations with our employees are good. See Risk Factors contained within Part I, Item 1A of this Form 10-K for additional information regarding certain risks related to our employees.
AVAILABLE INFORMATION
General information about us can be obtained from our website address at
www.ducommun.com
. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports, if any, are available free of charge on our website as soon as reasonably practicable after they are filed with or furnished to the SEC. Information included in our website is not incorporated by reference in this Annual Report on Form 10-K. The SEC also maintains a website at
www.sec.gov
that contains reports, proxy statements and other information regarding SEC registrants, including our company.
ITEM 1A. RISK FACTORS
Our business, financial condition, results of operations and cash flows may be affected by known and unknown risks, uncertainties and other factors. We have summarized below the significant, known material risks to our business. Additional risk factors not currently known to us or that we currently believe are immaterial may also impair our business, financial condition, results of operations and cash flows. Any of these risks, uncertainties and other factors could cause our future financial results to differ materially from recent financial results or from currently anticipated future financial results. The risk factors below should be considered together with the information included elsewhere in this Annual Report on Form 10-K (“Form 10-K”) as well as other required filings by us to the SEC.
RISKS RELATED TO OUR CAPITAL STRUCTURE
Our indebtedness could limit our financing options, adversely affect our financial condition, and prevent us from fulfilling our debt obligations.
In July 2015, we completed the refinancing of our existing debt by entering into a new credit facility to replace the existing credit facilities. The new credit facility consists of a $275.0 million senior secured term loan, which matures on June 26, 2020 (“Term Loan”), and a $200.0 million senior secured revolving credit facility (“Revolving Credit Facility”), which matures on June 26, 2020 (collectively, the “Credit Facilities”).
At
December 31, 2016
, we had
$170.0 million
of outstanding long-term debt under the Term Loan. The debt was the direct result of our LaBarge Acquisition. There are no further required payments under the Credit Facilities until June 2020.
Our ability to complete a debt refinancing in the future may be limited, as discussed below in this risk factor. We may have to undertake alternative financing plans, such as selling assets; reducing or delaying scheduled expansions and/or capital investments; or seeking various forms of capital. Our ability to complete alternative financing plans may be affected by circumstances and economic events outside of our control. We cannot ensure that we would be able to refinance our debt or enter into alternative financing plans in adequate amounts on commercially reasonable terms, terms acceptable to us or at all, or that such plans guarantee that we would be able to meet our debt obligations.
Our level of debt could:
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limit our ability to obtain additional financing to fund future working capital, capital expenditures, investments or acquisitions or other general corporate requirements;
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require a substantial portion of our cash flows to be dedicated to debt service payments instead of other purposes, thereby reducing the amount of cash flows available for working capital, capital expenditures, investments or acquisitions or other general corporate purposes;
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increase our vulnerability to adverse changes in general economic, industry and competitive conditions;
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place us at a disadvantage compared to other, less leveraged competitors;
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expose us to the risk of increased borrowing costs and higher interest rates as approximately one half of our borrowings under our Credit Facilities bear interest at variable rates, which could further adversely impact our cash flows;
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limit our flexibility to plan for and react to changes in our business and the industry in which we compete;
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restrict us from making strategic acquisitions or causing us to make non-strategic divestitures;
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expose us to risk of rating agency downgrades and unfavorable changes in the global credit markets; and
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make it more difficult for us to satisfy our obligations with respect to the Credit Facilities and our other debt.
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The occurrence of any one of these events could have an adverse effect on our business, financial condition, results of operations and ability to satisfy our obligations in respect of our outstanding debt.
We require a considerable amount of cash to service our indebtedness.
Our ability to make payments on our debt in the future and to fund planned capital expenditures and working capital needs, will depend upon our ability to generate significant cash in the future. Our ability to generate cash is subject to economic, financial, competitive, legislative, regulatory and other factors that may be beyond our control.
The Credit Facilities bear interest, at our option, at a rate equal to either (i) the Eurodollar Rate (defined as a London Interbank Offered Rate [“LIBOR”]) plus an applicable margin ranging from 1.50% to 2.75% per year or (ii) the Base Rate (defined as the highest of [a] Federal Funds Rate plus 0.50%, [b] Bank of America’s prime rate, and [c] the Eurodollar Rate plus 1.00%) plus an applicable margin ranging from 0.50% to 1.75% per year, in each case based upon the consolidated total net adjusted leverage ratio, typically payable quarterly. In October 2015, we entered into interest rate cap hedges designated as cash flow hedges, with maturity dates of June 2020 and notional value in aggregate, totaling $135.0 million. At
December 31, 2016
, the outstanding balance on the Credit Facilities was
$170.0 million
with an average interest rate of
3.25%
. Should interest rates increase significantly, even though $135.0 million of our debt was hedged, our debt service cost will increase. Any inability to generate sufficient cash flow could have a material adverse effect on our financial condition or results of operations.
While we expect to meet all of our financial obligations, we cannot ensure that our business will generate sufficient cash flow from operations in an amount sufficient to enable us to pay our debt or to fund our other liquidity needs.
We require a considerable amount of cash to fund our anticipated voluntary principal prepayments on our Credit Facilities.
Our ability to continue to reduce the debt outstanding under our Credit Facilities through voluntary principal prepayments will be a contributing factor to our ability to meet the leverage ratio covenant and keeping our interest rate towards the lower end of the interest rate range as defined in the Credit Facilities. Our ability to make such prepayments will depend upon our ability to generate significant cash in the future. We cannot ensure that our business will generate sufficient cash flow from operations to fund any such prepayments.
The covenants in the credit agreement to our Credit Facilities impose restrictions that may limit our operating and financial flexibility.
We are required to comply with a leverage covenant as defined in the credit agreement to the Credit Facilities. The leverage covenant is defined as Consolidated Funded Indebtedness less unrestricted cash and cash equivalents in excess of $10.0 million, divided by consolidated earnings before interest, taxes and depreciation and amortization (“EBITDA”). The leverage covenant decreases over the term of the Credit Facilities, which will require us to lower our outstanding debt or increase our EBITDA in the future. We believe the voluntary prepayments on the Credit Facilities will help reduce our leverage, as defined in the credit agreement.
At
December 31, 2016
, we were in compliance with the leverage covenant under the Credit Facility. However, there is no assurance that we will continue to be in compliance with the leverage covenant in future periods.
Our credit agreement to the Credit Facilities contains a number of significant restrictions and covenants that limit our ability, among other things, to incur additional indebtedness, to create liens, to make certain payments, investments, to engage in transactions with affiliates, to sell certain assets or enter into mergers.
These covenants could materially and adversely affect our ability to finance our future operations or capital needs. Furthermore, they may restrict our ability to expand, pursue our business strategies and otherwise conduct our business. Our ability to comply with these covenants may be affected by circumstances and events beyond our control, such as prevailing economic conditions and changes in regulations, and we cannot ensure that we will be able to comply with such covenants. These restrictions also limit our ability to obtain future financings to withstand a future downturn in our business or the economy in general.
A breach of any covenant in credit agreement to the Credit Facilities would result in a default under the Credit Facilities agreement. A default, if not waived, could result in acceleration of the debt outstanding under the agreement. A default could permit our lenders to foreclose on any of our assets securing such debt. Even if new financing were available at that time, it
may not be on terms or amounts that are acceptable to us or terms as favorable as our current agreements. If our debt is in default for any reason, our business, results of operations and financial condition could be materially and adversely affected.
The typical trading volume of our common stock may affect an investor’s ability to sell significant stock holdings in the future without negatively impacting stock price.
The level of trading activity may vary daily and typically represents only a small percentage of outstanding shares. As a result, a stockholder who sells a significant amount of shares in a short period of time could negatively affect our share price.
Our amount of debt may require us to raise additional capital to fund operations.
We may sell additional shares of common stock or other equity securities to raise capital in the future, which could dilute the value of an investor’s holdings.
RISKS RELATED TO OUR BUSINESS
Our end-use markets are cyclical.
We sell our products into aerospace, defense, and industrial end-use markets, which are cyclical and have experienced periodic declines. Our sales are, therefore, unpredictable and tend to fluctuate based on a number of factors, including global economic conditions, geopolitical developments and conditions, and other developments affecting our end-use markets and the customers served. Consequently, results of operations in any period should not be considered indicative of the operating results that may be experienced in any future period.
We depend upon a selected base of industries and customers, which subjects us to unique risks which may adversely affect us.
We currently generate a majority of our revenues from customers in the aerospace and defense industry. Our business depends, in part, on the level of new military and commercial aircraft orders. As a result, we have significant sales to certain customers. Sales to the Boeing Company and Spirit AeroSystems Holdings, Inc. comprise the majority of our commercial aerospace end-use market. A significant portion of our net sales in our military and space end-use markets are made under subcontracts with OEMs, under their prime contracts with the U. S. Government. We had significant sales to Raytheon Company in
2016
in our defense technologies end-use market.
Our customers may experience delays in the launch of new products, labor strikes, diminished liquidity or credit unavailability, weak demand for their products, or other difficulties in their business. In addition, sequestration and a shift in government spending priorities have caused and may continue to cause additional uncertainty in the placement of orders.
Our sales to our top ten customers, which represented
59%
of our total
2016
net revenues, were diversified over a number of different aerospace and defense and Industrial products. Any significant change in production rates by these customers would have a material effect on our results of operations and cash flows. There is no assurance that our current significant customers will continue to buy products from us at current levels, or that we will retain any or all of our existing customers, or that we will be able to form new relationships with customers upon the loss of one or more of our existing customers. This risk may be further complicated by pricing pressures, intense competition prevalent in our industry and other factors. A significant reduction in sales to any of our major customers, the loss of a major customer, or a default of a major customer on accounts receivable could have a material adverse impact on our financial results.
In addition, we generally make sales under purchase orders and contracts that are subject to cancellation, modification or rescheduling. Changes in the economic environment and the financial condition of the industries we serve could result in customer cancellation of contractual orders or requests for rescheduling. Some of our contracts have specific provisions relating to schedule and performance, and failure to deliver in accordance with such provisions could result in cancellations, modifications, rescheduling and/or penalties, in some cases at the customers’ convenience and without prior notice. While we have normally recovered our direct and indirect costs, such cancellations, modifications, or rescheduling that cannot be replaced in a timely fashion, could have a material adverse effect on our financial results.
A significant portion of our business depends upon U.S. Government defense spending.
We derive a significant portion of our business from customers whose principal sales are to the U.S. Government and from direct sales by us to the U.S. Government. Accordingly, the success of our business depends upon government spending generally or for specific departments or agencies in particular. Such spending, among other factors, is subject to the uncertainties of governmental appropriations and national defense policies and priorities, constraints of the budgetary process,
timing and potential changes in these policies and priorities, and the adoption of new laws or regulations or changes to existing laws or regulations.
These and other factors could cause the government and government agencies, or prime contractors that use us as a subcontractor, to reduce their purchases under existing contracts, to exercise their rights to terminate contracts at-will or to abstain from exercising options to renew contracts, any of which could have a material adverse effect on our business, financial condition and results of operations.
Further, the levels of U.S. Department of Defense (“U.S. DoD”) spending in future periods are difficult to predict and are impacted by numerous factors such as the political environment, U.S. foreign policy, macroeconomic conditions and the ability of the U.S. Government to enact relevant legislation such as the authorization and appropriations bills. In addition, significant budgetary delays and constraints have already resulted in reduced spending levels, and additional reductions may be forthcoming. The Budget Control Act (“2011 Act”) established limits on U.S. government discretionary spending, including a reduction of defense spending between the 2012 and 2021 U.S. Government fiscal years. Accordingly, long-term uncertainty remains with respect to overall levels of defense spending and it is likely that U.S. Government discretionary spending levels will continue to be subject to pressure.
We are subject to extensive regulation and audit by the Defense Contract Audit Agency.
T
he accuracy and appropriateness of certain costs and expenses used to substantiate our direct and indirect costs for the U.S. Government contracts are subject to extensive regulation and audit by the Defense Contract Audit Agency, an arm of the U.S. DoD. Such audits and reviews could result in adjustments to our contract costs and profitability. However, we cannot ensure the outcome of any future audits and adjustments may be required to reduce net sales or profits upon completion and final negotiation of audits. If any audit or review were to uncover inaccurate costs or improper activities, we could be subject to penalties and sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension or prohibition from conducting future business with the U.S. Government. Any such outcome could have a material adverse effect on our financial results.
Contracts with some of our customers, including Federal government contracts, contain provisions which give our customers a variety of rights that are unfavorable to us and the OEMs to whom we provide products and services, including the ability to terminate a contract at any time for convenience.
Contracts with some of our customers, including Federal government contracts, contain provisions and are subject to laws and regulations that provide rights and remedies not typically found in commercial contracts. These provisions may allow our customers to:
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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;
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suspend or debar us from doing business with the federal government or with a governmental agency;
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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;
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claim rights in products and systems produced by us; and
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control or prohibit the export of the products and related services we offer.
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If the U.S. Government terminates a contract for convenience, the counterparty with whom we have contracted on a subcontract may terminate its contract with us. As a result of any such termination, whether on a direct government contract or subcontract, we may recover only our incurred or committed costs, settlement expenses and profit on work completed prior to the termination. If the U.S. Government terminates a direct contract with us for default, we may not even recover those amounts and instead may be liable for excess costs incurred by the U.S. Government in procuring undelivered items and services from another source. Contracts with foreign governments generally contain similar provisions relating to termination at the convenience of the customer.
In addition, the U.S. Government is typically required to open all programs to competitive bidding and, therefore, may not automatically renew any of its prime contracts. If one or more of our government prime or subcontracts is terminated or canceled, our failure to replace sales generated from such contracts would result in lower sales and have an adverse effect on our business, results of operations and financial condition.
Further consolidation in the aerospace industry could adversely affect our business and financial results.
The aerospace and defense industry is experiencing significant consolidation, including our customers, competitors and suppliers. Consolidation among our customers may result in delays in the awarding of new contracts and losses of existing business. Consolidation among our competitors may result in larger competitors with greater resources and market share, which could adversely affect our ability to compete successfully. Consolidation among our suppliers may result in fewer sources of supply and increased cost to us.
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, including the LaBarge Acquisition, entails risks, and it is possible that we will not realize the expected benefits from an acquisition or that an acquisition will adversely affect our existing operations. Acquisitions entail certain risks, including:
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•
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difficulty in integrating the operations and personnel of the acquired company within our existing operations or in maintaining uniform standards;
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•
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loss of key employees or customers of the acquired company;
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•
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the failure to achieve anticipated synergies;
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•
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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
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•
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management and other personnel having their time and resources diverted to evaluate, negotiate and integrate acquisitions.
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We rely on our suppliers to meet the quality and delivery expectations of our customers.
Our ability to deliver our products and services on schedule and to satisfy specific quality levels is dependent upon a variety of factors, including execution of internal performance plans, availability of raw materials, internal and supplier produced parts and structures, conversion of raw materials into parts and assemblies, and performance of suppliers and others.
We rely on numerous third-party suppliers for raw materials and a large proportion of the components used in our production process. Certain of these raw materials and components are available only from single sources or a limited number of suppliers, or similarly, customers’ specifications may require us to obtain raw materials and/or components from a single source or certain suppliers. Many of our suppliers are small companies with limited financial resources and manufacturing capabilities. We do not currently have the ability to manufacture these components ourselves. These and other factors, including the loss of a critical supplier or raw materials and/or component shortages, could cause disruptions or cost inefficiencies in our operations compared to our competitors that have greater direct purchasing power, which could have a material adverse effect on our financial results.
We use estimates when bidding on fixed-price contracts. Changes in our estimates could adversely affect our financial results.
We enter into contracts providing for a firm, fixed-price for the sale of some of our products regardless of the production costs incurred by us. In many cases, we make multi-year firm, fixed-price commitments to our customers, without assurance that our anticipated production costs will be achieved. Contract bidding and accounting require judgment relative to assessing risks, estimating contract net sales and costs, including estimating cost increases over time and efficiencies to be gained, and making assumptions for supplier sourcing and quality, manufacturing scheduling and technical issues over the life of the contract. Such assumptions can be particularly difficult to estimate for contracts with new customers. Our failure to accurately estimate these costs can result in reduced profits or incurred losses. Due to the significance of the judgments and estimates involved, it is possible that materially different amounts could be obtained if different assumptions were used or if the underlying circumstances were to change. Therefore, any changes in our underlying assumptions, circumstances or estimates could have a material adverse effect on our financial results. For example, in the third quarter of 2015, we recorded a charge in the Structural Systems segment related to a regional jet program for estimated cost overruns of $10.0 million. See “Provision for Estimated Losses on Contracts” in Note 1 to our consolidated financial statements included in Part IV, Item 15(a) of this Form 10-K for further information.
As we move up the value chain to become a Tier 2 supplier, enhanced design, product development, manufacturing, supply chain project management and other skills will be required.
We may encounter difficulties as we execute our growth strategy to move up the value chain to become a Tier 2 supplier of more complex, value-added assemblies. Difficulties we may encounter include, but are not limited to, the need for enhanced and expanded product design skills, enhanced ability to control and influence our suppliers, enhanced quality control systems and infrastructure, enhanced large-scale project management skills, and expanded industry certifications. Assuming incremental project design responsibilities would require us to assume additional risk in developing cost estimates and could expose us to increased risk of losses. There can be no assurance that we will be successful in obtaining the enhanced skills required to be a Tier 2 supplier or that our customers will outsource such functions to us.
Risks associated with operating and conducting our business outside the United States could adversely impact us.
We have manufacturing facilities in Thailand and Mexico and also derive a portion of our net revenues from direct foreign sales. Further, our customers may derive portions of their revenues from non-U.S. customers. As a result, we are subject to the risks of conducting and operating our business internationally, including:
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•
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economic and geopolitical developments and conditions;
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•
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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;
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•
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imposition of taxes, export controls, tariffs, embargoes and other trade restrictions;
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•
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difficulties repatriating funds or restrictions on cash transfers; and
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•
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potential for new tariffs imposed on imports by the new U.S. administration.
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While the impact of these factors is difficult to predict, any one or more of these factors could have a material adverse effect on our financial results.
Goodwill and/or other assets could be impaired in the future, which could result in substantial charges.
Goodwill is tested for impairment on an annual basis during our fourth quarter or more frequently if events or circumstances occur which could indicate potential impairment. For example, our annual goodwill impairment testing in the fourth quarter of 2015 indicated the Structural Systems reporting unit’s carrying value exceeded its fair value as a result of the lowered revenues and cash flows outlook in our military and space end-use markets due to the decrease in U.S. government defense spending and thus, requiring us to perform Step Two of the goodwill impairment test. Based on the Step Two test, we impaired the entire goodwill for the Structural Systems reporting unit of $57.2 million in 2015.
We also test intangible assets with indefinite life periods for potential impairment annually and on an interim basis if there are indicators of potential impairment. For example, in performing our annual impairment test in the fourth quarter of 2015, we concluded the fair value of the indefinite-lived trade name to be zero as a result of divesting businesses in Electronic Systems and our discontinuation of the use of the trade name. Thus, we recorded an impairment of $32.9 million, which was the remaining carrying value of the trade name.
In addition, we evaluate amortizable intangible assets, fixed assets, and production cost of contracts for impairment if there are indicators of a potential impairment.
In assessing the recoverability of goodwill, management is required to make certain critical estimates and assumptions. These estimates and assumptions include projected sales levels, including the addition of new customers, programs or platforms and increased content on existing programs or platforms, improvements in manufacturing efficiency, and reductions in operating costs. Due to many variables inherent in the estimation of a business’s fair value and the relative size of our recorded goodwill, differences in estimates and assumptions may have a material effect on the results of our impairment analysis. If any of these or other estimates and assumptions are not realized in the future, or if market multiples decline, we may be required to record an additional impairment charge for goodwill.
Further, additional impairment charges may be incurred against other intangible assets or long-term assets if asset utilization declines, customer demand declines or other circumstances indicate that the asset carrying value may not be recoverable.
Our production cost of contracts as of December 31, 2016 was $
11.3 million
or
2%
of total assets. Our goodwill and other intangible assets as of December 31, 2016 were
$184.1 million
, or
36%
of total assets. See “Goodwill and Indefinite-Lived
Intangible Assets” and “Production Cost of Contracts” in Note 7 of our consolidated financial statements included in Part IV, Item 15(a) of this Form 10-K for further information.
OTHER RISKS
Our operations are subject to numerous extensive, complex, costly and evolving laws, regulations and restrictions, and failure to comply with these laws, regulations and restrictions could subject us to penalties and sanctions that could harm our business.
Prime contracts with various agencies of the U.S. Government, and subcontracts with other prime contractors, are subject to numerous laws and regulations which affect how we do business with our customers and may impose added costs on our business. As a result, our contracts and operations are subject to numerous, extensive, complex, costly and evolving laws, regulations and restrictions, principally by the U.S. Government or their agencies. These laws, regulation and restrictions govern items including, but not limited to, the formation, administration and performance of U.S. Government contracts, disclosure of cost and pricing data, civil penalties for violations or false claims to the U.S. Government for payment, define reimbursable costs, establish ethical standards for the procurement process and control the import and export of defense articles and services.
Noncompliance could expose us to liability for penalties, including termination of our U.S. Government contracts and subcontracts, disqualification from bidding on future U.S. Government contracts and subcontracts, suspension or debarment from U.S. Government contracting and various other fines and penalties
.
Noncompliance found by any one agency could result in fines, penalties, debarment or suspension from receiving additional contracts with all U.S. Government agencies. Given our dependence on U.S. Government business, suspension or debarment could have a material adverse effect on our financial results.
In addition, the U.S. Government may revise its procurement practices or adopt new contract rules and regulations, at any time, including increased usage of fixed-price contracts and procurement reform. Such changes could impair our ability to obtain new contracts or subcontracts or renew contracts or subcontracts under which we currently perform when those contracts are put up for recompetition. Any new contracting methods could be costly or administratively difficult for us to implement and could adversely affect our future net revenues.
In addition, our international operations subject us to numerous U.S. and foreign laws and regulations, including, without limitation, regulations relating to import-export control, technology transfer restrictions, repatriation of earnings, exchange controls, the Foreign Corrupt Practices Act and the anti-boycott provisions of the U.S. Export Administration Act. Changes in regulations or political environments may affect our ability to conduct business in foreign markets including investment, procurement and repatriation of earnings. Failure by us or our sales representatives or consultants to comply with these laws and regulations could result in certain liabilities and could possibly result in suspension or debarment from government contracts or suspension of our export privileges, which could have a material adverse effect on our financial results.
Customer pricing pressures could reduce the demand and/or price for our products and services.
The markets we serve are highly competitive and price sensitive. We compete worldwide with a number of domestic and international companies that have substantially greater manufacturing, purchasing, marketing and financial resources than we do. Many of our customers have the in-house capability to fulfill their manufacturing requirements. Our larger competitors may be able to compete more effectively for very large-scale contracts than we can by providing different or greater capabilities or benefits such as technical qualifications, past performance on large-scale contracts, geographic presence, price and availability of key professional personnel. If we are unable to successfully compete for new business, our net revenues growth and operating margins may decline.
Several of our major customers have completed extensive cost containment efforts and we expect continued pricing pressures in 2017 and beyond. Competitive pricing pressures may have an adverse effect on our financial condition and operating results. Further, there can be no assurance that competition from existing or potential competitors in other segments of our business will not have a material adverse effect on our financial results. If we do not continue to compete effectively and win contracts, our future business, financial condition, results of operations and our ability to meet our financial obligations may be materially compromised.
Our products and processes are subject to risk of obsolescence as a result of changes in technology and evolving industry and regulatory standards.
The future success of our business depends in large part upon our and our customers’ ability to maintain and enhance technological capabilities, develop and market manufacturing services that meet changing customer needs and successfully anticipate or respond to technological advances in manufacturing processes on a cost-effective and timely basis, while meeting
evolving industry and regulatory standards. To address these risks, we invest in product design and development, and incur related capital expenditures. There can be no guarantee that our product design and development efforts will be successful, or that funds required to be invested in product design and development or incurred as capital expenditures will not increase materially in the future.
Environmental liabilities could adversely affect our financial results.
We are subject to various federal, local, and foreign environmental laws and regulations, including those relating to the use, storage, transport, discharge and disposal of hazardous chemicals and materials used and emissions generated during our manufacturing process. We do not carry insurance for these potential environmental liabilities. Any failure by us to comply with present or future regulations could subject us to future liabilities or the suspension of production, which could have a material adverse effect on our financial results. Moreover, some environmental laws relating to contaminated sites can impose joint and several liability retroactively regardless of fault or the legality of the activities giving rise to the contamination. Compliance with existing or future environmental laws and regulations may require extensive capital expenditures, increase our cost or impact our production capabilities. Even if such expenditures are made, there can be no assurance that we will be able to comply. We have been directed to investigate and take corrective action for groundwater contamination at certain sites. Our ultimate liability for such matters will depend upon a number of factors. See Note 16 to our consolidated financial statements included in Part IV, Item 15(a) of this Form 10-K for further information.
Cyber security attacks, internal system or service failures may adversely impact our business and operations.
Any system or service disruptions, including those caused by projects to improve our information technology systems, if not anticipated and appropriately mitigated, could disrupt our business and impair our ability to effectively provide products and related services to our customers and could have a material adverse effect on our business. We could also be subject to systems failures, including network, software or hardware failures, whether caused by us, third-party service providers, intruders or hackers, computer viruses, natural disasters, power shortages or terrorist attacks. Cyber security threats are evolving and include, but are not limited to, malicious software, unauthorized attempts to gain access to sensitive, confidential or otherwise protected information related to us or our products, customers or suppliers, or other acts that could lead to disruptions in our business. Any such failures could cause loss of data and interruptions or delays in our business, cause us to incur remediation costs, subject us to claims and damage our reputation. In addition, the failure or disruption of our communications or utilities could cause us to interrupt or suspend our operations or otherwise adversely affect our business. Our property and business interruption insurance may be inadequate to compensate us for all losses that may occur as a result of any system or operational failure or disruption which would adversely affect our business, results of operations and financial condition.
We may not have the ability to renew facilities leases on terms favorable to us and relocation of operations presents risks due to business interruption.
Certain of our manufacturing facilities and offices are leased and have lease terms that expire between 2019 and 2022. The majority of these leases provide renewal options at the fair market rental rate at the time of renewal, which, if renewed, could be significantly higher than our current rental rates. We may be unable to offset these cost increases by charging more for our products and services. Furthermore, continued economic conditions may continue to negatively impact and create greater pressure in the commercial real estate market, causing higher incidences of landlord default and/or lender foreclosure of properties, including properties occupied by us. While we maintain certain non-disturbance rights in most cases, it is not certain that such rights will in all cases be upheld and our continued right of occupancy in such instances is potentially jeopardized. An occurrence of any of these events could have a material adverse effect on our financial results.
Additionally, if we choose to move any of our operations, those operations will be subject to additional relocation costs and associated risks of business interruption.
The occurrence of litigation in which we could be named as a defendant is unpredictable.
From time to time, we and our subsidiaries are involved in various legal and other proceedings that are incidental to the conduct of our business. While we believe no current proceedings, if adversely determined, could have a material adverse effect on our financial results, no assurances can be given. Any such claims may divert financial and management resources that would otherwise be used to benefit our operations and could have a material adverse effect on our financial results.
Product liability claims in excess of insurance could adversely affect our financial results and financial condition.
We face potential liability for personal injury or death as a result of the failure of products designed or manufactured by us. Although we currently maintain product liability insurance (including aircraft product liability insurance), any material product
liability not covered by insurance could have a material adverse effect on our financial condition, results of operations and cash flows.
Damage or destruction of our facilities caused by storms, earthquake or other causes could adversely affect our financial results and financial condition.
We have operations located in regions of the U.S. that may be exposed to damaging storms, earthquakes and other natural disasters. Although we maintain standard property casualty insurance covering our properties and may be able to recover costs associated with certain natural disasters through insurance, we do not carry any earthquake insurance because of the cost of such insurance. Many of our properties are located in Southern California, an area subject to earthquake activity. Our California facilities generated $190.8 million in net revenues during 2016. Even if covered by insurance, any significant damage or destruction of our facilities due to storms, earthquakes or other natural disasters could result in our inability to meet customer delivery schedules and may result in the loss of customers and significant additional costs to us. Thus, any significant damage or destruction of our properties could have a material adverse effect on our business, financial condition or results of operations.
We are dependent upon our ability to attract and retain key personnel.
Our success depends in part upon our ability to attract and retain key engineering, technical and managerial personnel, at both the executive and plant level. We face competition for management, engineering and technical personnel from other companies and organizations. The loss of members of our senior management group, or key engineering and technical personnel, could negatively impact our ability to grow and remain competitive in the future and could have a material adverse effect on our financial results.
Labor disruptions by our employees could adversely affect our business.
As of
December 31, 2016
, we employed
2,700
people. Two of our operating facilities are parties to collective bargaining agreements, covering
140
full time hourly employees in one of those facilities and
260
full time hourly employees in the other facility, and will expire in
June 2018
and
January 2019
, respectively. Although we have not experienced any material labor-related work stoppage and consider our relations with our employees to be good, labor stoppages may occur in the future. If the unionized workers were to engage in a strike or other work stoppage, if we are unable to negotiate acceptable collective bargaining agreements with the unions or if other employees were to become unionized, we could experience a significant disruption of our operations, higher ongoing labor costs and possible loss of customer contracts, which could have an adverse effect on our business and results of operations.
We have identified a material weakness in our internal control over financial reporting which could, if not remediated, adversely impact the reliability of our financial reports, cause us to submit our financial reports in an untimely fashion, result in material misstatements in our financial statements and cause current and potential stockholders to lose confidence in our financial reporting, which in turn could adversely affect the trading price of our common stock.
We have concluded that there is a material weakness in our internal control over financial reporting related to the annual accounting for income taxes. There was an incorrect recording to a deferred tax asset of $1.6 million when this amount should have decreased our income tax benefit for the year and fourth quarter ended December 31, 2015. We assessed the materiality of this error and do not believe it is material to any prior interim or annual periods, however, we determined it was appropriate to revise our consolidated financial statements as of and for the year and quarter ended December 31, 2015 in this Form 10-K. Therefore, we have revised our December 31, 2015 consolidated balance sheet to increase non-current deferred tax liabilities by $1.6 million and revised our consolidated statement of operations for the year ended December 31, 2015 to increase our net loss by $1.6 million. We have also revised all related footnote disclosures in these consolidated financial statements to correct this error. This error had no effect on net cash provided by operating activities on our consolidated cash flow statement for the year ended December 31, 2015, however, management has determined that our internal control over financial reporting relating to the annual accounting for income taxes was not effective as of December 31, 2016.
Under standards established by the Public Company Accounting Oversight Board (“PCAOB”), a material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected and corrected on a timely basis. The existence of this issue could adversely affect us, our reputation or investor perceptions of us. We have and will continue to take additional measures to remediate the underlying causes of the material weakness noted above. As we continue to evaluate and work to remediate the material weakness, we may determine to take additional measures to address the control deficiency. Also, see Item 9A in Part II of this Form 10-K. We expect to incur additional costs remediating this material weakness.
Although we plan to complete this remediation process as quickly as possible, we cannot at this time estimate how long it will take, and our measures may not prove to be successful in remediating this material weakness. If our remedial measures are insufficient to address the material weakness, or if additional material weaknesses or significant deficiencies in our internal control over financial reporting are discovered or occur in the future, our consolidated financial statements may contain material misstatements and we could be required to restate our financial results. In addition, if we are unable to successfully remediate this material weakness and if we are unable to produce accurate and timely financial statements, our stock price may be adversely affected and we may be unable to maintain compliance with applicable stock exchange listing requirements and debt covenant requirements.
Future restatements of our consolidated financial statements and possible related events, should they occur, may consume our time and resources and may have an adverse effect on our business and stock price.
In 2014, our Annual Report on Form 10-K included the restatement of our consolidated financial statements to correct errors in prior periods primarily related to (i) a long-term contract (“Contract”) following the discovery of misconduct by employees in the recording of direct labor costs to the Contract from 2009 through the third quarter 2014 which resulted in the identification of a forward loss provision that should have been recorded in 2009 and the impact on subsequent periods of adjustments to the forward loss provision based on information available at the time; and (ii) the year end reconciliation of income taxes payable and deferred tax balances identified errors primarily in 2013, 2012, and 2011.
As with all corporate controls, we cannot be certain that the measures we have taken to remedy the errors since they were discovered will ensure that no errors will occur in the future. Further, the future restatements, if any, may affect investor confidence in the accuracy of our financial reporting and disclosures, may raise reputational issues for our business and may negatively impact our stock price.
Although the restatement was completed in the 2014 Annual Report on Form 10-K that was filed in April 2015, we cannot guarantee that we will not receive regulatory inquiries or be subject to litigation regarding our restated financial statements or related matters. If any such future regulatory inquiries or litigation to occur, regardless of the outcome, such actions would likely consume internal resources and result in additional legal and consulting costs.
Enacted and proposed changes in securities laws and regulations have increased our costs and may continue to increase our costs in the future.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), enacted in July 2010, expands federal regulation of corporate governance matters. While some provisions of the Dodd-Frank Act are effective upon enactment, others will be implemented upon the SEC’s adoption of related rules and regulations. The scope and timing of the adoption of such rules and regulations is uncertain and accordingly, the cost of compliance with the Dodd-Frank Act is also uncertain.
The Dodd-Frank Act contains provisions to improve transparency and accountability concerning the supply of certain minerals originating from the Democratic Republic of Congo and adjoining countries that are believed to be benefiting armed groups (“Conflict Minerals”). The provision does not prevent companies from using conflict minerals; however the SEC mandates due diligence, disclosure and reporting requirements for companies which manufacture products that include components containing such conflict minerals in a Form SD (“Form SD”). These regulations and disclosures in our Form SDs could result in our customers’ request to not use Conflict Minerals in our products they purchase from us. The number of suppliers who provide conflict-free minerals may be limited and thus, decrease the availability and increase the prices of components free of such Conflict Minerals used in our products. In addition, the compliance process will be both time-consuming and costly. Since our supply chain is complex, we may not be able to sufficiently verify the origins of the relevant minerals used in our products through our due diligence procedures, which may harm our reputation with our customers and other stakeholders. In addition, we may be unable to satisfy customers who require that all components included in our products be conflict-free, which could place us at a competitive disadvantage.
Our efforts to comply with the Dodd-Frank Act and other evolving laws, regulations and standards are likely to result in increased general and administrative expenses and a diversion of management time and attention from revenue generating activities to compliance activities. Further, compliance with new and existing laws, rules, regulations and standards may make it more difficult and expensive for us to maintain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage.
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.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We occupy 25 owned or leased facilities, totaling 1.9 million square feet of manufacturing area and office space. At
December 31, 2016
, facilities which were in excess of 50,000 square feet each were occupied as follows:
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|
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Location
|
|
Segment
|
|
Square
Feet
|
|
Expiration
of Lease
|
Carson, California
|
|
Structural Systems
|
|
299,000
|
|
Owned
|
Monrovia, California
|
|
Structural Systems
|
|
274,000
|
|
Owned
|
Coxsackie, New York
|
|
Structural Systems
|
|
168,000
|
|
Owned
|
Parsons, Kansas
|
|
Structural Systems
|
|
120,000
|
|
Owned
|
Carson, California
|
|
Electronic Systems
|
|
117,000
|
|
2021
|
Phoenix, Arizona
|
|
Electronic Systems
|
|
100,000
|
|
2022
|
Joplin, Missouri
|
|
Electronic Systems
|
|
92,000
|
|
Owned
|
Appleton, Wisconsin
|
|
Electronic Systems
|
|
77,000
|
|
Owned
|
Orange, California
|
|
Structural Systems
|
|
76,000
|
|
Owned
|
Adelanto, California
|
|
Structural Systems
|
|
74,000
|
|
Owned
|
Huntsville, Arkansas
|
|
Electronic Systems
|
|
69,000
|
|
2020
|
Carson, California
|
|
Structural Systems
|
|
77,000
|
|
2019
|
Joplin, Missouri
|
|
Electronic Systems
|
|
55,000
|
|
2021
|
Tulsa, Oklahoma
|
|
Electronic Systems
|
|
55,000
|
|
Owned
|
Berryville, Arkansas
|
|
Electronic Systems
|
|
52,000
|
|
Owned
|
Management believes these properties are adequate to meet our current requirements, are in good condition and are suitable for their present use.
ITEM 3. LEGAL PROCEEDINGS
See Note 16 to our consolidated financial statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K for a description of our legal proceedings.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Description of Business
We are a leading global provider of engineering and manufacturing services for high-performance products and high-cost-of failure applications used primarily in the aerospace, defense, industrial, medical, and other industries. Our subsidiaries are organized into
two
primary businesses: Electronic Systems segment and Structural Systems segment, each of which is a reportable operating segment. Electronic Systems designs, engineers and manufactures high-reliability products used in worldwide technology-driven markets including aerospace, defense, industrial, medical, and other end-use markets. Electronic Systems’ product offerings range from prototype development to complex assemblies. Structural Systems designs, engineers and manufactures large, complex contoured aerospace structural components and assemblies and supplies composite and metal bonded structures and assemblies. Structural Systems’ products are used on commercial aircraft, military fixed-wing aircraft and military and commercial rotary-wing aircraft. All reportable operating segments follow the same accounting principles.
Basis of Presentation
The consolidated financial statements include the accounts of Ducommun Incorporated and its subsidiaries (“Ducommun,” the “Company,” “we,” “us” or “our”), after eliminating intercompany balances and transactions.
In the opinion of management, all adjustments, consisting of recurring accruals, have been made that are necessary to fairly state our consolidated financial position, results of operations, comprehensive income (loss) and cash flows in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
Our fiscal quarters typically end on the Saturday closest to the end of March, June and September for the first three fiscal quarters of each year, and ends on December 31 for our fourth fiscal quarter. As a result of using fiscal quarters for the first three quarters combined with leap years, our first and fourth fiscal quarters can range between 12 1/2 weeks to 13 1/2 weeks while the second and third fiscal quarters remain at a constant 13 weeks per fiscal quarter.
Use of Estimates
Certain amounts and disclosures included in the consolidated financial statements required management to make estimates and judgments that affect the amount of assets, liabilities (including forward loss reserves), revenues and expenses, and related disclosures of contingent assets and liabilities. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates.
Reclassifications
Certain prior period amounts have been reclassified to conform to current year’s presentation.
Revision of 2015 Financial Statements
During the fourth quarter of 2016, we determined that we improperly calculated the tax impact of the goodwill impairment charge recorded in the fourth quarter of 2015. As a result,
$1.6 million
was incorrectly recorded as a deferred tax asset as of December 31, 2015, however, this amount should have decreased our income tax benefit for the year ended December 31, 2015. Therefore, we have revised our December 31, 2015 consolidated balance sheet to increase non-current deferred tax liabilities by
$1.6 million
and revised our consolidated statement of operations for the year ended December 31, 2015 to increase our net loss by
$1.6 million
. We have also revised all related footnote disclosures in these consolidated financial statements to correct this error. This error had no effect on net cash provided by operating activities on our consolidated cash flow statement for the year ended December 31, 2015. We assessed the materiality of this error and do not believe it is material to any prior interim or annual periods.
Fair Value
We measure certain assets and liabilities at fair value based on the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. See Note 3 for further information.
Cash Equivalents
Cash equivalents consist of highly liquid instruments purchased with original maturities of
three months or less
.These assets are valued at cost, which approximates fair value, which we classify as Level 1. See Fair Value above.
Derivative Instruments
We recognize derivative instruments on our consolidated balance sheets at their fair value. On the date that we enter into a derivative contract, we designate the derivative instrument as a fair value hedge, a cash flow hedge, a hedge of a net investment in a foreign operation, or a derivative instrument that will not be accounted for using hedge accounting methods. As of December 31, 2016 and December 31, 2015, all of our derivative instruments were designated as cash flow hedges.
We record changes in the fair value of a derivative instrument that is highly effective and that is designated and qualifies as a cash flow hedge in other comprehensive income (loss), net of tax until our earnings are affected by the variability of cash flows of the underlying hedge. We record any hedge ineffectiveness and amounts excluded from effectiveness testing in current period earnings within interest expense. We report changes in the fair values of derivative instruments that are not designated or do not qualify for hedge accounting in current period earnings. We classify cash flows from derivative instruments on the consolidated statements of cash flows in the same category as the item being hedged or on a basis consistent with the nature of the instrument.
When we determine that a derivative instrument is not highly effective as a hedge, we discontinue hedge accounting prospectively. In all situations in which we discontinue hedge accounting and the derivative instrument remains outstanding, we will carry the derivative instrument at its fair value on our consolidated balance sheets and recognize subsequent changes in its fair value in our current period earnings.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for estimated losses from the inability of customers to make required payments. The allowance for doubtful accounts is evaluated periodically based on the aging of accounts receivable, the financial condition of customers and their payment history, historical write-off experience and other assumptions, such as current assessment of economic conditions.
Inventories
Inventories are stated at the lower of cost or market with cost being determined using a moving average cost basis for raw materials and actual cost for work-in-process and finished goods, with units being relieved from inventory and charged to cost of sales on a first-in, first-out basis. Market value for raw materials is based on replacement cost and for other inventory classifications it is based on net realizable value. Inventoried costs include raw materials, outside processing, direct labor and allocated overhead, adjusted for any abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) incurred. Costs under long-term contracts are accumulated into, and removed from, inventory on the same basis as other contracts. We assess the inventory carrying value and record write-downs, if necessary, to its net realizable value based on customer orders on hand, and internal demand forecasts using management’s best estimates given information currently available. We maintain a reserve for excess and obsolete inventories and inventories that are carried at costs that are higher than their estimated net realizable values.
We net progress payments from customers related to inventory purchases against inventories in the consolidated balance sheets.
Production Cost of Contracts
Production cost of contracts includes non-recurring production costs, such as design and engineering costs, and tooling and other special-purpose machinery necessary to build parts as specified in a contract. Production costs of contracts are recorded to cost of goods sold using the units of delivery method. We review long-lived assets within production costs of contracts for impairment on an annual basis (which we perform during the fourth quarter) or when events or changes in circumstances indicate that the carrying value of our long-lived assets may not be recoverable. An impairment charge is recognized when the carrying value of an asset exceeds the projected undiscounted future cash flows expected from its use and disposal. As of
December 31, 2016
and
2015
, production costs of contracts were
$11.3 million
and
$10.3 million
, respectively.
Assets Held For Sale
In the fourth quarter of 2015, we made the decision to sell our Huntsville, Alabama and Iuka, Mississippi (collectively, “Miltec”) operations and our Pittsburgh, Pennsylvania operation, both of which are part of our Electronic Systems operating segment, and as a result, we met the criteria for assets held for sale. However, the proposed sale of these
two
operations did not represent a strategic shift in our business and thus, were included in the ongoing operating results in the consolidated statements of operations for all periods presented.
On January 22, 2016, we entered into an agreement, and completed the sale on the same date, to sell our operation located in Pittsburgh, Pennsylvania for a final sales price of
$38.6 million
in cash. We divested this facility as part of our overall strategy to streamline operations, which includes consolidating our footprint. Net assets sold were $
24.0 million
, net liabilities sold were
$4.0 million
, and direct transaction costs incurred were
$0.3 million
, resulting in a gain on divestiture of
$18.3 million
.
In February 2016, we entered into an agreement to sell our Miltec operation for a final sales price of
$13.3 million
, in cash. We divested this facility as part of our overall strategy to streamline operations, which includes consolidating our footprint. We completed the sale on March 25, 2016. Net assets sold were
$15.4 million
, net liabilities sold were
$2.7 million
, and direct transaction costs incurred were
$1.3 million
, resulting in a loss on divestiture of
$0.7 million
.
The carrying values of the major classes of assets and liabilities related to these assets held for sale were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
December 31,
2016
|
|
December 31,
2015
|
Assets
|
|
|
|
|
Accounts receivable (less allowance for doubtful accounts of zero and $24 at December 31, 2016 and December 31, 2015, respectively)
|
|
$
|
—
|
|
|
$
|
9,395
|
|
Inventory
|
|
—
|
|
|
6,453
|
|
Deferred income taxes
|
|
—
|
|
|
1,246
|
|
Other current assets
|
|
—
|
|
|
3,315
|
|
Total current assets
|
|
—
|
|
|
20,409
|
|
Property and equipment, net of accumulated depreciation of zero and $8,509 at December 31, 2016 and December 31, 2015, respectively
|
|
—
|
|
|
1,941
|
|
Goodwill
|
|
—
|
|
|
17,772
|
|
Other Intangible Assets
|
|
—
|
|
|
1,514
|
|
|
|
$
|
—
|
|
|
$
|
41,636
|
|
Liabilities
|
|
|
|
|
Accounts payable
|
|
$
|
—
|
|
|
$
|
4,836
|
|
Accrued liabilities
|
|
—
|
|
|
1,944
|
|
|
|
$
|
—
|
|
|
$
|
6,780
|
|
Property and Equipment and Depreciation
Property and equipment, including assets recorded under capital leases, are recorded at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related assets, or the lease term if shorter for leasehold improvements. Repairs and maintenance are charged to expense as incurred. We evaluate long-lived assets for recoverability considering undiscounted cash flows, when significant changes in conditions occur, and recognize impairment losses if any, based upon the fair value of the assets.
Goodwill and Indefinite-Lived Intangible Asset
Goodwill is tested for impairment utilizing a two-step method. In the first step, we determine the fair value of the reporting unit using expected future discounted cash flows and market valuation approaches considering comparable Company revenue and Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) multiples. If the carrying value of the reporting unit exceeds its fair value, we then perform the second step of the impairment test to measure the amount of the goodwill impairment loss, if any. The second step requires fair valuation of all the reporting unit’s assets and liabilities in a manner similar to a purchase price allocation, with any residual fair value being allocated to goodwill. This residual fair value of goodwill is then compared to the carrying value of goodwill to determine impairment. An impairment charge will be recognized equal to the excess of the carrying value of goodwill over the implied fair value of goodwill.
In 2015, as a result of the annual goodwill impairment test, we recorded
$57.2 million
of goodwill impairment to the Structural Systems operating segment reducing the goodwill carrying value to
zero
as of December 31, 2015. See Note 7 for further information.
We review our indefinite-lived intangible asset for impairment on an annual basis or when events or changes in circumstances indicate that the carrying value of our intangible asset may not be recoverable. We may first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test. Impairment indicators include, but are not limited to, cost factors, financial performance, adverse legal or regulatory developments, industry and market conditions and general economic conditions. If the carrying amount of the indefinite-lived intangible asset exceeds its fair value, we would recognize an impairment loss in the amount of such excess. In performing our annual impairment test in the fourth quarter of 2015, we concluded the fair value of the indefinite-lived trade name to be
zero
as a result of divesting businesses in Electronic Systems and our discontinuation of the use of the trade name. Thus, we recorded a
$32.9 million
of trade name impairment to the Electronic Systems trade name carrying value to decrease its trade name carrying value to zero as of December 31, 2015. See Note 7 for further information.
Other Intangible Assets
We amortize purchased other intangible assets with finite lives over the estimated economic lives of the assets, ranging from
fourteen
to
eighteen
years generally using the straight-line method. The value of other intangibles acquired through business combinations has been estimated using present value techniques which involve estimates of future cash flows. We evaluate other intangible assets for recoverability considering undiscounted cash flows, when significant changes in conditions occur, and recognize impairment losses, if any, based upon the estimated fair value of the assets.
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss, as reflected in the consolidated balance sheets under the equity section, was composed of cumulative pension and retirement liability adjustments, net of tax, and change in net unrealized gains and losses on cash flow hedges, net of tax.
Revenue Recognition
Except as described below, we recognize revenue, including revenue from products sold under long-term contracts, when persuasive evidence of an arrangement exists, the price is fixed or determinable, collection is reasonably assured and delivery of products has occurred or services have been rendered.
We have a significant number of contracts for which we recognize revenue under the contract method of accounting and record revenues and cost of sales on each contract in accordance with the percentage-of-completion method of accounting, using the units-of-delivery method. Under the units-of-delivery method, revenue is recognized based upon the number of units delivered during a period and the costs are recognized based on the actual costs allocable to the delivered units. Costs allocable to undelivered units are reported on the balance sheet as inventory. This method is used in circumstances in which a company produces units of a basic product under production-type contracts in a continuous or sequential production process to buyers’ specifications. These contracts are primarily fixed-price contracts that vary widely in terms of size, length of performance period, and expected gross profit margins.
Provision for Estimated Losses on Contracts
We record provisions for the total anticipated losses on contracts considering total estimated costs to complete the contract compared to total anticipated revenues in the period in which such losses are identified. The provisions for estimated losses on contracts require management to make certain estimates and assumptions, including those with respect to the future revenue under a contract and the future cost to complete the contract. Management's estimate of the future cost to complete a contract may include assumptions as to improvements in manufacturing efficiency, reductions in operating and material costs, and our ability to resolve claims and assertions with our customers. If any of these or other assumptions and estimates do not materialize in the future, we may be required to record additional provisions for estimated losses on contracts.
In 2015, we recorded a charge in Structural Systems related to estimated cost overruns as a result of a change in the contract requirements for the remaining contractual period for a regional jet program of
$10.0 million
. This amount was recorded as part of cost of goods sold in our results of operations and increased accrued liabilities by
$7.6 million
and other long-term liabilities by
$2.4 million
.
Income Taxes
Deferred tax assets and liabilities are recognized, using enacted tax rates, for the expected future tax consequences of temporary differences between the book and tax bases of recorded assets and liabilities, operating losses and tax credit carryforwards. Deferred tax assets are evaluated quarterly and are reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Tax positions taken or expected to be taken in a tax return are recognized when it is more-likely-than-not, based on technical merits, to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than
50%
likely of being realized upon ultimate settlement, including resolution of related appeals and/or litigation process, if any.
We elected to early adopt ASU 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes” and on a prospective basis for the year ended December 31, 2015.
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.
Earnings (Loss) Per Share
Basic earnings per share are computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding in each period. Diluted earnings per share are computed by dividing income available to common shareholders plus income associated with dilutive securities by the weighted-average number of common shares outstanding, plus any potential dilutive shares that could be issued if exercised or converted into common stock in each period.
The net earnings (loss) and weighted-average number of common shares outstanding used to compute earnings (loss) per share were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share data)
Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Net income (loss)
|
|
$
|
25,261
|
|
|
$
|
(74,879
|
)
|
|
$
|
19,867
|
|
Weighted-average number of common shares outstanding
|
|
|
|
|
|
|
Basic weighted-average common shares outstanding
|
|
11,151
|
|
|
11,047
|
|
|
10,897
|
|
Dilutive potential common shares
|
|
148
|
|
|
—
|
|
|
229
|
|
Diluted weighted-average common shares outstanding
|
|
11,299
|
|
|
11,047
|
|
|
11,126
|
|
Earnings (loss) per share
|
|
|
|
|
|
|
Basic
|
|
$
|
2.27
|
|
|
$
|
(6.78
|
)
|
|
$
|
1.82
|
|
Diluted
|
|
$
|
2.24
|
|
|
$
|
(6.78
|
)
|
|
$
|
1.79
|
|
Potentially dilutive stock options and stock units to purchase common stock, as shown below, were excluded from the computation of diluted earnings per share because their inclusion would have been anti-dilutive. However, these shares may be potentially dilutive common shares in the future.
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Stock options and stock units
|
|
553
|
|
|
778
|
|
|
218
|
|
Recent Accounting Pronouncements
New Accounting Guidance Adopted in 2016
In August 2015, the FASB issued ASU 2015-15, “Imputation of Interest (Subtopic 835-30)” (“ASU 2015-15”), which provides guidance on the presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements. Other guidance does not address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. Thus, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The new guidance was effective for us beginning January 1, 2016. We did not have debt issuance costs associated with line-of-credit arrangements and thus, the adoption of this new guidance did not have a significant impact on our consolidated financial statements.
In June 2015, the FASB issued ASU 2015-10, “Technical Corrections and Improvements” (“ASU 2015-10”), which covers a wide range of Topics in the Codification. The amendments in ASU 2015-10 represent changes to make minor corrections or minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost on most entities. The amendments in this new guidance that require transition guidance were effective for us beginning January 1, 2016. The adoption of this standard did not have a significant impact on our consolidated financial statements.
In June 2015, the FASB issued ASU 2015-7, “Fair Value Measurement (820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)” (“ASU 2015-7”), which permits a reporting entity, as a practical expedient, to measure the fair value of certain investments using the net asset value per share of the investment. The amendments in ASU 2015-7 remove the requirement to categorize investments for which fair values are measured using the net asset value per share practical expedient. It also limits disclosures to investments for which the entity has elected to measure the fair value using the practical expedient. The new guidance was effective for us beginning January 1, 2016.. As a result of the adoption of this new guidance, we are disclosing certain investments using the net asset value per share of the investment and prior amounts have been reclassified to conform to current year presentation. See Note 12.
In April 2015, the FASB issued ASU 2015-05, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement” (“ASU 2015-05”), which provides guidance on fees paid by a customer in a cloud computing arrangement. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The new guidance was effective for us beginning January 1, 2016. The adoption of this standard did not have a significant impact on our consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”), which changes the presentation of debt issuance costs in financial statements. Under ASU 2015-03, an entity presents such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of those costs is reported as interest expense. The new guidance was effective for us beginning January 1, 2016. As a result of the adoption of this new guidance, we reclassed
$3.1 million
of debt issuance costs against
$170.0 million
of total debt as of December 31, 2016 and prior period amounts have been reclassified to conform to current year presentation. See Note 9.
In January 2015, the FASB issued ASU 2015-01, “Income Statement - Extraordinary and Unusual Items (Subtopic 225-20)” (“ASU 2015-01”), which eliminates from U.S. GAAP the concept of extraordinary items. Current guidance requires separate classification, presentation, and disclosure of extraordinary events and transactions. In addition, an event or transaction is presumed to be an ordinary and usual activity of the reporting entity unless evidence clearly supports its classification as an extraordinary item. The new guidance was effective for us beginning January 1, 2016. The adoption of this standard did not have a significant impact on our consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”), which defines
management’s responsibility to evaluate whether there is substantial doubt about a company’s ability to continue as a going concern. ASU 2014-15 also provide principles and definitions that are intended to reduce diversity in the timing and content of disclosures in the financial statement footnotes. The new guidance was effective for us for our annual year ending December 31, 2016, and interim periods beginning January 1, 2017. The adoption of this standard did not have a significant impact on our consolidated financial statements.
In June 2014, the FASB issued ASU 2014-12, “Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide that a Performance Target Could be Achieved after the Requisite Service Period” (“ASU 2014-12”), which requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. Thus, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. The new guidance was effective for us beginning January 1, 2016. The adoption of this standard did not have a significant impact on our consolidated financial statements.
Recently Issued Accounting Standards
In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”), which simplifies the subsequent measurement of goodwill, the amendments eliminate Step Two from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step Two of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The new guidance is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are evaluating the impact of this standard.
In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business” (“ASU 2017-01”), which clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of businesses. The new guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods, which will be our interim period beginning January 1, 2018. We are evaluating the impact of this standard.
In December 2016, the FASB issued ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers” (“ASU 2016-20”), which cover a variety of Topics in the Codification related to the new revenue recognition standard (ASU 2014-09). The amendments in ASU 2016-20 represent changes to make minor corrections or minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. The new guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods, which will be our interim period beginning January 1, 2018. We are evaluating the impact of this standard.
In December 2016, the FASB issued ASU 2016-19, “Technical Corrections and Improvements” (“2016-19”), which cover a variety of Topics in the Codification. The amendments in ASU 2016-19 represent changes to make corrections or improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. The new guidance is effective for annual periods beginning after December 15, 2016, including interim periods within those annual periods, which will be our interim period beginning January 1, 2017. We are evaluating the impact of this standard and currently do not anticipate it will have a significant impact on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”), which addresses the following eight specific cash flow issues: Debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (“COLIs”) (including bank-owned life insurance policies [“BOLIs”]); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. The new guidance is effective for annual periods beginning after December 15,
2017, including interim periods within those annual periods, which will be our interim period beginning January 1, 2018. We are evaluating the impact of this standard.
In May 2016, the FASB issued ASU 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients” (“ASU 2016-12”), which amends the guidance in the new revenue standard on collectability, noncash consideration, presentation of sales tax, and transition. The amendments are intended to address implementation issues and provide additional practical expedients to reduce the cost and complexity of applying the new revenue standard. The new guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods, which will be our interim period beginning January 1, 2018. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods with that reporting period. We are evaluating the impact of this standard.
In May 2016, the FASB issued ASU 2016-11, “Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-06 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting” (“ASU 2016-11”), which clarifies revenue and expense recognition for freight costs, accounting for shipping and handling fees and costs, and accounting for consideration given by a vendor to a customer. The new guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods, which will be our interim period beginning January 1, 2018. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods with that reporting period. We are evaluating the impact of this standard.
In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing” (“ASU 2016-10”), which clarifies the following two aspects of Topic 606: (a) identifying performance obligations; and (b) the licensing implementation guidance. The amendments do not change the core principle of the guidance in Topic 606. The new guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods, which will be our interim period beginning January 1, 2018. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods with that reporting period. We are evaluating the impact of this standard.
In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”), which is intended to improve the accounting for employee share-based payments. The new guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, which will be our interim period beginning January 1, 2017. Early adoption is permitted in any interim or annual reporting period. We are evaluating the impact of this standard and currently do not anticipate it will have a significant impact on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-05, “Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships” (“ASU 2016-05”), which clarifies that a change in the counter party to a derivative instrument designated as a hedging instrument does not require dedesignation of that hedging relationship, provided that all other hedge accounting criteria are met. The new guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, which will be our interim period beginning January 1, 2017. Early adoption is permitted as of the beginning of an interim period on a modified retrospective basis. We are evaluating the impact of this standard and currently do not anticipate it will have a significant impact on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which requires lessees to present right-of-use assets and lease liabilities on the balance sheet. Lessees are required to apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The new guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, which will be our interim period beginning January 1, 2019. We are evaluating the impact of this standard and currently anticipate it will impact our consolidated financial statements.
In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330)” (“ASU 2015-11”), which requires inventory within the scope of ASU 2015-11 to be measured at the lower of cost and net realizable value. Subsequent measurement is unchanged for inventory measured using last-in, first-out (“LIFO”) or the retail inventory value. The new guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, which will be our interim period beginning January 1, 2017. Early adoption is permitted as of the beginning of an interim or annual reporting period. We are evaluating the impact of this standard, but currently do not anticipate it will have a significant impact on our consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”), which outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. This new revenue recognition
model provides a five-step analysis in determining when and how revenue is recognized. It requires entities to exercise judgment when considering the terms of the contract(s) which include (i) identifying the contract(s) with the customer, (ii) identifying the separate performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction price to the separate performance obligations, and (v) recognizing revenue when each performance obligation is satisfied. Thus, it depicts the transfer of promised goods or services to customers in an amount that reflects the consideration an entity expects to receive in exchange for those goods or services. Companies have the option of applying the provisions of ASU 2014-09 either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying this guidance recognized at the date of initial application. In August 2015, the FASB issued ASU 2015-14, “Revenue From Contracts With Customers (Topic 606)” (“ASU 2015-14”), which defer the effective date of ASU 2014-09 by one year to annual periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The new guidance is effective for us beginning January 1, 2018 and will provide us additional time to evaluate the method and impact that ASU 2014-09 will have on our consolidated financial statements. We are evaluating the impact of this standard, and with the percentage of completion, unit of delivery method of recognizing revenue being eliminated under ASU 2014-09, we currently anticipate our revenue, cost of sales, and related items on our consolidated financial statements will be impacted.
Note 2. Restructuring Activities
Summary of 2015 Restructuring Plans
In September 2015, management approved and commenced implementation of several restructuring actions, including organizational re-alignment, consolidation and relocation of the New York facilities that was completed in December 2015, closure of the Houston facility that was completed in December 2015, and closure of the St. Louis facility that was completed in April 2016, all of which are part of our overall strategy to streamline operations. We have recorded cumulative expenses of
$2.2 million
for severance and benefits and loss on early exit from leases, all of which were charged to selling, general and administrative expenses in 2015. We do not expect to record additional expenses related to these restructuring plans.
As of December 31, 2016, we have accrued
$0.6 million
for loss on early exit from lease in the Structural Systems segment.
Summary of 2016 Restructuring Plan
In May 2016, management approved and commenced implementation of the closure of
one
of our Tulsa facilities that was completed in June 2016, and is part of our overall strategy to streamline operations. We have recorded cumulative expenses of
$0.2 million
for severance and benefits and loss on early exit from a lease, all of which were charged to selling, general and administrative expenses in 2016. We do not expect to record additional expenses related to this restructuring plan.
As of December 31, 2016, we have accrued
$0.1 million
for loss on early exit from lease in the Electronic Systems segment.
Our restructuring activities for 2016 and 2015 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
2016
|
|
December 31, 2016
|
|
|
Balance
|
|
Charges
|
|
Cash Payments
|
|
Change in Estimates
|
|
Balance
|
Severance and benefits
|
|
$
|
722
|
|
|
$
|
49
|
|
|
$
|
(779
|
)
|
|
$
|
8
|
|
|
$
|
—
|
|
Lease termination
|
|
1,181
|
|
|
133
|
|
|
(674
|
)
|
|
14
|
|
|
654
|
|
Ending balance
|
|
$
|
1,903
|
|
|
$
|
182
|
|
|
$
|
(1,453
|
)
|
|
$
|
22
|
|
|
$
|
654
|
|
Note 3. Fair Value Measurements
Fair value is defined as the price that would be received for an asset or the price that would be paid to transfer a liability (an exit price) in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. The accounting standard provides a framework for measuring fair value using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. This hierarchy requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Three levels of inputs that may be used to measure fair value are as follows:
Level 1
- Quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2
- Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
Level 3
- Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Our financial instruments consist primarily of cash and cash equivalents and interest rate cap derivatives designated as cash flow hedging instruments. Assets and liabilities measured at fair value on a recurring basis were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
As of December 31, 2015
|
|
|
Fair Value Measurements Using
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total Balance
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total Balance
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
(1)
|
|
$
|
3,751
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,751
|
|
|
$
|
4,587
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,587
|
|
Interest rate cap hedges
(2)
|
|
—
|
|
|
553
|
|
|
—
|
|
|
553
|
|
|
—
|
|
|
963
|
|
|
—
|
|
|
963
|
|
Total Assets
|
|
$
|
3,751
|
|
|
$
|
553
|
|
|
$
|
—
|
|
|
$
|
4,304
|
|
|
$
|
4,587
|
|
|
$
|
963
|
|
|
$
|
—
|
|
|
$
|
5,550
|
|
(1) Included as cash and cash equivalents.
(2) Interest rate cap hedge premium included as other current assets and other assets.
The fair value of the interest rate cap hedge agreements is determined using pricing models that use observable market inputs as of the balance sheet date, a Level 2 measurement.
There were no transfers between Level 1, Level 2, or Level 3 financial instruments in either 2016 or 2015.
Note 4. Financial Instruments
Derivative Instruments and Hedging Activities
We periodically enter into cash flow derivative transactions, such as interest rate cap agreements, to hedge exposure to various risks related to interest rates. We assess the effectiveness of the interest rate cap hedges at inception of the hedge. We recognize all derivatives at their fair value. For cash flow designated hedges, the effective portion of the changes in fair value of the derivative contract are recorded in accumulated other comprehensive income (loss), net of taxes, and are recognized in net earnings at the time earnings are affected by the hedged transaction. Adjustments to record changes in fair values of the derivative contracts that are attributable to the ineffective portion of the hedges, if any, are recognized in earnings. We present derivative instruments in our consolidated statements of cash flows’ operating, investing, or financing activities consistent with the cash flows of the hedged item.
Our interest rate cap hedges were designated as cash flow hedges and deemed highly effective at the inception of the hedges. These interest rate cap hedges mature concurrently with the term loan in June 2020. In 2016, the interest rate cap hedges continued to be highly effective and
$0.3 million
, net of tax, was recognized in other comprehensive income.
No
amount was recorded in the consolidated statements of operations in 2016. See Note 9.
The recorded fair value of the derivative financial instruments in the consolidated balance sheets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
December 31, 2016
|
|
(In thousands)
December 31, 2015
|
|
|
Other Current Assets
|
|
Other Long Term Assets
|
|
Other Current Assets
|
|
Other Long Term Assets
|
Derivatives Designated as Hedging Instruments
|
|
|
|
|
|
|
|
|
Cash Flow Hedges:
|
|
|
|
|
|
|
|
|
Interest rate cap premiums
|
|
$
|
—
|
|
|
$
|
553
|
|
|
$
|
1
|
|
|
$
|
962
|
|
|
|
|
|
|
|
|
|
|
Total Derivatives
|
|
$
|
—
|
|
|
$
|
553
|
|
|
$
|
1
|
|
|
$
|
962
|
|
Note 5. Inventories
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
December 31,
|
|
|
2016
|
|
2015
|
Raw materials and supplies
|
|
$
|
64,650
|
|
|
$
|
61,840
|
|
Work in process
|
|
56,806
|
|
|
49,299
|
|
Finished goods
|
|
9,180
|
|
|
10,073
|
|
|
|
130,636
|
|
|
121,212
|
|
Less progress payments
|
|
10,740
|
|
|
5,808
|
|
Total
|
|
$
|
119,896
|
|
|
$
|
115,404
|
|
We net progress payments from customers related to inventory purchases against inventories on the consolidated balance sheets.
Note 6. Property and Equipment, Net
Property and equipment, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
December 31,
|
|
Range of
Estimated
|
|
|
2016
|
|
2015
|
|
Useful Lives
|
Land
|
|
$
|
15,662
|
|
|
$
|
15,454
|
|
|
|
Buildings and improvements
|
|
49,870
|
|
|
44,313
|
|
|
5 - 40 Years
|
Machinery and equipment
|
|
137,555
|
|
|
127,934
|
|
|
2 - 20 Years
|
Furniture and equipment
|
|
21,749
|
|
|
24,187
|
|
|
2 - 10 Years
|
Construction in progress
|
|
12,238
|
|
|
13,196
|
|
|
|
|
|
237,074
|
|
|
225,084
|
|
|
|
Less accumulated depreciation
|
|
135,484
|
|
|
128,533
|
|
|
|
Total
|
|
$
|
101,590
|
|
|
$
|
96,551
|
|
|
|
Depreciation expense was
$13.3 million
,
$15.7 million
and
$15.3 million
, for the years ended
December 31, 2016
,
2015
and
2014
, respectively.
Note 7. Goodwill and Other Intangible Assets
Goodwill
The carrying amounts of goodwill, by operating segment, for the years ended
December 31, 2016
and
2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Structural
Systems
|
|
Electronic
Systems
|
|
Consolidated
Ducommun
|
Gross goodwill
|
|
$
|
57,243
|
|
|
$
|
182,048
|
|
|
$
|
239,291
|
|
Accumulated goodwill impairment
|
|
(57,243
|
)
|
|
(81,722
|
)
|
|
(138,965
|
)
|
Transfer to assets held for sale
|
|
—
|
|
|
(17,772
|
)
|
|
(17,772
|
)
|
Balance at December 31, 2015
|
|
$
|
—
|
|
|
$
|
82,554
|
|
|
$
|
82,554
|
|
Balance at December 31, 2016
|
|
$
|
—
|
|
|
$
|
82,554
|
|
|
$
|
82,554
|
|
We perform our annual goodwill impairment test during the fourth quarter each year. In the fourth quarter of 2016, the carrying amount of goodwill at the date of the most recent annual impairment test was
$82.6 million
, all of which was in our Electronic Systems operating segment. In performing our annual goodwill impairment test in the fourth quarter of 2016, the fair value of our Electronic Systems internal reporting unit exceeding its carrying value by
32%
and thus, not deemed impaired.
In the fourth quarter of 2015, we met the criteria for assets held for sale for our Pittsburgh, Pennsylvania (“Pittsburgh”) operation and Miltec (“Miltec”) operation (both are part of our Electronic Systems operating segment). Assets held for sale, other than goodwill, is tested for impairment prior to the testing of goodwill for impairment. No impairment was noted of these assets held for sale. Our Pittsburgh operation and Miltec operation were sold in January 2016 and March 2016, respectively. As of the date of the 2015 annual goodwill impairment test, the fair value of the Electronic Systems and Miltec internal reporting units exceeded their carrying values by
42%
and
18%
, respectively, and thus, not deemed impaired. However, the fair value of the Structural Systems reporting unit was less than the carrying value as a result of the lowered revenue outlook in our military and space end-use markets due to the decrease in U.S. government defense spending. As a result, the second step (“Step Two”) of the goodwill impairment test was performed for the Structural Systems reporting unit. The implied fair value of goodwill was determined by allocating the fair value of the tangible and intangible assets and liabilities in a manner similar to a purchase price allocation. As a result of this analysis, we recorded
$57.2 million
of goodwill impairment thereby reducing the Structural Systems operating segment’s its goodwill carrying value to
zero
as of December 31, 2015.
In the fourth quarter of 2015, the carrying value of the trade-name indefinite-lived intangible asset at the date of the impairment test was approximately
$32.9 million
. In performing our annual impairment test in the fourth quarter of 2015, we concluded the fair value of the indefinite-lived trade name to be zero as a result of divesting businesses in Electronic Systems and our discontinuation of the use of the trade name. Thus, we recorded an impairment of approximate
$32.9 million
, which was the remaining carrying value of the trade name.
Other Intangible Assets
Other intangible assets are related to acquisitions and recorded at fair value at the time of the acquisition. Other intangible assets with finite lives are generally amortized on the straight-line method over periods ranging from
fourteen
to
eighteen
years. Intangible assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
Wtd. Avg Life (Yrs)
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
Finite-lived assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
18
|
|
$
|
159,200
|
|
|
$
|
58,352
|
|
|
$
|
100,848
|
|
|
$
|
159,200
|
|
|
$
|
49,463
|
|
|
$
|
109,737
|
|
Contract renewal
|
14
|
|
1,845
|
|
|
1,362
|
|
|
483
|
|
|
1,845
|
|
|
1,230
|
|
|
615
|
|
Technology
|
15
|
|
400
|
|
|
158
|
|
|
242
|
|
|
400
|
|
|
131
|
|
|
269
|
|
Total
|
|
|
$
|
161,445
|
|
|
$
|
59,872
|
|
|
$
|
101,573
|
|
|
$
|
161,445
|
|
|
$
|
50,824
|
|
|
$
|
110,621
|
|
The carrying amount of other intangible assets by operating segment as of
December 31, 2016
and
2015
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
Carrying
Value
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
Carrying
Value
|
Other intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Structural Systems
|
|
$
|
19,300
|
|
|
$
|
15,555
|
|
|
$
|
3,745
|
|
|
$
|
19,300
|
|
|
$
|
14,433
|
|
|
$
|
4,867
|
|
Electronic Systems
|
|
142,145
|
|
|
44,317
|
|
|
97,828
|
|
|
142,145
|
|
|
36,391
|
|
|
105,754
|
|
Total
|
|
$
|
161,445
|
|
|
$
|
59,872
|
|
|
$
|
101,573
|
|
|
$
|
161,445
|
|
|
$
|
50,824
|
|
|
$
|
110,621
|
|
Amortization expense of other intangible assets was
$9.0 million
,
$10.0 million
and
$10.4 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively. Future amortization expense by operating segment is expected to be as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Structural
Systems
|
|
Electronic
Systems
|
|
Consolidated
Ducommun
|
2017
|
|
$
|
907
|
|
|
$
|
7,927
|
|
|
$
|
8,834
|
|
2018
|
|
737
|
|
|
7,927
|
|
|
8,664
|
|
2019
|
|
591
|
|
|
7,926
|
|
|
8,517
|
|
2020
|
|
490
|
|
|
7,883
|
|
|
8,373
|
|
2021
|
|
381
|
|
|
7,794
|
|
|
8,175
|
|
Thereafter
|
|
639
|
|
|
58,371
|
|
|
59,010
|
|
|
|
$
|
3,745
|
|
|
$
|
97,828
|
|
|
$
|
101,573
|
|
Note 8. Accrued Liabilities
The components of accrued liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
December 31,
|
|
|
2016
|
|
2015
|
Accrued compensation
|
|
$
|
15,455
|
|
|
$
|
13,521
|
|
Accrued income tax and sales tax
|
|
332
|
|
|
1,513
|
|
Customer deposits
|
|
3,204
|
|
|
1,758
|
|
Interest payable
|
|
273
|
|
|
58
|
|
Provision for forward loss reserves
|
|
4,780
|
|
|
11,925
|
|
Other
|
|
5,235
|
|
|
7,683
|
|
Total
|
|
$
|
29,279
|
|
|
$
|
36,458
|
|
Note 9. Long-Term Debt
Long-term debt and the current period interest rates were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
December 31,
|
|
|
2016
|
|
2015
|
Term loan
|
|
$
|
170,000
|
|
|
$
|
245,000
|
|
Other debt (fixed 5.41%)
|
|
3
|
|
|
26
|
|
Total debt
|
|
170,003
|
|
|
245,026
|
|
Less current portion
|
|
3
|
|
|
26
|
|
Total long-term debt
|
|
170,000
|
|
|
245,000
|
|
Less debt issuance costs
|
|
3,104
|
|
|
4,339
|
|
Total long-term debt, net of debt issuance costs
|
|
$
|
166,896
|
|
|
$
|
240,661
|
|
Weighted-average interest rate
|
|
3.25
|
%
|
|
3.07
|
%
|
Future long-term debt payments at
December 31, 2016
were as follows:
|
|
|
|
|
|
(In thousands)
|
2017
|
$
|
3
|
|
2018
|
—
|
|
2019
|
—
|
|
2020
|
170,000
|
|
2021
|
—
|
|
Total
|
$
|
170,003
|
|
In June 2015, we completed a new credit facility to replace the Existing Credit Facilities. The new credit facility consists of a
$275.0 million
senior secured term loan, which matures on June 26, 2020 (“Term Loan”), and a
$200.0 million
senior secured revolving credit facility (“Revolving Credit Facility”), which matures on June 26, 2020 (collectively, the “Credit Facilities”). The Credit Facilities bear interest, at our option, at a rate equal to either (i) the Eurodollar Rate (defined as LIBOR) plus an applicable margin ranging from
1.50%
to
2.75%
per year or (ii) the Base Rate (defined as the highest of [a] Federal Funds Rate plus
0.50%
, [b] Bank of America’s prime rate, and [c] the Eurodollar Rate plus
1.00%
) plus an applicable margin ranging from
0.50%
to
1.75%
per year, in each case based upon the consolidated total net adjusted leverage ratio. The undrawn portions of the commitments of the Credit Facilities are subject to a commitment fee ranging from
0.175%
to
0.300%
, based upon the consolidated total net adjusted leverage ratio.
Further, we are required to make mandatory prepayments of amounts outstanding under the Term Loan. The mandatory prepayments will be made quarterly, equal to
5.0%
per year of the original aggregate principal amount during the first two years and increase to
7.5%
per year during the third year, and increase to
10.0%
per year during the fourth year and fifth years, with the remaining balance payable on June 26, 2020. The loans under the Revolving Credit Facility are due on June 26, 2020. As of December 31, 2016, we were in compliance with all covenants required under the Credit Facilities.
We have been making voluntary principal prepayments on a quarterly basis on our senior secured term loan and in conjunction with the closing of the Credit Facilities in June 2015, we drew down
$65.0 million
on the Revolving Credit Facility and used those proceeds along with current cash on hand to extinguish the existing senior secured term loan of
$80.0 million
. We expensed the unamortized debt issuance costs related to the existing senior secured term loan of
$2.8 million
as part of extinguishing the existing senior secured term loan during 2015. We also incurred
$4.8 million
of debt issuance costs related to the Credit Facilities and those costs are capitalized and being amortized over the
five
year life of the Credit Facilities.
In addition, we retired all of the
$200.0 million
senior unsecured notes (“Existing Notes”) in July 2015. We drew down on the Term Loan in the amount of
$275.0 million
. Along with the call notice amount and paying the call premium of
$9.8 million
, we also paid down the
$65.0 million
drawn on the Revolving Credit Facility in June 2015. We expensed the call premium of
$9.8 million
and debt issuance costs related to the Existing Notes of
$2.1 million
upon extinguishing the Existing Notes during 2015.
We made voluntary principal prepayments of
$75.0 million
under the Term Loan during 2016.
As of December 31, 2016, we had
$199.0 million
of unused borrowing capacity under the Revolving Credit Facility, after deducting
$1.0 million
for standby letters of credit.
The Existing Notes were issued by us (“Parent Company”) and guaranteed by all of our subsidiaries, other than one subsidiary that was considered minor (“Subsidiary Guarantors”). The Subsidiary Guarantors jointly and severally guarantee the Existing Notes and Credit Facilities. The Parent Company has no independent assets or operations and therefore, no consolidating financial information for the Parent Company and its subsidiaries are presented.
In October 2015, we entered into interest rate cap hedges designated as cash flow hedges with maturity dates of June 2020, and in aggregate, totaling
$135.0 million
of our debt. We paid a total of
$1.0 million
in connection with the interest rate cap hedges. See Note 4 for further information.
In December 2016, we entered into an agreement to purchase
$9.9 million
of industrial revenue bonds (“IRBs”) issued by the city of Parsons, Kansas (“Parsons”) and concurrently, sold
$9.9 million
of property and equipment (“Property”) to Parsons as well as entered into a lease agreement to lease the Property from Parsons (“Lease”) with lease payments totaling
$9.9 million
over the lease term. The sale of the Property and concurrent lease back of the Property did not meet the sale-leaseback accounting requirements as a result of our continuous involvement with the Property and thus, the
$9.9 million
in cash received from Parsons was not recorded as a sale but as a financing obligation. Further, the Lease included a right of offset and thus, the
financing obligation of
$9.9 million
was offset against the
$9.9 million
of IRBs assets and presented net on the consolidated balance sheets with no impact to the consolidated statements of operations or consolidated cash flow statements.
Note 10. Shareholders’ Equity
We are authorized to issue
five million
shares of preferred stock. At
December 31, 2016
and
2015
, no preferred shares were issued or outstanding.
Note 11. Stock-Based Compensation
Stock Incentive Compensation Plans
We have
two
stock incentive plans: the 2007 Stock Incentive Plan (the “2007 Plan”), as amended effective March 20, 2007, and the 2013 Stock Incentive Plan (the “2013 Plan”), collectively referred to as (the “Stock Incentive Plans”). The Stock Incentive Plans permit awards of stock options, restricted stock units, performance stock units and other stock-based awards to our officers, key employees and non-employee directors on terms determined by the Compensation Committee of the Board of Directors (the “Committee”). The aggregate number of shares available for issuance under the 2007 Plan and 2013 Plan is
1,200,000
and
1,040,000
, respectively. Under the 2007 Plan, no more than an aggregate of
400,000
shares are available for issue of stock-based awards other than stock options and stock appreciation rights. As of
December 31, 2016
, shares available for future grant under the 2007 Plan and 2013 Plan are
78,417
and
320,172
, respectively. Prior the adoption of the 2007 Plan, we granted stock-based awards to purchase shares of our common stock to officers, key employees and non-employee directors under certain predecessor plans. No further awards can be granted under these predecessor plans.
Stock Options
In the years ended
December 31, 2016
, 2015, and 2014, we granted stock options to our officers, key employees and non-employee directors of
123,500
,
73,000
, and
71,000
, respectively, with weighted-average grant date fair values of
$6.53
,
$10.63
, and
$12.62
, respectively. Stock options have been granted with an exercise price equal to the fair market value of our stock on the date of grant and expire not more than
seven
years from the date of grant. The stock options typically vest over a period of
four
years from the date of grant. The option price and number of shares are subject to adjustment under certain dilutive circumstances. If an employee terminates employment, the non-vested portion of the stock options will not vest and all rights to the non-vested portion will terminate completely.
Stock option activity for the year ended
December 31, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Stock Options
|
|
Weighted-
Average
Exercise
Price Per Share
|
|
Weighted-Average Remaining Contractual Life (Years)
|
|
Aggregate Intrinsic Value (in thousands)
|
Outstanding at January 1, 2016
|
|
483,491
|
|
|
$
|
20.08
|
|
|
|
|
|
Granted
|
|
123,500
|
|
|
$
|
15.92
|
|
|
|
|
|
Exercised
|
|
(132,325
|
)
|
|
$
|
16.04
|
|
|
|
|
|
Expired
|
|
(19,516
|
)
|
|
$
|
22.66
|
|
|
|
|
|
Forfeited
|
|
(15,600
|
)
|
|
$
|
18.54
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
439,550
|
|
|
$
|
20.07
|
|
|
4.4
|
|
$
|
2,414
|
|
Exerciseable at December 31, 2016
|
|
214,375
|
|
|
$
|
20.24
|
|
|
3.3
|
|
$
|
1,141
|
|
Changes in nonvested stock options for the year ended
December 31, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of Stock Options
|
|
Weighted-
Average
Grant
Date Fair Value
|
Nonvested at January 1, 2016
|
|
231,600
|
|
|
$
|
10.03
|
|
Granted
|
|
123,500
|
|
|
$
|
6.53
|
|
Vested
|
|
(114,325
|
)
|
|
$
|
7.95
|
|
Forfeited
|
|
(15,600
|
)
|
|
$
|
8.08
|
|
Nonvested at December 31, 2016
|
|
225,175
|
|
|
$
|
8.77
|
|
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, 2016
,
2015
and
2014
was
$1.3 million
,
$2.3 million
, and
$1.0 million
, respectively. Cash received from stock options exercised for the years ended
December 31, 2016
,
2015
and
2014
was
$2.1 million
,
$3.1 million
, and
$2.3 million
, respectively, with related tax benefits of
$0.5 million
,
$0.9 million
, and
$0.4 million
, respectively. The total amount of stock options vested and expected to vest in the future is
439,550
shares with a weighted-average exercise price of
$20.07
and an aggregate intrinsic value of
$2.4 million
. These stock options have a weighted-average remaining contractual term of
4.4
years.
The share-based compensation cost expensed for stock options for the years ended
December 31, 2016
,
2015
, and
2014
(before tax benefits) was
$0.8 million
,
$1.2 million
, and
$1.5 million
, respectively, and is included in selling, general and administrative expenses on the consolidated income statements. At
December 31, 2016
, total unrecognized compensation cost (before tax benefits) related to stock options of
$1.3 million
is expected to be recognized over a weighted-average period of
2.3
years. The total fair value of stock options vested during the years ended
December 31, 2016
,
2015
, and
2014
was
$0.9 million
,
$1.3 million
, and
$1.3 million
, respectively.
We apply fair value accounting for stock-based compensation based on the grant date fair value estimated using a Black-Scholes-Merton (“Black-Scholes”) valuation model. The assumptions used to compute the fair value of stock option grants under the Stock Incentive Plans for years ended December 31, 2016, 2015, and 2014 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Risk-free interest rate
|
|
1.20
|
%
|
|
1.13
|
%
|
|
1.67
|
%
|
Expected volatility
|
|
51.79
|
%
|
|
53.72
|
%
|
|
55.27
|
%
|
Expected dividends
|
|
—
|
|
|
—
|
|
|
—
|
|
Expected term (in months)
|
|
48
|
|
|
47
|
|
|
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 one award population with an option vesting term of
four
years. We estimate the forfeiture rate based on our historic experience, attempting to determine any discernible activity patterns. The expected life computation is based on historic exercise patterns and post-vesting termination behavior. The risk-free interest rate for periods within the contractual life of the award is based on the U.S. Treasury yield curve in effect at the time of grant. The expected volatility is derived from historical volatility of our common stock. We suspended payments of dividends after the first quarter of 2011.
Restricted Stock Units
We granted restricted stock units (“RSUs”) to certain officers, key employees and non-employee directors of
139,450
,
108,500
, and
86,300
RSUs during the years ended
December 31, 2016
,
2015
, and
2014
, respectively, with weighted-average grant date fair values (equal to the fair market value of our stock on the date of grant) of
$15.97
,
$25.15
, and
$24.74
per share, respectively. RSUs represent a right to receive a share of stock at future vesting dates with no cash payment required from the holder. The RSUs have a
three
year vesting term of
33%
,
33%
and
34%
on the first, second and third anniversaries of the date of grant, respectively. If an employee terminates employment, their non-vested portion of the RSUs will not vest and all rights to the non-vested portion will terminate.
Restricted stock unit activity for the year ended
December 31, 2016
was as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of Restricted Stock Units
|
|
Weighted-
Average
Grant
Date Fair Value
|
Outstanding at January 1, 2016
|
|
155,191
|
|
|
$
|
24.24
|
|
Granted
|
|
139,450
|
|
|
15.97
|
|
Vested
|
|
(84,107
|
)
|
|
23.34
|
|
Forfeited
|
|
(17,152
|
)
|
|
21.76
|
|
Outstanding at December 31, 2016
|
|
193,382
|
|
|
$
|
18.88
|
|
The share-based compensation cost expensed for RSUs for the years ended
December 31, 2016
,
2015
, and
2014
(before tax benefits) was
$1.8 million
,
$1.8 million
, and
$1.3 million
respectively, and is included in selling, general and administrative expenses on the consolidated income statements. At
December 31, 2016
, total unrecognized compensation cost (before tax benefits) related to RSUs of
$2.2 million
is expected to be recognized over a weighted average period of
1.7
years. The total fair value of RSUs vested for the years ended
December 31, 2016
,
2015
, and
2014
was
$1.3 million
,
$1.8 million
, and
$1.3 million
, respectively. The tax benefit realized from vested RSUs for the years ended
December 31, 2016
,
2015
, and
2014
was
$0.7 million
,
$0.7 million
, and
$0.5 million
, respectively.
Performance Stock Units
We granted performance stock awards (“PSUs”) to certain key employees of
62,500
,
64,000
, and
67,500
PSUs during the years ended
December 31, 2016
,
2015
, and
2014
, respectively, with weighted-average grant date fair values of
$15.92
,
$25.51
, and
$24.90
per share, respectively. PSU awards are subject to the attainment of performance goals established by the Committee, the periods during which performance is to be measured, and all other limitations and conditions applicable to the awarded shares. Performance goals are based on a pre-established objective formula that specifies the manner of determining the number of performance stock awards that will be granted if performance goals are attained. If an employee 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, 2016
was as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of Performance Stock Units
|
|
Weighted-
Average
Grant
Date Fair Value
|
Outstanding at January 1, 2016
|
|
133,497
|
|
|
$
|
22.86
|
|
Granted
|
|
62,500
|
|
|
15.92
|
|
Vested
|
|
(44,979
|
)
|
|
18.36
|
|
Forfeited
|
|
(29,381
|
)
|
|
25.22
|
|
Outstanding at December 31, 2016
|
|
121,637
|
|
|
$
|
20.39
|
|
The share-based compensation cost expensed for PSUs for the years ended
December 31, 2016
,
2015
, and
2014
(before tax benefits) was
$0.4 million
,
$0.5 million
and
$1.0 million
, respectively, and is included in selling, general and administrative expenses on the consolidated income statements. At
December 31, 2016
, total unrecognized compensation cost (before tax benefits) related to PSUs of
$1.1 million
is expected to be recognized over a weighted-average period of
1.3
years. The total fair value of PSUs vested during the years ended
December 31, 2016
,
2015
, and
2014
, was
$1.1 million
,
$0.9
million, and
zero
, respectively. The tax benefit realized from PSUs for the years ended
December 31, 2016
,
2015
, and
2014
were
$0.2 million
,
0.3
million, and
zero
, respectively.
Note 12. Employee Benefit Plans
Supplemental Retirement Plans
We have
three
unfunded supplemental retirement plans. The first plan was
suspended in 1986
, but continues to cover certain former executives. The second plan was
suspended in 1997
, but continues to cover certain current and retired directors. The third plan covers certain current and retired employees and further employee contributions to this plan were
suspended on August 5, 2011
. The liability for the third plan and interest thereon is included in accrued employee compensation and long-
term liabilities and was
$0.6 million
and
$0.8 million
, respectively, at
December 31, 2016
and
$0.5 million
and
$1.7 million
, respectively, at
December 31, 2015
. The accumulated benefit obligations of the first
two
plans at
December 31, 2016
and
December 31, 2015
were
$1.1 million
and
$0.9 million
, respectively, and are included in accrued liabilities.
Defined Contribution 401(K) Plans
We sponsor
a
401(k) defined contribution plan for all our employees. The plan allows the employees to make annual voluntary contributions not to exceed the lesser of an amount equal to
25%
of their compensation or limits established by the Internal Revenue Code. Under this plan, we generally provide a match equal to
50%
of the employee’s contributions up to the first
6%
of compensation, except for union employees who are not eligible to receive the match. Our provision for matching and profit sharing contributions for the three years ended
December 31, 2016
,
2015
, and
2014
was
$2.7 million
,
$3.2 million
, and
$3.3 million
, respectively.
Other Plans
We have a defined benefit pension plan covering certain hourly employees of a subsidiary (the “Pension Plan”). Pension Plan benefits are generally determined on the basis of the retiree’s age and length of service. Assets of the Pension Plan are composed primarily of fixed income and equity securities. We also have a retirement plan covering certain current and retired employees (the “LaBarge Retirement Plan”).
The components of net periodic pension cost for both plans are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Service cost
|
|
$
|
531
|
|
|
$
|
785
|
|
|
$
|
693
|
|
Interest cost
|
|
1,367
|
|
|
1,350
|
|
|
1,278
|
|
Expected return on plan assets
|
|
(1,482
|
)
|
|
(1,495
|
)
|
|
(1,400
|
)
|
Amortization of actuarial losses
|
|
762
|
|
|
887
|
|
|
419
|
|
Net periodic pension cost
|
|
$
|
1,178
|
|
|
$
|
1,527
|
|
|
$
|
990
|
|
The components of the reclassifications of net actuarial losses from accumulated other comprehensive loss to net income for 2016 were as follows:
|
|
|
|
|
|
|
|
(In thousands)
Year Ended December 31,
|
|
|
2016
|
Amortization of actuarial loss - total before tax
(1)
|
|
$
|
762
|
|
Tax benefit
|
|
(283
|
)
|
Net of tax
|
|
$
|
479
|
|
|
|
(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
2017
is
$0.8 million
.
The obligations, fair value of plan assets, and funded status of both plans are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
December 31,
|
|
|
2016
|
|
2015
|
Change in benefit obligation
(1)
|
|
|
|
|
Beginning benefit obligation (January 1)
|
|
$
|
31,510
|
|
|
$
|
33,299
|
|
Service cost
|
|
531
|
|
|
785
|
|
Interest cost
|
|
1,367
|
|
|
1,350
|
|
Actuarial loss (gain)
|
|
1,132
|
|
|
(2,599
|
)
|
Benefits paid
|
|
(1,386
|
)
|
|
(1,325
|
)
|
Ending benefit obligation (December 31)
|
|
$
|
33,154
|
|
|
$
|
31,510
|
|
Change in plan assets
|
|
|
|
|
Beginning fair value of plan assets (January 1)
|
|
$
|
19,933
|
|
|
$
|
19,725
|
|
Return on assets
|
|
1,551
|
|
|
(296
|
)
|
Employer contribution
|
|
1,917
|
|
|
1,829
|
|
Benefits paid
|
|
(1,386
|
)
|
|
(1,325
|
)
|
Ending fair value of plan assets (December 31)
|
|
$
|
22,015
|
|
|
$
|
19,933
|
|
Funded status (underfunded)
|
|
$
|
(11,139
|
)
|
|
$
|
(11,577
|
)
|
Amounts recognized in the consolidated balance sheet
|
|
|
|
|
Current liabilities
|
|
$
|
545
|
|
|
$
|
527
|
|
Non-current liabilities
|
|
$
|
10,595
|
|
|
$
|
11,050
|
|
Unrecognized loss included in accumulated other comprehensive loss
|
|
|
|
|
Beginning unrecognized loss, before tax (January 1)
|
|
$
|
8,919
|
|
|
$
|
10,614
|
|
Amortization
|
|
(762
|
)
|
|
(887
|
)
|
Liability (gain) loss
|
|
1,132
|
|
|
(2,599
|
)
|
Asset (loss) gain
|
|
(69
|
)
|
|
1,791
|
|
Ending unrecognized loss, before tax (December 31)
|
|
9,220
|
|
|
8,919
|
|
Tax impact
|
|
(3,425
|
)
|
|
(3,316
|
)
|
Unrecognized loss included in accumulated other comprehensive loss, net of tax
|
|
$
|
5,795
|
|
|
$
|
5,603
|
|
|
|
(1)
|
Projected benefit obligation equals the accumulated benefit obligation for the plans.
|
On
December 31, 2016
, our annual measurement date, the accumulated benefit obligation exceeded the fair value of the plans assets by
$11.1 million
. Such excess is referred to as an unfunded accumulated benefit obligation. We recorded unrecognized loss included in accumulated other comprehensive loss, net of tax at
December 31, 2016
and
2015
of
$5.8 million
and
$5.6 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, 2016
and
2015
, by asset category, were as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
Equity securities
|
|
65
|
%
|
|
74
|
%
|
Cash and equivalents
|
|
2
|
%
|
|
6
|
%
|
Debt securities
|
|
33
|
%
|
|
20
|
%
|
Total
(1)
|
|
100
|
%
|
|
100
|
%
|
|
|
(1)
|
Our overall investment strategy is to achieve an asset allocation within the following ranges to achieve an appropriate rate of return relative to risk.
|
|
|
|
Cash
|
0-5%
|
Fixed income securities
|
0-25%
|
Equities
|
25-95%
|
Pension Plan assets consist primarily of listed stocks and bonds and do not include any of the Company’s securities. The return on assets assumption reflects the average rate of return expected on funds invested or to be invested to provide for the benefits included in the projected benefit obligation. We select the return on asset assumption by considering our current and target asset allocation. We consider information from various external investment managers, forward-looking information regarding expected returns by asset class and our own judgment when determining the expected returns.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
Year Ended December 31, 2016
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Cash and cash equivalents
|
|
$
|
366
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
366
|
|
Fixed income securities
|
|
3,468
|
|
|
—
|
|
|
—
|
|
|
3,468
|
|
Equities
(1)
|
|
1,611
|
|
|
—
|
|
|
—
|
|
|
1,611
|
|
Other investments
|
|
760
|
|
|
—
|
|
|
—
|
|
|
760
|
|
Total plan assets at fair value
|
|
$
|
6,205
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
6,205
|
|
Pooled funds
|
|
|
|
|
|
|
|
15,810
|
|
Total fair value of plan assets
|
|
|
|
|
|
|
|
|
|
|
$
|
22,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
Year Ended December 31, 2015
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Cash and cash equivalents
|
|
$
|
1,149
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,149
|
|
Fixed income securities
|
|
3,986
|
|
|
—
|
|
|
—
|
|
|
3,986
|
|
Equities
(1)
|
|
9,468
|
|
|
—
|
|
|
—
|
|
|
9,468
|
|
Other investments
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total plan assets at fair value
|
|
$
|
14,603
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
14,603
|
|
Pooled funds
|
|
|
|
|
|
|
|
5,330
|
|
Total fair value of plan assets
|
|
|
|
|
|
|
|
|
|
|
$
|
19,933
|
|
|
|
(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.
The weighted-average assumptions used to determine the net periodic benefit costs under the two plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Discount rate used to determine pension expense
|
|
|
|
|
|
|
Pension Plan
|
|
4.55
|
%
|
|
4.25
|
%
|
|
4.75
|
%
|
LaBarge Retirement Plan
|
|
4.00
|
%
|
|
3.70
|
%
|
|
4.00
|
%
|
The weighted-average assumptions used to determine the benefit obligations under the two plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Discount rate used to determine value of obligations
|
|
|
|
|
|
|
Pension Plan
|
|
4.18
|
%
|
|
4.55
|
%
|
|
4.25
|
%
|
LaBarge Retirement Plan
|
|
3.75
|
%
|
|
4.00
|
%
|
|
3.70
|
%
|
Long-term rate of return - Pension Plan only
|
|
7.00
|
%
|
|
7.50
|
%
|
|
7.50
|
%
|
The following benefit payments under both plans, which reflect expected future service, as appropriate, are expected to be paid:
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Pension Plan
|
|
LaBarge
Retirement
Plan
|
2017
|
|
$
|
1,063
|
|
|
$
|
545
|
|
2018
|
|
1,174
|
|
|
535
|
|
2019
|
|
1,215
|
|
|
521
|
|
2020
|
|
1,297
|
|
|
504
|
|
2021
|
|
1,369
|
|
|
485
|
|
2022 - 2026
|
|
7,862
|
|
|
2,079
|
|
Our funding policy is to contribute cash to our plans so that the minimum contribution requirements established by government funding and taxing authorities are met. We expect to make contributions of
$0.9 million
to the plans in
2017
.
Note 13. Indemnifications
We have made guarantees and indemnities under which we may be required to make payments to a guaranteed or indemnified party, in relation to certain transactions, including revenue transactions in the ordinary course of business. In connection with certain facility leases, we have indemnified our lessors for certain claims arising from the facility or the lease. We indemnify our directors and officers to the maximum extent permitted under the laws of the State of Delaware.
However, we have a directors and officers insurance policy that may reduce our exposure in certain circumstances and may enable us to recover a portion of future amounts that may be payable, if any. The duration of the guarantees and indemnities varies and, in many cases is indefinite but subject to statute of limitations. The majority of guarantees and indemnities do not provide any limitations of the maximum potential future payments we could be obligated to make. Historically, payments related to these guarantees and indemnities have been immaterial. We estimate the fair value of our indemnification obligations as insignificant based on this history and insurance coverage and have, therefore, not recorded any liability for these guarantees and indemnities in the accompanying consolidated balance sheets.
Note 14. Leases
We lease certain facilities and equipment for periods ranging from
one
to
ten
years. The leases generally are renewable and provide for the payment of property taxes, insurance and other costs relative to the property. Rental expense in
2016
,
2015
, and
2014
was
$4.9 million
,
$8.5 million
, and
$7.3 million
, respectively. Future minimum rental payments under operating leases having initial or remaining non-cancelable terms in excess of one year at
December 31, 2016
were as follows:
|
|
|
|
|
|
(In thousands)
|
2017
|
$
|
4,270
|
|
2018
|
3,505
|
|
2019
|
2,732
|
|
2020
|
2,492
|
|
2021
|
1,864
|
|
Thereafter
|
1,106
|
|
Total
|
$
|
15,969
|
|
Note 15. Income Taxes
Our pre-tax income attributable to foreign operations was not material. The provision for income tax expense (benefit) consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Current tax expense (benefit)
|
|
|
|
|
|
|
Federal
|
|
$
|
5,953
|
|
|
$
|
(1,511
|
)
|
|
$
|
5,258
|
|
State
|
|
2,982
|
|
|
(418
|
)
|
|
244
|
|
|
|
8,935
|
|
|
(1,929
|
)
|
|
5,502
|
|
Deferred tax expense (benefit)
|
|
|
|
|
|
|
Federal
|
|
3,876
|
|
|
(28,011
|
)
|
|
1,186
|
|
State
|
|
41
|
|
|
(1,771
|
)
|
|
(315
|
)
|
|
|
3,917
|
|
|
(29,782
|
)
|
|
871
|
|
Income tax expense (benefit)
|
|
$
|
12,852
|
|
|
$
|
(31,711
|
)
|
|
$
|
6,373
|
|
The current income tax expense (benefit) excludes net (tax shortfalls) excess tax benefits recorded directly to additional paid-in-capital related to share-based compensation of
$(0.1) million
,
$0.6 million
, and
$0.1 million
for the years ended December 31, 2016, 2015, and 2014, respectively.
Deferred tax (liabilities) assets were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
December 31,
|
|
|
2016
|
|
2015
|
Deferred tax assets:
|
|
|
|
|
Accrued expenses
|
|
$
|
760
|
|
|
$
|
1,363
|
|
Allowance for doubtful accounts
|
|
184
|
|
|
134
|
|
Contract overrun reserves
|
|
1,776
|
|
|
4,412
|
|
Deferred compensation
|
|
507
|
|
|
491
|
|
Employment-related accruals
|
|
2,888
|
|
|
2,463
|
|
Environmental reserves
|
|
769
|
|
|
772
|
|
Federal tax credit carryforwards
|
|
4,234
|
|
|
7,031
|
|
Inventory reserves
|
|
2,313
|
|
|
2,703
|
|
Investment in common stock
|
|
—
|
|
|
297
|
|
Pension obligation
|
|
4,002
|
|
|
3,299
|
|
State net operating loss carryforwards
|
|
63
|
|
|
1,402
|
|
State tax credit carryforwards
|
|
6,585
|
|
|
5,937
|
|
Stock-based compensation
|
|
1,950
|
|
|
2,165
|
|
Workers’ compensation
|
|
122
|
|
|
133
|
|
Other
|
|
2,098
|
|
|
1,595
|
|
Total gross deferred tax assets
|
|
28,251
|
|
|
34,197
|
|
Valuation allowance
|
|
(6,607
|
)
|
|
(7,477
|
)
|
Total gross deferred tax assets, net of valuation allowance
|
|
21,644
|
|
|
26,720
|
|
Deferred tax liabilities:
|
|
|
|
|
Depreciation
|
|
(13,167
|
)
|
|
(11,802
|
)
|
Goodwill
|
|
(3,909
|
)
|
|
(3,632
|
)
|
Intangibles
|
|
(35,071
|
)
|
|
(37,891
|
)
|
Prepaid insurance
|
|
(626
|
)
|
|
(514
|
)
|
Section 481(a) adjustment
|
|
—
|
|
|
(682
|
)
|
Unbilled receivables
|
|
(2
|
)
|
|
—
|
|
Total gross deferred tax liabilities
|
|
(52,775
|
)
|
|
(54,521
|
)
|
Net deferred tax liabilities
|
|
$
|
(31,131
|
)
|
|
$
|
(27,801
|
)
|
We elected to early adopt ASU 2015-17, prospectively, beginning with the annual period ended December 31, 2015, which required that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. The adoption of this new guidance had no impact on our results of operations or cash flows for 2015.
We have net operating losses in various states of
$1.7 million
as of December 31, 2016. The state net operating loss carryforwards include
$1.3 million
that is not expected to be realized under ASC Subtopic 740-10 and has been reduced by a valuation allowance. If not realized, the state net operating loss carryforwards will begin to expire in
2032
.
We have federal and state tax credit carryforwards of
$4.9 million
and
$11.1 million
, respectively, as of December 31, 2016. A valuation allowance of
$10.1 million
has been provided on state tax credit carryforwards that are not expected to be realized under ASC Subtopic 740-10. If not realized, the federal and state tax credit carryforwards will expire between
2017
and
2030
.
We believe it is more likely than not that we will generate sufficient taxable income to realize the benefit of the remaining deferred tax assets.
The principal reasons for the variation between the statutory and effective tax rates were as follows:
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Statutory federal income tax (benefit) rate
|
|
35.0%
|
|
(35.0)%
|
|
35.0%
|
State income taxes (net of federal benefit)
|
|
5.7
|
|
(1.2)
|
|
0.9
|
Qualified domestic production activities
|
|
(2.0)
|
|
0.5
|
|
(2.3)
|
Research and development tax credits
|
|
(8.6)
|
|
(2.9)
|
|
(11.3)
|
Goodwill impairment
|
|
—
|
|
8.1
|
|
—
|
Changes in valuation allowance
|
|
0.9
|
|
0.6
|
|
8.5
|
Non-deductible book expenses
|
|
0.2
|
|
0.2
|
|
0.9
|
Changes in deferred tax assets
|
|
1.5
|
|
0.1
|
|
(5.0)
|
Remeasurement of deferred taxes for changes in state tax law
|
|
—
|
|
—
|
|
(1.9)
|
Changes in tax reserves
|
|
—
|
|
0.1
|
|
(0.7)
|
Other
|
|
1.0
|
|
(0.2)
|
|
0.2
|
Effective income tax (benefit) rate
|
|
33.7%
|
|
(29.7)%
|
|
24.3%
|
The deduction for qualified domestic production activities is treated as a “special deduction” which has no effect on deferred tax assets and liabilities. Instead, the impact of this deduction is reported in our rate reconciliation. No deduction for qualified domestic production has been recognized in 2015 due to a taxable loss. The loss has been carried back to 2014 and 2013, reducing the deduction for qualified domestic production in those years.
We recorded a goodwill impairment charge related to the Structural Systems operating segment in 2015. A portion of this goodwill impairment charge was nondeductible for tax purposes and was a permanent impact to our income tax provision of
$8.7 million
.
On December 18, 2015, the President of the United States signed into law the Protecting Americans from Tax Hikes Act (“PATH”). The PATH Act permanently extended the research and development credit. As a result, we recorded a benefit of
$2.2 million
and
$2.6 million
for the U.S. Federal R&D credit in 2016 and 2015, respectively. In December 2014, the federal research and development tax credit was retroactively extended from the beginning of 2014. We recorded total federal research and development tax credits of
$2.4 million
in 2014.
Our total amount of unrecognized tax benefits was
$3.0 million
,
$3.0 million
, and
$2.8 million
at
December 31, 2016
,
2015
, and 2014, respectively. We record interest and penalty charge, if any, related to uncertain tax positions as a component of tax expense and unrecognized tax benefits. The amounts accrued for interest and penalty charge as of December 31, 2016, 2015, and 2014 were not significant. If recognized,
$2.0 million
would affect the effective income tax rate. We do not reasonably expect significant increases or decreases to our unrecognized tax benefits in the next twelve months.
A reconciliation of the beginning and ending amount of unrecognized tax benefits was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Balance at January 1,
|
|
$
|
2,963
|
|
|
$
|
2,803
|
|
|
$
|
2,297
|
|
Additions for tax positions related to the current year
|
|
476
|
|
|
702
|
|
|
668
|
|
Additions for tax positions related to prior years
|
|
385
|
|
|
—
|
|
|
31
|
|
Reductions for tax positions related to prior years
|
|
(567
|
)
|
|
(48
|
)
|
|
(22
|
)
|
Reductions for lapse of statute of limitations
|
|
(221
|
)
|
|
(494
|
)
|
|
(171
|
)
|
Balance at December 31,
|
|
$
|
3,036
|
|
|
$
|
2,963
|
|
|
$
|
2,803
|
|
We file U.S. Federal and state income tax returns. Federal income tax returns after 2012, California franchise (income) tax returns after 2011 and other state income tax returns after 2011 are subject to examination. We are no longer subject to examination prior to those periods, although carryforwards generated prior to those periods may still be adjusted upon examination by the Internal Revenue Service (“IRS”) or state taxing authority if they either have been or will be used in a subsequent period. During 2016, the IRS commenced an audit of our 2014 and 2015 tax years. Although the outcome of tax examinations cannot be predicted with certainty, we believe we have adequately accrued for tax deficiencies or reductions in tax benefits, if any, that could result from the examination as well as all open audit years.
Note 16. Contingencies
On October 8, 2014, the United States District Court for the District of Kansas (the “District Court”) granted summary judgment in favor of The Boeing Company (“Boeing”) and Ducommun and dismissed the lawsuit entitled
United States of America ex rel Taylor Smith, Jeannine Prewitt and James Ailes v. The Boeing Company and Ducommun Inc.
The lawsuit was a qui tam action brought by
three
former Boeing employees (“Relators”) against Boeing and Ducommun on behalf of the United States of America for violations of the United States False Claims Act. On June 13, 2016, the United States Court of Appeals for the Tenth Circuit affirmed the District Court’s decision and on July 8, 2016, denied Relators’ petition for rehearing.
Structural Systems has been directed by California environmental agencies to investigate and take corrective action for groundwater contamination at its facilities located in El Mirage and Monrovia, California. Based on currently available information, Ducommun has established a reserve for its estimated liability for such investigation and corrective action of
$1.5 million
at
December 31, 2016
, which is reflected in other long-term liabilities on its consolidated balance sheet.
Structural Systems also faces liability as a potentially responsible party for hazardous waste disposed at landfills located in Casmalia and West Covina, California. Structural Systems and other companies and government entities have entered into consent decrees with respect to these landfills with the United States Environmental Protection Agency and/or California environmental agencies under which certain investigation, remediation and maintenance activities are being performed. Based on currently available information, Ducommun preliminarily estimates that the range of its future liabilities in connection with the landfill located in West Covina, California is between
$0.4 million
and
$3.1 million
. Ducommun has established a reserve for its estimated liability in connection with the West Covina landfill of
$0.4 million
at
December 31, 2016
, which is reflected in other long-term liabilities on its consolidated balance sheet. Ducommun’s ultimate liability in connection with these matters will depend upon a number of factors, including changes in existing laws and regulations, the design and cost of construction, operation and maintenance activities, and the allocation of liability among potentially responsible parties.
In the normal course of business, Ducommun and its subsidiaries are defendants in certain other litigation, claims and inquiries, including matters relating to environmental laws. In addition, Ducommun makes various commitments and incurs contingent liabilities. While it is not feasible to predict the outcome of these matters, Ducommun does not presently expect that any sum it may be required to pay in connection with these matters would have a material adverse effect on its consolidated financial position, results of operations or cash flows.
Note 17. Major Customers and Concentrations of Credit Risk
We provide proprietary products and services to the Department of Defense and various United States Government agencies, and most of the aerospace and aircraft manufacturers who receive contracts directly from the U.S. Government as an original equipment manufacturer (“prime manufacturers”). In addition, we also service technology-driven markets in the industrial, 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”), Raytheon Company (“Raytheon”), Spirit AeroSystems Holdings, Inc. (“Spirit”), and United Technologies Corporation (“United Technologies”), represented the following percentages of total net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Boeing
|
|
17.3
|
%
|
|
16.0
|
%
|
|
19.4
|
%
|
Raytheon
|
|
8.4
|
%
|
|
8.7
|
%
|
|
9.4
|
%
|
Spirit
|
|
8.2
|
%
|
|
7.4
|
%
|
|
6.4
|
%
|
United Technologies
|
|
6.0
|
%
|
|
6.1
|
%
|
|
5.5
|
%
|
Top ten customers
(1)
|
|
58.6
|
%
|
|
55.7
|
%
|
|
59.2
|
%
|
(1) Includes the Boeing, Raytheon, Spirit, and United Technologies.
Boeing, Raytheon, Spirit, and United Technologies represented the following percentages of total accounts receivable:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
Boeing
|
|
7.8
|
%
|
|
13.3
|
%
|
Raytheon
|
|
10.9
|
%
|
|
11.5
|
%
|
Spirit
|
|
9.0
|
%
|
|
7.1
|
%
|
United Technologies
|
|
7.8
|
%
|
|
5.0
|
%
|
In
2016
,
2015
and
2014
, net revenues from foreign customers based on the location of the customer were
$56.4 million
,
$60.2 million
and
$66.7 million
, respectively. No net revenues from a foreign country were greater than
3.0%
of total net revenues in
2016
,
2015
, and
2014
. 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
2016
,
2015
, and
2014
. We are not subject to any significant foreign currency risks as all our sales are made in United States dollars.
Note 18. Business Segment Information
We supply products and services primarily to the aerospace and defense industries. Our subsidiaries are organized into
two
strategic businesses, Structural Systems and Electronic Systems, each of which is an operating segment as well as a reportable segment.
Financial information by reportable segment was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Net Revenues
|
|
|
|
|
|
|
Structural Systems
|
|
$
|
246,465
|
|
|
$
|
273,319
|
|
|
$
|
319,956
|
|
Electronic Systems
|
|
304,177
|
|
|
392,692
|
|
|
422,089
|
|
Total Net Revenues
|
|
$
|
550,642
|
|
|
$
|
666,011
|
|
|
$
|
742,045
|
|
Segment Operating (Loss) Income
(1)
|
|
|
|
|
|
|
Structural Systems
(2)
|
|
$
|
16,497
|
|
|
$
|
(53,010
|
)
|
|
$
|
34,949
|
|
Electronic Systems
(3)
|
|
28,983
|
|
|
(4,472
|
)
|
|
34,599
|
|
|
|
45,480
|
|
|
(57,482
|
)
|
|
69,548
|
|
Corporate General and Administrative Expenses
(1)(4)
|
|
(16,912
|
)
|
|
(17,827
|
)
|
|
(17,781
|
)
|
Operating (Loss) Income
|
|
$
|
28,568
|
|
|
$
|
(75,309
|
)
|
|
$
|
51,767
|
|
Depreciation and Amortization Expenses
|
|
|
|
|
|
|
Structural Systems
|
|
$
|
8,688
|
|
|
$
|
9,417
|
|
|
$
|
10,959
|
|
Electronic Systems
|
|
14,087
|
|
|
17,267
|
|
|
17,928
|
|
Corporate Administration
|
|
85
|
|
|
162
|
|
|
137
|
|
Total Depreciation and Amortization Expenses
|
|
$
|
22,860
|
|
|
$
|
26,846
|
|
|
$
|
29,024
|
|
Capital Expenditures
|
|
|
|
|
|
|
Structural Systems
|
|
$
|
15,661
|
|
|
$
|
11,559
|
|
|
$
|
12,742
|
|
Electronic Systems
|
|
3,032
|
|
|
4,419
|
|
|
5,782
|
|
Corporate Administration
|
|
—
|
|
|
10
|
|
|
30
|
|
Total Capital Expenditures
|
|
$
|
18,693
|
|
|
$
|
15,988
|
|
|
$
|
18,554
|
|
|
|
(1)
|
Includes cost not allocated to either the Structural Systems or Electronic Systems operating segments.
|
|
|
(2)
|
The results for 2015 included
$57.2 million
of goodwill impairment charge.
|
|
|
(3)
|
The results for 2015 included
$32.9 million
of an intangible asset impairment charge.
|
|
|
(4)
|
The results for 2014 included
$1.2 million
of workers’ compensation insurance expenses included in gross profit and not allocated to the 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
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
December 31,
|
|
|
2016
|
|
2015
|
Total Assets
|
|
|
|
|
Structural Systems
|
|
$
|
175,580
|
|
|
$
|
179,134
|
|
Electronic Systems
|
|
325,780
|
|
|
363,227
|
|
Corporate Administration
|
|
14,069
|
|
|
14,720
|
|
Total Assets
|
|
$
|
515,429
|
|
|
$
|
557,081
|
|
Goodwill and Intangibles
|
|
|
|
|
Structural Systems
|
|
$
|
3,745
|
|
|
$
|
4,866
|
|
Electronic Systems
|
|
180,382
|
|
|
207,595
|
|
Total Goodwill and Intangibles
|
|
$
|
184,127
|
|
|
$
|
212,461
|
|
In the first quarter of 2016, we entered into and completed the sale of our Pittsburgh, Pennsylvania and Miltec operations, both of which were part of our Electronic Systems operating segment. See Note 1 for additional information.
Note 19. Supplemental Quarterly Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Three Months Ended
2016
|
|
Three Months Ended
2015
|
|
|
Dec 31
|
|
Oct 1
|
|
Jul 2
|
|
Apr 2
|
|
Dec 31
|
|
Oct 3
|
|
Jul 4
|
|
Apr 4
|
Net Revenues
|
|
$
|
142,486
|
|
|
$
|
132,571
|
|
|
$
|
133,437
|
|
|
$
|
142,148
|
|
|
$
|
156,576
|
|
|
$
|
161,670
|
|
|
$
|
174,845
|
|
|
$
|
172,920
|
|
Gross Profit
|
|
27,786
|
|
|
25,223
|
|
|
26,215
|
|
|
26,969
|
|
|
22,796
|
|
|
20,028
|
|
|
31,207
|
|
|
26,761
|
|
Income (Loss) Before Taxes
|
|
5,825
|
|
|
6,248
|
|
|
5,331
|
|
|
20,709
|
|
|
(90,170
|
)
|
|
(16,447
|
)
|
|
3,061
|
|
|
(3,034
|
)
|
Income Tax Expense (Benefit)
|
|
2,989
|
|
|
1,234
|
|
|
1,470
|
|
|
7,159
|
|
|
(24,997
|
)
|
|
(6,932
|
)
|
|
1,279
|
|
|
(1,061
|
)
|
Net Income (Loss)
|
|
$
|
2,836
|
|
|
$
|
5,014
|
|
|
$
|
3,861
|
|
|
$
|
13,550
|
|
|
$
|
(65,173
|
)
|
|
$
|
(9,515
|
)
|
|
$
|
1,782
|
|
|
$
|
(1,973
|
)
|
Earnings (Loss) Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
0.25
|
|
|
$
|
0.45
|
|
|
$
|
0.35
|
|
|
$
|
1.22
|
|
|
$
|
(5.88
|
)
|
|
$
|
(0.86
|
)
|
|
$
|
0.16
|
|
|
$
|
(0.18
|
)
|
Diluted earnings (loss) per share
|
|
$
|
0.25
|
|
|
$
|
0.44
|
|
|
$
|
0.34
|
|
|
$
|
1.21
|
|
|
$
|
(5.88
|
)
|
|
$
|
(0.86
|
)
|
|
$
|
0.16
|
|
|
$
|
(0.18
|
)
|
In the first quarter of 2016, we entered into and completed the sale of our Pittsburgh, Pennsylvania and Miltec operations, both of which were part of our Electronic Systems operating segment. We recorded a preliminary pre-tax gain of
$18.8 million
. See Note 1 for additional information.
In the fourth quarter of 2015, we recorded a goodwill impairment charge in our Structural Systems operating segment of
$57.2 million
. In addition, we recorded an intangible asset impairment charge in our Electronic Systems operating segment of
$32.9 million
related to the write off an indefinite-lived trade name intangible asset.
In the third quarter of 2015, we recorded loss on extinguishment of debt of
$11.9 million
which was made up of the call premium to retire the existing
$200.0 million
senior unsecured notes in July 2015 of
$9.8 million
and the write off of the unamortized debt issuance costs associated with the existing
$200.0 million
senior unsecured notes of
$2.1 million
.
Also in the third quarter of 2015, we recorded a charge in our Structural Systems operating segment related to estimated cost overruns as a result of a change in the contract requirements for the remaining contractual period for a regional jet program of
$10.0 million
. This amount was recorded as part of cost of goods sold in our results of operations and increased accrued liabilities by
$7.6 million
and other long-term liabilities by
$2.4 million
.
In the second quarter of 2015, we recorded loss on extinguishment of debt of
$2.8 million
which was made up of the write off of the unamortized debt issuance costs associated with the existing senior secured term loan and existing senior secured revolving credit facility when the existing senior secured term loan was paid off in June 2015 and both were replaced with the Credit Facilities.